UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM10-K


(Mark
One)





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





For the fiscal year ended December 31,
2007





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





For the transition period
from__________________
to __________________





Commission
File Number: 0-50876





NAUGATUCK
VALLEY FINANCIAL CORPORATION


(Exact
name of registrant as specified in its charter)





United
      States
            65-1233977(State
      or other jurisdiction of
            (I.R.S.
      Employer Identification No.)incorporation
      or organization)333 Church Street,
      Naugatuck, Connecticut
            06770(Address
      of principal executive offices)
            (Zip
      Code)





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





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




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


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





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





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





Indicate by check mark whether the
registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days.  Yes ý     No
o





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





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




Large
      accelerated filer o
            Accelerated
      filer oNon-accelerated
      filer o  (Do
      not check if a smaller reporting company)
            Smaller
      reporting company ý








Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
 ̈     No
ý





The aggregate market value of the
voting and non-voting common equity held by non-affiliates as of June 30, 2007,
was $35,085,796.





The number of shares outstanding of the
registrant’s common stock as of March 10, 2008 was 7,158,734.


Of such
shares outstanding, 4,182,407 shares were held by Naugatuck Valley Mutual
Holding Company.





DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of the 2007 Annual Report to Stockholders and portions of the Proxy Statement
for the 2008 Annual Meeting of Stockholders are incorporated by reference in
Parts II and III, respectively, of this Form 10-K.














INDEX





Part IPageItem 1.
            Business
            1Item 1A.
            Risk Factors
            16Item 1B.
            Unresolved Staff Comments
            18Item 2.
            Properties
            19Item 3.
            Legal Proceedings
            20Item 4.
            Submission of Matters to a Vote of Securities
      Holders
            20Part IIItem 5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            20Item 6.
            Selected Financial Data
            21Item 7.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operation
            21Item 7A.
            Quantitative and Qualitative Disclosures About Market
      Risk
            21Item 8.
            Financial Statements and Supplementary Data
            21Item 9.
            Changes in and Disagreements With Accountants on Accounting and
      Financial Disclosure
            21Item 9A(T).
            Controls and Procedures
            21Item 9B.
            Other Information
            22Part IIIItem 10.
            Directors, Executive Officers and Corporate
      Governance
            22Item 11.
            Executive Compensation
            22Item 12.
            Security Ownership of Certain Beneficial Owners and Management
      and Related Stockholder Matters
            22Item 13.
            Certain Relationships and Related Transactions, and Director
      Independence
            23Item 14.
            Principal Accountant Fees and Services
            23Part IVItem 15.
            Exhibits and Financial Statement Schedules
            23SIGNATURES











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





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








PART I





ITEM
      1.
            BUSINESS.





General





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





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





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





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





Available
Information





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





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





Market
Area





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





Competition





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





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





We expect competition to continue in
the future as a result of legislative, regulatory and technological changes and
the continuing trend of consolidation in the financial services
industry.  Technological advances, for example, have lowered the
barriers to enter new market areas, allowed banks to expand their geographic
reach by providing services over the internet and made it possible for
non-depository institutions to offer products and services that traditionally
have been provided by banks.  Changes in federal law permit
affiliation among banks, securities firms and insurance companies, which
promotes a competitive environment in the financial services
industry.  Competition for deposits and the origination of loans could
limit our growth in the future.





Lending
Activities





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





One- to
Four-Family Residential Loans.Our primary lending
activity is the origination of mortgage loans to enable borrowers to purchase or
refinance existing homes or to construct new residential dwellings in our market
area.  We offer fixed-rate and adjustable-rate mortgage loans with
terms up to 40 years.  Borrower demand for adjustable-rate loans
versus fixed-rate loans is a function of the level of interest rates, the
expectations of changes in the level of interest rates, the difference between
the interest rates and loan fees offered for fixed-rate mortgage loans and the
initial period interest rates and loan fees for adjustable-rate
loans.  The relative amount of fixed-rate mortgage loans and
adjustable-rate mortgage loans that can be originated at any time is largely
determined by the demand for each in a competitive environment and the effect
each has on our interest rate risk.  The loan fees charged, interest
rates and other provisions of mortgage loans are determined by us on the basis
of our own pricing criteria and competitive market conditions.





We offer fixed-rate loans with terms of
either 10, 15, 20, 30 or 40 years.  Our adjustable-rate mortgage loans
are based on either a 15, 20 or 30-year amortization schedule and interest rates
and payments on our


2


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





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





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





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





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





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





We originate multi-family and
commercial real estate loans for terms generally up to 20
years.  Interest rates and payments on adjustable-rate loans adjust
every one, three, five or ten years.  Interest rates and payment on
our adjustable rate loans generally are adjusted to a rate typically equal to
2.25% above the one-year, three-year, five-year or ten-year Federal Home Loan
Bank classic advance rate.There are no
adjustment period or lifetime interest rate caps.  Loan amounts
generally do not exceed 80% of the appraised value.





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


3


2007 was
$3.8 million, of which $3.7 million was outstanding.  This loan was
secured by an owner-occupied commercial building and was performing according to
its terms at December 31, 2007.





Construction
Loans.We originate loans to
individuals to finance the construction of residential dwellings for personal
use.  Our construction loans generally provide for the payment of
interest only during the construction phase, which is usually nine
months.  At the end of the construction phase, the loan converts to a
permanent mortgage loan.  Loans generally can be made with a maximum
loan to value ratio of 80% of the appraised value with a maximum term of 30
years. The largest outstanding residential construction loan at December 31,
2007 was $2.0 million, $1.6 million of which was outstanding.This loan was performing
according to its terms at December 31, 2007.  We also make commercial
construction loans for commercial development projects, including condominiums,
apartments buildings, single family subdivisions; as well as office buildings,
retail and other income producing properties.  These loans provide for
payment of interest only during the construction phase and may, in the case of
an apartment or commercial building, convert to a permanent mortgage loan or, in
the case of a single family subdivision or construction or builder loan, be paid
in full with the sale of the property after construction is
complete.  In the case of a commercial construction loan, the
construction period may be from nine months to two years.  Loans are
generally made to a maximum of 80% of the appraised value as determined by an
appraisal of the property made by an independent licensed
appraiser.  We also require an inspection of the property before
disbursement of funds during the term of the construction loan for both
residential and commercial construction loans.  The largest
outstanding commercial construction loan at December 31, 2007 was $4.8 million,
of which $3.2 million was outstanding.  This loan was secured by real
estate for the construction of single family homes, and was performing according
to its terms at December 31, 2007.  Our largest commercial real estate
loan relationship at December 31, 2007 involved loans totaling $4.1 million,
secured by a first and second mortgage on a warehouse and packaging
facility.  These loans were performing according to their original
terms at December 31, 2007.





We originate land loans to individuals
on approved residential building lots for personal use for terms of up to 20
years and to a maximum loan-to-value ratio of 75% of the lower of the appraisal
value or purchase price.  Our land loans adjust annually after a
five-year initial fixed period.  Interest rates are equal to 3.75%
above the one-year constant maturity Treasury index.





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





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





Commercial
Business Loans.We make commercial
business loans to a variety of professionals, sole proprietorships and small
businesses primarily in our market area.  We offer a variety of
commercial lending products.  These loans are typically secured,
primarily by business assets.  These loans are originated with maximum
loan-to-value ratios of 75% of the value of the business assets.  We
originate one- to ten-year term loans for the acquisition of equipment or
business expansion, lines of credit for seasonal financing needs and demand
loans for short term financing needs with specific repayment
sources.  Commercial business loans are usually written at variable
rates which use the prime rate as published in The Wall Street Journal as an
index and, depending on the


4


qualifications
of the borrower, a 0.5% to 3.0% margin is added.  These rates will
change when and as the index rate changes without caps.  Fixed-rate
loans are written at market rates determined at the time the loan is granted and
are based on the length of the term and the qualifications of the
borrower.  Our largest commercial business loan relationship at
December 31, 2007 was a loan in the amount of $1.2 million of which $289,000 was
outstanding and performing according to the original terms at December 31,
2007.  This loan is secured by an assignment of fee
income.





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





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





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





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





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





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





We consider loan sales as a part of our
interest rate risk management efforts.  We sell longer-term fixed-rate
loans in the secondary market based on prevailing market interest rate
conditions, an analysis of the composition and risk of the loan portfolio,
liquidity needs and interest rate risk management goals.  Generally,
loans are sold without recourse and with servicing retained.  We did
not sell any loans in the years ended December 31, 2007 or 2006.  We
occasionally sell participation interests in loans.





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


5


For one- to four-family loans and owner
occupied residential construction loans, two members of the mortgage loan
committee, one of which must be a vice president or above, may approve loans up
to $417,000 and a majority of the members of the Board loan committee must
approve loans over $417,000.  For unsecured commercial business loans,
a majority of the members of the Board must approve loans over $500,000 and two
members of the Board of Directors loan committee must approve loans over
$250,000 and up to $500,000.  Unsecured business loans of $250,000 or
less must be approved by two members of the officers’ loan
committee.  Loans of $50,000 or less which are unsecured can be
approved by one member of the officers’ loan committee and later presented to
the officers’ loan committee for ratification.  For secured commercial
loans and commercial construction loans, a majority of the members of the Board
must approve loans over $1.5 million and two members of the Board of Directors
loan committee must approve loans over $750,000 and up to $1.5
million.  Loans of $500,001 to $750,000, secured by real estate, where
the loan to value ratio is 80% or less supported by a conforming appraisal, can
be approved by the officers’ loan committee.  Loans of $500,000 or
less secured by real estate where the loan-to-value is 80% or less can be
approved by two members of the officers’ loan committee and for $100,000 or less
secured by real estate with an 80% loan-to-value one member of the officers’
loan committee can approve with a later ratification by the officers’ loan
committee.  The Board of Directors must approve all consumer loans
over $200,000.  Various bank personnel have been delegated authority
to approve smaller commercial loans and consumer loans.





Loans
to One Borrower.  The maximum amount that we may lend to
one borrower and the borrower’s related entities is limited, by regulation, to
generally 15% of our stated capital and reserves.  At December 31,
2007, our regulatory limit on loans to one borrower was$6.4 million.At that date, our largest lending
relationship was$5.7 million and included a residential
construction mortgage, three secured commercial real estate loans (secured by
two office buildings and one mixed use office/retail building) and a leasehold
mortgage (secured by retail space), all of which were performing according to
the original repayment terms at December 31, 2007.





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





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





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





Investment
Activities





We have legal authority to invest in
various types of liquid assets, including U.S. Treasury obligations, securities
of various federal agencies and of state and municipal governments,
mortgage-backed securities and certificates of deposit of federally insured
institutions.  Within certain regulatory limits, we also may invest a
portion


of our
assets in corporate securities and mutual funds.  We also are required
to maintain an investment in Federal Home Loan Bank of Boston
stock.





At December 31, 2007, our investment
portfolio consisted of U.S. government and agency securities with maturities
primarily less than three years, mortgage-backed securities issued by Fannie
Mae, Freddie Mac and Ginnie Mae with stated final maturities of 30 years or
less, collateralized mortgage obligations with stated final maturities of 30
years or less, municipal securities with maturities of 15 years or less,
preferred money market securities with terms of primarily 91 days or less, and
insured certificates of deposit at other financial
institutions.


6





Our investment objectives are to
provide and maintain liquidity, to maintain a balance of high quality,
diversified investments to minimize risk, to provide collateral for pledging
requirements, to establish an acceptable level of interest rate risk, to provide
an alternate source of low-risk investments when demand for loans is weak, and
to generate a favorable return.  During 2007 we enhanced overall
portfolio yield by reducing our position in insured certificates of deposit and
U.S. government and agency securities and increasing our position in
mortgage-backed, municipal and preferred money market securities.Our Board of Directors
has the overall responsibility for our investment portfolio, including approval
of our investment policy and appointment of our Asset/Liability
Committee.  The Asset/Liability Committee is responsible for approval
of investment strategies and monitoring of investment
performance.  Our Executive Vice President and our Controller are
co-designated investment portfolio managers who are responsible for the daily
investment activities and are authorized to make investment decisions consistent
with our investment policy.  The Asset/Liability Committee meets
regularly with the Controller, the Executive Vice President and President and
Chief Executive Officer in order to determine and review investment strategies
and transactions.





Deposit
Activities and Other Sources of Funds





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





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





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





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





Subsidiaries





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





Naugatuck Valley Savings has one
subsidiary, Naugatuck Valley Mortgage Servicing
Corporation.  Naugatuck Valley Mortgage Servicing, established in 1999
under Connecticut law as a subsidiary of Naugatuck Valley Savings, is a passive
investment corporation organized in order to take advantage of certain tax
benefits.  Its primary business is to service mortgage loans which we
have originated and subsequently transferred to Naugatuck Valley Mortgage
Servicing.  At December 31, 2007, Naugatuck Valley Mortgage Servicing
had $236.2 million in assets.


7














Personnel





At December 31, 2007, we had 107
full-time employees and 16 part-time employees, none of whom is represented by a
collective bargaining unit.  We believe our relationship with our
employees is good.




















8


Regulation and
Supervision





General





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





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





Regulation
of Federal Savings Associations





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





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





The risk-based capital standard
requires federal savings institutions to maintain Tier 1 (core) and total
capital (which is defined as core capital and supplementary capital) to
risk-weighted assets of at least 4% and 8%, respectively.  In
determining the amount of risk-weighted assets, all assets, including certain
off-balance sheet assets, recourse obligations, residual interests and direct
credit substitutes, are multiplied by a risk-weight factor of 0% to 100%,
assigned by the Office of Thrift Supervision capital regulation based on the
risks believed inherent in the type of asset.  Core (Tier 1) capital
is generally defined as common stockholders’ equity (including
retained


9


earnings),
certain noncumulative perpetual preferred stock and related surplus and minority
interests in equity accounts of consolidated subsidiaries, less intangibles
other than certain mortgage servicing rights and credit card
relationships.  The components of supplementary (Tier 2) capital
currently include cumulative preferred stock, long-term perpetual preferred
stock, mandatory convertible securities, subordinated debt and intermediate
preferred stock, the allowance for loan and lease losses limited to a maximum of
1.25% of risk-weighted assets and up to 45% of unrealized gains on
available-for-sale equity securities with readily determinable fair market
values.  Overall, the amount of supplementary capital included as part
of total capital cannot exceed 100% of core capital.





The Office of Thrift Supervision also
has authority to establish individual minimum capital requirements in
appropriate cases upon a determination that an institution’s capital level is or
may become inadequate in light of the particular circumstances.  At
December 31, 2007 Naugatuck Valley Savings met each of its capital
requirements.





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





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





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





Limitation on
Capital Distributions.Office of Thrift Supervision
regulations impose limitations upon all capital distributions by a savings
institution, including cash dividends, payments to repurchase its shares and
payments to stockholders of another institution in a cash-out
merger.  Under the regulations, an application to and the prior
approval of the Office of Thrift Supervision is required before any capital
distribution if the institution does not meet the criteria for “expedited
treatment” of applications under Office of Thrift Supervision regulations (i.e.,
generally, examination and Community Reinvestment Act ratings in the two top
categories), the total capital distributions for the calendar year exceed net
income for that year plus the amount of retained net income for the preceding
two years, the institution would be undercapitalized following the distribution
or the distribution would otherwise be contrary to a statute, regulation or
agreement with the Office of Thrift Supervision.  If an application is
not required, the institution must still provide prior notice to the Office of
Thrift Supervision of the capital distribution if, like Naugatuck Valley
Savings, it is a subsidiary of a holding company.  If Naugatuck Valley
Savings’ capital were ever to fall below its regulatory requirements or the
Office of Thrift Supervision notified it that it was in need of increased
supervision, its ability to make capital distributions could be
restricted.  In addition,


10


the
Office of Thrift Supervision could prohibit a proposed capital distribution that
would otherwise be permitted by the regulation, if the agency determines that
such distribution would constitute an unsafe or unsound practice.





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





A savings institution that fails the
qualified thrift lender test is subject to certain operating restrictions and
may be required to convert to a bank charter.  As of December 31,
2007, Naugatuck Valley Savings maintained 91.22% of its portfolio assets in
qualified thrift investments and, therefore, met the qualified thrift lender
test.





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





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





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





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


11


Federal
Deposit Insurance Corporation has authority to take such action under certain
circumstances.  Federal law also establishes criminal penalties for
certain violations.





Assessments.  Federal
savings banks are required to pay assessments to the Office of Thrift
Supervision to fund its operations.  The general assessments, paid on
a semi-annual basis, are based upon the savings institution’s total assets,
including consolidated subsidiaries, financial condition and complexity of its
portfolio.  The Office of Thrift Supervision assessments paid by
Naugatuck Valley Savings for the year ended December 31, 2007 totaled
$101,696.





Insurance of
Deposit Accounts.The deposits of Naugatuck Valley Savings are
insured up to applicable limits by the Deposit Insurance Fund of the Federal
Deposit Insurance Corporation.  The Deposit Insurance Fund is the
successor to the Bank Insurance Fund and the Savings Association Insurance Fund,
which were merged in 2006.  The Federal Deposit Insurance Corporation
amended its risk-based assessment system for 2007 to implement authority granted
by the Federal Deposit Insurance Reform Act of 2005 (“Reform
Act”).  Under the revised system, insured institutions are assigned to
one of four risk categories based on supervisory evaluations, regulatory capital
levels and certain other factors.  An institution’s assessment rate
depends upon the category to which it is assigned.  Risk category I,
which contains the least risky depository institutions, is expected to include
more than 90% of all institutions.  Unlike the other categories, Risk
Category I contains further risk differentiation based on the Federal Deposit
Insurance Corporation’s analysis of financial ratios, examination component
ratings and other information.  Assessment rates are determined by the
Federal Deposit Insurance Corporation and currently range from five to seven
basis points for the healthiest institutions (Risk Category I) to 43 basis
points of assessable deposits for the riskiest (Risk Category
IV).  The Federal Deposit Insurance Corporation may adjust rates
uniformly from one quarter to the next, except that no single adjustment can
exceed three basis points.  No institution may pay a dividend if in
default of its Federal Deposit Insurance Corporation assessment.





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





In addition to the assessment for
deposit insurance, institutions are required to make payments on bonds issued in
the late 1980s by the Financing Corporation to recapitalize a predecessor
deposit insurance fund.  That payment is established quarterly and
during the calendar year ending December 31, 2007 averaged 1.18 basis points of
assessable deposits.





The Reform Act provided the Federal
Deposit Insurance Corporation with authority to adjust the Deposit Insurance
Fund ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to
the prior statutorily fixed ratio of 1.25%.  The ratio, which is
viewed by the Federal Deposit Insurance Corporation as the level that the fund
should achieve, was established by the agency at 1.25% for 2008, which is
unchanged from 2007.





The Federal Deposit Insurance
Corporation has authority to increase insurance assessments.  A
significant increase in insurance premiums would likely have an adverse effect
on the operating expenses and results of operations of Naugatuck Valley
Savings.  Management cannot predict what insurance assessment rates
will be in the future.





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





Federal Home Loan
Bank System.Naugatuck Valley Savings is a member of the
Federal Home Loan Bank System, which consists of twelve regional Federal Home
Loan Banks.  The Federal Home Loan Bank provides a central credit
facility primarily for member institutions.  Naugatuck Valley Savings,
as a member of the Federal Home Loan Bank of Boston, is required to acquire and
hold shares of capital stock in that Federal Home


12


Loan
Bank.  Naugatuck Valley Savings was in compliance with this
requirement with an investment in Federal Home Loan Bank stock at December 31,
2007 of $4.6 million.  Federal Home Loan Bank advances must be secured
by specified types of collateral.





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





Federal
Reserve System.





The Federal Reserve Board regulations
require savings institutions to maintain noninterest earning reserves against
their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and
regular checking accounts).  The regulations generally provide that
reserves be maintained against aggregate transaction accounts as follows: a 3%
reserve ratio is assessed on net transaction accounts up to and including $43.9
million; a 10% reserve ratio is applied above $43.9 million.  The
first $9.3 million of otherwise reservable balances are exempted from the
reserve requirements.  The amounts are adjusted
annually.  Naugatuck Valley Savings complies with the foregoing
requirements.





Holding
Company Regulation





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





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





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





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


13





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





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





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





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





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





Federal
Securities Laws





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





14


Executive
Officers of the Registrant





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





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





Below is information regarding the
executive officers who are not also directors.  Unless otherwise
stated, each executive officer has held his or her current position for at least
the last five years.  Ages presented are as of December 31,
2007.





Dominic J. Alegi,
Jr. has served as Executive Vice President of Naugatuck Valley Financial
and Naugatuck Valley Mutual since September 2004 and has been Executive Vice
President of Naugatuck Valley Savings since 1989.  Mr. Alegi has
served with Naugatuck Valley Savings since 1970.  Age 61.





Lee R.
Schlesingerwas appointed Senior Vice
President and Chief Financial Officer of Naugatuck Valley Mutual, Naugatuck
Valley Financial and Naugatuck Valley Savings in December,
2007.  Prior to that, he served as Vice President and Treasurer of
Naugatuck Valley Financial and Naugatuck Valley Mutual since September 2004, and
as Vice President and Treasurer of Naugatuck Valley Savings since August
2004.  Mr. Schlesinger served as Vice President and Controller of
Naugatuck Valley Savings from 2003 to 2004 and as Assistant Vice President and
Controller of Naugatuck Valley Savings from 2000 to 2003.  Mr.
Schlesinger has served with Naugatuck Valley Savings since 1983.  Age
47.





William C.
Nimons has served as Senior Vice President of Naugatuck Valley Financial
and Naugatuck Valley Mutual since September 2004 and has been Senior Vice
President of Naugatuck Valley Savings since 2001.  Mr. Nimons
previously was the Manager-Network Management of Prudential Real Estate and
Relocation, a real estate and relocation firm and was an Executive Vice
President at Shelton Savings Bank.  Age 61.





Mark S.
Graveline has served as Senior Vice President of Naugatuck Valley
Financial and Naugatuck Valley Mutual and as Senior Vice President and Chief
Lending Officer of Naugatuck Valley Savings since February 2005.  Mr.
Graveline previously was a Vice President of Banknorth-Connecticut and a Vice
President of North American Bank and Trust.  Age 51.











15


ITEM
      1A.
            RISK
      FACTORS.





Changes
in interest rates may hurt our profits and asset value.





Short-term market interest rates (which
we use as a guide to price our deposits) have until recently risen from
historically low levels, while longer-term market interest rates (which we use
as a guide to price our longer-term loans) have not.  This
“flattening” of the market yield curve has had a negative impact on our interest
rate spread and net interest margin, which has reduced our
profitability.  For the years ended December 31, 2007 and 2006,
respectively, our interest rate spread was 2.76% compared to
3.07%.  If short-term interest rates rise, and if rates on our
deposits reprice upwards faster than the rates on our long-term loans and
investments, we would experience compression of our interest rate spread and net
interest margin, which would have a negative effect on our
profitability.  Recently, however, the U.S. Federal Reserve decreased
its target for the federal funds rate from 5.25% to 3.00%.  Decreases
in interest rates can result in increased prepayments of loans and
mortgage-related securities, as borrowers refinance to reduce their borrowing
costs.  Under these circumstances, we are subject to reinvestment risk
as we may have to redeploy such loan or securities proceeds into lower-yielding
assets, which might also negatively impact our income.  For further
discussion of how changes in interest rates could impact us, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations—Market
Risk Analysis” contained in the Company’s 2007 Annual Report to
Stockholders.





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





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





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





Since December 31, 2002, our commercial
real estate, commercial business and residential construction loan portfolio has
increased $108.9 million, or 577.3%, and at December 31, 2007, $127.8 million,
or 35.1%, of our loan portfolio consisted of these commercial real estate,
construction and commercial business loans.  We intend to continue to
emphasize these types of lending.  These types of loans generally
expose a lender to greater risk of non-payment and loss than one- to four-family
residential mortgage loans because repayment of the loans often depends on the
successful operation of the property, the income stream of the borrowers for
commercial business loans and for construction loans, the accuracy of the
estimate of the property’s value at completion of construction and the estimated
cost of construction.  These factors can be impacted by many variables
including economic events beyond the borrowers’ control.  Such loans
typically involve larger loan balances to single borrowers or groups of related
borrowers compared to one- to four-family residential mortgage
loans.  Also, many of our commercial and construction borrowers have
more than one loan outstanding with us.  Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to
a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan.





Because of our planned continued
emphasis on commercial and construction lending and the unseasoned nature of
many of these loans, we may determine it necessary to increase the level of our
allowance for loan losses.  We make various judgments about the
collectibility of our loans, including the creditworthiness of our borrowers and
the value of the real estate and other assets serving as collateral for our
loans.  In determining the amount of the allowance for loan losses, we
review our loans and our loan loss and delinquency experience, and we evaluate
economic conditions.  However, as a result of our recent expansion, a
significant portion of our commercial and construction loans are unseasoned,
with the risk that these loans may not have had sufficient time to perform
to


16


properly
indicate the potential magnitude of losses.  If our judgments are
incorrect, our allowance for loan losses may not be sufficient to cover future
losses, which will result in additions to our allowance through increased
provisions for loan losses.  In addition, bank regulators periodically
review our allowance for loan losses and may require us to increase our
provision for loan losses or recognize further loan
charge-offs.  Increased provisions for loan losses would increase our
expenses and reduce our profits.  Finally, during our recent
expansion, we have also experienced a historically low interest rate
environment.  Our unseasoned adjustable rate loans have not,
therefore, been subject to a rising interest rate environment which could cause
them to adjust to their maximum interest rate level.  Such an increase
could increase collection risks resulting from potentially higher payment
obligations by the borrower.





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





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





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





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





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





Current Office of Thrift Supervision
regulations permit a mutual holding company to be acquired by a mutual
institution in a remutualization transaction.  The possibility of a
remutualization transaction has recently resulted in a degree of takeover
speculation for mutual holding companies which is reflected in the stock prices
of mutual holding companies.  However, the Office of Thrift
Supervision has issued a policy statement indicating that it views
remutualization transactions as raising significant issues concerning disparate
treatment of minority stockholders and mutual members of the target entity and
as raising issues concerning the effect on the mutual members of the acquiring
entity.  Under certain circumstances, the Office of Thrift Supervision
intends to give these issues special scrutiny and reject applications for the
remutualization of a mutual holding company unless the applicant can clearly
demonstrate that the Office of Thrift Supervision’s concerns are not warranted
in the particular case.  Should the Office of Thrift Supervision
prohibit or otherwise restrict these transactions in the future, our stock price
may be adversely affected.  We have no current plans to undertake a
remutualization transaction.  In addition, Office of Thrift
Supervision regulations prohibit, for three years following the completion of a
stock offering by a company such as Naugatuck Valley Financial, the acquisition
of more than 10% of any class of equity security of the company without the
prior approval of the Office of Thrift Supervision.











17


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





Although we consider ourselves
competitive in the Greater Naugatuck Valley, which we consider our market area,
we face intense competition both in making loans and attracting
deposits.  Price competition for loans and deposits might result in us
earning less on our loans and paying more on our deposits, which reduces net
interest income.  Some of the institutions with which we compete have
substantially greater resources and lending limits than we have and may offer
services that we do not provide.  We expect competition to increase in
the future as a result of legislative, regulatory and technological changes and
the continuing trend of consolidation in the financial services
industry.  Our profitability depends upon our continued ability to
compete successfully in our market area.





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





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





ITEM 1B.
            UNRESOLVED
      STAFF COMMENTS.





None.


18


ITEM 2.
            PROPERTIES.





We conduct our business through our
main office and branch offices.  The following table sets forth
certain information relating to these facilities as of December 31,
2007.





Location
                
                Year
                  Opened/
                  Acquired
                
                Net
      Book Value at
                  December
      31, 2007
                
                Square
                  Footage
                
                Owned/
                  Leased
                
                Date
      of Lease
                  Expiration(Dollars
      in thousands)Main
      Office:333
      Church Street
                  Naugatuck,
      CT  06770
                
                1996
                
                $2,663
                
                23,000
                
                Owned
                
                —Branches:1009
      New Haven Road
                  Naugatuck,
      CT  06770
                
                2001
                
                1,263
                
                3,300
                
                Owned
                
                —127
      South Main Street
                  Beacon
      Falls, CT  06403
                
                1997
                
                197
                
                960
                
                Owned
                
                —49
      Pershing Drive
                  Derby,
      CT  06418
                
                2003
                
                155
                
                1,950
                
                Leased
                
                2013
      (1)249
      West Street (2)
                  Seymour,
      CT  06483
                
                2002
                
                2,499
                
                9,500
                
                Owned
                
                —504
      Bridgeport Avenue
                  Shelton,
      CT  06484
                
                2004
                
                517
                
                3,000
                
                Leased
                
                2020
      (3)1699
      Highland Avenue, Cheshire, CT  06410
                
                2006
                
                97
                
                3,000
                
                Leased
                
                2011
      (4)1570
      Southford Road (5)
                  Southbury,
      CT  06488
                
                2006
                
                1,824
                
                4,823
                
                Owned
                
                —1030
      Hamilton Avenue Waterbury, CT  06706
                
                2006
                
                20
                
                1,239
                
                Leased
                
                2011
      (6)Other
      Properties:1007
      New Haven Road
                  Naugatuck,
      CT  06770
                
                1974
                
                27
                
                1,725
                
                Leased
                
                2014
      (7)135
      South Main Street (8)
                  Beacon
      Falls, CT  06403
                
                2003
                
                159
                
                N/A
                
                Owned
                
                —








(1)
              We
      have an option to renew this lease for three additional five-year
      periods.
 (2)
              This
      branch occupies 3,500 square feet of this building and 1,465 square feet
      is utilized as a training facility for the bank.  The building
      also includes 4,535 square feet of rentable space which is currently
      leased until 2013.  The tenant has an option to renew this lease
      for three additional five year
periods.
 (3)
              We
      have an option to renew this lease for five additional five-year
      periods.
 (4)
              We
      have an option to renew this lease for three additional five-year
      periods.
 (5)
              This
      branch occupies 3,383 square feet of this building.  The
      building also includes 1,440 square feet of rental space, none of which
      was rented as of December 31, 2007.
 (6)
              We
      have an option to renew this lease for four additional five-year
      periods.
 (7)
              Former
      branch site.  We have an option to renew this lease for two
      additional ten-year periods.  This property has been leased to a
      subtenant under a lease that expires in
2011.
 (8)
              This
      property is designated for future parking, additional access and possible
      future expansions of our Beacon Falls
branch.


19


ITEM 3.
            LEGAL
      PROCEEDINGS.





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




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





None.


PART II





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





The information required by this item
regarding the market for Naugatuck Valley Financial’s common equity and related
stockholder matters, other than information relating to restrictions on
Naugatuck Valley Financial’s payment of dividends which is provided below, is
incorporated herein by reference to Naugatuck Valley Financial’s 2007 Annual
Report to Stockholders at “Investor and Corporate
Information.”





Naugatuck Valley Financial’s ability to
pay dividends is dependent on dividends received from Naugatuck Valley
Savings.  For a discussion of restrictions on the payment of cash
dividends by Naugatuck Valley Savings, see “Business—Regulation and
Supervision—Regulation of Federal Savings Associations—Limitation on Capital
Distributions” in this Annual Report on Form 10-K and note 13 to the
Consolidated Financial Statements included in Naugatuck Valley Financial’s 2007
Annual Report to Stockholders.





The following table presents
information regarding Naugatuck Valley Financial stock repurchases during the
three months ended December 31, 2007.





Period
            Total
      Number of
              Shares
      Purchased
            Average
      Price
              Paid
              per
      Share
            Total
      Number of
              Shares
      Purchased as
              Part
      of Publicly
              Announced
      Plans or
              Programs
            Maximum
      Number
              of
      Shares that May
              Yet
      Be Purchased
              Under
      the Plans or
              ProgramsOctober
            10,000
            10.50
            10,000
            79,337November
            35,000
            10.36
            35,000
            44,337December
            -
            -
            -
            44,337Total
            45,000
            10.39
            45,000
            44,337





On May 2,
2006, the Company announced that the Board of Directors authorized the Company
to repurchase up to 380,218 shares, or approximately 5%, of the outstanding
shares of common stock, including the shares held by Naugatuck Valley Mutual
Holding Company.  The repurchases will be conducted through
open-market purchases or privately negotiated transactions and will be made from
time to time depending on market conditions and other factors.  No
time limit was placed on the duration of the share repurchase
program.  Any repurchased shares will be held as treasury stock and
will be available for general corporate purposes.





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








20








ITEM 6.
            SELECTED
      FINANCIAL DATA.





The information required by this item
is incorporated herein by reference to the Section captioned “Selected
Consolidated Financial and Other Data” in Naugatuck Valley Financial’s 2007
Annual Report to Stockholders.


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





The information required by this item
is incorporated herein by reference to the Section captioned “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in the
2007 Annual Report to Stockholders.





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





The information required by this item
is incorporated herein by reference to the Section captioned “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in the
2007 Annual Report to Stockholders.





ITEM 8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTAL DATA.





The information regarding financial
statements is incorporated herein by reference to Naugatuck Valley Financial’s
2007 Annual Report to Stockholders in the Consolidated Financial Statements and
the Notes thereto.





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





Not applicable.





ITEM9A(T).
            CONTROLS
      AND PROCEDURES.





(a)
            Disclosure
      Controls and Procedures





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





(b)
            Internal
      Controls Over Financial Reporting





Management’s
      annual report on internal control over financial reporting is incorporated
      herein by reference to the Company’s audited Consolidated Financial
      Statements in the Company’s 2007 Annual Report to
      Stockholders.





(c)
            Changes
      to Internal Control Over Financial
Reporting





There
were no changes in the Company’s internal control over financial reporting
during the three months ended December 31, 2007 that have materially affected,
or are reasonable likely to materially affect, the Company’s internal control
over financial reporting.


21





ITEM
      9B.
            OTHER
      INFORMATION.





Not applicable.





PART III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.





Directors





For information concerning Naugatuck
Valley Financial’s directors, the information contained under the section
captioned “Proposal 1—Election
of Directors” in Naugatuck Valley Financial’s Proxy Statement for the
2008 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated
herein by reference.





Executive
Officers





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





Compliance
with Section 16(a) of the Exchange Act





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





Disclosure
of Code of Ethics





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





Corporate
Governance





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





ITEM 11.
            EXECUTIVE
      COMPENSATION.





The information regarding executive
compensation is incorporated herein by reference to Naugatuck Valley Financial’s
Proxy Statement for the 2008 Annual Meeting of Stockholders.





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





(a)
            Security
      Ownership of Certain Beneficial
Owners





Information
      required by this item is incorporated herein by reference to the section
      captioned “Stock Ownership” in Naugatuck Valley Financial’s Proxy
      Statement for the 2008 Annual Meeting of
  Stockholders.





(b)
            Security
      Ownership of Management





Information
required by this item is incorporated herein by reference to the section
captioned “Stock Ownership” in Naugatuck Valley Financial’s Proxy Statement for
the 2008 Annual Meeting of Stockholders.


22


(c)
            Changes
      in Control





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





(d)
            Equity
      Compensation Plan Information





The
following table sets forth information as of December 31, 2007 about Company
common stock that may be issued under the Naugatuck Valley Financial Corporation
2005 Equity Incentive Plan.  The plan was approved by the Company’s
stockholders.





PLAN
      CATEGORY
            
            Number
      of securities
              to
      be issued upon
              the
      exercise of
              outstanding
      options,
              warrants
      and rights
            
            Weighted-average
              exercise
      price of
              outstanding
      options,
              warrants
      and rights
            
            Number
      of securities
              remaining
      available
              for
      future issuance
              under
      equity
              compensation
      plans
              (excluding
      securities
              reflected
      in the first
              column)Equity
      compensation plans
              approved
      by security holders
            
            359,460
            
            $11.13
            
            15,747Equity
      compensation plans
              not
      approved by security holders
            
            n/a
            
            n/a
            
            n/aTotal
            
            359,460
            
            $11.13
            
            15,747





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





The information relating to certain
relationships and related transactions, and director independence is
incorporated herein by reference to the section captioned “Corporate Governance
and Board Matters” in Naugatuck Valley Financial’s Proxy Statement for the 2008
Annual Meeting of Stockholders.





ITEM 14.
            PRINCIPAL
      ACCOUNTANT FEES AND EXPENSES.





The information relating to the
principal accountant fees and expenses is incorporated herein by reference to
the section captioned “Items to be Voted on by Stockholders – Item 2 –
Ratification of Independent Registered Public Accounting Firm” in Naugatuck
Valley Financial’s Proxy Statement for the 2008 Annual Meeting of
Stockholders.





PART IV





ITEM 15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES.





(1)
            The
      following are filed as a part of this report by means of incorporation to
      Naugatuck Valley Financial’s 2007 Annual Report to
      Stockholders:





●
            Report
      of Independent Registered Public Accounting
Firm





●
            Consolidated
      Statements of Financial Condition as of December 31, 2007 and
      2006





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





●
            Consolidated
      Statements of Changes in Stockholders’ Equity for the Years Ended December
      31, 2007 and 2006


23


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





●
            Notes
      to Consolidated Financial
Statements





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





(3)
            Exhibits








Exhibit
      No.
            
            Description3.1
            
            Charter
      of Naugatuck Valley Financial Corporation (1)3.2
            
            Bylaws
      of Naugatuck Valley Financial Corporation (2)4.0
            
            Specimen
      Stock Certificate of Naugatuck Valley Financial Corporation
      (3)10.1
            
            Naugatuck
      Valley Financial Corporation and Naugatuck Valley Savings Employment
      Agreement with John C. Roman *10.2
            
            Naugatuck
      Valley Savings Change in Control Agreement with Dominic J. Alegi, Jr.
      *10.3
            
            Naugatuck
      Valley Financial Corporation and Naugatuck Valley Savings Deferred
      Compensation Plan for Directors (6)*10.4
            
            Form
      of Naugatuck Valley Savings Employee Severance Compensation Plan
      (3)*10.5
            
            Naugatuck
      Valley Savings Death Benefit Agreement with John C. Roman, as amended
      (3)*10.6
            
            Naugatuck
      Valley Savings Death Benefit Agreement with Dominic J. Alegi, Jr.
      (3)*10.7
            
            Naugatuck
      Valley Financial Corporation 2005 Equity Incentive Plan
    (5)*10.8
            
            Naugatuck
      Valley Savings Change in Control Agreement with William C. Nimons
      *10.9
            
            Naugatuck
      Valley Savings Change in Control Agreement with Lee R. Schlesinger
      *13.0
            
            Annual
      Report to Stockholders14.0
            
            Code
      of Ethics and Business Conduct (4)21.0
            
            List
      of Subsidiaries23.0
            
            Consent
      of Whittlesey & Hadley, P.C.31.1
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
            
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32.0
            
            Section
      1350 Certification of Chief Executive Officer and Chief Financial
      Officer


______________________________


*Management
      contract or compensation plan
arrangement


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


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


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


(4)
            Incorporated
      by reference to the Company’s Form 10-K for the fiscal year ended December
      31, 2004.


(5)
            Incorporated
      by reference to Appendix C to the Proxy Statement for the 2005 Annual
      Meeting of Stockholders filed on April 1,
2005.


(6)
            Incorporated
      by reference to Exhibit 10.1 to the Company’s Form 10-Q for the three
      months ended March 31, 2007, filed on May 15,
  2007.





24


SIGNATURES





Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.





NAUGATUCK
      VALLEY FINANCIAL CORPORATIONDate:
      March 18, 2008
            By:
            /s/
      John C. RomanJohn
      C. RomanPresident
      and Chief Executive Officer





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





Name
            
            Title
            Date/s/
      John C. Roman
            
            President,
      Chief Executive Officer
            March
      18, 2008John
      C. Roman
            
            and
      Director(principal
      executive officer)/s/
      Lee R. Schlesinger
            
            Senior
      Vice President and Chief
            March
      18, 2008Lee
      R. Schlesinger
            
            Financial
      Officer(principal
      accounting andfinancial
      officer)/s/
      Ronald D. Lengyel
            
            Director
            March
      18, 2008Ronald
      D. Lengyel/s/
      Carlos S. Batista
            
            Director
            March
      18, 2008Carlos
      S. Batista/s/
      Richard M. Famiglietti
            
            Director
            March
      11, 2008Richard
      M. Famiglietti/s/
      James A. Mengacci
            
            Director
            March
      18, 2008James
      A. Mengacci/s/
      Michael S. Plude
            
            Director
            March
      18, 2008Michael
      S. Plude/s/
      Camilo P. Vieira
            
            Director
            March
      18, 2008Camilo
      P. Vieira/s/
      Jane H. Walsh
            
            Director
            March
      18, 2008Jane
      H. Walsh




25