Exhibit
13.0








Annual
Report to Stockholders














Table
of Contents
 
 PageLetter
      to Our Stockholders
              
              1Selected
      Consolidated Financial and Other Data
              
              2Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              
              4Management’s
      Report on Internal Control Over Financial Reporting
              
              20Report
      of Independent Registered Public Accounting Firm
              
              21Consolidated
      Statements of Financial Condition
              
              22Consolidated
      Statements of Income
              
              23Consolidated
      Statements of Changes in Stockholders’ Equity
              
              24Consolidated
      Statements of Cash Flows
              
              25Notes
      to Consolidated Financial Statements
              
              27Directors
      and Officers
              
              48Investor
      and Corporate Information
              
              48Office
      Locations
              
              49
 
 
 Naugatuck
Valley Financial Corporation
 
 Naugatuck
Valley Financial Corporation, headquartered in Naugatuck, Connecticut, is the
holding company for Naugatuck Valley Savings and Loan.  A majority of
the outstanding shares of Naugatuck Valley Financial’s common stock are owned by
Naugatuck Valley Mutual Holding Company, the mutual holding company for
Naugatuck Valley Savings.  Naugatuck Valley Savings operates as a
community-oriented financial institution, dedicated to serving the financial
service needs of consumers and businesses with a variety of deposit and loan
products from its nine full-service banking offices in the Greater Naugatuck
Valley Region of southwestern Connecticut.
 
 
  
  
 
 
 Dear
Stockholders,
 
 
 In an
industry dominated by larger national and super-regional institutions managed
from afar, Naugatuck Valley Financial Corporation and Naugatuck Valley Savings
and Loan are community-based institutions.  Our board of directors and
management team are local bankers who take pride in their knowledge of our
community and our customers. We differentiate ourselves through the knowledge,
experience and dedication of our management team, our employees, and our
Board.
 
 During 2007 Naugatuck Valley Financial
Corporation continued to build shareholder value through organic growth. Assets
grew $49 million as a result of a $32 million increase in deposits combined with
a $17 million increase in borrowings. This increased funding was reinvested into
residential and commercial loans in our market area. This growth combined with
increased noninterest income enabled us to maintain net income levels seen in
2006 in spite of a decrease in net interest margin. Net income in 2007 totaled
$1.42 million as compared to $1.45 million in 2006 and in the fourth quarter of
2007, we improved earnings to $479,000 versus $150,000 in the fourth quarter of
2006.
 
 Most importantly, our credit quality
remains strong as a result of our on-going adherence to strict underwriting
standards.
 
 We are pleased with the performance of
our nine branch offices. Each of these offices, including the three branches
opened in the summer of 2006, has been successful and the expansion of our
branch network has made banking at “the Valley” more convenient.
 
 One of our highlights in 2007 was our
acceptance of the Traurig Family Award for Philanthropy. This award was granted
by the Connecticut Community Foundation to Naugatuck Valley Savings and Loan in
recognition of the contribution by the bank and its employees of time and funds
to over 75 community groups and non-profit organizations in our market
area.
 
 We value the continued support of our
shareholders. We have great confidence in the future of Naugatuck Valley
Financial Corporation and are dedicated to continued efforts to maximize value
for our shareholders, customers, employees and our community.
 
 
 Sincerely
      Yours,signature
              signatureRonald
      D. Lengyel
              John
      C. RomanChairman
      of the Board
              President
      and CEO
 
 
 
 
  
  
 Selected
Consolidated Financial and Other Data
 
 
 The
following table sets forth certain consolidated summary historical financial
information concerning the financial position of Naugatuck Valley Financial and
its subsidiary, Naugatuck Valley Savings, at the dates and for the periods
indicated.  The financial data is derived in part from, and should be
read in conjunction with, the consolidated financial statements and related
notes of Naugatuck Valley Financial appearing later in this annual
report.
 
 At
      December 31,2007
                
                
                2006
                
                
                2005
                
                
                2004
                
                
                2003(In
      thousands)Financial
      Condition Data:Total
      assets
                
                $
                462,527
                
                
                $
                413,855
                
                
                $
                355,346
                
                
                $
                265,449
                
                
                $
                243,956Securities
      held to maturity
                
                
                1,190
                
                
                
                2,531
                
                
                
                5,002
                
                
                
                5,168
                
                
                
                1,561Securities
      available for sale
                
                
                65,264
                
                
                
                67,736
                
                
                
                58,047
                
                
                
                31,096
                
                
                
                37,166Loans
      receivable, net
                
                
                359,831
                
                
                
                308,376
                
                
                
                259,427
                
                
                
                203,820
                
                
                
                180,378Cash
      and cash equivalents
                
                
                8,370
                
                
                
                7,942
                
                
                
                8,951
                
                
                
                7,575
                
                
                
                9,775Deposits
                
                
                321,398
                
                
                
                289,198
                
                
                
                240,846
                
                
                
                193,366
                
                
                
                183,455Borrowed
      funds
                
                
                85,107
                
                
                
                68,488
                
                
                
                57,059
                
                
                
                15,826
                
                
                
                34,990Total
      capital
                
                
                50,457
                
                
                
                51,084
                
                
                
                50,964
                
                
                
                51,571
                
                
                
                21,217
 
 Year
      Ended December 31,2007
                
                
                2006
                
                
                2005
                
                
                2004
                
                
                2003(In
      thousands, except per share data)Operating
      Data:Interest
      and dividend income
                
                $
                25,030
                
                
                $
                20,750
                
                
                $
                15,908
                
                
                $
                12,713
                
                
                $
                12,644Interest
      expense
                
                
                13,174
                
                
                
                9,350
                
                
                
                4,941
                
                
                
                3,559
                
                
                
                4,241Net
      interest income
                
                
                11,856
                
                
                
                11,400
                
                
                
                10,967
                
                
                
                9,154
                
                
                
                8,403Provision
      for loan losses
                
                
                151
                
                
                
                192
                
                
                
                32
                
                
                
                –
                
                
                
                45Net
      interest income after provisionfor
      loan losses
                
                
                11,705
                
                
                
                11,208
                
                
                
                10,935
                
                
                
                9,154
                
                
                
                8,358Noninterest
      income
                
                
                2,354
                
                
                
                1,948
                
                
                
                1,517
                
                
                
                1,078
                
                
                
                1,115Noninterest
      expense
                
                
                12,422
                
                
                
                11,504
                
                
                
                10,097
                
                
                
                9,803
                
                
                
                6,845Income
      before provision forincome
      taxes
                
                
                1,637
                
                
                
                1,652
                
                
                
                2,355
                
                
                
                429
                
                
                
                2,628Provision
      for income taxes
                
                
                217
                
                
                
                204
                
                
                
                450
                
                
                
                14
                
                
                
                822Net
      income
                
                $
                1,420
                
                
                $
                1,448
                
                
                $
                1,905
                
                
                $
                415
                
                
                $
                1,806Earnings
      per share, basic and diluted
                
                $
                0.20
                
                
                $
                0.20
                
                
                $
                0.26
                
                
                $
                0.07
                (1)
                
                NA
   (1)
              Net
      income per share is for the fourth quarter of 2004.  Before
      September 30, 2004, Naugatuck Valley Financial did not exist and Naugatuck
      Valley Savings operated as a mutual institution and, accordingly, had no
      per share data.
 
  2
  
 At
      or For the Year Ended December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Performance
      Ratios:Return
      on average
      assets
              
              
              0.33
              %
              
              
              0.38
              %
              
              
              0.62
              %
              
              
              0.16
              %
              
              
              0.77
              %Return
      on average
      equity
              
              
              2.77
              
              
              
              2.79
              
              
              
              3.66
              
              
              
              1.42
              
              
              
              8.59Interest
      rate spread
      (1)
              
              
              2.76
              
              
              
              3.07
              
              
              
              3.68
              
              
              
              3.78
              
              
              
              3.77Net
      interest margin
      (2)
              
              
              2.95
              
              
              
              3.26
              
              
              
              3.87
              
              
              
              3.85
              
              
              
              3.85Noninterest
      expense to average
      assets
              
              
              2.86
              
              
              
              3.03
              
              
              
              3.27
              
              
              
              3.81
              
              
              
              2.94Efficiency
      ratio
      (3)
              
              
              87.18
              
              
              
              85.93
              
              
              
              80.61
              
              
              
              95.47
              
              
              
              71.62Dividend
      payout ratio
      (4)
              
              
              100.00
              
              
              
              100.00
              
              
              
              61.54
              
              
              
              –
              
              
              
              –Average
      interest-earning assets toaverage
      interest-bearing liabilities
              
              
              105.65
              
              
              
              107.18
              
              
              
              111.20
              
              
              
              104.98
              
              
              
              103.69Average
      equity to average
      assets
              
              
              11.80
              
              
              
              13.65
              
              
              
              16.87
              
              
              
              11.37
              
              
              
              9.02Capital
      Ratios:Total
      capital to risk-weighted
      assets
              
              
              12.88
              
              
              
              14.29
              
              
              
              17.88
              %
              
              
              23.61
              %
              
              
              16.21
              %Tier
      1 capital to risk-weighted
      assets
              
              
              12.22
              
              
              
              13.56
              
              
              
              17.07
              
              
              
              22.52
              
              
              
              14.96Tier
      1 capital to adjusted total assets (5)
              
              
              8.81
              
              
              
              9.53
              
              
              
              11.42
              
              
              
              14.78
              
              
              
              8.64Total
      equity to total
      assets
              
              
              10.91
              
              
              
              12.34
              
              
              
              14.34
              
              
              
              19.43
              
              
              
              8.70Asset
      Quality Ratios:Allowance
      for loan losses as a percent oftotal
      loans
              
              
              0.60
              %
              
              
              0.67
              %
              
              
              0.72
              %
              
              
              0.89
              %
              
              
              0.99
              %Allowance
      for loan losses as a percent ofnonperforming
      loans
              
              
              222.99
              
              
              
              103.03
              
              
              
              638.78
              
              
              
              306.88
              
              
              
              199.78Net
      charge-offs (recoveries) to average loansoutstanding
      during the period
              
              
              0.02
              
              
              
              0.00
              
              
              
              0.01
              
              
              
              (0.01
              )
              
              
              0.13Nonperforming
      loans as a percent oftotal
      loans
              
              
              0.27
              
              
              
              0.65
              
              
              
              0.11
              
              
              
              0.29
              
              
              
              0.50Nonperforming
      assets as a percent oftotal
      assets
              
              
              0.21
              
              
              
              0.49
              
              
              
              0.10
              
              
              
              0.25
              
              
              
              0.46Other
      Data:Number
      of:Deposit
      accounts
              
              
              29,489
              
              
              
              27,385
              
              
              
              25,592
              
              
              
              22,599
              
              
              
              22,447Full
      service customer service facilities
              
              
              9
              
              
              
              9
              
              
              
              6
              
              
              
              5
              
              
              
              5
   (1)
              Represents
      the difference between the weighted average yield on average
      interest-earning assets and the weighted average cost of interest-bearing
      liabilities.
 (2)
              Represents
      net interest income as a percent of average interest-earning
      assets.
 (3)
              Represents
      noninterest expense (less intangible amortization) divided by the sum of
      net interest income and noninterest
income.
 (4)
              Represents
      dividends declared per share divided by basic net income per
      share.
 (5)
              Data
      for 2003 represents Tier 1 capital to average
  assets.
  3
  Management’s
Discussion and Analysis of
 Financial
Condition and Results of Operations
 
 The objective of this section is to
help the reader understand our views on our financial condition and results of
operations.  You should read this discussion in conjunction with the
consolidated financial statements and notes to the financial statements that
appear at the end of this annual report.
 
 Overview
 
 Income.  We
have two primary sources of income.  The first is net interest income,
which is the difference between interest income, the income that we earn on our
loans and investments, and interest expense, the interest that we pay on our
deposits and borrowings.
 
 To a lesser extent, we also recognize
income from fees and service charges, which is the compensation we receive from
providing products and services.  Our primary noninterest income comes
from fees and service charges on loan and deposit accounts.  We also
earn income from bank owned life insurance, sales of loans and investments and
investment advisory services.
 
 Expenses.The expenses
we incur in operating our business consist of compensation, taxes and benefits,
office occupancy, computer processing fees, advertising and professional fees
and other expenses.
 
 Compensation, taxes and benefits
consist primarily of the salaries and wages paid to our employees and directors,
payroll taxes and expenses for retirement and other employee
benefits.
 
 Occupancy expenses, which are the fixed
and variable costs of buildings and equipment, consist primarily of lease
payments, real estate taxes, depreciation charges, maintenance, and costs of
utilities.
 
 Computer processing fees includes fees
paid to our third-party data processing servicer and our network security
expenses.
 
 Professional fees include fees paid for
our attorneys, accountants and consultants.
 
 Other expenses include expenses for
insurance (including Federal Deposit Insurance Corporation insurance), postage,
expenses associated with being a public company, expenses related to checking
accounts, supervisory examinations and other miscellaneous operating
activities.
 
 Critical
Accounting Policies
 
 We consider accounting policies
involving significant judgments and assumptions by management that have, or
could have, a material impact on the carrying value of certain assets or on
income to be critical accounting policies.  We consider the following
to be critical accounting policies:  allowance for loan losses and
deferred income taxes.
 
 Allowance
for Loan Losses.  Determining
the amount of the allowance for loan losses necessarily involves a high degree
of judgment.  Management reviews the level of the allowance on a
quarterly basis, at a minimum, and establishes the provision for loan losses
based on the composition of the loan portfolio, delinquency levels, loss
experience, economic conditions, and other factors related to the collectibility
of the loan portfolio.
 
 Although we believe that we use the
best information available to establish the allowance for loan losses, future
additions to the allowance may be necessary based on estimates that are
susceptible to change as a result of changes in economic conditions and other
factors.  We engage an independent review of our commercial loan
portfolio annually and adjust our loan ratings based in part upon this
review.  In addition, our banking regulators as an integral part of
their examination process, periodically review our allowance for loan
losses.  Such agencies may require us to recognize adjustments to the
allowance based on their judgments about information available to it at the time
of its examination.  See notes 2 and 4 of the notes to the financial
statements included in this annual report.
  Deferred
Income Taxes.  We
use the asset and liability method of accounting for income
taxes.  Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.  If current available information raises
doubt as to the realization of the deferred tax assets, a valuation allowance is
established.  Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled.  We exercise significant judgment in evaluating the amount
and timing of recognition of the resulting tax liabilities and assets, including
projections of future taxable income.  These judgments and estimates
are reviewed periodically as regulatory and business factors
change.  See note 11 of the notes to the financial statements in this
annual report.
  4
  Operating
Strategy
  Naugatuck Valley Savings and Loan has
identified growth as one of the key components in its strategy to increase
shareholder value. In 2007 Naugatuck Valley Financial Corporation grew
organically by attracting deposits at competitive rates and reinvesting those
deposits into loans to area businesses and residents.
 
 We grew
mortgages by offering competitive rates and through the sales efforts of our
knowledgeable mortgage originators. Commercial loan growth was the result of
competitive rates and the superior customer service provided by our experienced
loan officers. We grew deposits through competitive pricing and structures, the
offering of Health Savings Accounts (accounts designed to help individuals save
for future qualified medical and retiree health expenses on a tax free basis),
marketing Municipal Deposits, the reintroduction of Vacation Club Accounts
(special accounts designed to help individuals save for vacation expenses) and
the calling efforts of our branch managers and loan officers. In addition we
acquired new DDA accounts by offering $50 to new account customers plus a gas
card for the added commitment of a direct deposit. We are increasing convenience
for our commercial checking account customers by offering remote deposit
capabilities and we have increased the functionality of our business internet
banking product.
 
 Our
growth produced an increase in net interest income in spite of decreasing
spreads. As rates fell during the fourth quarter of 2007, we were able to
decrease deposit rates offered while maintaining a competitive stance in our
marketplace. We also maintained a high loan to asset ratio during 2007 which
also contributed to increased net income since loans typically earn higher rates
of return than investments.
 
 As we
have grown we have also marketed and sold products which produce fee income for
the bank. This resulted in an increase in noninterest income in 2007. These fee
income producing products include investment advisory services, reverse
mortgages and brokerage of mortgage loans. We also increased fees related to our
checking accounts. The lease of rental space at our Seymour Office, which was
previously vacant also served to increase noninterest income.
 
 We have
increased the number of customers and the number of products per customer
through effective utilization of our branch structure and the sales efforts
within those branches.
 
 At the
same time we have become more efficient as we have grown expenses at a slower
pace than we have grown assets. We have controlled expenses through a measured
reduction in branch staffing, a reduction in pension expenses and through the
control of the expenses of our employee’s health insurance benefits by
instituting health reimbursement accounts in the fourth quarter of
2007.  We also conducted a review of our operational procedures which
resulted in increased efficiencies in our loan and deposit operational
areas.
 
 Our
maintenance of strict loan underwriting standards has resulted in the
maintenance of the low delinquency levels seen in our loan portfolios since
2000.  We have not originated or purchased any no-income/no-asset
verified mortgages nor any mortgages that do not meet our full underwriting
standards (“low doc” loans).
 
 In late
2007 we began to expand and modernize our Beacon Falls Office. This upgrade will
make banking at this small but active office more pleasing and will improve the
functionality of this branch for our employees. We are pleased with the growth
and performance of all of our branches including the three new branches opened
in 2006. We did not open any new branches in 2007 but remain dedicated to our de
novo branching strategy as a way to
increase loans and deposits and expand our market areas.  Internet
banking activity increased in 2007 and during 2008 we plan to enhance our
internet banking offerings by adding the ability to apply to open deposit and
loan accounts on-line.
 
 We
controlled interest rate risk in 2007 through the lengthening of borrowings and
the purchase of shorter term investments. In December 2007 we took advantage of
improved yield curve conditions and implemented a $10 million leverage
transaction involving the purchase of Agency Mortgage Backed Securities funded
with lower cost borrowings from the Federal Home Loan Bank of Boston. Also
during 2007 we sold investments at a gain in order to fund loan
demand.
  Balance
Sheet
 
 Loans.  Our
principal lending activity is the origination of loans secured by real estate
primarily located in our market area.  We originate real estate loans
secured by one- to four-family residential homes and multi-family and commercial
real estate and construction loans.  At December 31, 2007, real estate
loans totaled $304.9 million, or 83.8% of total loans compared to $255.4
million, or 81.5% of total loans at December 31, 2006.  Real
estate loans have increased due to favorable interest rates together with
significant real estate development in our market area.
 
 The largest segment of our real estate
loans is one- to four-family residential loans.  At December 31, 2007,
these loans totaled $193.8 million and represented 63.6% of real estate loans
and 53.2% of total loans compared to $179.4 million, which represented 70.2% of
real estate loans and 57.3% of total loans, at December 31,
2006.  One- to four-family residential loans increased $14.4 million,
or 8.0%, from December 31, 2006 to December 31, 2007, reflecting growth in the
mortgage portfolio from new borrowers and refinancing of existing
customers.
  5
  Multi-family and commercial real estate
loans are the second largest segment of our real estate loan
portfolio.  This portfolio was $70.0 million and represented 23.0% of
real estate loans and 19.2% of total loans at December 31, 2007, compared to
$45.9 million, which represented 18.0% of real estate loans and 14.6% of total
loans, at December 31, 2006.  Multi-family and commercial real
estate loans increased $24.1 million, or 52.7%, for the year ended December 31,
2007 due to the efforts of our business development officers to grow market
share and attract new customers.  Additionally, in early 2007 we hired
an additional business development officer to cover the market near our Cheshire
office which was opened in the third quarter of 2006.
 
 We also originate construction loans
secured by residential and commercial real estate.  This portfolio was
$41.0 million and represented 13.5% of real estate loans and 11.3% of total
loans at December 31, 2007, compared to $30.1 million, which represented 11.8%
of real estate loans and 9.6% of total loans at December 31,
2006.  Construction loans increased $10.9 million, or 36.2%, for the
year ended December 31, 2007 primarily due to increased demand by contractors
for construction loans and an increased demand for construction to permanent
financing by commercial customers.
 
 We originate commercial business loans
secured by business assets other than real estate, such as business equipment,
inventory and accounts receivable and letters of credit.  Commercial
business loans totaled $16.7 million, and represented 4.6% of total loans at
December 31, 2007, compared to $13.5 million, representing 4.3% of total loans,
at December 31, 2006.
 
 We also originate a variety of consumer
loans, including second mortgage loans, home equity lines of credit and loans
secured by savings accounts and automobiles.  Consumer loans totaled
$42.4 million and represented 11.6% of total loans at December 31, 2007,
compared to $44.3 million, which represented 14.2% of total loans at
December 31, 2006.  The $1.9 million, or 4.3%, decrease for the
year ended December 31, 2007 was due to reduced demand for this type of
product.
  The following table sets forth the
composition of our loan portfolio at the dates indicated.
 
   At
      December 31,2007
                  
                  
                  2006
                  
                  
                  2005
                  
                  
                  2004
                  
                  
                  2003Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent
                  
                  
                  Amount
                  
                  
                  Percent(Dollars
      in thousands)Real
      estate loans:One-
      to four-family
                  
                  $
                  193,787
                  
                  
                  
                  53.24
                  %
                  
                  $
                  179,374
                  
                  
                  
                  57.27
                  %
                  
                  $
                  156,900
                  
                  
                  
                  59.44
                  %
                  
                  $
                  134,785
                  
                  
                  
                  64.75
                  %
                  
                  $
                  131,353
                  
                  
                  
                  70.98
                  %Construction
                  
                  
                  41,041
                  
                  
                  
                  11.27
                  
                  
                  
                  30,124
                  
                  
                  
                  9.62
                  
                  
                  
                  24,943
                  
                  
                  
                  9.45
                  
                  
                  
                  17,486
                  
                  
                  
                  8.40
                  
                  
                  
                  14,094
                  
                  
                  
                  7.62Multi-family
      and commercial
                    real
      estate
                  
                  
                  70,051
                  
                  
                  
                  19.25
                  
                  
                  
                  45,879
                  
                  
                  
                  14.65
                  
                  
                  
                  33,608
                  
                  
                  
                  12.73
                  
                  
                  
                  22,559
                  
                  
                  
                  10.84
                  
                  
                  
                  14,273
                  
                  
                  
                  7.71Total
      real estate loans
                  
                  
                  304,879
                  
                  
                  
                  83.76
                  
                  
                  
                  255,377
                  
                  
                  
                  81.54
                  
                  
                  
                  215,451
                  
                  
                  
                  81.62
                  
                  
                  
                  174,830
                  
                  
                  
                  83.99
                  
                  
                  
                  159,720
                  
                  
                  
                  86.31Commercial
      business loans
                  
                  
                  16,690
                  
                  
                  
                  4.59
                  
                  
                  
                  13,508
                  
                  
                  
                  4.31
                  
                  
                  
                  9,728
                  
                  
                  
                  3.69
                  
                  
                  
                  4,989
                  
                  
                  
                  2.40
                  
                  
                  
                  4,240
                  
                  
                  
                  2.29Consumer
      loans:Savings
      accounts
                  
                  
                  1,272
                  
                  
                  
                  0.35
                  
                  
                  
                  634
                  
                  
                  
                  0.20
                  
                  
                  
                  785
                  
                  
                  
                  0.30
                  
                  
                  
                  679
                  
                  
                  
                  0.33
                  
                  
                  
                  592
                  
                  
                  
                  0.32Personal
                  
                  
                  302
                  
                  
                  
                  0.08
                  
                  
                  
                  275
                  
                  
                  
                  0.09
                  
                  
                  
                  212
                  
                  
                  
                  0.08
                  
                  
                  
                  217
                  
                  
                  
                  0.10
                  
                  
                  
                  139
                  
                  
                  
                  0.08Automobile
                  
                  
                  327
                  
                  
                  
                  0.09
                  
                  
                  
                  186
                  
                  
                  
                  0.06
                  
                  
                  
                  160
                  
                  
                  
                  0.06
                  
                  
                  
                  98
                  
                  
                  
                  0.05
                  
                  
                  
                  143
                  
                  
                  
                  0.08Home
      equity
                  
                  
                  40,517
                  
                  
                  
                  11.13
                  
                  
                  
                  43,220
                  
                  
                  
                  13.80
                  
                  
                  
                  37,628
                  
                  
                  
                  14.25
                  
                  
                  
                  27,342
                  
                  
                  
                  13.13
                  
                  
                  
                  20,212
                  
                  
                  
                  10.92Total
      consumer loans
                  
                  
                  42,418
                  
                  
                  
                  11.65
                  
                  
                  
                  44,315
                  
                  
                  
                  14.15
                  
                  
                  
                  38,785
                  
                  
                  
                  14.69
                  
                  
                  
                  28,336
                  
                  
                  
                  13.61
                  
                  
                  
                  21,086
                  
                  
                  
                  11.40Total
      loans
                  
                  
                  363,987
                  
                  
                  
                  100.00
                  %
                  
                  
                  313,200
                  
                  
                  
                  100.00
                  %
                  
                  
                  263,964
                  
                  
                  
                  100.00
                  %
                  
                  
                  208,155
                  
                  
                  
                  100.00
                  %
                  
                  
                  185,046
                  
                  
                  
                  100.00
                  %Less:Allowance
      for loan losses
                  
                  
                  2,163
                  
                  
                  
                  
                  
                  
                  
                  2,071
                  
                  
                  
                  
                  
                  
                  
                  1,878
                  
                  
                  
                  
                  
                  
                  
                  1,829
                  
                  
                  
                  
                  
                  
                  
                  1,810Undisbursed
      construction loans
                  
                  
                  1,532
                  
                  
                  
                  
                  
                  
                  
                  2,343
                  
                  
                  
                  
                  
                  
                  
                  2,258
                  
                  
                  
                  
                  
                  
                  
                  2,094
                  
                  
                  
                  
                  
                  
                  
                  2,519Deferred
      loan origination fees
                  
                  
                  461
                  
                  
                  
                  
                  
                  
                  
                  410
                  
                  
                  
                  
                  
                  
                  
                  401
                  
                  
                  
                  
                  
                  
                  
                  412
                  
                  
                  
                  
                  
                  
                  
                  339Loans
      receivable, net
                  
                  $
                  359,831
                  
                  
                  
                  
                  
                  
                  $
                  308,376
                  
                  
                  
                  
                  
                  
                  $
                  259,427
                  
                  
                  
                  
                  
                  
                  $
                  203,820
                  
                  
                  
                  
                  
                  
                  $
                  180,378
 
  6
  The
following table sets forth certain information at December 31, 2007 regarding
the dollar amount of loans repricing or maturing during the periods
indicated.  The table does not include any estimate of prepayments
which significantly shorten the average life of all loans and may cause our
actual repayment experience to differ from that shown below.  Demand
loans having no stated maturity are reported as due in one year or
less.
 
 At
      December 31, 2007Real
      Estate
                  Loans
                
                
                Commercial
                  Business
                  Loans
                
                
                Consumer
                  Loans
                
                
                Total
                  Loans(In
      thousands)One
      year or less
                
                $
                35,010
                
                
                $
                7,719
                
                
                $
                18,805
                
                
                $
                61,534More
      than one year to five years
                
                
                61,409
                
                
                
                6,525
                
                
                
                2,163
                
                
                
                70,097More
      than five years
                
                
                208,457
                
                
                
                2,446
                
                
                
                21,453
                
                
                
                232,356Total
                
                $
                304,876
                
                
                $
                16,690
                
                
                $
                42,421
                
                
                $
                363,987
 
 The following table sets forth the
dollar amount of all loans at December 31, 2007 that are due after
December 31, 2008 and have either fixed interest rates or floating or
adjustable interest rates.  The amounts shown below exclude applicable
loans in process, nonperforming loans and deferred loan fees, net.
 
 Fixed-Rates
                
                
                Floating
      or
                  Adjustable-
                  Rates
                
                
                Total(In
      thousands)Real
      estate loans:One-
      to four-family
                
                $
                170,154
                
                
                $
                35,720
                
                
                $
                205,874Construction
                
                
                5,982
                
                
                
                1,064
                
                
                
                7,046Multi-family
      and commercial
                
                
                5,295
                
                
                
                51,650
                
                
                
                56,945Commercial
      business loans
                
                
                4,006
                
                
                
                4,965
                
                
                
                8,971Consumer
      loans
                
                
                23,536
                
                
                
                81
                
                
                
                23,617Total
                
                $
                208,973
                
                
                $
                93,480
                
                
                $
                302,453
 
 The following table shows loan
origination activity during the periods indicated.
 
 Year
      Ended December 31,2007
                
                
                2006
                
                
                2005(In
      thousands)Total
      loans at beginning of
      period
                
                $
                313,200
                
                
                $
                263,964
                
                
                $
                208,155Loans
      originated:Real
      estate loans:One-
      to
      four-family
                
                
                30,172
                
                
                
                35,330
                
                
                
                42,144Construction
                
                
                32,913
                
                
                
                27,288
                
                
                
                27,695Multi-family
      and
      commercial
                
                
                30,009
                
                
                
                15,672
                
                
                
                23,389Commercial
      business
      loans
                
                
                10,714
                
                
                
                8,172
                
                
                
                6,308Consumer
      loans
                
                
                15,914
                
                
                
                22,651
                
                
                
                24,664Total
      loans
      originated
                
                
                119,722
                
                
                
                109,113
                
                
                
                124,200Loans
      purchased
                
                
                —
                
                
                
                —
                
                
                
                —Deduct:Real
      estate loan principal repayments
                
                
                (43,595
                )
                
                
                (38,364
                )
                
                
                (52,607
                )Loan
      sales
                
                
                —
                
                
                
                —
                
                
                
                —Other
      repayments
                
                
                (25,340
                )
                
                
                (21,513
                )
                
                
                (15,784
                )Net
      loan
      activity
                
                
                50,787
                
                
                
                49,236
                
                
                
                55,809Total
      loans at end of
      period
                
                $
                363,987
                
                
                $
                313,200
                
                
                $
                263,964
 
  7
  Allowance
for Loan Losses and Asset Quality.  The
allowance for loan losses is a valuation allowance for the probable losses
inherent in the loan portfolio.  We evaluate the need to establish
allowances against losses on loans on a quarterly basis.  When
additional allowances are needed a provision for loan losses is charged against
earnings.  The recommendations for increases or decreases to the
allowance are presented by management to the Board of Directors on a quarterly
basis.
 
 The allowance for loan losses is
established to recognize the inherent losses associated with lending
activities.  The methodology for assessing the appropriateness of the
allowance for loan losses consists of the following process.
 
 On a quarterly basis, or more often if
warranted, management analyzes the loan portfolio.  For individually
evaluated loans that are considered impaired, a reserve will be established
based on either the present value of expected future cash flows discounted at
the loan’s effective interest rate, the loan’s observable market price, or for
loans that are considered collateral dependant, the fair value of the
collateral.  (A loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due under the contractual term of the loan agreement.)
 
 All other loans, including loans that
are individually evaluated but not considered impaired, are segregated into
groups based on similar risk factors.  Each of these groups is then
evaluated based on several factors to estimate credit
losses.  Management will determine for each category of loans with
similar risk characteristics the historical loss rate.  Historical
loss rates provide a reasonable starting point for the Bank’s analysis but
analysis and trends in losses do not form a sufficient basis to determine the
appropriate level of the loan loss reserve.  Management also considers
qualitative and environmental factors likely to cause losses.  These
factors include but are not limited to: changes in the amount and severity of
past due, non-accrual and adversely classified loans; changes in local,
regional, and national economic conditions that will affect the collectibility
of the portfolio; changes in the nature and volume of loans in the portfolio;
changes in concentrations of credit, lending area, industry concentrations, or
types of borrowers; changes in lending policies, procedures, competition,
management, portfolio mix, competition, pricing, loan to value trends, extension
and modification requests; and loan quality trends.  This analysis
establishes factors that are applied to each of the segregated groups of loans
to determine an acceptable level of loan loss reserve.
 
 Our banking regulators, as an integral
part of their examination process, periodically review our allowance for loan
loss reserve.  The examination may require us to make additional
provision for loan losses based on judgments different from ours.  In
addition, we engage an independent consultant to review our commercial loan
portfolio and make recommendations based on their review as to the specific
credits in the portfolio.
 
 At December 31, 2007, our
allowance for loan losses represented 0.60% of total gross loans and 222.99% of
nonperforming loans.   The allowance for loan losses increased
$92,000 from December 31, 2006 to December 31, 2007.  The increase in
the allowance was largely the result of a $151,000 provision for loan losses
made druing 2007.  This provision was based on the increasing size of
the loan portfolio and a change in the mix of the portfolio towards commercial
real estate loans which are generally riskier than one-to-four family
loans.
 
 At December 31, 2006, our allowance for
loan losses represented 0.67% of total gross loans and 103.3% of nonperforming
loans.  The allowance for loan losses increased $193,000 from
December 31, 2005 to December 31, 2006.  The increase in the
allowance was the result of net recoveries and provisions for loan
losses.
 
 Total nonperforming loans decreased
from $2.0 million at December 31, 2006, to $970,000 at December 31, 2007 due to
lower nonaccrual delinquency rates in commercial loans.  The Company
recorded a provision for loan losses of $151,000 during the year ended December
31, 2007 and a provision of $192,000 during the year ended December 31,
2006.
 
 Although we believe that we use the
best information available to establish the allowance for loan losses, future
adjustments to the allowance for loan losses may be necessary and results of
operations could be adversely affected if circumstances differ substantially
from the assumptions used in making the determinations.  Furthermore,
while we believe we have established our allowance for loan losses in conformity
with generally accepted accounting principles, there can be no assurance that
regulators, in reviewing our loan portfolio, will not request us to
increase our allowance for loan losses.  In addition, because further
events affecting borrowers and collateral cannot be predicted with certainty,
there can be no assurance that the existing allowance for loan losses is
adequate or that increases will not be necessary should the quality of any loans
deteriorate as a result of the factors discussed above.  Any material
increase in the allowance for loan losses may adversely affect our financial
condition and results of operations.
  8
 
 Summary
of Loan Loss Experience.  The
following table sets forth an analysis of the allowance for loan losses for the
periods indicated.  Where specific loan loss allowances have been
established, any difference between the loss allowance and the amount of loss
realized has been charged or credited to current income.
 
 Year
      Ended December 31,2007
                
                
                2006
                
                
                2005
                
                
                2004
                
                
                2003(Dollars
      in thousands)Allowance
      at beginning of period
                
                $
                2,071
                
                
                $
                1,878
                
                
                $
                1,829
                
                
                $
                1,810
                
                
                $
                1,994Provision
      for loan
      losses
                
                
                151
                
                
                
                192
                
                
                
                32
                
                
                
                —
                
                
                
                45Less:  Charge
      offs:Real
      estate
      loans
                
                
                46
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                265Commercial
      business
      loans
                
                
                5
                
                
                
                —
                
                
                
                3
                
                
                
                51
                
                
                
                —Consumer
      loans
                
                
                10
                
                
                
                2
                
                
                
                1
                
                
                
                5
                
                
                
                2Total
      charge-offs
                
                
                61
                
                
                
                2
                
                
                
                4
                
                
                
                56
                
                
                
                267Plus:  Recoveries:Real
      estate
      loans
                
                
                1
                
                
                
                3
                
                
                
                18
                
                
                
                43
                
                
                
                38Commercial
      business
      loans
                
                
                —
                
                
                
                —
                
                
                
                3
                
                
                
                —
                
                
                
                —Consumer
      loans
                
                
                1
                
                
                
                —
                
                
                
                —
                
                
                
                32
                
                
                
                —Total
      recoveries
                
                
                2
                
                
                
                3
                
                
                
                21
                
                
                
                75
                
                
                
                38Net
      charge-offs
      (recoveries)
                
                
                59
                
                
                
                (1
                )
                
                
                (17
                )
                
                
                (19
                )
                
                
                229Allowance
      at end of
      period
                
                $
                2,163
                
                
                $
                2,071
                
                
                $
                1,878
                
                
                $
                1,829
                
                
                $
                1,810Allowance
      to nonperforming loans
                
                
                222.99
                %
                
                
                103.03
                %
                
                
                638.78
                %
                
                
                306.88
                %
                
                
                199.78
                %Allowance
      to total loans outstanding
                  at
      the end of the
      period
                
                
                0.60
                %
                
                
                0.67
                %
                
                
                0.72
                %
                
                
                0.89
                %
                
                
                0.99
                %Net
      charge-offs (recoveries) to average
                  loans
      outstanding during the period
                
                
                0.02
                %
                
                
                0.00
                %
                
                
                (0.01
                )%
                
                
                0.01
                %
                
                
                0.13
                %
 
 The following table sets forth the
breakdown of the allowance for loan losses by loan category at the dates
indicated.
 
 At
      December 31,2007
                  
                  
                  2006
                  
                  
                  2005Amount
                  
                  
                  %
      of
                    Allowance
                    to
      Total
                    Allowance
                  
                  
                  %
      of
                    Loans
      in
                    Category
                    to
      Total
                    Loans
                  
                  
                  Amount
                  
                  
                  %
      of
                    Allowance
                    to
      Total
                    Allowance
                  
                  
                  %
      of
                    Loans
      in
                    Category
                    to
      Total
                    Loans
                  
                  
                  Amount
                  
                  
                  %
      of
                    Allowance
                    to
      Total
                    Allowance
                  
                  
                  %
      of
                    Loans
      in
                    Category
                    to
      Total
                    Loans(Dollars
      in thousands)One-
      to four-family
                  
                  $
                  661
                  
                  
                  
                  30.56
                  %
                  
                  
                  53.24
                  %
                  
                  $
                  718
                  
                  
                  
                  34.67
                  %
                  
                  
                  57.27
                  %
                  
                  $
                  724
                  
                  
                  
                  38.55
                  %
                  
                  
                  59.44
                  %Construction
                  
                  
                  473
                  
                  
                  
                  21.87
                  
                  
                  
                  11.27
                  
                  
                  
                  464
                  
                  
                  
                  22.40
                  
                  
                  
                  9.62
                  
                  
                  
                  376
                  
                  
                  
                  20.02
                  
                  
                  
                  9.45Multi-family
      and commercial
                    real
      estate
                  
                  
                  495
                  
                  
                  
                  22.88
                  
                  
                  
                  19.25
                  
                  
                  
                  347
                  
                  
                  
                  16.76
                  
                  
                  
                  14.65
                  
                  
                  
                  379
                  
                  
                  
                  20.18
                  
                  
                  
                  12.73Commercial
      business
                  
                  
                  185
                  
                  
                  
                  8.55
                  
                  
                  
                  4.59
                  
                  
                  
                  209
                  
                  
                  
                  10.09
                  
                  
                  
                  4.31
                  
                  
                  
                  113
                  
                  
                  
                  6.02
                  
                  
                  
                  3.69Consumer
      loans
                  
                  
                  349
                  
                  
                  
                  16.14
                  
                  
                  
                  11.65
                  
                  
                  
                  333
                  
                  
                  
                  16.08
                  
                  
                  
                  14.15
                  
                  
                  
                  283
                  
                  
                  
                  15.07
                  
                  
                  
                  14.69Unallocated
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  3
                  
                  
                  
                  0.16
                  
                  
                  
                  —Total
      allowance for loan losses
                  
                  $
                  2,163
                  
                  
                  
                  100.00
                  %
                  
                  
                  100.00
                  %
                  
                  $
                  2,071
                  
                  
                  
                  100.00
                  %
                  
                  
                  100.00
                  %
                  
                  $
                  1,878
                  
                  
                  
                  100.00
                  %
                  
                  
                  100.00
                  %
 
  9
  
 At
      December 31,2004
              
              
              2003Amount
              
              
              %
      of
                Allowance
                to
      Total
                Allowance
              
              
              %
      of
                Loans
      in
                Category
                to
      Total
                Loans
              
              
              Amount
              
              
              %
      of
                Allowance
                to
      Total
                Allowance
              
              
              %
      of
                Loans
      in
                Category
                to
      Total
                Loans(Dollars
      in thousands)One-
      to
      four-family
              
              $
              864
              
              
              
              47.25
              %
              
              
              64.75
              %
              
              $
              927
              
              
              
              51.22
              %
              
              
              70.98
              %Construction
              
              
              142
              
              
              
              7.76
              
              
              
              8.40
              
              
              
              185
              
              
              
              10.22
              
              
              
              7.62Multi-family
      and commercial real estate
              
              
              374
              
              
              
              20.45
              
              
              
              10.84
              
              
              
              321
              
              
              
              17.73
              
              
              
              7.71Commercial
      business
              
              
              50
              
              
              
              2.73
              
              
              
              2.40
              
              
              
              92
              
              
              
              5.08
              
              
              
              2.29Consumer
      loans
              
              
              302
              
              
              
              16.51
              
              
              
              13.61
              
              
              
              232
              
              
              
              12.82
              
              
              
              11.40Unallocated
              
              
              97
              
              
              
              5.30
              
              
              
              —
              
              
              
              53
              
              
              
              2.93
              
              
              
              —Total
      allowance for loan losses
              
              $
              1,829
              
              
              
              100.00
              %
              
              
              100.00
              %
              
              $
              1,810
              
              
              
              100.00
              %
              
              
              100.00
              %
 
 Nonperforming
and Classified Assets.When a loan becomes 90
days delinquent, the loan is placed on nonaccrual status at which time the
accrual of interest ceases, the interest previously accrued to income is
reversed and the loan is placed on a cash basis.  Payments on a
nonaccrual loan are applied to the outstanding principal and interest as
determined at the time of collection of the loan.
 
 We consider repossessed assets and
loans that are 90 days or more past due to be nonperforming
assets.  Real estate that we acquire as a result of foreclosure or by
deed-in-lieu of foreclosure is classified as foreclosed real estate until it is
sold.  When property is acquired it is recorded at the lower of its
cost, which is the unpaid balance of the loan, or fair market value at the date
of foreclosure.  Holding costs and declines in fair value after
acquisition of the property are charged against income.
 
 Nonperforming assets totaled $970,000,
or 0.21% of total assets, at December 31, 2007, which was a decrease of
approximately $1.0 million, or 51.7%, from December 31,
2006.  Nonaccrual loans accounted for 100% of the total nonperforming
assets at December 31, 2007. Nonperforming
assets totaled $2.0 million, or 0.49% of total assets, at December 31, 2006,
which was an increase of $1.7 million, or 489.4%, from December 31,
2005.  Nonaccrual loans accounted for 100% of the total nonperforming
assets at December 31, 2006.
 
 Under current accounting guidelines, a
loan is defined as impaired when, based on current information and events, it is
probable that the creditor will be unable to collect all amounts due under the
contractual terms of the loan agreement.  We consider one- to
four-family mortgage loans and consumer loans to be homogeneous and only
evaluate them for impairment separately when they are delinquent or
classified.  Other loans are evaluated for impairment on an individual
basis.  At December 31, 2007, two loans were considered
impaired.
  The following table provides
information with respect to our nonperforming assets at the dates
indicated.  We did not have any troubled debt restructurings or any
accruing loans past due 90 days or more at the dates presented.
 
 At
      December 31,2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003(Dollars
      in thousands)Nonaccrual
      loans:One-
      to four-family
              
              $
              422
              
              
              $
              423
              
              
              $
              165
              
              
              $
              474
              
              
              $
              500Multi-family
      and commercial realestate
              
              
              356
              
              
              
              1,388
              
              
              
              120
              
              
              
              119
              
              
              
              315Commercial
      business
              
              
              144
              
              
              
              142
              
              
              
              9
              
              
              
              3
              
              
              
              15Consumer
              
              
              48
              
              
              
              57
              
              
              
              —
              
              
              
              —
              
              
              
              76Total
              
              
              970
              
              
              
              2,010
              
              
              
              294
              
              
              
              596
              
              
              
              906Foreclosed
      real estate
              
              
              —
              
              
              
              —
              
              
              
              47
              
              
              
              68
              
              
              
              208Total
      nonperforming assets
              
              $
              970
              
              
              $
              2,010
              
              
              $
              341
              
              
              $
              664
              
              
              $
              1,114Total
      nonperforming loans to total loans
              
              
              0.27
              %
              
              
              0.65
              %
              
              
              0.11
              %
              
              
              0.29
              %
              
              
              0.50
              %Total
      nonperforming loans to total assets
              
              
              0.21
              %
              
              
              0.49
              %
              
              
              0.08
              %
              
              
              0.22
              %
              
              
              0.37
              %Total
      nonperforming assets to total assets
              
              
              0.21
              %
              
              
              0.49
              %
              
              
              0.10
              %
              
              
              0.25
              %
              
              
              0.46
              %
  10
 
 Other than disclosed in the previous
table, there are no other loans at December 31, 2007 that we have serious doubts
about the ability of the borrowers to comply with the present loan repayment
terms.
 
 Interest income that would have been
recorded for the years ended December 31, 2007 and December 31, 2006 had
nonaccruing loans been current according to their original terms amounted to
$45,000 and $68,200, respectively.  Income related to nonaccrual loans
included in interest income for the years ended December 31, 2007 and December
31, 2006 amounted to $69,000 and $125,400, respectively.
 
 Federal regulations require us to
regularly review and classify our assets.  In addition, our regulators
have the authority to identify problem assets and, if appropriate, require them
to be classified.  There are three classifications for problem assets:
substandard, doubtful and loss.  “Substandard assets” must have one or
more defined weaknesses and are characterized by the distinct possibility that
we will sustain some loss if the deficiencies are not
corrected.  “Doubtful assets” have the weaknesses of substandard
assets with the additional characteristic that the weaknesses make collection or
liquidation in full on the basis of currently existing facts, conditions and
values questionable, and there is a high possibility of loss.  An
asset classified “loss” is considered uncollectible and of such little value
that continuance as an asset of the institution is not warranted.  The
regulations also provide for a “special mention” category, described as assets
which do not currently expose us to a sufficient degree of risk to warrant
classification but do possess credit deficiencies or potential weaknesses
deserving our close attention.  If we classify an asset as loss, we
must charge off such amount.
  The following table shows the aggregate
amounts of our classified assets at the dates indicated.
 
 At
      December 31,2007
              
              
              2006(In
      thousands)Special
      mention assets
              
              $
              15,408
              
              
              $
              6,899Substandard
      assets
              
              
              2,211
              
              
              
              3,137Doubtful
      assets
              
              
              5
              
              
              
              4Loss
      assets
              
              
              —
              
              
              
              —Total
      classified assets
              
              $
              17,624
              
              
              $
              10,040
 
 Special mention assets at December 31,
2007 and December 31, 2006 did not include any nonaccrual
loans.   Substandard assets at December 31, 2007 and
December 31, 2006 included nonaccrual loans of $970,000 and $2.0 million,
respectively.  Doubtful assets at December 31, 2007 did not include
any nonaccrual loans, while all doubtful assets at  December 31,
2006 were nonaccrual loans.  The increase in loans classified special
mention in the 2007 period was due in part to the timeliness of the borrower’s
financial information and a general increase of commercial lending activity over
the last three years.
 
 Delinquencies.  The
following table provides information about delinquencies in our loan portfolios
at the dates indicated.
 
 At
      December 31,2007
              
              
              2006
              
              
              200530-59
      Days
                Past
      Due
              
              
              60-89
      Days
                Past
      Due
              
              
              30-59
      Days
                Past
      Due
              
              
              60-89
      Days
                Past
      Due
              
              
              30-59
      Days
                Past
      Due
              
              
              60-89
      Days
                Past
      Due(In
      thousands)One-
      to
      four-family
              
              $
              99
              
              
              $
              950
              
              
              $
              413
              
              
              $
              392
              
              
              $
              792
              
              
              $
              498Multi-family
      and commercial
                real
      estate
              
              
              880
              
              
              
              678
              
              
              
              603
              
              
              
              664
              
              
              
              —
              
              
              
              —Commercial
      business
              
              
              31
              
              
              
              25
              
              
              
              262
              
              
              
              310
              
              
              
              164
              
              
              
              —Consumer
      loans
              
              
              11
              
              
              
              —
              
              
              
              —
              
              
              
              5
              
              
              
              7
              
              
              
              —Total
              
              $
              1,021
              
              
              $
              1,653
              
              
              $
              1,278
              
              
              $
              1,371
              
              
              $
              963
              
              
              $
              498
  11
 
 Securities.  Our
securities portfolio consists primarily of mortgage-backed securities and
collateralized mortgage obligations with maturities of 30 years or less,
municipal obligations with maturities of 15 years or less, money market
preferred obligations, as well as U.S. Government and agency
obligations.  Securities decreased by $3.8 million in the year ended
December 31, 2007 primarily due to principal payments received on
mortgage-backed securities and investment sales to meet liquidity
needs.   Substantially all of our mortgage-backed securities and
collateralized mortgage obligations were issued either by Ginnie Mae, Fannie Mae
or Freddie Mac.  Our securities portfolio also includes a private
label collateralized mortgage obligation and, to a lesser extent, corporate
obligations and interest-bearing balances (certificates of deposits) at other
institutions.  The interest-bearing balances are all held to maturity
and all mature within one year.
 
 Securities increased by $7.2 million in
the year ended December 31, 2006 primarily due to the purchase of securities
funded through Federal Home Loan Bank advances and excess
liquidity.
  The following table sets forth the
amortized costs and fair values of our securities portfolio at the dates
indicated.
 
 At
      December 31,2007
              
              
              2006
              
              
              2005Amortized
                Cost
              
              
              Fair
                Value
              
              
              Amortized
                Cost
              
              
              Fair
                Value
              
              
              Amortized
                Cost
              
              
              Fair
                Value(In
      thousands)Available-for-sale
      securities:U.S.
      Government and agency obligations
              
              $
              2,749
              
              
              $
              2,744
              
              
              $
              8,495
              
              
              $
              8,415
              
              
              $
              15,344
              
              
              $
              15,175Mortgage-backed
      securities
              
              
              31,352
              
              
              
              31,261
              
              
              
              25,111
              
              
              
              24,782
              
              
              
              22,544
              
              
              
              22,082Collateralized
      mortgage obligations
              
              
              3,547
              
              
              
              3,494
              
              
              
              4,796
              
              
              
              4,694
              
              
              
              4,199
              
              
              
              4,098Municipal
      obligations
              
              
              14,092
              
              
              
              14,075
              
              
              
              15,177
              
              
              
              15,190
              
              
              
              8,715
              
              
              
              8,769Money
      market preferred obligations
              
              
              12,700
              
              
              
              12,700
              
              
              
              12,700
              
              
              
              12,700
              
              
              
              6,000
              
              
              
              6,000Corporate
      obligations
              
              
              1,000
              
              
              
              990
              
              
              
              1,951
              
              
              
              1,955
              
              
              
              1,928
              
              
              
              1,923Held-to-maturity
      securities:U.S.
      Government and agency obligations
              
              
              1,000
              
              
              
              998
              
              
              
              1,201
              
              
              
              1,192
              
              
              
              1,202
              
              
              
              1,189Interest-bearing
      balances
              
              
              190
              
              
              
              190
              
              
              
              1,330
              
              
              
              1,330
              
              
              
              3,800
              
              
              
              3,800Total
              
              $
              66,630
              
              
              $
              66,452
              
              
              $
              70,761
              
              
              $
              70,258
              
              
              $
              63,732
              
              
              $
              63,036
 
 At December 31, 2007, we did not own
any securities, other than U.S. Government and agency securities, that had an
aggregate book value in excess of 10% of our total capital at that
date.
 
  12
  The following table sets forth the
final maturities and weighted average yields of securities at December 31,
2007.  Mortgage-backed securities and collateralized mortgage
obligations are secured by mortgages and as a result produce monthly principal
repayments which are not reflected in the table below.  Certain
mortgage-backed securities, collateralized mortgage obligations and money market
preferred obligations have adjustable interest rates and reprice within the
various maturity ranges.  These repricing schedules are not reflected
in the table below.  At December 31, 2007, mortgage-backed securities
and collateralized mortgage obligations with adjustable rates totaled $16.0
million.
  
 Less
      Than
                  One
      Year
                
                
                More
      than
                  One
      Year to
                  Five
      Years
                
                
                More
      than
                  Five
      Years to
                  Ten
      Years
                
                
                More
      than
                  Ten
      Years
                
                
                TotalCarrying
                  Value
                
                
                Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  Average
                  Yield
                
                
                Carrying
                  Value
                
                
                Weighted
                  Average
                  Yield(Dollars
      in thousands)Available-for-sale
      securities:U.S.
      Government and agency
                  obligations
                
                $
                1,745
                
                
                
                4.39
                %
                
                $
                —
                
                
                
                —
                
                
                $
                999
                
                
                
                5.00
                %
                
                $
                —
                
                
                
                —
                
                
                $
                2,744
                
                
                
                4.61
                %Mortgage-backed
      securities
                
                
                —
                
                
                
                —
                
                
                
                1,364
                
                
                
                3.50
                %
                
                
                —
                
                
                
                —
                
                
                
                29,897
                
                
                
                5.22
                %
                
                
                31,261
                
                
                
                5.14
                %Collateralized
      mortgage
                  obligations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                3,494
                
                
                
                3.81
                %
                
                
                3,494
                
                
                
                3.81
                %Municipal
      obligations
                
                
                
                
                
                
                
                
                
                
                —
                
                
                
                —
                
                
                
                1,555
                
                
                
                3.92
                %
                
                
                12,520
                
                
                
                4.02
                %
                
                
                14,075
                
                
                
                4.01
                %Money
      market preferred
                  obligations
                
                
                12,700
                
                
                
                6.55
                %
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                12,700
                
                
                
                6.55
                %Corporate
      obligations
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                990
                
                
                
                6.00
                %
                
                
                —
                
                
                
                —
                
                
                
                990
                
                
                
                6.00
                %Total
      available-for-sale
                  securities
                
                
                14,445
                
                
                
                6.29
                %
                
                
                1,364
                
                
                
                3.50
                %
                
                
                3,544
                
                
                
                4.81
                %
                
                
                45,911
                
                
                
                4.79
                %
                
                
                65,264
                
                
                
                5.09
                %Held-to-maturity
      securities:U.S.
      Government and agency
                  obligations
                
                
                1,000
                
                
                
                4.63
                %
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,000
                
                
                
                4..63
                %Interest-bearing
      balances
                
                
                190
                
                
                
                3.75
                %
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                190
                
                
                
                3.75
                %Total
      held-to-maturity
                  securities
                
                
                1,190
                
                
                
                4.49
                %
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,190
                
                
                
                4.49
                %Total
                
                $
                15,635
                
                
                
                6.15
                %
                
                $
                1,364
                
                
                
                3.50
                %
                
                $
                3,544
                
                
                
                4.81
                %
                
                $
                45,911
                
                
                
                4.79
                %
                
                $
                66,454
                
                
                
                5.08
                %
  Bank
Owned Life Insurance.During
2003, we purchased life insurance policies on certain key
executives.  We purchased $2.5 million of additional policies in the
fourth quarter of 2005.  Bank owned life insurance is recorded as an
asset at the lower of its cash surrender value or the amount that can be
realized.  Income earned on bank owned life insurance policies is
exempt from income taxes.
 
 Deposits.  Our
primary source of funds is retail deposit accounts held principally by
individuals and businesses within our market area.  The deposit base
is comprised of certificate accounts, regular savings accounts, checking and NOW
accounts, money market savings accounts and health savings
accounts.  At December 31, 2007, we had no brokered
deposits.  Total deposits increased $32.2 million or 11.1% in the year
ended December 31, 2007.  During that time period, certificate
accounts increased 22.6%, regular savings accounts decreased by 10.1%, checking
and NOW accounts decreased by 13.6% and money market deposit accounts increased
by 35.5%.  The increase in deposits was primarily due to the opening
of our three new offices in the third quarter of 2006 combined with more
aggressive pricing.  The decrease in regular savings accounts was
primarily due to the transfer of funds to other savings products with higher
rates.
 
 The following table sets forth the
balances of our deposit products at the date indicated.
 
 At
      December 31,2007
                
                
                2006
                
                
                2005(In
      thousands)Certificate
      accounts
                
                $
                202,411
                
                
                $
                165,076
                
                
                $
                122,431Regular
      savings accounts
                
                
                41,480
                
                
                
                46,156
                
                
                
                51,375Checking
      and NOW accounts
                
                
                49,511
                
                
                
                57,301
                
                
                
                46,825Money
      market savings accounts
                
                
                27,996
                
                
                
                20,665
                
                
                
                20,215Total
                
                $
                321,398
                
                
                $
                289,198
                
                
                $
                240,846
    13
 
 The following table indicates the
amount of jumbo certificate accounts by time remaining until maturity at
December 31, 2007.  Jumbo certificate accounts require minimum
deposits of $100,000.
 
 Maturity
      Period
                
                Certificate
                  Accounts(In
      thousands)Three
      months or less
                
                $
                30,817Over
      three through six months
                
                
                14,128Over
      six through twelve months
                
                
                17,857Over
      twelve months
                
                
                4,448Total
                
                $
                67,250
 
 Borrowings.  We
borrow funds from the Federal Home Loan Bank of Boston during periods of low
liquidity to match fund increases in our fixed-rate mortgage portfolio and to
provide long-term fixed-rate funding with the goal of decreasing our exposure to
an increase in interest rates.  In addition, we occasionally borrow
short-term from correspondent banks to cover temporary cash needs.  At
December 31, 2007, we had the ability to borrow a total of $3.5 million from a
correspondent bank, none of which was borrowed at such date.  We also
use securities sold under agreements to repurchase as a source of
borrowings
  The
following table presents certain information regarding our borrowings during the
periods and at the dates indicated (all of which were Federal Home Loan Bank
advances).
 
 Year
      Ended December 31,2007
              
              
              2006
              
              
              2005(Dollars
      in thousands)Maximum
      amount of advances outstanding
                at
      any month end during the period
              
              $
              84,878
              
              
              $
              70,414
              
              
              $
              57,059Average
      advances outstanding
                during
      the
      period
              
              
              69,866
              
              
              
              59,423
              
              
              
              38,530Weighted
      average interest rate
                during
      the
      period
              
              
              4.89
              %
              
              
              4.69
              %
              
              
              3.93
              %Balance
      outstanding at end of period
              
              $
              84,878
              
              
              $
              68,488
              
              
              $
              57,059Weighted
      average interest rate
                at
      end of
      period
              
              
              4.66
              %
              
              
              4.83
              %
              
              
              4.20
              %
 
 Equity.  Total
equity decreased by $627,000, or 1.2%, to $50.5 million at December 31, 2007
from $51.1 million at December 31, 2006.  The decrease in 2007
resulted from net income of $1.4 million, dividends of $589,000 paid to
stockholders, stock repurchases of $2.4 million, a net decrease to the
unrealized loss on available for sale securities of $210,000 and $696,000 in
capital adjustments related to the Company’s 2005 Equity Incentive
Plan.  Our average equity to average assets ratio was 11.80% at
December 31, 2007, compared to 13.65% at December 31, 2006.
 
 Comparison
of Operating Results for the Years Ended December 31, 2007 and 2006
 
 
 Overview.
 2007
              
              
              2006
              
              
              %
      Change
                2007/2006(Dollars
      in thousands)Net
      income
              
              $
              1,420
              
              
              $
              1,448
              
              
              
              (1.93
              %)Return
      on average assets
              
              
              0.33
              %
              
              
              0.38
              %
              
              
              (13.16
              %)Return
      on average equity
              
              
              2.77
              %
              
              
              2.79
              %
              
              
              (0.72
              %)
 
 Net income for the year ended December
31, 2007 decreased $28,000 from net income in 2006.  The decrease
resulted primarily from an increase in noninterest expense of $947,000,
partially offset by a $456,000 increase in net interest income and a $435,000
increase in noninterest income.
 
 Net Interest Income.
 
 Net interest income for the year ended
December 31, 2007, totaled $11.9 million compared to $11.4 million for the year
ended December 31, 2006, an increase of $456,000 or 4.0%.  The slight
increase in 2007 was due to an increase in the average balance of interest
earning assets of 15.1%, combined with an increase in the average rate earned on
these assets of 29 basis points.
 
 The increase in interest earning assets
is attributed primarily to an increase in the loan portfolio.  The
average balances in the loan portfolio increased by 19.3% in
2007.  The largest increases were in the commercial mortgage portfolio
followed by the residential mortgage portfolio.
 
 The increase in interest income was
partially offset by an increase in interest expense.  Interest expense
increased by $3.8 million, or 40.9% in 2007 due to rising rates on deposits and
borrowings along with increases in the average balances of deposits and
borrowings.  The average balances of deposits increased by 16.5% in
2007, and the average balance of borrowings increased by 17.7% due to increased
loan demand.  We experienced an increase of 60 basis points in the
average rate paid on deposits and borrowings during 2007.  The largest
increases in deposits were in
certificates of deposit, followed by smaller increases in money market accounts
and checking accounts, partially offset by a decrease in savings
accounts.  The increase in certificates of deposit was due to our
three new offices which were opened in the third quarter of 2006, combined with
promotional rate accounts.
  14
  
 Average
Balances and Yields.  The
following table presents information regarding average balances of assets and
liabilities, the total dollar amounts of interest income and dividends, the
total dollar amount of interest expense and the resulting average yields and
costs.  The yields and costs for the periods indicated are derived by
dividing income or expense by the average balances of assets or liabilities,
respectively, for the periods presented.  For purposes of this table,
average balances have been calculated using the average of daily balances and
nonaccrual loans are included in average balances only.  During the
2007, 2006 and 2005 periods, we held tax-exempt municipal securities with
average balances of $15.0 million, $9.7 million and $6.3 million, respectively,
and during the 2007, 2006 and 2005 periods we held preferred money market
securities with an average balance of $12.7 million, $8.1 million, and $4.4
million respectively which recognize a dividends received
deduction.  The yields below do not reflect the tax benefits of these
securities.
 
 2007
                
                
                2006
                
                
                2005Average
                  Balance
                
                
                Interest
                  and
                  Dividends
                
                
                Yield/
                  Cost
                
                
                Average
                  Balance
                
                
                Interest
                  and
                  Dividends
                
                
                Yield/
                  Cost
                
                
                Average
                  Balance
                
                
                Interest
                  and
                  Dividends
                
                
                Yield/
                  Cost(Dollars
      in thousands)Interest-earning
      assets:Loans
                
                $
                331,490
                
                
                $
                21,681
                
                
                
                6.54
                %
                
                $
                277,789
                
                
                $
                17,506
                
                
                
                6.30
                %
                
                $
                225,850
                
                
                $
                13,642
                
                
                
                6.04
                %Fed
      Funds sold
                
                
                2,599
                
                
                
                143
                
                
                
                5.50
                
                
                
                1,407
                
                
                
                77
                
                
                
                5.47
                
                
                
                1,756
                
                
                
                56
                
                
                
                3.19Investment
      securities
                
                
                64,290
                
                
                
                2,938
                
                
                
                4.57
                
                
                
                67,077
                
                
                
                2,976
                
                
                
                4.44
                
                
                
                52,987
                
                
                
                2,102
                
                
                
                3.97Federal
      Home Loan Bank
                  stock
                
                
                4,179
                
                
                
                268
                
                
                
                6.41
                
                
                
                3,581
                
                
                
                191
                
                
                
                5.33
                
                
                
                2,481
                
                
                
                108
                
                
                
                4.35Total
      interest-earning assets
                
                
                402,558
                
                
                
                25,030
                
                
                
                6.22
                
                
                
                349,854
                
                
                
                20,750
                
                
                
                5.93
                
                
                
                283,074
                
                
                
                15,908
                
                
                
                5.62Noninterest-earning
      assets
                
                
                31,629
                
                
                
                
                
                
                
                
                
                
                
                30,084
                
                
                
                
                
                
                
                
                
                
                
                25,340Total
      assets
                
                $
                434,187
                
                
                
                
                
                
                
                
                
                
                $
                379,938
                
                
                
                
                
                
                
                
                
                
                $
                308,414Interest-bearing
      liabilities:Certificate
      accounts
                
                $
                183,172
                
                
                $
                8,414
                
                
                
                4.59
                
                
                $
                143,007
                
                
                $
                5,613
                
                
                
                3.92
                
                
                $
                99,487
                
                
                $
                2,772
                
                
                
                2.79Regular
      savings accounts and
                  escrow
                
                
                46,093
                
                
                
                258
                
                
                
                0.56
                
                
                
                52,769
                
                
                
                418
                
                
                
                0.79
                
                
                
                51,326
                
                
                
                360
                
                
                
                0.70Checking
      and NOW accounts
                
                
                56,915
                
                
                
                487
                
                
                
                0.86
                
                
                
                52,682
                
                
                
                288
                
                
                
                0.55
                
                
                
                39,857
                
                
                
                46
                
                
                
                0.12Money
      market savings
                  accounts
                
                
                24,709
                
                
                
                591
                
                
                
                2.39
                
                
                
                18,356
                
                
                
                232
                
                
                
                1.26
                
                
                
                25,160
                
                
                
                245
                
                
                
                0.97Total
      interest-bearing
                  deposits
                
                
                310,889
                
                
                
                9,750
                
                
                
                3.14
                
                
                
                266,814
                
                
                
                6,551
                
                
                
                2.46
                
                
                
                215,830
                
                
                
                3,423
                
                
                
                1.59FHLB
      advances
                
                
                69,866
                
                
                
                3,414
                
                
                
                4.89
                
                
                
                59,423
                
                
                
                2,789
                
                
                
                4.69
                
                
                
                38,530
                
                
                
                1,512
                
                
                
                3.92Other
      borrowings
                
                
                290
                
                
                
                10
                
                
                
                3.45
                
                
                
                193
                
                
                
                10
                
                
                
                5.17
                
                
                
                161
                
                
                
                6
                
                
                
                3.73Total
      interest-bearing
                  liabilities
                
                
                381,045
                
                
                
                13,174
                
                
                
                3.46
                
                
                
                326,431
                
                
                
                9,350
                
                
                
                2.86
                
                
                
                254,521
                
                
                
                4,941
                
                
                
                1.94Noninterest-bearing
      liabilities
                
                
                1,899
                
                
                
                
                
                
                
                
                
                
                
                1,639
                
                
                
                
                
                
                
                
                
                
                
                1,869Total
      liabilities
                
                
                382,944
                
                
                
                
                
                
                
                
                
                
                
                328,070
                
                
                
                
                
                
                
                
                
                
                
                256,390Stockholders’
      equity
                
                
                51,243
                
                
                
                
                
                
                
                
                
                
                
                51,868
                
                
                
                
                
                
                
                
                
                
                
                52,024Total
      liabilities and
                  stockholders’
      equity
                
                $
                434,187
                
                
                
                
                
                
                
                
                
                
                $
                379,938
                
                
                
                
                
                
                
                
                
                
                $
                308,414Net
      interest income
                
                
                
                
                
                $
                11,856
                
                
                
                
                
                
                
                
                
                
                $
                11,400
                
                
                
                
                
                
                
                
                
                
                $
                10,967Interest
      rate spread
                
                
                
                
                
                
                
                
                
                
                2.76
                %
                
                
                
                
                
                
                
                
                
                
                3.07
                %
                
                
                
                
                
                
                
                
                
                
                3.68
                %Net
      interest margin
                
                
                
                
                
                
                
                
                
                
                2.95
                %
                
                
                
                
                
                
                
                
                
                
                3.26
                %
                
                
                
                
                
                
                
                
                
                
                3.87
                %Average
      interest-earning assets
                  to
      average interest-bearing
                  liabilities
                
                
                
                
                
                
                
                
                
                
                105.65
                %
                
                
                
                
                
                
                
                
                
                
                107.18
                %
                
                
                
                
                
                
                
                
                
                
                111.22
                %
 
 
  15
  Rate/Volume
Analysis.  The
following table sets forth the effects of changing rates and volumes on our net
interest income.  The rate column shows the effects attributable to
changes in rate (changes in rate multiplied by prior volume).  The
volume column shows the effects attributable to changes in volume (changes in
volume multiplied by prior rate).  For purposes of this table, changes
attributable to changes in both rate and volume that cannot be segregated have
been allocated proportionately based on the changes due to rate and the changes
due to volume.  The net column represents the sum of the prior
columns.
 
 2007
      Compared to 2006
                
                
                2006
      Compared to 2005Increase
      (Decrease)
                  Due
      to
                
                
                
                
                
                Increase
      (Decrease)
                  Due
      toVolume
                
                
                Rate
                
                
                Net
                
                
                Volume
                
                
                Rate
                
                
                Net(In
      thousands)Interest
      income:Loans
                
                $
                3,491
                
                
                $
                684
                
                
                $
                4,175
                
                
                $
                3,254
                
                
                $
                610
                
                
                $
                3,864Fed
      Funds sold
                
                
                66
                
                
                
                -
                
                
                
                66
                
                
                
                (8
                )
                
                
                29
                
                
                
                21Investment
      securities
                
                
                (137
                )
                
                
                99
                
                
                
                (38
                )
                
                
                605
                
                
                
                269
                
                
                
                874Federal
      Home Loan Bank
                  stock
                
                
                35
                
                
                
                42
                
                
                
                77
                
                
                
                55
                
                
                
                28
                
                
                
                83Total
      interest income
                
                
                3,455
                
                
                
                825
                
                
                
                4,280
                
                
                
                3,906
                
                
                
                936
                
                
                
                4,842Interest
      expense:Certificate
      accounts
                
                
                1,744
                
                
                
                1,057
                
                
                
                2,801
                
                
                
                1,469
                
                
                
                1,372
                
                
                
                2,841Regular
      savings accounts
                
                
                (48
                )
                
                
                (112
                )
                
                
                (160
                )
                
                
                10
                
                
                
                48
                
                
                
                58Checking
      and NOW accounts
                
                
                25
                
                
                
                174
                
                
                
                199
                
                
                
                19
                
                
                
                223
                
                
                
                242Money
      market savings
                  accounts
                
                
                100
                
                
                
                259
                
                
                
                359
                
                
                
                128
                
                
                
                (141
                )
                
                
                (13
                )Total
      deposit expense
                
                
                1,821
                
                
                
                1,378
                
                
                
                3,199
                
                
                
                1,626
                
                
                
                1,502
                
                
                
                3,128FHLB
      advances
                
                
                506
                
                
                
                119
                
                
                
                625
                
                
                
                938
                
                
                
                339
                
                
                
                1,277Other
      borrowings
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1
                
                
                
                3
                
                
                
                4Total
      interest expense
                
                
                2,327
                
                
                
                1,497
                
                
                
                3,824
                
                
                
                2,565
                
                
                
                1,844
                
                
                
                4,409Net
      interest income
                
                $
                1,128
                
                
                $
                (672
                )
                
                $
                456
                
                
                $
                1,341
                
                
                $
                (908
                )
                
                $
                433
 
 Provision for Loan Losses.
 
 During the year ended December 31,
2007, a $151,000 provision was made to the allowance for loan
losses.   The provision was primarily due to the increasing size
of the loan portfolio, a change in the mix of the portfolio towards commercial
loans which are generally riskier than one-to-four family loans and a small
adjustment to the factor used for general economic conditions.
 
 During the year ended December 31,
2006, a $192,000 provision was made to the allowance for loan
losses.  This provision is due to the increasing size of the loan
portfolio, specifically, the increase in commercial construction, commercial
real estate and commercial business loan portfolios, as well as an increase in
the mortgage loan portfolio.  In addition, there was an increase in
the loans which were classified requiring an increase to the
reserve.  In 2006, there was an increase in nonperforming loans and as
a result there was a decrease in the ratio of the allowance to nonperforming
loans and assets.
 
  16
  Noninterest
Income.  The
following table shows the components of noninterest income and the percentage
changes from 2007 to 2006.
 
 2007
                
                
                2006
                
                
                %
      Change
                  2007/2006Fees
      for services related to deposit accounts
                
                $
                955
                
                
                $
                873
                
                
                
                9.39
                %Fees
      for other services
                
                
                559
                
                
                
                540
                
                
                
                3.52Income
      from bank owned life insurance
                
                
                308
                
                
                
                304
                
                
                
                1.32Income
      from investment advisoryservices,
      net
                
                
                260
                
                
                
                98
                
                
                
                165.31Gain
      on sale of investments
                
                
                65
                
                
                
                6
                
                
                
                983.33Other
      income
                
                
                207
                
                
                
                127
                
                
                
                62.99Total
                
                $
                2,354
                
                
                $
                1,948
                
                
                
                20.84
                %
 
 For the year ended December 31, 2007,
noninterest income increased 20.8% to $2.4 million, compared to $1.9 million for
2006.  The largest increases in noninterest income were in income from
investment advisory services, fees for services related to deposit accounts and
fees for other services, as a result of product growth in these
areas.  In 2007, the Company also experienced an increase in gains on
the sale of investments over the 2006 period.
 
 Noninterest
Expense.The
following table shows the components of noninterest expense and the percentage
changes from 2007 to 2006.
 
 2007
              
              
              2006
              
              
              %
      Change 2
                007/2006Compensation,
      taxes and benefits
              
              $
              6,914
              
              
              $
              6,408
              
              
              
              7.90
              %Office
      occupancy
              
              
              1,966
              
              
              
              1,757
              
              
              
              11.90Computer
      processing
              
              
              733
              
              
              
              606
              
              
              
              20.96Advertising
              
              
              594
              
              
              
              672
              
              
              
              (11.61
              )Professional
      fees
              
              
              504
              
              
              
              380
              
              
              
              32.63Directors
      compensation
              
              
              494
              
              
              
              516
              
              
              
              (4.26
              )Office
      supplies
              
              
              201
              
              
              
              193
              
              
              
              4.15Charitable
      contributions
              
              
              31
              
              
              
              34
              
              
              
              (8.82
              )Loss
      on foreclosed real estate, net
              
              
              -
              
              
              
              16
              
              
              
              (100.00
              )Other
      expenses (1)
              
              
              985
              
              
              
              922
              
              
              
              6.94Total
              
              $
              12,422
              
              
              $
              11,504
              
              
              
              7.98
              %
 ____________________________
 (1)
              Other
      expenses for all periods include, among other items, insurance, postage
      and expenses related to checking
accounts.
 
 Noninterest expense was $12.4 million
for the year ended December 31, 2007, compared to $11.5 million for
2006.  The increases was primarily the result of increases in
compensation costs, computer processing costs and office occupancy expenses over
the 2006 period.  All of the increases were primarily related to the
opening of three new branch offices and were partially offset by a decrease in
advertising expense in 2007.
 
 Income Taxes
 
 Income taxes for the year ended
December 31, 2007 increased to $217,000 from $204,000 in 2006.  The
increase was due to a higher level of taxable income.  The effective
tax rate for 2007 was 13.3% compared to 12.3% for 2006.  See note 11
to the financial statements in this annual report.
  17
  Market
Risk Analysis
 
 Qualitative
Aspects of Market Risk.Our
most significant form of market risk is interest rate risk.  We manage
the interest rate sensitivity of our interest-bearing liabilities and
interest-earning assets in an effort to minimize the adverse effects of changes
in the interest rate environment.  Deposit accounts typically react
more quickly to changes in market interest rates than mortgage loans because of
the shorter maturities of deposits.  As a result, sharp increases in
interest rates may adversely affect our earnings while decreases in interest
rates may beneficially affect our earnings.  To reduce the potential
volatility of our earnings, we have sought to improve the match between assets
and liability maturities (or rate adjustment periods), while maintaining an
acceptable interest rate spread, by originating adjustable-rate mortgage loans
for retention in our loan portfolio, variable-rate home equity lines and
variable-rate commercial loans and by purchasing variable-rate investments and
investments with expected maturities of less than 10 years.  In
2002-2004 we sold a small percentage of our originations of longer term
fixed-rate one- to four-family mortgage 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.  We did not sell any loans in 2007, 2006 or
2005.  Generally, loans are sold without recourse and with servicing
retained.  We currently do not participate in hedging programs,
interest rate swaps or other activities involving the use of off-balance sheet
derivative financial instruments.
 
 Our Asset/Liability Committee
communicates, coordinates and controls all aspects of asset/liability
management.  The committee establishes and monitors the volume and mix
of assets and funding sources with the objective of managing assets and funding
sources.
 
 Quantitative
Aspects of Market Risk.  We use an interest rate sensitivity
analysis prepared by the Office of Thrift Supervision to review our level of
interest rate risk.  This analysis measures interest rate risk by
computing changes in net portfolio value of our cash flows from assets,
liabilities and off-balance sheet items in the event of a range of assumed
changes in market interest rates.  Net portfolio value represents the
market value of portfolio equity and is equal to the market value of assets
minus the market value of liabilities, with adjustments made for off-balance
sheet items.  This analysis assesses the risk of loss in market risk
sensitive instruments in the event of a sudden and sustained 100 to 300 basis
point increase or a 100 to 200 basis point decrease in market interest rates
with no effect given to any steps that we might take to counter the effect of
that interest rate movement.  We measure interest rate risk by
modeling the changes in net portfolio value over a variety of interest rate
scenarios.  The following table, which is based on information that we
provide to the Office of Thrift Supervision, presents the change in our net
portfolio value at December 31, 2007 that would occur in the event of an
immediate change in interest rates based on Office of Thrift Supervision
assumptions, with no effect given to any steps that we might take to counteract
that change.
 
 Net
      Portfolio Value
                
                
                Net
      Portfolio Value as % of
                  Present
      Value of AssetsBasis
      Point (“bp”)
                  Change
      in Rates
                
                $
      Amount
                
                
                $
      Change
                
                
                %
      Change
                
                
                NPV
      Ratio
                
                
                Change(Dollars
      in thousands)300
                bp
                
                $
                24,814
                
                
                $
                (25,516
                )
                
                
                (51
                )%
                
                
                5.64
                %
                
                
                (5.04
                )%200
                
                
                
                33,916
                
                
                
                (16,414
                )
                
                
                (33
                )
                
                
                7.52
                
                
                
                (3.16
                )100
                
                
                
                42,710
                
                
                
                (7,620
                )
                
                
                (15
                )
                
                
                9.25
                
                
                
                (1.43
                )0
                
                
                
                50,330
                
                
                
                -
                
                
                
                -
                
                
                
                10.68
                
                
                
                -(100
                )
                
                
                54,817
                
                
                
                4,487
                
                
                
                9
                
                
                
                11.48
                
                
                
                0.80(200
                )
                
                
                57,368
                
                
                
                7,038
                
                
                
                14
                
                
                
                11.89
                
                
                
                1.21
 
 The Office of Thrift Supervision uses
certain assumptions in assessing the interest rate risk of savings
associations.  These assumptions relate to interest rates, loan
prepayment rates, deposit decay rates, and the market values of certain assets
under differing interest rate scenarios, among others.  As with any
method of measuring interest rate risk, certain shortcomings are inherent in the
method of analysis presented in the foregoing table.  For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates.  Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market
rates.  Additionally, certain assets, such as adjustable-rate mortgage
loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset.  Further, in the event of a
change in interest rates, expected rates of prepayments on loans and early
withdrawals from certificates could deviate significantly from those assumed in
calculating the table.
  18
  Liquidity
and Capital Resources
 
 Liquidity is the ability to meet
current and future short-term financial obligations.  Our primary
sources of funds consist of deposit inflows, loan repayments, maturities and
sales of investment securities, and advances from the Federal Home Loan Bank of
Boston.  While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and mortgage
prepayments are greatly influenced by general interest rates, economic
conditions and competition.
 
 Each quarter we project liquidity
availability and demands on this liquidity for the next 90 days.  We
regularly adjust our investments in liquid assets based upon our assessment of
(1) expected loan demand, (2) expected deposit flows, (3) yields
available on interest-earning deposits and securities, and (4) the
objectives of our asset/liability management program.  Excess liquid
assets are invested generally in Federal funds and short- and intermediate-term
U.S. Government agency obligations.
 
 Our most liquid assets are cash and
cash equivalents and interest-bearing deposits.  The levels of these
assets depend on our operating, financing, lending and investing activities
during any given period.  At December 31, 2007 and December 31, 2006,
cash and cash equivalents totaled approximately $8.4 million and $7.9 million
respectively, including Federal funds of $497,000 and $31,000,
respectively.  Securities classified as available for sale, which
provide additional sources of liquidity, totaled $65.3 million and $67.7 million
at December 31, 2007 and December 31, 2006, respectively.  At December
31, 2007 and December 31, 2006, we had the ability to borrow a total of $138.4
million and $128.7 million, respectively, from the Federal Home Loan Bank of
Boston, of which $84.9 million and $68.4 million, was outstanding,
respectively.  At December 31, 2007 and December 31, 2006, we had
arranged overnight lines of credit of $2.5 million with the Federal Home Loan
Bank of Boston for both periods.  We had no overnight advances
outstanding with the Federal Home Loan Bank of Boston on these
dates.  In addition, at December 31, 2007 and December 31, 2006, we
had the ability to borrow $3.5 million from a correspondent bank for both
periods.   There were no advances outstanding on this line at
December 31, 2007 or December 31, 2006.
 
 At December 31, 2007, we had $22.0
million in unused line availability on home equity lines of credit, $7.7 million
in unadvanced commercial lines, $14.6 million in mortgage commitments, $7.9
million in commercial mortgage loan commitments, $22.8 million in unadvanced
construction mortgage commitments, $5.7 million in letters of credit, $1.6
million in commercial business loan commitments and $88,000 in overdraft line of
credit availability.  Certificates of deposit due within one year of
December 31, 2007 totaled $184.7 million, or 57.5% of total
deposits.  If these deposits do not remain with us, we will be
required to seek other sources of funds, including other certificates of deposit
and lines of credit.  Depending on market conditions, we may be
required to pay higher rates on such deposits or other borrowings than we
currently pay on the certificates of deposit due on or before December 31,
2007.  We believe, however, based on past experience, that a
significant portion of our certificates of deposit will remain with
us.  We have the ability to attract and retain deposits by adjusting
the interest rates offered.
 
 Historically, we have remained highly
liquid, with our liquidity position increasing substantially over the past two
fiscal years.  We expect that all of our liquidity needs, including
the contractual commitments set forth in the table below, the estimated costs of
our branch expansion plans and increases in loan demand can be met by our
currently available liquid assets and cash flows.  If loan demand were
to increase at a pace greater than expected, or any unforeseen demand or
commitment were to occur, we would access our borrowing capacity with the
Federal Home Loan Bank of Boston.  We expect that our currently
available liquid assets and our ability to borrow from the Federal Home Loan
Bank of Boston would be sufficient to satisfy our liquidity needs without any
material adverse effect on our liquidity.  We are not aware of any
trends and/or demands, commitments, events or uncertainties that could result in
a material decrease in liquidity.
 
 Our primary investing activities are
the origination of loans and the purchase of securities.  For the year
ended December 31, 2007 we originated $119.7 million of loans and purchased
$17.8 million of securities. For the year ended December 31, 2006 we originated
$109.1 million of loans and purchased $31.4 million of
securities.  During the year ended December 31, 2007, these activities
were funded primarily by an increase in deposits of $32.2 million, net increase
in borrowed funds of $16.6 million, proceeds from sales and maturities of
available-for-sale securities
of $20.7 million and proceeds from held-to-maturity securities of $1.4
million.  During the year ended December 31, 2006, these activities
were funded primarily by an increase in deposits of $48.4 million, net advances
from the Federal Home Loan Bank of Boston of $11.4 million, proceeds from sales
and maturities of available-for-sale securities of $21.9 million and proceeds
from held-to-maturity securities of $2.5 million.
 
 Historically, our investment portfolio
had been funded by excess liquidity when deposit inflows exceed loan
demand.  In December 2007, we implemented a leverage strategy with the
objective of enhancing earnings by borrowing $10.0 million from the Federal Home
Loan Bank of Boston on an intermediate-term basis to fund the purchase of a like
amount of intermediate-term mortgage-backed securities.  This strategy
is accretive to earnings.
 
 Financing activities consist primarily
of activity in deposit accounts and in Federal Home Loan Bank
advances.  We experienced a net increase in total deposits of $32.2
million and $48.4 million for the years ended December 31, 2007 and 2006,
respectively.  Deposit
   19
  flows are
affected by the overall level of interest rates, the interest rates and products
offered by us and our local competitors and other factors.  We
generally manage the pricing of our deposits to be competitive and to increase
core deposit relationships.  Occasionally, we offer promotional rates
on certain deposit products in order to attract deposits.  We
experienced an increase in borrowed funds of $16.6 million for the year ended
December 31, 2007.  The increase in 2007 was primarily due to lending
and investing activities. Federal Home Loan Bank advances increased $11.4
million for the year ended December 31, 2006.  The increase in 2006
was primarily due to lending and investing activities.  We are subject
to various regulatory capital requirements administered by the Office of Thrift
Supervision, including a risk-based capital measure.  The risk-based
capital guidelines include both a definition of capital and a framework for
calculating risk-weighted assets by assigning balance sheet assets and
off-balance sheet items to broad risk categories.  At December 31,
2007, we exceeded all of our regulatory capital requirements.  We are
considered “well capitalized” under regulatory guidelines.  See note
13 of the notes to the financial statements in this annual report.
 
 Off-Balance
Sheet Arrangements
 
 In the normal course of operations, we
engage in a variety of financial transactions that, in accordance with generally
accepted accounting principles, are not recorded in our financial
statements.  These transactions involve, to varying degrees, elements
of credit, interest rate, and liquidity risk.  Such transactions are
used primarily to manage customers’ requests for funding and take the form of
loan commitments, unused lines of credit, amounts due mortgagors on construction
loans, amounts due on commercial loans, commercial letters of credit and
commitments to sell loans.  See note 15 of the notes to the financial
statements in this annual report.
 
 For the years ended December 31, 2007
and 2006, we engaged in no off-balance-sheet transactions reasonably likely to
have a material effect on our financial condition, results of operations or cash
flows.
 
 Effect
of Inflation and Changing Prices
 
 We have prepared the financial
statements and related financial data presented in this report in accordance
with generally accepted accounting principles in the United States, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation.  The primary impact of
inflation on our operations is reflected in increased operating
costs.  Unlike most industrial companies, virtually all of our assets
and liabilities are monetary in nature.  As a result, interest rates
generally have a more significant impact on our performance than do general
levels of inflation.  Interest rates do not necessarily move in the
same direction or to the same extent as the prices of goods and
services.
  Management’s
Report on Internal Control Over Financial Reporting
 
 The management of the Company is
responsible for establishing and maintaining adequate internal control over
financial reporting.  The internal control process has been designed
under our supervision to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the Company’s financial statements
for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America.
 
 Management conducted an assessment of
the effectiveness of the Company’s internal control over financial reporting as
of December 31, 2007, utilizing the framework established in Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  Based on this assessment, management has
determined that the Company’s internal control over financial reporting as of
December 31, 2007 is effective.
 
 Our internal control over financial
reporting includes policies and procedures that pertain to the maintenance of
records that accurately and fairly reflect, in reasonable detail, transactions
and dispositions of assets; and provide reasonable assurances
that:  (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
the Company; and (3) unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the Company’s financial
statements are prevented or timely detected.
 
 All internal control systems, no matter
how well designed, have inherent limitations.  Therefore, even those
systems determined to be effective can provide only reasonable assurance with
respect to financial statement preparation and presentation.  Also,
projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may
deteriorate.
 
 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.
  20
  
 
  Report
of Independent Registered Public Accounting Firm
  
 
 To The
Board of Directors and Shareholders
 Naugatuck Valley Financial
Corporation
 
 
 We have
audited the accompanying consolidated statements of financial condition of
Naugatuck Valley Financial Corporation (the “Company”) and subsidiary as of
December 31, 2007 and 2006, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years ended
December 31, 2007, 2006 and 2005.  These consolidated financial
statements are the responsibility of the Company's management.  Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Companies
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Naugatuck Valley Financial
Corporation and subsidiary at December 31, 2007 and 2006, and the results of its
operations and its cash flows for the each of the years ended December 31, 2007,
2006 and 2005, in conformity with accounting principles generally accepted in
the United States of America.
 
 
 Hartford,
Connecticut
 March 11,
2008
 
 
 
 
 21
 
 
 
 Consolidated
Statements of Financial Condition
 (Dollars
in thousands)
  December
      31,2007
                
                
                2006ASSETSCash
      and due from depository institutions
                
                $
                7,873
                
                
                $
                7,911Investment
      in federal funds
                
                
                497
                
                
                
                31Investment
      securities
                
                
                66,454
                
                
                
                70,267Loans
      receivable, net
                
                
                359,831
                
                
                
                308,376Accrued
      income receivable
                
                
                2,033
                
                
                
                1,904Premises
      and equipment, net
                
                
                10,624
                
                
                
                11,209Bank
      owned life insurance
                
                
                8,264
                
                
                
                7,956Federal
      Home Loan Bank of Boston stock
                
                
                4,632
                
                
                
                3,898Other
      assets
                
                
                2,319
                
                
                
                2,303Total
      assets
                
                $
                462,527
                
                
                $
                413,855LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesDeposits
                
                $
                321,398
                
                
                $
                289,198Borrowed
      funds
                
                
                85,107
                
                
                
                68,488Mortgagors'
      escrow accounts
                
                
                3,871
                
                
                
                3,495Other
      liabilities
                
                
                1,694
                
                
                
                1,590Total
      liabilities
                
                
                412,070
                
                
                
                362,771Commitments
      and contingenciesStockholders'
      EquityCommon
      stock, $.01 par value; 25,000,000 shares authorized;7,604,375
      shares issued; shares outstanding - 7,268,734 atDecember
      31, 2007; 7,473,225 at December 31, 2006
                
                
                76
                
                
                
                76Preferred
      stock, $.01 par value; 1,000,000 shares authorized;no
      shares issued or outstanding
                
                
                -
                
                
                
                -Paid-in
      capital
                
                
                33,483
                
                
                
                33,302Retained
      earnings
                
                
                24,233
                
                
                
                23,415Unearned
      ESOP shares (233,513 shares at December 31, 2007and
      253,402 shares at December 31, 2006)
                
                
                (2,335
                )
                
                
                (2,534
                )Unearned
      stock awards (90,020 shares at December 31, 2007and
      113,266 shares at December 31, 2006)
                
                
                (995
                )
                
                
                (1,256
                )Treasury
      Stock, at cost (338,474 shares at December 31, 2007and
      138,983 shares at December 31, 2006)
                
                
                (3,889
                )
                
                
                (1,593
                )Accumulated
      other comprehensive loss
                
                
                (116
                )
                
                
                (326
                )Total
      stockholders' equity
                
                
                50,457
                
                
                
                51,084Total
      liabilities and stockholders' equity
                
                $
                462,527
                
                
                $
                413,855
 
 See notes
to consolidated financial statements.
 22
 
 
 Consolidated
Statements of Income
 (Dollars
in thousands, except earnings per share)
 
 For
      the Years Ended December 31,2007
                
                
                2006
                
                
                2005Interest
      and dividend incomeInterest
      on loans
                
                $
                21,681
                
                
                $
                17,506
                
                
                $
                13,642Interest
      and dividends on investments and deposits
                
                
                3,349
                
                
                
                3,244
                
                
                
                2,266Total
      interest income
                
                
                25,030
                
                
                
                20,750
                
                
                
                15,908Interest
      expenseInterest
      on deposits
                
                
                9,750
                
                
                
                6,551
                
                
                
                3,423Interest
      on borrowed funds
                
                
                3,424
                
                
                
                2,799
                
                
                
                1,518Total
      interest expense
                
                
                13,174
                
                
                
                9,350
                
                
                
                4,941Net
      interest income
                
                
                11,856
                
                
                
                11,400
                
                
                
                10,967Provision
      for loan losses
                
                
                151
                
                
                
                192
                
                
                
                32Net
      interest income after provision for loan losses
                
                
                11,705
                
                
                
                11,208
                
                
                
                10,935Noninterest
      incomeFees
      for services related to deposit accounts
                
                
                955
                
                
                
                873
                
                
                
                618Fees
      for other services
                
                
                559
                
                
                
                540
                
                
                
                356Income
      from bank owned life insurance
                
                
                308
                
                
                
                304
                
                
                
                218Income
      from investment advisory services, net
                
                
                260
                
                
                
                98
                
                
                
                167Gain
      on sale of investments
                
                
                65
                
                
                
                6
                
                
                
                47Other
      income
                
                
                207
                
                
                
                127
                
                
                
                111Total
      noninterest income
                
                
                2,354
                
                
                
                1,948
                
                
                
                1,517Noninterest
      expenseCompensation,
      taxes and benefits
                
                
                6,914
                
                
                
                6,408
                
                
                
                5,477Office
      occupancy
                
                
                1,966
                
                
                
                1,757
                
                
                
                1,538Advertising
                
                
                594
                
                
                
                672
                
                
                
                523Computer
      processing
                
                
                733
                
                
                
                606
                
                
                
                624Directors
      compensation
                
                
                494
                
                
                
                516
                
                
                
                435Professional
      fees
                
                
                504
                
                
                
                380
                
                
                
                448Office
      supplies
                
                
                201
                
                
                
                193
                
                
                
                232Contributions
                
                
                31
                
                
                
                34
                
                
                
                34Loss
      (gain) on foreclosed real estate, net
                
                
                -
                
                
                
                16
                
                
                
                (35
                )Other
      expenses
                
                
                985
                
                
                
                922
                
                
                
                821Total
      noninterest expense
                
                
                12,422
                
                
                
                11,504
                
                
                
                10,097Income
      before provision for income taxes
                
                
                1,637
                
                
                
                1,652
                
                
                
                2,355Provision
      for income taxes
                
                
                217
                
                
                
                204
                
                
                
                450Net
      income
                
                $
                1,420
                
                
                $
                1,448
                
                
                $
                1,905Earnings
      per share - basic and diluted
                
                $
                0.20
                
                
                $
                0.20
                
                
                $
                0.26
 
 
 See notes
to consolidated financial statements.
 23
 
 
 
 Consolidated
Statements of Changes in Stockholders' Equity
 (Dollars
in thousands)
  Common
                      
                      
                      Paid-in
                      
                      
                      Retained
                      
                      
                      Unearned
                        ESOP
                      
                      
                      Unearned
                        Stock
                      
                      
                      Treasury
                      
                      AccumulatedOtherComprehensiveStock
                      
                      
                      Capital
                      
                      
                      Earnings
                      
                      
                      Shares
                      
                      
                      Awards
                      
                      
                      Stock
                      
                      
                      Loss
                      
                      
                      TotalBalance
      at December 31, 2005
                      
                      $
                      76
                      
                      
                      $
                      33,157
                      
                      
                      $
                      22,588
                      
                      
                      $
                      (2,733
                      )
                      
                      $
                      (1,551
                      )
                      
                      $
                      (122
                      )
                      
                      $
                      (451
                      )
                      
                      $
                      50,964ESOP
      shares released - 19,889 shares
                      
                      
                      -
                      
                      
                      
                      22
                      
                      
                      
                      -
                      
                      
                      
                      199
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      221Dividends
      paid ($0.20 per common share)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (617
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (617
                      )Stock
      based compensation
                      
                      
                      -
                      
                      
                      
                      123
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      123Stock
      based compensation -  1,500 shares awarded
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      (4
                      )
                      
                      
                      
                      
                      
                      
                      (16
                      )
                      
                      
                      20
                      
                      
                      
                      -
                      
                      
                      
                      -Stock
      based compensation - 27,942 shares vested
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      311
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      311Stock
      based compensation - options
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,491
                      )
                      
                      
                      -
                      
                      
                      
                      (1,491
                      )Comprehensive
      income:Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,448
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      change in unrealized holding gain on available-for-sale
      securities, net of tax effect
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      125
                      
                      
                      
                      -Comprehensive
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,573Balance
      at December 31, 2006
                      
                      
                      76
                      
                      
                      
                      33,302
                      
                      
                      
                      23,415
                      
                      
                      
                      (2,534
                      )
                      
                      
                      (1,256
                      )
                      
                      
                      (1,593
                      )
                      
                      
                      (326
                      )
                      
                      
                      51,084ESOP
      shares released - 19,889 shares
                      
                      
                      -
                      
                      
                      
                      28
                      
                      
                      
                      -
                      
                      
                      
                      199
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      227Dividends
      paid ($0.20 per common share)
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (589
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (589
                      )Stock
      based compensation -  5,000 shares awarded
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (13
                      )
                      
                      
                      -
                      
                      
                      
                      (52
                      )
                      
                      
                      65
                      
                      
                      
                      -
                      
                      
                      
                      -Stock
      based compensation - 28,242 shares vested
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      313
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      313Stock
      based compensation - options
                      
                      
                      -
                      
                      
                      
                      153
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      3
                      
                      
                      
                      -
                      
                      
                      
                      156Treasury
      stock acquired - 204,731 shares
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (2,364
                      )
                      
                      
                      -
                      
                      
                      
                      (2,364
                      )Comprehensive
      income:Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,420
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Net
      change in unrealized holding gain on available-for-sale
      securities, net of tax effect
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      
                      210
                      
                      
                      
                      -Comprehensive
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,630Balance
      at December 31, 2007
                      
                      $
                      76
                      
                      
                      $
                      33,483
                      
                      
                      $
                      24,233
                      
                      
                      $
                      (2,335
                      )
                      
                      
                      (995
                      )
                      
                      $
                      (3,889
                      )
                      
                      $
                      (116
                      )
                      
                      $
                      50,457
  
 See notes
to consolidated financial statements.
 24
 
 
 Consolidated
Statements of Cash Flows
 (In
thousands)
  For
      the Years Ended December 31,2007
                
                
                2006
                
                
                2005Cash
      flows from operating activitiesNet
      income
                
                $
                1,420
                
                
                $
                1,448
                
                
                $
                1,905Adjustments
      to reconcile net income to net cash provided
      by operating activities:Provision
      for loan losses
                
                
                151
                
                
                
                192
                
                
                
                32Depreciation
      and amortization expense
                
                
                776
                
                
                
                655
                
                
                
                597Net
      amortization (accretion) from investments
                
                
                (21
                )
                
                
                (35
                )
                
                
                55Amortization
      of intangible assets
                
                
                34
                
                
                
                34
                
                
                
                34Provision
      for deferred tax (benefit)
                
                
                11
                
                
                
                (75
                )
                
                
                (177
                )Net
      gain on sale of real estate owned
                
                
                -
                
                
                
                (4
                )
                
                
                (46
                )Gain
      on sale of investments
                
                
                (65
                )
                
                
                (6
                )
                
                
                (47
                )Loss
      on disposal of premises and equipment
                
                
                -
                
                
                
                1
                
                
                
                14Stock-based
      compensation
                
                
                698
                
                
                
                657
                
                
                
                397Net
      change in:Accrued
      income receivable
                
                
                (130
                )
                
                
                (379
                )
                
                
                (448
                )Deferred
      loan fees
                
                
                51
                
                
                
                9
                
                
                
                (11
                )Cash
      surrender value of  life insurance
                
                
                (308
                )
                
                
                (304
                )
                
                
                (218
                )Other
      assets
                
                
                (35
                )
                
                
                107
                
                
                
                (319
                )Other
      liabilities
                
                
                98
                
                
                
                228
                
                
                
                (381
                )Net
      cash provided by operating activities
                
                
                2,680
                
                
                
                2,528
                
                
                
                1,387Cash
      flows from investing activitiesProceeds
      from maturities and repayments ofavailable-for-sale
      securities
                
                
                12,236
                
                
                
                16,779
                
                
                
                19,245Proceeds
      from sale of available-for-sale securities
                
                
                8,441
                
                
                
                5,163
                
                
                
                3,742Proceeds
      from maturities of held-to-maturity securities
                
                
                1,390
                
                
                
                2,470
                
                
                
                665Purchase
      of available-for-sale securities
                
                
                (17,598
                )
                
                
                (31,401
                )
                
                
                (50,593
                )Purchase
      of held-to-maturity securities
                
                
                (250
                )
                
                
                -
                
                
                
                (500
                )Loan
      originations net of principal payments
                
                
                (51,656
                )
                
                
                (49,148
                )
                
                
                (55,674
                )Purchase
      of Federal Home Loan Bank of Boston stock
                
                
                (734
                )
                
                
                (739
                )
                
                
                (980
                )Proceeds
      from the sale of foreclosed real estate
                
                
                -
                
                
                
                50
                
                
                
                113Proceeds
      from sale of property and equipment
                
                
                -
                
                
                
                2
                
                
                
                11Purchase
      of property and equipment
                
                
                (325
                )
                
                
                (2,780
                )
                
                
                (1,943
                )Purchase
      of bank owned life insurance asset
                
                
                -
                
                
                
                -
                
                
                
                (2,500
                )Net
      cash used by investing activities
                
                
                (48,496
                )
                
                
                (59,604
                )
                
                
                (88,414
                )
 
 
 See notes
to consolidated financial statements.
 25
 
 
 For
      the Years Ended December 31,2007
                
                
                2006
                
                
                2005Cash
      flows from financing activitiesNet
      change in time deposits
                
                
                37,335
                
                
                
                42,645
                
                
                
                41,231Net
      change in other deposit accounts
                
                
                (5,135
                )
                
                
                5,707
                
                
                
                6,249Advances
      from Federal Home Loan Bank of Boston
                
                
                46,927
                
                
                
                51,250
                
                
                
                62,193Repayment
      of Advances from Federal HomeLoan
      Bank of Boston
                
                
                (30,538
                )
                
                
                (39,821
                )
                
                
                (20,960
                )Net
      change in mortgagors' escrow accounts
                
                
                376
                
                
                
                293
                
                
                
                143Change
      in short-term borrowings
                
                
                229
                
                
                
                (1,899
                )
                
                
                1,899Common
      stock repurchased
                
                
                (2,364
                )
                
                
                (1,491
                )
                
                
                (1,852
                )Cash
      dividends to common stockholders
                
                
                (589
                )
                
                
                (617
                )
                
                
                (500
                )Proceeds
      from exercise of options
                
                
                3
                
                
                
                -
                
                
                
                -Net
      cash provided by financing activities
                
                
                46,244
                
                
                
                56,067
                
                
                
                88,403Increase
      (decrease) in cash and cash equivalents
                
                
                428
                
                
                
                (1,009
                )
                
                
                1,376Cash
      and cash equivalents at beginning of year
                
                
                7,942
                
                
                
                8,951
                
                
                
                7,575Cash
      and cash equivalents at end of year
                
                $
                8,370
                
                
                $
                7,942
                
                
                $
                8,951Supplemental
      disclosuresNon-cash
      investing activities:Transfer
      of loans to foreclosed real estate
                
                $
                -
                
                
                $
                -
                
                
                $
                47Cash
      paid during the year for:Interest
                
                $
                13,130
                
                
                $
                9,347
                
                
                $
                4,939Income
      taxes
                
                
                296
                
                
                
                305
                
                
                
                683
  
 
 See notes
to consolidated financial statements.
 26
 
 
 Notes
to Consolidated Financial Statements
   1.  Nature
of Operations
  Naugatuck
Valley Financial Corporation (the “Company”) was organized as a federal
corporation at the direction of Naugatuck Valley Savings and Loan (the “Bank”)
in connection with the mutual holding company reorganization of Naugatuck Valley
Savings.  The reorganization and initial public offering of Naugatuck
Valley Financial was completed on September 30, 2004.  In the
offering, Naugatuck Valley Financial issued a majority of its outstanding shares
of common stock to Naugatuck Valley Mutual Holding Company, the mutual holding
company parent of the Bank.  As long as Naugatuck Valley Mutual
exists, it will own at least a majority of Naugatuck Valley Financial
Corporation’s common stock.
 
 Originally
organized in 1922, the Bank is a federally chartered stock savings bank which is
headquartered in Naugatuck, Connecticut. The Bank provides a full range of
personal banking services to individual and small business customers located
primarily in the Naugatuck Valley and the immediate surrounding
vicinity.  It is subject to competition from other financial
institutions throughout the region.  The Bank is also subject to the
regulations of various federal agencies and undergoes periodic examinations by
those regulatory authorities.
 
 The Bank
owns the Naugatuck Valley Mortgage Servicing Corporation, which qualifies and
operates as a Connecticut passive investment company pursuant to
legislation.
  2.  Summary
of Significant Accounting Policies
  The
accounting and reporting policies of the Company and its subsidiary conform to
generally accepted accounting principles in the United States of America and to
general practices within the thrift industry. Such policies have been followed
on a consistent basis. The significant accounting policies of the Company are
summarized below.
  Use ofestimates
 In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet, and income and expenses for the
period.  Actual results could differ from those
estimates.
 
 Material
estimates that are particularly susceptible to significant change in the
near-term relate to the determination of the allowance for losses on loans and
the valuation of real estate acquired in connection with foreclosure or in
satisfaction of loans.  While management uses available information to
recognize losses on loans and foreclosed real estate, future additions to the
allowance may be necessary based on changes in economic conditions, particularly
in Connecticut.
  Principles ofconsolidation
 The
consolidated financial statements include the accounts of the Company, the Bank
and the Bank’s wholly-owned subsidiary, Naugatuck Valley Mortgage Servicing
Corporation.  All significant intercompany accounts and
transactions have been eliminated in consolidation.
  Investment
securities
 Investments
are accounted for in accordance with the intent of management at the time of
purchase.  If management has the intent and the Company has the
ability at the time of purchase to hold debt securities until maturity, they are
classified as held-to-maturity. These securities are carried at historical cost
adjusted
for the amortization of premiums and accretion of discounts, which are
recognized as adjustments to interest income. 
 Securities
to be held for indefinite periods of time are classified as available-for-sale
and are carried at fair value with unrealized gains and losses reported as a
separate component of capital net of estimated income taxes.
 
 The
Company has no securities held for trading.
 
 Gains or
losses on the sales of securities are recognized at trade date utilizing the
specific identification method.
  Loans receivable and
allowance for loan losses
 Loans
receivable are stated at unpaid principal balance undistributed construction
loans, deferred loan fees, and allowances for loan losses.
 
 Uncollected
interest on loans receivable is accrued as earned based on rates applied to
principal amounts outstanding.  Recognition of income on the accrual
basis is discontinued when there is sufficient question as to the collectibility
of the interest.  In these cases, the interest previously accrued to
income is reversed, and the loans are placed on the cash basis.
 
 Loan
origination fees and certain direct loan origination costs are being deferred
and the net amount amortized on a level-yield basis as an adjustment to the
related loan yield over its contractual life. Unamortized net fees are
recognized upon early repayment of the loans.
 
 The
allowance for loan losses is established by a provision charged to earnings and
is maintained at a level considered adequate to
 
 27
 
 
 
 Notes
to Consolidated Financial Statements
 
 provide
for potential loan losses based on management's evaluation of known and inherent
risks in the loan portfolio.  When a loan or portion of a loan is
considered uncollectible, it is charged against the allowance for loan
losses.  Recoveries of loans previously charged-off are credited to
the allowance when collected.
 
 Management
makes regular evaluations of the loan portfolio to determine the adequacy of the
level of the allowance for loan losses.  Numerous factors are
considered in the evaluation, including a review of certain borrowers' current
financial status and credit standing, available collateral, loss experience in
relation to outstanding loans, the overall loan portfolio quality, management's
judgment regarding prevailing and anticipated economic conditions, and other
relevant factors.
 
 In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan
losses.  Such agencies may require the Bank to recognize additions to
the allowance based on their judgments about information available to them
at the time of their examination.
  Loan sales and
mortgage-servicing rights
 Residential
mortgage loans originated and held for sale are classified separately in the
consolidated statement of financial condition and reported at the lower of
amortized cost or market value (based on secondary
market prices).  There were no loans held for sale at December 31,
2007 and 2006. Gains or losses on the sale of loans are determined using the
specific identification method.
 
 The Bank
sells residential mortgage loans with servicing rights retained. At the time of
the sale, the Bank determines the value of the retained servicing rights, which
represents the present value of the differential between the contractual
servicing fee and adequate compensation, defined as the fee a sub-servicer would
require to assume the role of servicer, after considering the estimated effects
of prepayments.  If material, a portion of the gain on the sale of the
loan is recognized as due to the value of the servicing rights, and a servicing
asset is recorded. The Bank has had no loan sales which have resulted in the
recording of a servicing asset, due to the immaterial differential between the
contractual servicing fee (25 basis points) and adequate compensation, as
described above.
  Foreclosed real
estate
 Real
estate properties acquired through loan foreclosure and other partial or total
satisfaction of problem loans are carried at the lower of fair value or the
related loan balance at the date of foreclosure.
 
 Valuations
are periodically performed by management and an allowance for losses is
established if the carrying value of a property subsequently exceeds its
fair value less estimated disposal costs.  Losses arising at the time
of acquisition of such properties are charged against the allowance for loan
losses. Subsequent write-downs in the carrying value and expenses incurred to
maintain the properties are charged to expense.
  Premises and
equipment
 Premises
and equipment are stated at cost less accumulated depreciation computed on the
straight-line method at rates based on estimated useful lives.
 
 Expenditures
for replacements or major improvements are capitalized.  Expenditures
for normal maintenance and repairs are charged to expense as
incurred.  Upon the sale or retirement of premises and equipment, the
cost and accumulated depreciation are removed from their respective accounts and
any gain or loss is included in income.
  Bank owned life
insurance
 The cash
surrender value of bank owned life insurance relates to policies on employees of
the Bank for which the Bank is the beneficiary.  Increases in cash
surrender value are included in non-interest income in the consolidated income
statements.
  Income from investment
advisory services, net
 In
conjunction with a third party, an employee of the Bank is licensed to sell
non-deposit investment products, including mutual funds, annuities and other
insurance products.  The Bank records, as noninterest income, revenues
earned from product sales in accordance with the terms of revenue sharing
agreements with the third party, net of certain marketing and
other expenses shared with the third party.  The Bank currently
employs the individual authorized to sell these products and pays most of the
direct costs related to the sales activities.  These costs are charged
to expense as incurred, and are classified primarily in compensation and
benefits expense.
  Income
taxes
 The
Company accounts for certain income and expense items differently for financial
reporting purposes than for income tax purposes.  Provisions for
deferred taxes are being made in recognition of these temporary
differences. It is the Company's policy to recognize interest and penalties
related to unrecognized tax liabilities within income tax expense in the
consolidated statements of income.
  Earnings per
share
 Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period.
  Computation of fair
values
 The
calculation of fair value estimates of financial instruments is dependent upon
certain subjective assumptions and involves significant
uncertainties.  Changes in assumptions could significantly affect the
estimates.  These estimates do not reflect any possible tax
ramifications, estimated transaction costs or any premium or discount that could
result from offering the Company's entire holdings of a particular financial
instrument.
   28
 
 Notes to Consolidated Financial
Statements
   2.  Summary of Significant
Accounting Policies–(Continued)
  The
following methods and assumptions were utilized by the Company in estimating the
fair values of its on-balance sheet financial instruments:
 
 Cash and cash
equivalents-
The carrying amounts reported in the statement of financial condition
approximate these assets' fair value.
 Investment securities-Fair values for investment
securities are based on quoted market prices where available.  If
quoted market prices are not available, fair values are based on market prices
for comparable instruments.
  Loans receivable - For
variable rate loans that reprice frequently and without significant change in
credit risk, fair values are based on carrying values.  The fair
value of other loans are estimated using discounted cash flow analyses
using interest rates currently being offered for loans with similar terms to
borrowers of similar credit quality.  The fair value of nonaccrual
loans was estimated using the estimated fair values of the underlying
collateral.
  Deposits liabilities - The
fair values of non-interest-bearing demand and savings deposits are, by
definition, equal to the amount payable on demand at the reporting date, i.e.,
their carrying amounts.  Fair values for time certificates of deposit
are estimated using a discounted cash flow technique that applies interest rates
currently being offered to a schedule of aggregated expected monthly maturities
on time deposits.
  Borrowed Funds - Fair values
are estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing
arrangements.
 
 Mortgagors’ escrow accounts –
The carrying amounts reported in the statement of financial condition
approximate the fair value of the mortgagors’ escrow accounts.
 Recent Accounting
Pronouncements
 In March
2006, the Financial Accounting Standards Board ("FASB") issued SFAS 156, Accounting forServicing of Financial
Assets. This Statement amends SFAS 140, Accounting for Transfers and
Servicingof Financial
Assets and Extinguishments of Liabilities, and requires that all
separately recognized servicing assets and servicing liabilities be initially
measured at fair value, if practicable, and permits the entities to elect either
fair value measurement with changes in fair value reflected in earnings or the
amortization and impairment requirements of SFAS 140 for subsequent measurement.
The subsequent measurement of separately recognized servicing assets and
servicing liabilities at fair value eliminates the necessity for entities that
manage the risks inherent in servicing assets and servicing liabilities with
derivatives to qualify for hedge accounting treatment and eliminates the
characterization of declines in fair value as impairments or direct write-downs.
The Company adopted SFAS 156 on January 1, 2007. The Company has determined that
adoption of SFAS 156 did not have any impact on its financial condition or
results of operations.
 
 In
September 2006, the FASB issued SFAS 157, Fair Value Measurements. SFAS
157 defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007 and interim periods within those
years. The Company does not expect the implementation of SFAS 157 to have a
material impact on its consolidated financial statements.
 
 In June
2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes ("FIN 48"). FIN 48 clarifies when tax benefits should be recorded
in financial statements, requires certain disclosures of uncertain tax
matters and indicates how any tax reserves should be classified in a balance
sheet. On January 1, 2007, the Company adopted FIN 48. The Company has
determined that adoption of FIN 48 did not have any impact on its financial
condition or results of operations.
 
 In
February 2007, the FASB issued SFAS 159, The Fair Value Option for Financial
Assets and Liabilities. This Statement permits entities to measure many
financial instruments and certain other items at fair value. The objective is to
improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. This pronouncement is effective as of the beginning of an entity's
first fiscal year beginning after November 15, 2007. The Company does not expect
the implementation of SFAS 159 to have a material impact on its financial
position or results of operations.
 
 In
December 2007, the FASB issued SFAS 141R, Business Combinations. SFAS
141R's objective is to improve the relevance, representational faithfulness, and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS 141R
applies prospectively to business combinations for which the acquisition date is
on or after December 31, 2008. The Company does not expect the implementation of
SFAS 141R to have a material impact on its consolidated financial
statements.
 
 In
December 2007, the FASB issued SFAS 160, Non-controlling Interests in
Consolidated Financial Statements. SFAS 160's objective is to improve the
relevance, comparability, and transparency of the financial information
that a reporting entity provides in its consolidated financial statements by
establishing accounting and reporting standards for the
non-controlling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 is effective for fiscal years and interim periods within
those fiscal years, beginning on or after December 15, 2008. The Company does
not expect the implementation of SFAS 160 to have a material impact on its
consolidated financial statements.  Reclassification
 The
financial statements for the prior years have been reclassified to conform with
changes in the current financial statement presentation.
 
 29
 
 
 
 Notes
to Consolidated Financial Statements
 
  3.  Investment
Securities
  A summary
of investment securities at December 31, 2007 and 2006 follows:
 
 2007
                
                
                2006Carrying
                
                
                Fair
                
                
                Carrying
                
                
                Fair(In
      thousands)
                
                Amount
                
                
                Value
                
                
                Amount
                
                
                ValueAvailable-for-sale
      securities
                
                $
                65,264
                
                
                $
                65,264
                
                
                $
                67,736
                
                
                $
                67,736Held-to-maturity
      securities
                
                
                1,190
                
                
                
                1,188
                
                
                
                2,531
                
                
                
                2,522Total
      investment securities
                
                $
                66,454
                
                
                $
                66,452
                
                
                $
                70,267
                
                
                $
                70,258
 
 At
December 31, 2007, the composition of the investment portfolio was:
 
 Amortized
                
                
                Gross
      Unrealized
                
                
                Fair(In
      thousands)
                
                Cost
      Basis
                
                
                Gains
                
                
                Losses
                
                
                ValueAvailable-for-sale
      securities:U.S.
      government and agency obligationsLess
      than one year
                
                $
                1,749
                
                
                $
                1
                
                
                $
                (5
                )
                
                $
                1,745From
      five through ten years
                
                
                1,000
                
                
                
                -
                
                
                
                (1
                )
                
                
                9992,749
                
                
                
                1
                
                
                
                (6
                )
                
                
                2,744Municipal
      obligationsFrom
      five through ten years
                
                
                1,533
                
                
                
                22
                
                
                
                -
                
                
                
                1,555After
      ten years
                
                
                12,559
                
                
                
                60
                
                
                
                (99
                )
                
                
                12,52014,092
                
                
                
                82
                
                
                
                (99
                )
                
                
                14,075Corporate
      bondsFrom
      five through ten years
                
                
                1,000
                
                
                
                -
                
                
                
                (10
                )
                
                
                990Mortgage-backed
      securities
                
                
                31,352
                
                
                
                67
                
                
                
                (158
                )
                
                
                31,261Collateralized
      mortgage obligations
                
                
                3,547
                
                
                
                -
                
                
                
                (53
                )
                
                
                3,494Total
      debt securities
                
                
                52,740
                
                
                
                150
                
                
                
                (326
                )
                
                
                52,564Money
      market preferred stocks
                
                
                12,700
                
                
                
                -
                
                
                
                -
                
                
                
                12,700Total
      available-for-sale securities
                
                $
                65,440
                
                
                $
                150
                
                
                $
                (326
                )
                
                $
                65,264
  Amortized
              
              
              Gross
      Unrealized
              
              
              Fair(In
      thousands)
              
              Cost
      Basis
              
              
              Gains
              
              
              Losses
              
              
              ValueHeld-to-maturity
      securities:U.S.
      government and agency obligationsLess
      than one year
              
              $
              1,000
              
              
              $
              -
              
              
              $
              (2
              )
              
              $
              998Interest
      bearing balancesLess
      than one year
              
              
              190
              
              
              
              -
              
              
              
              -
              
              
              
              190Total
      held-to-maturity securities
              
              $
              1,190
              
              
              $
              -
              
              
              $
              (2
              )
              
              $
              1,188
 30
 
 Notes to Consolidated Financial
Statements
   3.  Investment
Securities–
(Continued)
   At
December 31, 2006, the composition of the investment portfolio was:
 
 Amortized
                
                
                Gross
      Unrealized
                
                
                Fair(In
      thousands)
                
                Cost
      Basis
                
                
                Gains
                
                
                Losses
                
                
                ValueAvailable-for-sale
      securities:U.S.
      government and agency obligationsLess
      than one year
                
                $
                4,000
                
                
                $
                -
                
                
                $
                (37
                )
                
                $
                3,963From
      one through five years
                
                
                3,495
                
                
                
                -
                
                
                
                (23
                )
                
                
                3,472From
      five through ten years
                
                
                1,000
                
                
                
                -
                
                
                
                (20
                )
                
                
                9808,495
                
                
                
                -
                
                
                
                (80
                )
                
                
                8,415Municipal
      obligationsLess
      than one year
                
                
                1,000
                
                
                
                -
                
                
                
                (1
                )
                
                
                999From
      five through ten years
                
                
                828
                
                
                
                2
                
                
                
                -
                
                
                
                830After
      ten years
                
                
                13,349
                
                
                
                49
                
                
                
                (37
                )
                
                
                13,36115,177
                
                
                
                51
                
                
                
                (38
                )
                
                
                15,190Corporate
      bondsFrom
      one through five years
                
                
                1,951
                
                
                
                8
                
                
                
                (4
                )
                
                
                1,955Mortgage-backed
      securities
                
                
                25,111
                
                
                
                60
                
                
                
                (389
                )
                
                
                24,782Collateralized
      mortgage obligations
                
                
                4,796
                
                
                
                6
                
                
                
                (108
                )
                
                
                4,694Total
      debt securities
                
                
                55,530
                
                
                
                125
                
                
                
                (619
                )
                
                
                55,036Money
      market preferred stocks
                
                
                12,700
                
                
                
                -
                
                
                
                -
                
                
                
                12,700Total
      available-for-sale securities
                
                $
                68,230
                
                
                $
                125
                
                
                $
                (619
                )
                
                $
                67,736
  Amortized
                
                
                Gross
      Unrealized
                
                
                Fair(In
      thousands)
                
                Cost
      Basis
                
                
                Gains
                
                
                Losses
                
                
                ValueHeld-to-maturity
      securities:U.S.
      government and agency obligationsFrom
      one through five years
                
                $
                1,201
                
                
                $
                -
                
                
                $
                (9
                )
                
                $
                1,192Interest
      bearing balancesLess
      than one year
                
                
                1,140
                
                
                
                -
                
                
                
                -
                
                
                
                1,140From
      one through five years
                
                
                190
                
                
                
                -
                
                
                
                -
                
                
                
                190Total
      held-to-maturity securities
                
                $
                2,531
                
                
                $
                -
                
                
                $
                (9
                )
                
                $
                2,522
  The
Company has certain investment securities in which the market value of the
security is less than the cost of the security. Management believes that these
unrealized losses are temporary and are the result of changes in market interest
rates. In making this determination, management considered the period of time
the securities have been in a loss position, the percentage decline in
comparison to the securities’ amortized cost, the financial condition of the
issuer and the Company’s ability and intent to hold these securities until their
fair value recovers to their amortized cost. At December 31, 2007, these
securities had an aggregate fair value of $29,267,000 which resulted in
unrealized losses of $328,000.
   31
 
 Notes to Consolidated Financial
Statements
  3.  Investment
Securities–
(Continued)
  The
following is a summary of the fair value and related unrealized losses
aggregated by investment category and length of time that individual securities
have been in a continuous unrealized loss position at December 31,
2007.
 
 Securities
      in Continuous UnrealizedLoss
      Position Less Than 12 MonthsNumber
      of
                  
                  
                  Market
                  
                  
                  Unrealized(Dollars
      in thousands)
                  
                  Securities
                  
                  
                  Value
                  
                  
                  LossU.S.
      government and agency obligations
                  
                  
                  4
                  
                  
                  $
                  3,491
                  
                  
                  $
                  (7
                  )Municipal
      obligations
                  
                  
                  11
                  
                  
                  
                  6,457
                  
                  
                  
                  (52
                  )Mortgage-backed
      securities
                  
                  
                  1
                  
                  
                  
                  737
                  
                  
                  
                  (1
                  )Corporate
      bonds
                  
                  
                  1
                  
                  
                  
                  990
                  
                  
                  
                  (10
                  )Total
      securities in unrealized loss position
                  
                  
                  17
                  
                  
                  $
                  11,675
                  
                  
                  $
                  (70
                  )
  Securities
      in Continuous UnrealizedLoss
      Position 12 or More Consecutive MonthsNumber
      of
                
                
                Market
                
                
                Unrealized(Dollars
      in thousands)
                
                Securities
                
                
                Value
                
                
                LossU.S.
      government and agency obligations
                
                
                2
                
                
                
                1,070
                
                
                
                (47
                )Mortgage-backed
      securities
                
                
                22
                
                
                
                16,522
                
                
                
                (211
                )Total
      securities in unrealized loss position
                
                
                24
                
                
                $
                17,592
                
                
                $
                (258
                )
  For the
year ended December 31, 2007, the Company realized gross gains of $68,686 and
gross losses of $3,477 compared with realized gross gains of $20,224 and gross
losses of $14,436 for the year ended December 31, 2006 and realized gross gains
of $47,046 and no gross losses for the year ended December 31, 2005 on sales of
investment securities.
 
 At
December 31, 2007 and 2006, securities with a carrying value of $2,250,000 and
$3,200,000, and fair values of approximately $2,264,181 and $3,173,000,
respectively, were pledged as collateral to secure municipal
deposits.
   32
 
 
 
 Notes
to Consolidated Financial Statements
 4.  Loans
Receivable
  A summary
of loans receivable at December 31, 2007 and 2006 is as follows:
 
 (Dollars
      in thousands)
                  
                  2007
                  
                  
                  2006Loans
      secured by first mortgages on real estate:Conventional:Fixed
      rate mortgage loans
                  
                  $
                  165,764
                  
                  
                  $
                  148,357Adjustable
      rate mortgage loans
                  
                  
                  24,834
                  
                  
                  
                  29,364Construction
      loans
                  
                  
                  7,046
                  
                  
                  
                  6,960Commercial
      loans
                  
                  
                  123,925
                  
                  
                  
                  84,203Loans
      on savings accounts
                  
                  
                  1,272
                  
                  
                  
                  634Personal,
      auto and property improvement loans
                  
                  
                  41,146
                  
                  
                  
                  43,682363,987
                  
                  
                  
                  313,200Less:   Allowance
      for loan losses
                  
                  
                  2,163
                  
                  
                  
                  2,071Undisbursed
      construction loans
                  
                  
                  1,532
                  
                  
                  
                  2,343Deferred
      loan origination fees
                  
                  
                  461
                  
                  
                  
                  410Loans
      receivable, net
                  
                  $
                  359,831
                  
                  
                  $
                  308,376Weighted
      average yield
                  
                  
                  6.42
                  %
                  
                  
                  6.32
                  %
 The
Bank's lending activities are conducted principally in the Naugatuck Valley
area of Connecticut.  The Bank's investment in loans includes both
adjustable and fixed rate loans. At December 31, 2007 and 2006, the
composition of the Bank's investment in fixed rate loans was as
follows:
 
 Fixed
      RateTerm
      to Maturity
                
                2007
                
                
                2006(In
      thousands)Less
      than 1 year
                
                $
                1,579
                
                
                $
                6,6601 -
      3 years
                
                
                3,780
                
                
                
                3,1553 -
      5 years
                
                
                3,801
                
                
                
                2,5815 -
      10 years
                
                
                25,852
                
                
                
                21,98510
      - 20 years
                
                
                50,773
                
                
                
                54,486Over
      20 years
                
                
                124,767
                
                
                
                99,089Total
      loans at fixed rates
                
                $
                210,552
                
                
                $
                187,956
 
 Adjustable
rate loans have interest rate adjustment limitations and are indexed to treasury
notes or FHLBB classic advances with similar repricing durations, or prime rate.
At December 31, 2007 and 2006, the Bank had the following adjustable rate
loans:
  Adjustable
      RateRate
      Adjustment
                
                2007
                
                
                2006(In
      thousands)Less
      than 1 year
                
                $
                59,955
                
                
                $
                53,2481 -
      3 years
                
                
                20,133
                
                
                
                13,3883 -
      5 years
                
                
                42,383
                
                
                
                37,1095 -
      10 years
                
                
                28,281
                
                
                
                20,736Over
      10 years
                
                
                2,683
                
                
                
                763Total
      loans at adjustable rates
                
                $
                153,435
                
                
                $
                125,244
 
 33
 
 Notes to Consolidated Financial
Statements
   4.  Loans
Receivable–(Continued)
  Nonperforming
loans totaled approximately $970,000 and $2.0 million at December 31, 2007 and
2006, respectively.  These loans, primarily delinquent 90 days or
more, were accounted for on a nonaccrual basis.  The amount of income
that was contractually due but not recognized on nonperforming loans totaled
$45,000, $68,200, and $20,900 in 2007, 2006 and 2005,
respectively.
 
 At
December 31, 2007 the Bank had approximately $107,600 of loans which were
considered to be impaired without an allowance allocation, compared with $49,500
of loans with an allowance of $2,000 at December 31, 2006.  These
loans averaged $110,000 during 2007 and paid $7,000 in interest.
  Transactions in the
allowance for loan losses account for the years ended December 31, 2007, 2006
and 2005 were as follows:
 
 (In
      thousands)
                
                2007
                
                
                2006
                
                
                2005Balance
      at beginning of year
                
                $
                2,071
                
                
                $
                1,878
                
                
                $
                1,829Provision
      for loan losses
                
                
                151
                
                
                
                192
                
                
                
                32Loans
      written off
                
                
                (61
                )
                
                
                (2
                )
                
                
                (4
                )Recoveries
      of loans written off
                
                
                2
                
                
                
                3
                
                
                
                21Balance
      at end of year
                
                $
                2,163
                
                
                $
                2,071
                
                
                $
                1,878
 
 As of
December 31, 2007 and 2006, loans to related parties totaled approximately
$4,660,000 and $3,711,000, respectively.  For the year ended December 31,
2007, new loans of approximately $160,000 were granted to these parties and
principal payments of approximately $123,000 were received.  During
2007, an additional $912,000 in existing loans were included in loans to related
parties for an individual whose related interests changed during the
year.  For the year ended December 31, 2006, new loans of
approximately $538,000 were granted to these parties and principal payments of
approximately $180,000 were received.  During 2006, an additional
$84,000 in existing loans were included in loans to related parties for an
individual who became a related party during the year.
 
 Related
parties include directors and officers of the Bank, any respective affiliates in
which they have a controlling interest, and their immediate families. For the
years ended December 31, 2007 and 2006, all loans to related parties were
performing in accordance with the original terms.
 
  The Bank
services loans for other financial institutions and agencies.  These
loans are originated by the Bank and then sold.  The Bank continues to
service these loans and remits the payments received to the purchasing
institution.  The amounts of these loans were approximately $9,705,000
and $10,121,000 at December 31, 2007 and 2006, respectively.
  
 34


Notes
to Consolidated Financial Statements


5.  Premises
and Equipment
  Premises
and equipment at December 31, 2007 and 2006 are summarized as
follows:
 
 (In
      thousands)
                  
                  2007
                  
                  
                  2006Banking
      offices and branch buildings
                  
                  $
                  8,390
                  
                  
                  $
                  8,489Furniture
      and equipment
                  
                  
                  3,321
                  
                  
                  
                  3,241Land
                  
                  
                  1,596
                  
                  
                  
                  1,551Leasehold
      improvements
                  
                  
                  1,227
                  
                  
                  
                  1,22714,534
                  
                  
                  
                  14,508Accumulated
      depreciation and amortization
                  
                  
                  (3,910
                  )
                  
                  
                  (3,299
                  )Premises
      and equipment, net
                  
                  $
                  10,624
                  
                  
                  $
                  11,209
 Depreciation
and amortization expense is computed using the straight-line method over the
estimated useful life of an asset. Estimated useful lives range from three to
ten years for furniture and equipment, 39 years for the banking offices, and the
initial lease term for leasehold improvements. Land is not
depreciated.  Depreciation and amortization expenses were $775,978 and
$655,607 and $596,670 for the years ended December 31, 2007, 2006 and 2005,
respectively.
 
 At
December 31, 2007, future minimum rental income and lease payment
expense were expected to be:
 
 (In
      thousands)
                
                Income
                
                
                Expense2008
                
                $
                98
                
                
                $
                2082009
                
                
                100
                
                
                
                2172010
                
                
                102
                
                
                
                2332011
                
                
                98
                
                
                
                1952012
                
                
                72
                
                
                
                167Thereafter
                
                
                67
                
                
                
                788Total
      future minimum rents
                
                $
                537
                
                
                $
                1,808
  6.  Deposits
  
 Deposits
and weighted average rates at December 31, 2007 and 2006 are summarized as
follows:
 
 2007
                
                2006(Dollars
      in thousands)
                
                Amount
                
                
                Weighted
                  Average
                  Cost
                
                Amount
                
                
                Weighted
                  Average
                  CostCertificate
      accounts
                
                $
                202,411
                
                
                
                4.47
                %
                
                $
                165,076
                
                
                
                4.43
                %Regular
      savings accounts
                
                
                41,480
                
                
                
                0.58
                %
                
                
                46,156
                
                
                
                0.63
                %Checking
      and NOW accounts
                
                
                49,511
                
                
                
                0.15
                %
                
                
                57,301
                
                
                
                0.73
                %Money
      market savings accounts
                
                
                27,996
                
                
                
                2.64
                %
                
                
                20,665
                
                
                
                1.89
                %Total
      deposits
                
                $
                321,398
                
                
                
                3.14
                %
                
                $
                289,198
                
                
                
                2.91
                %
 
 The
aggregate amount of individual certificate accounts of $100,000 or more
at December 31, 2007 and 2006 was $67,250,000 and $48,228,000
respectively. Deposits up to $100,000 are federally insured.  In
addition, federal law provides up to $250,000 in deposit insurance coverage for
self-directed retirement accounts, such as Individual Retirement Accounts
(IRAs).
 
 35
 
 Notes to Consolidated Financial
Statements
  6.  Deposits–(Continued)
  At
December 31, 2007 and 2006 the remaining maturities for certificate accounts
were:
 
 (In
      thousands)
                
                2007
                
                
                2006Certificate
      accounts maturing in:Under
      12 months
                
                $
                184,728
                
                
                $
                145,05612
      to 24 months
                
                
                8,968
                
                
                
                13,02124
      to 36 months
                
                
                5,177
                
                
                
                3,474Over
      36 months
                
                
                3,538
                
                
                
                3,525Total
      certificate accounts
                
                $
                202,411
                
                
                $
                165,076
  7.  Borrowed
Funds
  The Bank
has an agreement with Federal Home Loan Bank of Boston (FHLBB) providing for
future credit availability of up to twenty times the amount of FHLBB stock held
by the Bank, not to exceed 30% of its total assets.  The Bank held
$4,632,400 in FHLBB stock at December 31, 2007. In additional to the
outstanding advances, the Bank has a $2,540,000 line of credit available from
FHLBB and a $3,500,000 line of credit available from another correspondent bank,
none of which was outstanding at December 31, 2007.
 
 FHLBB
advances are secured by a blanket lien on the Bank’s
assets.  Outstanding advances with calendar-year maturity dates and
weighted average cost of funds at December 31, 2007 and 2006 were as
follows:
 
 (Dollars
      in thousands)
                
                2007
                
                
                2006Weighted
                
                
                Amount
                
                
                WeightedYear
      of Maturity
                
                AmountDue
                
                
                AverageCost
                
                
                AmountDue
                
                
                AverageCost2007
                
                $
                -
                
                
                
                -
                %
                
                $
                30,465
                
                
                
                5.03
                %2008
                
                
                24,099
                
                
                
                4.78
                
                
                
                12,172
                
                
                
                4.602009
                
                
                45,981
                
                
                
                4.67
                
                
                
                21,718
                
                
                
                4.792010
                
                
                9,535
                
                
                
                4.54
                
                
                
                2,203
                
                
                
                4.322011
                
                
                3,990
                
                
                
                4.24
                
                
                
                657
                
                
                
                4.092012
                
                
                684
                
                
                
                4.09
                
                
                
                684
                
                
                
                4.092013
                
                
                579
                
                
                
                4.13
                
                
                
                579
                
                
                
                4.132014
                
                
                10
                
                
                
                3.94
                
                
                
                10
                
                
                
                3.94Total
      advances
                
                $
                84,878
                
                
                
                4.66
                
                
                $
                68,488
                
                
                
                4.83
 
 The Bank
also uses securities sold under agreements to repurchase as a source of
borrowings. The balance at December 31, 2007 was $229,000 at a rate of
2.75%.  There were no balances outstanding at December 31,
2006.
 
 36
 
 
 
 Notes to Consolidated Financial
Statements
   8.
Pension and Other Post-Retirement Benefits
  Pension
Plan
  Prior to
September 1, 2005, the Bank participated in a multi-employer defined benefit
pension plan covering all of its full time (as defined) employees who had been
employed by the Bank for more than six months and were at least twenty-one years
of age.  Benefits under this plan became fully vested after five years
of service.  The Bank's net pension cost for the period is the amount
of contributions due.  Total pension expense was $131,000 for the year
ended December 31, 2007 compared with $280,000  and $439,000 for 2006
and 2005, respectively.  Current valuations of the Bank's allocation
of the plan's pooled assets are not available. Effective September 1, 2005, the
Plan was amended and as a result, is considered frozen, with no new participants
being accepted.  No future compensation will be considered for benefit
accruals, and there will be no future credited service, service accruals, or
additional accrued benefits.
  Defined Contribution
Plan
  The
Bank has a defined contribution 401(k) plan for eligible employees. The
Bank provides 75% matching of employee contributions, with a maximum
contribution on up to 6% of the employee’s salary. The Bank’s contribution vests
over a 6 year graded vesting schedule.  The Bank’s contribution to the
plan was $168,000, $136,000 and $89,000 for the years ended December 31, 2007,
2006 and 2005, respectively.
  DirectorsRetirement
Plan
  Through
December 27, 2006, the Bank sponsored a retirement and benefits plan for
non-employee directors.  All benefits earned were fully accrued based
on a fixed amount at December 31, 2006, and were paid to the participating
individuals in January, 2007.
 
 Effective
December 27, 2006, for fees and compensation earned beginning January 1, 2007,
the Bank sponsors a deferred compensation plan under which non-employee
directors may elect to defer up to 100% of their compensation in the form of
either cash or stock-appreciation rights (“SARs”).  If a deferral is
made in SARs,  then at the time of distribution an individual will
receive in cash the value of an equivalent number of shares of the Company’s
stock that could have been purchased at the time of the deferral.  The
individual will also receive in cash an amount equal to any dividends which
would be paid on the equivalent shares during the deferral
period.  Under terms of the plan, an election to defer compensation,
including which form (cash or SARs), must be made prior to December 31st of the
preceding year.  Each year the form of previous deferrals may be
converted to the other form at the option of the individual
participant.
  Healthcare
Benefits
  In
addition to providing pension benefits, the Bank provides certain health care
benefits to retired employees.  Substantially all of the Bank's
employees may become eligible for those benefits. The Bank's policy is to
accrue the expected cost of providing those benefits during the years that the
employee renders the necessary service.
  Obligation and Funded
Status
  The
following table summarizes the obligation and funded status, as well as the
amounts recognized in the consolidated statements of financial condition for the
Directors Retirement Plan and the Healthcare Benefits plan as of December 31,
2007 and 2006:
 
 Directors
      Retirement Plan
                  
                  
                  Healthcare
      Benefit Plan(In
      thousands)
                  
                  2007
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2006Measurement
      date
                  
                  12/31/2007
                  
                  
                  12/31/2006
                  
                  
                  12/31/2007
                  
                  
                  12/31/2006Projected
      benefit obligation
                  
                  
                  N/A
                  
                  
                  $
                  (250
                  )
                  
                  $
                  (366
                  )
                  
                  $
                  (371
                  )Fair
      value of plan assets
                  
                  
                  
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Funded
      status
                  
                  
                  
                  
                  
                  $
                  (250
                  )
                  
                  $
                  (366
                  )
                  
                  $
                  (371
                  )Accrued
      benefit cost recognized in thestatement
      of financial condition
                  
                  
                  N/A
                  
                  
                  $
                  (250
                  )
                  
                  $
                  (366
                  )
                  
                  $
                  (371
                  )
 
 37
 
 
 
 Notes to Consolidated Financial
Statements
   8. Pension and Other
Post-Retirement Benefits– (Continued)
   Net Periodic Benefit Cost
and Contributions
  The
benefit costs and contributions the Directors Retirement Plan and the Healthcare
Benefits plan for the years ended December 31, 2007 and 2006 were:
 
 Directors
      Retirement Plan
                
                
                Healthcare
      Benefit Plan(In
      thousands)
                
                2007
                
                
                2006
                
                
                2007
                
                
                2006Net
      periodic benefit cost
                
                $
                -
                
                
                $
                86
                
                
                $
                (5
                )
                
                $
                (54
                )Employer
      contributions
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Plan
      participants' contributions
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Benefits
      paid during the year
                
                
                250
                
                
                
                39
                
                
                
                20
                
                
                
                19
  Due to
the unfunded status of the plans, the Bank expects to contribute the amount of
the estimated benefit payments for the next fiscal year, which is $19,765 for
the Healthcare Benefits Plan.  Because the Directors Retirement Plan
terminated at December 31, 2006, the Bank expects to make no future
contributions to that plan.
  Assumptions and
Effects
  The
actuarial assumptions used to determine the projected benefit obligations and
net periodic benefit cost for the years ended December 31, 2007 and 2006 were as
follows:
 
 Directors
      Retirement Plan
                  
                  
                  Healthcare
      Benefit PlanWeighted-average
      assumptions:
                  
                  2007
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2006Discount
      rate
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  6.375
                  %
                  
                  
                  6.625
                  %Rate
      of compensation increase
                  
                  
                  N/A
                  
                  
                  
                  N/A
                  
                  
                  
                  -
                  
                  
                  
                  -Medical
      trend rate next year
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  10.00
                  %
                  
                  
                  5.00
                  %Ultimate
      medical trend rate
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  5.00
                  %
                  
                  
                  5.00
                  %Year
      ultimate trend rate is achieved
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  2011
                  
                  
                  2006
 
 Assumed
health care cost trend rates have a significant effect on the amounts reported
for the Healthcare Benefits plan. At December 31, 2007, a one percentage-point
increase in the assumed health care trend rates would increase the projected
benefit obligation by $29,412 compared with a decrease of $33,839 if the assumed
health care trend rate were to decrease by one
percentage-point.
 
 38
 
 
 
 Notes
to Consolidated Financial Statements 
  9.  Employee
Stock Ownership Plan
  During
2004 the Bank implemented the Naugatuck Valley Savings and Loan Employee Stock
Ownership Plan (the “ESOP”). On September 30, 2004, the ESOP purchased 298,091
shares of the common stock of the Company. To fund the purchase, the ESOP
borrowed $2,980,910 from the Company. The borrowing is at an interest rate of
4.75% and is to be repaid on a pro-rata basis in fifteen annual installments of
$282,520 commencing with the quarter ended December 31, 2004 through September
30, 2019. In addition, dividends paid on the unreleased shares are used to
reduce the principal balance of the loan. The collateral for the loan is the
common stock of the Company purchased by the ESOP. Contributions by the Bank to
the ESOP are discretionary, however, the Bank intends to make annual
contributions in an aggregate amount at least equal to the principal and
interest requirement on the debt.
 
 The
shares of stock purchased by the ESOP are held in a suspense account until they
are released for allocation among participants. The shares will be released
annually from the suspense account and the released shares will be allocated
among the participants on the basis of each participant’s compensation for the
year of allocation. As shares are released from collateral, the Bank recognizes
compensation expense equal to the average market price of the shares during the
period and the shares will be outstanding for earning per share
purposes. The shares not released are reported as unearned ESOP shares in the
capital accounts of the consolidated statements of financial condition. ESOP
expense for the years ended December 31, 2007 and 2006 was $226,735
and $221,166 respectively. At December 31, 2007 and 2006, there were 19,889
unallocated ESOP shares, and 233,513 and 253,402 unreleased ESOP shares
respectively. At December 31, 2007 the unreleased shares had an aggregate fair
value of $2,218,000.
  10.  Equity
Incentive Plan
  In 2005,
stockholders of the Company approved the Naugatuck Valley Financial Corporation
2005 Equity Incentive Plan (the “Incentive Plan”).  Under the
Incentive Plan, the Company may grant up to 372,614 stock options and 149,045
shares of restricted stock to its employees, officers and directors for an
aggregate amount of up to 521,659 shares of the Company’s common stock for
issuance upon the grant or exercise of awards.  Both incentive stock
options and non-statutory stock options may be granted under the Incentive
Plan.
 
 Grant
      dateDecember
      18,
                
                
                March
      20,
                
                
                March
      21,
                
                
                July
      26,2007
                
                
                2007
                
                
                2006
                
                
                2005Option
      awardsAwarded
                
                
                2,000
                
                
                
                7,500
                
                
                
                6,500
                
                
                
                354,580Exercise
      price
                
                $
                11.10
                
                
                $
                12.49
                
                
                $
                11.10
                
                
                $
                11.10Maximum
      term (in years)
                
                
                10
                
                
                
                10
                
                
                
                10
                
                
                
                10Restricted
      stock awardsAwarded
                
                
                3,000
                
                
                
                2,000
                
                
                
                1,500
                
                
                
                139,712
 
 Stock
option awards were granted with an exercise price equal to the market price of
the Company’s stock at the date of grant with the exception of those granted on
March 21, 2006 and December 18, 2007, which have an exercise price equal to
those granted on July 26, 2005 ($11.10 which was higher than the market price of
$10.56 on March 21, 2006 and $9.09 on December 18, 2007).  Both stock
options and restricted stock awards vest at 20% per year beginning on the first
anniversary of the date of grant.
 
 Stock
options and restricted stock awards are considered common stock equivalents for
the purpose of computing earnings per share on a diluted basis.
 
 
 
  
 39
 
 
 Notes to Consolidated Financial
Statements
 
 A summary
of the status of outstanding stock options at December 31, 2007 and 2006 and
changes during the year, is as follows:
 
 2007
                
                
                2006Weighted
                
                
                
                
                
                WeightedNumber
                
                
                Average
                
                
                Number
                
                
                Averageof
                
                
                Exercise
                
                
                of
                
                
                ExerciseShares
                
                
                Price
                
                
                Shares
                
                
                PriceOptions
      outstanding at beginning of year
                
                
                353,730
                
                
                $
                11.10
                
                
                
                352,430
                
                
                $
                11.10Granted
                
                
                9,500
                
                
                
                12.20
                
                
                
                6,500
                
                
                
                11.10Forfeited
                
                
                (3,030
                )
                
                
                11.10
                
                
                
                (5,100
                )
                
                
                11.10Exercised
                
                
                (240
                )
                
                
                11.10
                
                
                
                -
                
                
                
                -Expired
                
                
                (500
                )
                
                
                11.10
                
                
                
                (100
                )
                
                
                11.10Options
      outstanding at end of year
                
                
                359,460
                
                
                
                11.13
                
                
                
                353,730
                
                
                
                11.10Options
      exercisable at end of year
                
                
                139,120
                
                
                
                11.10
                
                
                
                69,526
                
                
                
                11.10Weighted-average
      fair value of optionsgranted
      during the year
                
                
                
                
                
                $
                2.26
                
                
                
                
                
                
                $
                2.25
  The
Company adopted Financial Accounting Standards Board’s SFAS No.123(R), “Share
Based Payment”, during 2005, prior to the mandatory compliance date for the
Company of January 1, 2006.  In accordance with Statement No.123 (R),
the Company has recorded share-based compensation expense related to outstanding
stock option and restricted stock awards based upon the fair value at the date
of grant over the vesting period of such awards on a straight-line
basis.
 
 The fair
value of each restricted stock allocation, based on the market price at the date
of grant, is recorded to unearned stock awards.  Compensation expenses
related to unearned restricted shares are amortized to compensation, taxes and
benefits expense over the vesting period of the restricted stock
awards.
 
 The fair
value of each stock option award is estimated on the date of grant using the
Black-Scholes option pricing method which includes several assumptions such as
volatility, expected dividends, expected term and risk-free rate for each stock
option award.
 
 In
determining the expected term of the option awards, the Company elected to
follow the simplified method as permitted by the SEC Staff Accounting Bulletin
107, which was issued to provide guidance on the implementation of
SFAS 123(R). Under this method, the Company has estimated the expected term
of the options as being equal to the average of the vesting term plus the
original contractual term. The Company estimated its volatility using the
historical volatility of other, similar companies during a period of time equal
to the expected life of the options. The risk-free rate for the periods within
the contractual life of the options is based upon the U.S. Treasury yield curve
in effect at the time of grant.  Assumptions used to determine the
weighted-average fair value of stock options granted were as
follows:
 
 December
      18,
                
                
                March
      20,
                
                
                March
      21,
                
                
                July
      26,Grant
      date
                
                2007
                
                
                2007
                
                
                2006
                
                
                2005Dividend
      yield
                
                
                2.20
                %
                
                
                1.60
                %
                
                
                1.89
                %
                
                
                1.44
                %Expected
      volatility
                
                
                11.00
                %
                
                
                10.49
                %
                
                
                11.20
                %
                
                
                11.47
                %Risk-free
      rate
                
                
                3.63
                %
                
                
                4.48
                %
                
                
                4.61
                %
                
                
                4.18
                %Expected
      life in years
                
                
                6.5
                
                
                
                6.5
                
                
                
                6.5
                
                
                
                6.5Weighted
      average fair value of options at grant date
                
                $
                1.18
                
                
                $
                2.55
                
                
                $
                2.25
                
                
                $
                2.47
 
 The
Company recorded share-based compensation expense of $471,243 and $435,860 for
the year ended December 31, 2007 and 2006, respectively, in connection with the
stock option and restricted stock awards.  At December 31, 2007, the
Company has approximately $556,709 of unrecorded option expense to be recognized
over the remaining vesting period of the options.
 
 40
 
 Notes to Consolidated Financial
Statements
  11.  Income
Taxes
  The
Bank’s wholly-owned subsidiary, the Naugatuck Valley Mortgage Servicing
Corporation, qualifies and operates as a Connecticut passive investment company
pursuant to legislation.  Because the subsidiary earns income from
passive investments which is exempt from Connecticut Corporation Business Tax
and its dividends to the Bank are exempt from state tax, the Bank no longer
expects to incur state income tax expense.
 
 Deferred
income taxes reflect the impact of "temporary differences" between the amount of
assets and liabilities for financial reporting purposes and such amounts as
measured by tax laws and regulations.  Principal items making up the
deferred income tax provision include a carry forward of charitable
contributions, the provision for loan losses, accelerated tax depreciation and
deferred mortgage fee income. The Company records a valuation allowance against
deferred tax assets if, based on the weight of available evidence, it is more
likely than not, that some or all of the deferred tax assets will not be
realized.  The Company believes that all deferred tax assets will be
realized in the future and that no valuation allowance is
necessary.
 
 Income
taxes receivable and payable included in the balance sheet at December 31, 2007
and 2006 were:
 
 (In
      thousands)
                
                2007
                
                
                2006Current
      tax receivable
                
                $
                174
                
                
                $
                84Deferred
      tax receivableCharitable
      contributions carryforward
                
                $
                277
                
                
                $
                365Reserve
      for loan losses
                
                
                735
                
                
                
                704Post-retirement
      benefits
                
                
                125
                
                
                
                212Deferred
      income
                
                
                248
                
                
                
                213Available-for-sale
      securities
                
                
                60
                
                
                
                168Total
      deferred tax receivable
                
                
                1,445
                
                
                
                1,662Deferred
      tax payableDepreciation
                
                $
                (101
                )
                
                $
                (174
                )Other
      items
                
                
                (13
                )
                
                
                (38
                )Total
      deferred tax payable
                
                
                (114
                )
                
                
                (212
                )Net
      deferred tax receivable
                
                $
                1,331
                
                
                $
                1,450
  The
provision for income tax expense for the year ended December 31, 2007, 2006
and 2005 consisted of:
 
 (In
      thousands)
                
                2007
                
                
                2006
                
                
                2005Current
      income tax expense
                
                $
                206
                
                
                $
                279
                
                
                $
                627Deferred
      income tax expense (benefit), due to:Charitable
      contributions
                
                
                88
                
                
                
                63
                
                
                
                37Reserve
      for loan losses
                
                
                (31
                )
                
                
                (152
                )
                
                
                (170
                )Deferred
      income
                
                
                (34
                )
                
                
                (76
                )
                
                
                4Post
      retirement benefits
                
                
                86
                
                
                
                2
                
                
                
                6Depreciation
                
                
                (73
                )
                
                
                71
                
                
                
                (49
                )Other
      items
                
                
                (25
                )
                
                
                17
                
                
                
                (5
                )Total
      deferred income tax expense (benefit)
                
                
                11
                
                
                
                (75
                )
                
                
                (177
                )Provision
      for income taxes
                
                $
                217
                
                
                $
                204
                
                
                $
                450
 
 A
reconciliation of the statutory federal income tax rate applied to income before
income taxes with the income tax provision is as follows:
 
 Year
      Ended December 31,(Dollars
      in thousands)
                
                2007
                
                
                2006
                
                
                2005Income
      tax expense at statutory rate of 34%
                
                $
                557
                
                
                $
                562
                
                
                $
                801Increase
      (decrease) in income tax expense resulting from:Nondeductible
      compensation expense
                
                
                113
                
                
                
                104
                
                
                
                -Income
      exempt from income tax
                
                
                (456
                )
                
                
                (321
                )
                
                
                (193
                )Changes
      in tax bad debt base year reserves
                
                
                -
                
                
                
                (145
                )
                
                
                (160
                )Other
      items, net
                
                
                3
                
                
                
                4
                
                
                
                2Provision
      for income taxes
                
                $
                217
                
                
                $
                204
                
                
                $
                450Effective
      rate of income tax expense
                
                
                13.3
                %
                
                
                12.3
                %
                
                
                19.1
                %
 
 Retained
earnings at December 31, 2007 includes a contingency reserve for loan losses
of  $1,867,000, which represents the tax reserve balance existing at
December 31, 1987, and is maintained in accordance with provisions of the
Internal Revenue Code applicable to thrift institutions. It is not anticipated
that the Company will incur a federal income tax liability related to the
reduction of this reserve and accordingly, deferred income taxes of $635,000 has
not been recognized as of December 31, 2007
 
 As of
December 31, 2007, the Company is subject to unexpired statutes of limitation
for examination of its tax returns for U.S. federal and Connecticut income taxes
for the years 2004-2007.
 
 41
 
 Notes
to Consolidated Financial Statements
 12.  Consolidated
Statement of Comprehensive Income
  The
source of the Company’s other comprehensive income is the unrealized gains and
losses on its available for sale securities.
 
 For
      the Years Ended December 31,(In
      thousands)
                
                2007
                
                
                2006
                
                
                2005Net
      income
                
                $
                1,420
                
                
                $
                1,448
                
                
                $
                1,905Other
      comprehensive income (loss):Unrealized
      gain (loss) on securities available-for-sale
                
                
                384
                
                
                
                195
                
                
                
                (600
                )Reclassification
      adjustment for gainsrealized in net
      income
                
                
                (65
                )
                
                
                (6
                )
                
                
                (47
                )Other
      comprehensive income (loss) before tax effect
                
                
                319
                
                
                
                189
                
                
                
                (647
                )Income
      tax expense (benefit) related to items of othercomprehensive
      income (loss)
                
                
                109
                
                
                
                64
                
                
                
                (220
                )Other
      comprehensive income (loss) net of tax effect
                
                
                210
                
                
                
                125
                
                
                
                (427
                )Total
      comprehensive income
                
                $
                1,630
                
                
                $
                1,573
                
                
                $
                1,478
  13.  Regulatory
Capital
  The
Company, as a federally chartered holding company, is not subject to regulatory
capital requirements. The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank’s financial statements.
 
 The
Office of Thrift Supervision (OTS) regulations require savings institutions to
maintain minimum levels of regulatory capital. Under the regulations in effect
at December 31, 2007, the Bank was required to maintain a minimum ratio of
tangible equity capital to total tangible assets of 1.5%; a minimum ratio of
Tier 1 (core) capital to total adjusted assets of 4.0%; a minimum ratio of Tier
I capital to risk-weighted assets of 4.0% and a minimum ratio of total (core and
supplementary) capital to risk-weighted assets of 8.0%. As of December 31, 2007
the Bank meets all capital requirements to which it is subject.
 
 At
December 31, 2007 the Bank was considered “well capitalized” for regulatory
purposes. To be categorized as well capitalized, the Bank must maintain a
minimum ratio of tangible equity capital to total tangible assets of 2.0%; a
minimum ratio of Tier 1 (core) capital to adjusted total assets of 5.0%; a
minimum ratio of Tier I capital to risk-weighted assets of 6.0% and a minimum
ratio of total (core and supplementary) capital to risk-weighted assets of
10.0%. There have been no subsequent conditions or events which management
believes have changed the Bank’s status.
  The
following is a summary of the Bank’s actual capital as computed under the
standards established by the OTS at December 31, 2007 and 2006,
respectively.
 
 2007
                  
                  2006(Dollars
      in thousands)
                  
                  Amount
                  
                  
                  Ratio
                  
                  
                  Amount
                  
                  
                  RatioTangible
      Equity Ratio (to Tangible Assets)
                  
                  $
                  40,484
                  
                  
                  
                  8.81
                  %
                  
                  $
                  38,904
                  
                  
                  
                  9.53
                  %Tier
      I (Core) Capital (to Adjusted Total Assets)
                  
                  
                  40,484
                  
                  
                  
                  8.81
                  %
                  
                  
                  38,904
                  
                  
                  
                  9.53
                  %Tier
      I Risk-Based Capital (to Risk-Weighted Assets)
                  
                  
                  40,484
                  
                  
                  
                  12.22
                  %
                  
                  
                  38,904
                  
                  
                  
                  13.56
                  %Total
      Risk-Based Capital (to Risk-Weighted Assets)
                  
                  
                  42,647
                  
                  
                  
                  12.88
                  %
                  
                  
                  40,975
                  
                  
                  
                  14.29
                  %
 
 42
 Notes
to Consolidated Financial Statements
 The
ability of the Company to pay dividends depends, in part, on the ability of the
Bank to pay dividends to the Company. The Bank will not be able to declare or
pay a cash dividend on, or repurchase any of its common stock, if the effect
thereof would be to reduce the regulatory capital of the Bank to an amount below
amounts required under OTS rules and regulations.
 
 The
measurement of the Bank’s capital as computed under regulatory standards differs
from its measurement under generally accepted accounting principles. A
reconcilement of the Bank’s capital follows:
  December
      31,(In
      thousands)
                
                2007
                
                
                2006Total
      capital as calculated under generally acceptedaccounting
      principles (GAAP Capital)
                
                $
                40,560
                
                
                $
                38,850Adjustments
      to reconcile Total GAAP Capital to Regulatory Capital:Intangible
      assets
                
                
                (155
                )
                
                
                (188
                )Accumulated
      other comprehensive incomefrom available-for-sale
      securities
                
                
                79
                
                
                
                242Tier
      I Risk-Based Capital
                
                
                40,484
                
                
                
                38,904Includible
      portion of allowance for loan losses
                
                
                2,163
                
                
                
                2,071Total
      Risk-Based Capital
                
                $
                42,647
                
                
                $
                40,975
  14.  Earnings
per Share
  Basic net
income per common share is calculated by dividing the net income available to
common stockholders by the weighted-average number of common shares outstanding
during the period. Diluted net income per common share is computed in a manner
similar to basic net income per common share except that the weighted-average
number of common shares outstanding is increased to include the incremental
common shares (as computed using the treasury stock method) that would have been
outstanding if all potentially dilutive common stock equivalents were issued
during the period. The Company's common stock equivalents relate solely to stock
option and restricted stock awards. Anti-dilutive shares are common stock
equivalents with weighted-average exercise prices in excess of the
weighted-average market value for the periods presented.  The Company
had no anti-dilutive common shares outstanding for the year ended December 31,
2007.  Unallocated common shares held by the ESOP are not included in
the weighted-average number of common shares outstanding for purposes of
calculating either basic or diluted net income per common share.
 
 For
      the years ended December 31,2007
                
                
                2006Net
      income and income available to common stockholders
                
                $
                1,420,000
                
                
                $
                1,448,000Weighted-average
      shares outstanding during the periodBasic
                
                
                7,117,614
                
                
                
                7,275,718Effect
      of dilutive stock options and restrictive stock awards
                
                
                16,781
                
                
                
                5,864Diluted
                
                
                7,134,395
                
                
                
                7,281,582Net
      income per common share:Basic
      and Diluted Earnings per share
                
                $
                0.20
                
                
                $
                0.20
 
  
 43
  Notes
to Consolidated Financial Statements
 15.  Financial
Instruments
  The
Company is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers and to
reduce its own exposure to fluctuations in interest rates.  These
financial instruments include commitments to extend credit.  Those
instruments involve, to varying degrees, elements of credit and interest
rate risk in excess of the amounts recognized in the balance sheet. The
following table summarizes these financial instruments and other commitments and
contingent liabilities as of December 31, 2007 and 2006:
 
 (In
      thousands)
                    
                    2007
                    
                    
                    2006Commitments
      to extend credit:Loan
      commitments
                    
                    $
                    23,994
                    
                    
                    $
                    9,933Unused
      lines of credit
                    
                    
                    22,067
                    
                    
                    
                    21,057Amounts
      due mortgagors on construction loans
                    
                    
                    22,783
                    
                    
                    
                    21,713Amounts
      due on commercial  loans
                    
                    
                    7,673
                    
                    
                    
                    6,374Commercial
      letters of credit
                    
                    
                    5,698
                    
                    
                    
                    6,758
 The
Company's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual notional amount of those
instruments.  The Company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance sheet
instruments.
 
 Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
are principally collateralized by mortgages on real estate, generally have fixed
expiration dates or other termination clauses and may require payment of
fees.  Since some of the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements.
 
 The
estimated fair value of the Company's financial instruments
follows:
 
 December
      31,2007
                
                
                2006Carrying
                
                
                Estimated
                
                
                Carrying
                
                
                Estimated(In
      thousands)
                
                Amount
                
                
                Fair
      Value
                
                
                Amount
                
                
                Fair
      ValueFinancial
      AssetsCash
      and cash equivalents
                
                $
                8,370
                
                
                $
                8,370
                
                
                $
                7,942
                
                
                $
                7,942Investment
      securities
                
                
                66,454
                
                
                
                66,452
                
                
                
                70,267
                
                
                
                70,258Loans
      receivable, net
                
                
                359,831
                
                
                
                362,249
                
                
                
                308,376
                
                
                
                303,073Accrued
      income receivable
                
                
                2,033
                
                
                
                2,033
                
                
                
                1,904
                
                
                
                1,904Financial
      LiabilitiesDeposits
                
                $
                321,398
                
                
                $
                308,226
                
                
                $
                289,198
                
                
                $
                269,701Borrowed
      funds
                
                
                85,107
                
                
                
                85,640
                
                
                
                68,488
                
                
                
                67,847Mortgagors'
      escrow accounts
                
                
                3,871
                
                
                
                3,871
                
                
                
                3,495
                
                
                
                3,495
 
 
 
 44
 
 Notes
to Consolidated Financial Statements
 16.  Selected
Quarterly Consolidated Financial Information (unaudited)
  The
following tables present quarterly consolidated information for the Company for
2007, 2006 and 2005.
  For
      the Year Ended December 31, 2007Fourth
                
                
                Third
                
                
                Second
                
                
                First(In
      thousands)
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                QuarterInterest
      and dividend income
                
                $
                6,632
                
                
                $
                6,384
                
                
                $
                6,030
                
                
                $
                5,984Interest
      expense
                
                
                3,494
                
                
                
                3,394
                
                
                
                3,189
                
                
                
                3,097Net
      interest income
                
                
                3,138
                
                
                
                2,990
                
                
                
                2,841
                
                
                
                2,887Provision
      for loan losses
                
                
                100
                
                
                
                -
                
                
                
                -
                
                
                
                51Net
      interest income afterprovision for loan
      losses
                
                
                3,038
                
                
                
                2,990
                
                
                
                2,841
                
                
                
                2,836Noninterest
      income
                
                
                647
                
                
                
                577
                
                
                
                606
                
                
                
                524Noninterest
      expense
                
                
                3,104
                
                
                
                3,158
                
                
                
                3,096
                
                
                
                3,064Income
      before provision forincome
      tax
                
                
                581
                
                
                
                409
                
                
                
                351
                
                
                
                296Provision
      for income tax
                
                
                101
                
                
                
                55
                
                
                
                39
                
                
                
                22Net
      income
                
                $
                480
                
                
                $
                354
                
                
                $
                312
                
                
                $
                274
 For
      the Year Ended December 31, 2006Fourth
                
                
                Third
                
                
                Second
                
                
                First(In
      thousands)
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                QuarterInterest
      and dividend income
                
                $
                5,644
                
                
                $
                5,329
                
                
                $
                4,990
                
                
                $
                4,787Interest
      expense
                
                
                2,847
                
                
                
                2,490
                
                
                
                2,097
                
                
                
                1,916Net
      interest income
                
                
                2,797
                
                
                
                2,839
                
                
                
                2,893
                
                
                
                2,871Provision
      for loan losses
                
                
                62
                
                
                
                -
                
                
                
                68
                
                
                
                62Net
      interest income afterprovision for loan
      losses
                
                
                2,735
                
                
                
                2,839
                
                
                
                2,825
                
                
                
                2,809Noninterest
      income
                
                
                499
                
                
                
                522
                
                
                
                477
                
                
                
                450Noninterest
      expense
                
                
                3,029
                
                
                
                3,001
                
                
                
                2,819
                
                
                
                2,655Income
      before provision forincome tax
      (benefit)
                
                
                205
                
                
                
                360
                
                
                
                483
                
                
                
                604Provision
      for income tax (benefit)
                
                
                54
                
                
                
                (54
                )
                
                
                70
                
                
                
                134Net
      income
                
                $
                151
                
                
                $
                414
                
                
                $
                413
                
                
                $
                470
  For
      the Year Ended December 31, 2005Fourth
                
                
                Third
                
                
                Second
                
                
                First(In
      thousands)
                
                Quarter
                
                
                Quarter
                
                
                Quarter
                
                
                QuarterInterest
      and dividend income
                
                $
                4,545
                
                
                $
                4,124
                
                
                $
                3,807
                
                
                $
                3,432Interest
      expense
                
                
                1,668
                
                
                
                1,367
                
                
                
                1,093
                
                
                
                813Net
      interest income
                
                
                2,877
                
                
                
                2,757
                
                
                
                2,714
                
                
                
                2,619Provision
      for loan losses
                
                
                -
                
                
                
                -
                
                
                
                17
                
                
                
                15Net
      interest income afterprovision for loan
      losses
                
                
                2,877
                
                
                
                2,757
                
                
                
                2,697
                
                
                
                2,604Noninterest
      income
                
                
                425
                
                
                
                372
                
                
                
                384
                
                
                
                336Noninterest
      expense
                
                
                2,604
                
                
                
                2,594
                
                
                
                2,523
                
                
                
                2,376Income
      before provision forincome tax
      (benefit)
                
                
                698
                
                
                
                535
                
                
                
                558
                
                
                
                564Provision
      for income tax (benefit)
                
                
                151
                
                
                
                (2
                )
                
                
                140
                
                
                
                161Net
      income
                
                $
                547
                
                
                $
                537
                
                
                $
                418
                
                
                $
                403
  
 45
 
 Notes to Consolidated Financial
Statements
   17.  Parent
Company Only Financial Statements
  The
following financial statements are for the Company (Naugatuck Valley Financial
Corporation) only, and should be read in conjunction with the consolidated
financial statements of the Company.
 
 Statements of Financial
Condition
 
 December
      31,(In
      thousands)
                
                2007
                
                
                2006ASSETSCash
      on deposit with Naugatuck Valley Savings and Loan
                
                $
                3,661
                
                
                $
                3,124Investment
      in subsidiary, Naugatuck Valley Savings and Loan
                
                
                40,560
                
                
                
                38,850Investment
      securities
                
                
                2,745
                
                
                
                5,416Loan
      to ESOP
                
                
                2,499
                
                
                
                2,655Deferred
      income taxes
                
                
                296
                
                
                
                408Other
      assets
                
                
                703
                
                
                
                642Total
      assets
                
                $
                50,464
                
                
                $
                51,095LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilities
                
                $
                7
                
                
                $
                11Stockholders'
      equity
                
                
                50,457
                
                
                
                51,084Total
      liabilities and stockholders' equity
                
                $
                50,464
                
                
                $
                51,095
 
 Statements of
Income
 
 For the
Year Ended December 31, 2007, 2006 and 2005:
  For
      the Years Ended December 31,(In
      thousands)
                
                2007
                
                
                2006
                
                
                2005Interest
      income
                
                $
                351
                
                
                $
                441
                
                
                $
                506Other
      income
                
                
                1
                
                
                
                1
                
                
                
                -Total
      income
                
                
                352
                
                
                
                442
                
                
                
                506Other
      expense
                
                
                313
                
                
                
                309
                
                
                
                444Income
      before income tax and equity inundistributed net income of
      subsidiary
                
                
                39
                
                
                
                133
                
                
                
                62Income
      tax
                
                
                13
                
                
                
                47
                
                
                
                21Income
      before equity in undistributednet income of
    subsidiary
                
                
                26
                
                
                
                86
                
                
                
                41Equity
      in undistributed net income of subsidiary
                
                
                1,394
                
                
                
                1,362
                
                
                
                1,864Net
      income
                
                $
                1,420
                
                
                $
                1,448
                
                
                $
                1,905
 
 46
 Notes
to Consolidated Financial Statements
 Statements of Cash
flows
 
 For the
Year Ended December 31, 2007, 2006 and 2005:
 
 For
      the Years Ended December 31,(In
      thousands)
                
                2007
                
                
                2006
                
                
                2005Net
      cash provided by operating activities
                
                $
                438
                
                
                $
                278
                
                
                $
                243Cash
      flows from investing activitiesPurchase
      of available-for-sale securities
                
                
                (1,500
                )
                
                
                -
                
                
                
                -Paydowns
      and maturities of available-for-sale securities
                
                
                4,234
                
                
                
                3,854
                
                
                
                1,591Principal
      payments received from ESOP
                
                
                156
                
                
                
                -
                
                
                
                143Investment
      in subsidiary, Naugatuck Valley Savings and Loan
                
                
                -
                
                
                
                2,500
                
                
                
                -Net
      cash provided by investing activities
                
                
                2,890
                
                
                
                6,354
                
                
                
                1,734Cash
      flows from financing activitiesPayment
      of borrowings from subsidiary
                
                
                -
                
                
                
                (2,981
                )
                
                
                -Common
      stock repurchased
                
                
                (2,430
                )
                
                
                (1,491
                )
                
                
                (1,851
                )Cash
      dividends to common shareholders
                
                
                (588
                )
                
                
                (617
                )
                
                
                (500
                )Release
      of ESOP shares
                
                
                227
                
                
                
                -
                
                
                
                217Cost
      of issuance of common stock
                
                
                -
                
                
                
                -
                
                
                
                -Net
      cash used by financing activities
                
                
                (2,791
                )
                
                
                (5,089
                )
                
                
                (2,134
                )Increase
      (decrease) in cash and cash equivalents
                
                
                537
                
                
                
                1,543
                
                
                
                (157
                )Cash
      and cash equivalents at beginning of year
                
                
                3,124
                
                
                
                1,581
                
                
                
                1,738Cash
      and cash equivalents at end of year
                
                $
                3,661
                
                
                $
                3,124
                
                
                $
                1,581Supplemental
      Disclosures:Cash
      paid during the year for:Interest
                
                $
                -
                
                
                $
                -
                
                
                $
                -Income
      taxes
                
                
                -
                
                
                
                -
                
                
                
                -
 
 47
 
 Directors
and Executive Officers
 
 Directors
of Naugatuck Valley Financial Corporation,
 Naugatuck
Valley Mutual Holding Company
 and Naugatuck Valley Savings
and Loan
  Carlos
      S. Batista
                  Vice
      President – Bristol, Inc. a division of Emerson
                  Process
      Management
                  
                  Richard
      M. Famiglietti
                  Owner
      – CM Property Management
                  
                  Ronald
      D. Lengyel
                  Chairman
      of the Board – Naugatuck Valley
                  Financial
      Corporation, Naugatuck Valley Mutual
                  Holding
      Company and Naugatuck Valley
                  Savings
      and Loan
                  
                  Director
      – Connecticut Water Service, Inc.
                  
                  James
      A. Mengacci
                  Owner–James A. Mengacci Associates
      LLC
                Michael
      S. Plude, CPA
                  Managing
      Partner – Kaskie, Plude & Company, LLC
                  
                  John
      C. Roman
                  President and Chief Executive
      Officer– Naugatuck
                  Valley
      Financial Corporation, Naugatuck Valley
                  Mutual
      Holding Company and Naugatuck Valley
                  
                  Camilo
      P. Vieira
                  Consultant
      – CM Property Management
                  
                  Jane
      H. Walsh
                  Retired
      Senior Vice President – Naugatuck Valley
                  Financial
      Corporation, Naugatuck Valley Mutual
                  Holding
      Company and Naugatuck Valley Savings
                  and
      Loan
 
 Executive
Officers of
 Naugatuck
Valley Financial Corporation,
 Naugatuck
Valley Mutual Holding Company
 and Naugatuck Valley Savings
and Loan
 
 John
      C. Roman
                President and Chief Executive
      Officer
              William
      C. Nimons
                Senior Vice
      PresidentDominic
      J. Alegi, Jr.
                Executive Vice
      President
              Mark
      S. Graveline
                Senior Vice
      PresidentLee
      R. Schlesinger
                Senior Vice President and
      Chief
                Financial Officer
 
  Investor
and Corporate Information
 
 Annual
Meeting
 
 The
annual meeting of stockholders will be held at 10:30 a.m., local time, on May 8,
2008 in the Community Room at Naugatuck Valley Savings and Loan’s main office at
333 Church Street, Naugatuck, Connecticut 06770.
 
 Stock
Listing
 
 Naugatuck
Valley Financial Corporation common stock is listed on the Nasdaq Global Market
under the symbol "NVSL."
 
 Price
Range of Common Stock
 
 On
October 1, 2004, Naugatuck Valley Financial common stock commenced trading on
the Nasdaq National Market.  At March 6, 2008, there were 811 holders
of record of Naugatuck Valley Financial common stock.  The following
table sets forth the high and low sales prices of the common stock, as reported
on the Nasdaq National Market, and the dividend paid by Naugatuck Valley
Financial during each quarter since trading commenced.
   
 
 Dividends
              
              
              High
              
              
              Low2006:First
      Quarter
              
              $
              0.05
              
              
              $
              10.95
              
              
              $
              10.25Second
      Quarter
              
              
              0.05
              
              
              
              11.80
              
              
              
              10.17Third
      Quarter
              
              
              0.05
              
              
              
              11.67
              
              
              
              10.71Fourth
      Quarter
              
              
              0.05
              
              
              
              12.65
              
              
              
              10.792007:First
      Quarter
              
              $
              0.05
              
              
              $
              12.95
              
              
              $
              12.00Second
      Quarter
              
              
              0.05
              
              
              
              12.90
              
              
              
              10.05Third
      Quarter
              
              
              0.05
              
              
              
              11.90
              
              
              
              9.97Fourth
      Quarter
              
              
              0.05
              
              
              
              10.70
              
              
              
              8.75
 
 Stockholder
and General Inquiries
 
 John C.
Roman
 President
and Chief Executive Officer
 Naugatuck
Valley Financial Corporation
 333
Church Street
 Naugatuck,
Connecticut 06770
 (203)
720-5000
 
 Annual
and Other Reports
 
 A copy of
the Naugatuck Valley Financial Annual Report on Form 10-K, without exhibits, for
the year ended December 31, 2007, as filed with the Securities and Exchange
Commission, may be obtained without charge by contacting Bernadette A. Mole,
Corporate Secretary, Naugatuck Valley Financial Corporation, 333 Church Street,
Naugatuck, Connecticut 06770.
  Independent
      Registered Public Accounting Firm
                Transfer
      AgentWhittlesey
      & Hadley, P.C.
                Registrar
      and Transfer Company147
      Charter Oak Avenue
                10
      Commerce DriveHartford,
      Connecticut  06106
                Cranford,
      New Jersey 07016
 Corporate
Counsel
 
 Muldoon
Murphy & Aguggia LLP
 5101
Wisconsin Avenue, NW
 Washington,
DC 20016
  Office
Locations
 
 
 Main
      Office333
      Church Street
                Naugatuck,
      Connecticut  06770Branch
      Offices1009
      New Haven Road
                Naugatuck,
      Connecticut  06770127
      South Main Street
                Beacon
      Falls, Connecticut  064031699
      Highland Avenue
                Cheshire,
      Connecticut  0641049
      Pershing Drive
                Derby,
      Connecticut  06418249
      West Street
                Seymour,
      Connecticut  06483504
      Bridgeport Avenue
                Shelton,
      Connecticut  064841570
      Southford Road
                Southbury,
      Connecticut  064881030
      Hamilton Avenue
                Waterbury,
      Connecticut  06706