**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**


**WASHINGTON,
      DC 20549**


**____________**





**FORM
      10-Q**


(Mark
      One)





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





For
      the
      quarterly period ended September 30, 2006





OR





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





For
      the
      transition period from ______________ to _____________


Commission
      file number: 0-50876





**NAUGATUCK
      VALLEY FINANCIAL CORPORATION**





(Exact
      name of registrant as specified in its charter)





**UNITED
                STATES**
            
            **65-1233977**(State
                or other jurisdiction of incorporation or
            
            (I.R.S.
                Employer Identification No.)organization)**333
                CHURCH STREET, NAUGATUCK, CONNECTICUT**
            
            **06770**(Address
                of principal executive offices)
            
            (Zip
                Code)








**(203)
      720-5000**





(Registrant’s
      telephone number, including area code)




**N/A**





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





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


Yes ý  No o




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


Large
                accelerated filero
            Accelerated
                filero
            Non-accelerated
                filerý








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


Yes o  No ý


As
      of
      November 3, 2006, there were 7,474,025 shares of the registrant’s common stock
      outstanding.





**NAUGATUCK
      VALLEY FINANCIAL CORPORATION**





**Table
      of Contents**




**Part
                I.**
            **Financial
                Information**
            **Page
                No.******Item
                1.
            Financial
                Statements (Unaudited)Consolidated
                  Statements of Financial Condition at September 30, 2006 andDecember 31, 2005
            3Consolidated
                  Statements of Income for the three and nine months endedSeptember
                  30, 2006 and 2005
            4Consolidated
                  Statements of Cash Flows for the nine months endedSeptember 30,
                  2006 and 2005
            5Notes
                to Unaudited Consolidated Financial Statements
            6Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition and
                Results of Operations
            9Liquidity
                and Capital Resources
            14Item
                3.
            Quantitative
                and Qualitative Disclosures About Market Risk
            15Item
                4.
            Controls
                and Procedures
            16**Part
                II.**
            **Other
                Information**Item
                1.
            Legal
                Proceedings
            17Item
                1A.
            Risk
                Factors
            17Item
                2.
            Unregistered
                Sales of Equity Securities and Use of Proceeds
            17Item
                3.
            Defaults
                Upon Senior Securities
            17Item
                4.
            Submission
                of Matters to a Vote of Security Holders
            17Item
                5.
            Other
                Information
            17Item
                6.
            Exhibits
            17**Signatures****Exhibits**





**Item
      1. Financial Statements.**












*Table
          of Contents*
 2







**Condensed
      Consolidated Statements of Financial
      Condition**


*(In
      thousands, except share data)*




**September
                  30,**
              
              **December
                  31,****2006**
              
              **2005***(Unaudited)***ASSETS**Cash
                  and due from depository institutions
              
              $
              9,900
              
              $
              8,922Investment
                  in federal funds
              
              
              4,086
              
              
              29Investment
                  securities
              
              
              70,630
              
              
              63,049Loans
                  receivable, net
              
              
              293,799
              
              
              259,427Deferred
                  income taxes
              
              
              1,414
              
              
              1,331Other
                  assets
              
              
              25,215
              
              
              22,588**Total
                  assets**
              
              $
              405,044
              
              $
              355,346**LIABILITIES
                  AND STOCKHOLDERS' EQUITY**LiabilitiesDeposits
              
              $
              287,054
              
              $
              240,846Advances
                  from Federal Home Loan Bank of Boston
              
              
              63,746
              
              
              57,059Other
                  liabilities
              
              
              3,197
              
              
              6,477Total
                  liabilities
              
              
              353,997
              
              
              304,382Commitments
                  and contingenciesStockholders'
                  EquityCommon
                  stock, $.01 par value; 25,000,000 shares authorized;7,604,375
                  shares issued and outstanding at December 31, 2005and
                  7,499,025 outstanding at September 30, 2006
              
              
              76
              
              
              76Preferred
                  stock, $.01 par value; 1,000,000 shares authorized;no
                  shares issued or outstanding
              
              
              -
              
              
              -Paid-in
                  capital
              
              
              33,250
              
              
              33,157Retained
                  earnings
              
              
              23,416
              
              
              22,588Unearned
                  ESOP shares
              
              
              (2,733
              )
              
              (2,733
              )Unearned
                  stock awards
              
              
              (1,256
              )
              
              (1,551
              )Treasury
                  stock, at cost (113,183 shares at September 30, 2006and
                  9,333 shares at December 31, 2005)
              
              
              (1,303
              )
              
              (122
              )Accumulated
                  other comprehensive loss
              
              
              (403
              )
              
              (451
              )Total
                  stockholders' equity
              
              
              51,047
              
              
              50,964**Total
                  liabilities and stockholders' equity**
              
              $
              405,044
              
              $
              355,346


*Table
          of Contents*
 3







**Consolidated
      Statements of Income**


*(In
      thousands, except per share data)*





**Nine
                  Months Ended**
              
              **Three
                  Months Ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005***(Unaudited)***Interest
                  and dividend income**Interest
                  on loans
              
              $
              12,721
              
              $
              9,782
              
              $
              4,500
              
              $
              3,520Interest
                  and dividends on investments and deposits
              
              
              2,384
              
              
              1,581
              
              
              829
              
              
              604Total
                  interest income
              
              
              15,105
              
              
              11,363
              
              
              5,329
              
              
              4,124**Interest
                  expense**Interest
                  on deposits
              
              
              4,440
              
              
              2,275
              
              
              1,731
              
              
              954Interest
                  on borrowed funds
              
              
              2,061
              
              
              997
              
              
              759
              
              
              413Total
                  interest expense
              
              
              6,501
              
              
              3,272
              
              
              2,490
              
              
              1,367**Net
                  interest income**
              
              
              8,604
              
              
              8,091
              
              
              2,839
              
              
              2,757**Provision
                  for loan losses**
              
              
              130
              
              
              32
              
              
              -
              
              
              -**Net
                  interest income after provision for loan losses**
              
              
              8,474
              
              
              8,059
              
              
              2,839
              
              
              2,757**Noninterest
                  income**Fees
                  for services
              
              
              1,046
              
              
              679
              
              
              386
              
              
              237Income
                  from bank owned life insurance
              
              
              228
              
              
              146
              
              
              77
              
              
              49Income
                  from investment advisory services, net
              
              
              77
              
              
              149
              
              
              26
              
              
              58Gain
                  on sale of investments
              
              
              -
              
              
              47
              
              
              -
              
              
              -Other
                  income
              
              
              96
              
              
              71
              
              
              33
              
              
              28Total
                  noninterest income
              
              
              1,447
              
              
              1,092
              
              
              522
              
              
              372**Noninterest
                  expense**Compensation,
                  taxes and benefits
              
              
              5,117
              
              
              4,364
              
              
              1,795
              
              
              1,546Office
                  occupancy
              
              
              1,244
              
              
              1,126
              
              
              456
              
              
              368Advertising
              
              
              513
              
              
              425
              
              
              213
              
              
              119Computer
                  processing
              
              
              448
              
              
              473
              
              
              154
              
              
              170Loss
                  (gain) on foreclosed real estate, net
              
              
              13
              
              
              (34
              )
              
              3
              
              
              (2
              )Other
                  expenses
              
              
              1,138
              
              
              1,139
              
              
              380
              
              
              393Total
                  noninterest expense
              
              
              8,473
              
              
              7,493
              
              
              3,001
              
              
              2,594**Income
                  before provision****for
                  income taxes**
              
              
              1,448
              
              
              1,658
              
              
              360
              
              
              535**Provision
                  for income taxes**
              
              
              150
              
              
              299
              
              
              (54
              )
              
              (2
              )**Net
                  Income**
              
              $
              1,298
              
              $
              1,359
              
              $
              414
              
              $
              537**Earnings
                  per common share - Basic and Diluted**
              
              $
              0.18
              
              $
              0.19
              
              $
              0.06
              
              $
              0.07


*Table
          of Contents*
 4







**Consolidated
      Statements of Cash Flows**


*(In
      thousands)*





**Nine
                  Months Ended****September
                  30,****2006**
              
              **2005****Cash
                  flows from operating activities**
              
              *(Unaudited**)*Net
                  income
              
              $
              1,298
              
              $
              1,359Adjustments
                  to reconcile net income to cash provided by operating
                  activities:Provision
                  for loan losses
              
              
              130
              
              
              32Depreciation
                  and amortization expense
              
              
              463
              
              
              516Stock-based
                  compensation
              
              
              490
              
              
              71Provision
                  for deferred taxes
              
              
              (126
              )
              
              (69
              )Net
                  gain on sale of real estate owned
              
              
              (4
              )
              
              (46
              )Gain
                  on sale of investments
              
              
              -
              
              
              (47
              )Increase
                  in accrued income receivable
              
              
              (189
              )
              
              (355
              )Increase
                  in deferred loan fees
              
              
              17
              
              
              25Increase
                  in bank owned life insurance asset
              
              
              (228
              )
              
              (146
              )Decrease
                  in other assets
              
              
              294
              
              
              122Decrease
                  in other liabilities
              
              
              83
              
              
              (334
              )**Net
                  cash provided by operating activities**
              
              
              2,228
              
              
              1,128**Cash
                  flows from investing activities**Proceeds
                  from maturities and repayments of available-for-sale
                  securities
              
              
              12,498
              
              
              14,444Proceeds
                  from sale of available-for-sale securities
              
              
              -
              
              
              3,742Proceeds
                  from maturities of held-to-maturity securities
              
              
              1,995
              
              
              285Purchase
                  of available-for-sale securities
              
              
              (21,978
              )
              
              (40,842
              )Purchase
                  of held-to-maturity securities
              
              
              -
              
              
              (500
              )Purchase
                  of Federal Home Loan Bank stock
              
              
              (739
              )
              
              (404
              )Loan
                  originations net of principal payments
              
              
              (34,519
              )
              
              (34,562
              )Additions
                  to foreclosed real estate
              
              
              -
              
              
              (47
              )Proceeds
                  from the sale of foreclosed real estate
              
              
              51
              
              
              113Proceeds
                  from sale of property and equipment
              
              
              2
              
              
              -Purchase
                  of property and equipment
              
              
              (2,406
              )
              
              (1,746
              )**Net
                  cash used by investing activities**
              
              
              (45,096
              )
              
              (59,517
              )**Cash
                  flows from financing activities**Net
                  change in time deposits
              
              
              33,945
              
              
              31,766Net
                  change in other deposit accounts
              
              
              12,264
              
              
              6,790Advances
                  from Federal Home Loan Bank
              
              
              41,650
              
              
              62,968Repayment
                  of advances from Federal Home Loan Bank
              
              
              (34,964
              )
              
              (34,535
              )Repayment
                  of other short-term borrowings
              
              
              (1,899
              )
              
              -Net
                  change in mortgagors' escrow accounts
              
              
              (1,425
              )
              
              (1,482
              )Stock
                  repurchase for equity incentive plan
              
              
              -
              
              
              (1,720
              )Treasury
                  stock acquired
              
              
              (1,201
              )
              
              -Dividends
                  paid to stockholders
              
              
              (467
              )
              
              (375
              )**Net
                  cash provided by financing activities**
              
              
              47,903
              
              
              63,412Increase
                  in cash and cash equivalents
              
              
              5,035
              
              
              5,023Cash
                  and cash equivalents at beginning of period
              
              
              8,951
              
              
              7,575**Cash
                  and cash equivalents at end of period**
              
              $
              13,986
              
              $
              12,598Cash
                  paid during the period for:Interest
              
              $
              6,516
              
              $
              3,277Income
                  taxes
              
              
              265
              
              
              588


*Table
          of Contents*
 5





**NOTE
      1 - BASIS OF PRESENTATION**





The
      accompanying condensed consolidated interim financial statements are unaudited
      and include the accounts of Naugatuck Valley Financial Corporation (the
“Company”), Naugatuck Valley Savings and Loan (the “Bank”), and Naugatuck Valley
      Mortgage Servicing Corporation, a wholly owned subsidiary of the Bank. The
      consolidated financial statements have been prepared in accordance with
      accounting principles generally accepted in the United States of America
      (“GAAP”) for interim financial information and with the instructions to SEC Form
      10-Q. Accordingly, they do not include all the information and footnotes
      required by GAAP for complete financial statements. All significant intercompany
      accounts and transactions have been eliminated in the consolidation. These
      financial statements reflect, in the opinion of Management, all adjustments,
      consisting only of normal recurring adjustments, necessary for a fair
      presentation of the Company’s financial position and the results of its
      operations and its cash flows for the periods presented.





Operating
      results for the three and nine months ended September 30, 2006 are not
      necessarily indicative of the results that may be expected for the year ending
      December 31, 2006.





These
      financial statements should be read in conjunction with the consolidated
      financial statements and notes thereto included in the Company’s 2005 Annual
      Report to Stockholders. The year-end condensed balance sheet data was derived
      from audited financial statements, but does not include all disclosures required
      by GAAP.











**NOTE
      2 - EARNINGS PER SHARE**





Basic
      net
      income per common share is calculated by dividing the net income available
      to
      common stockholders by the weighted-average number of common shares outstanding
      during the period. Diluted net income per common share is computed in a manner
      similar to basic net income per common share except that the weighted-average
      number of common shares outstanding is increased to include the incremental
      common shares (as computed using the treasury stock method) that would have
      been
      outstanding if all potentially dilutive common stock equivalents were issued
      during the period. The Company's common stock equivalents relate solely to
      stock
      option and restricted stock awards. Anti-dilutive shares are common stock
      equivalents with weighted-average exercise prices in excess of the
      weighted-average market value for the periods presented. The Company had no
      anti-dilutive common shares outstanding for the three or nine months ended
      September 30, 2006 or September 30, 2005. Unallocated common shares held by
      the
      ESOP are not included in the weighted-average number of common shares
      outstanding for purposes of calculating either basic or diluted net income
      per
      common share.





**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005***(Dollars
                  in thousands, except share data)*Net
                  income
              
              $
              414
              
              $
              537
              
              $
              1,298
              
              $
              1,359Weighted-average
                  common shares outstanding:Basic
              
              
              7,331,084
              
              
              7,311,195
              
              
              7,331,084
              
              
              7,311,195Effect
                  of dilutive stock optionsand
                  restrictive stock awards
              
              
              1,904
              
              
              22,827
              
              
              635
              
              
              7,609Diluted
              
              
              7,332,988
              
              
              7,334,022
              
              
              7,331,719
              
              
              7,318,804Net
                  income per common share:Basic
              
              $
              0.06
              
              $
              0.07
              
              $
              0.18
              
              $
              0.19Diluted
              
              $
              0.06
              
              $
              0.07
              
              $
              0.18
              
              $
              0.19





*Table
          of Contents*
 6








**NOTE
      3 - COMPREHENSIVE INCOME**





Statement
      of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
      Income," establishes standards for disclosure of comprehensive income, which
      includes net income and any changes in equity from non-owner sources that are
      not recorded in the income statement (such as changes in the net unrealized
      gain/loss on available-for-sale securities). The purpose of reporting
      comprehensive income is to provide a measure of all changes in equity that
      result from recognized transactions and other economic events of the period
      other than transactions with owners in their capacity as owners. The Company’s
      sole source of other comprehensive income is the net unrealized gain (loss)
      on
      its available-for-sale securities.




**Nine
                  Months Ended**
              
              **Three
                  Months Ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005***(In
                  thousands)*Net
                  income
              
              $
              1,298
              
              $
              1,359
              
              $
              414
              
              $
              537Net
                  unrealized gain (loss) onsecurities
                  available for saleduring
                  the period, net of tax
              
              
              48
              
              
              (141
              )
              
              616
              
              
              (104
              )**Total
                  Comprehensive Income**
              $
              1,346
              
              $
              1,218
              
              $
              1,030
              
              $
              433







**NOTE
      4 -** **CRITICAL
      ACCOUNTING POLICIES**





The
      Company considers accounting policies involving significant judgments and
      assumptions by management that have, or could have, a material impact on the
      carrying value of certain assets or on income to be critical accounting
      policies. The Company considers the following to be critical accounting
      policies: allowance for loan losses and deferred income taxes.





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





Although
      the Company believes that it uses the best information available to establish
      the allowance for loan losses, future additions to the allowance may be
      necessary based on estimates that are susceptible to change as a result of
      changes in economic conditions and other factors. The Company engages an
      independent review of its commercial loan portfolio annually and adjusts its
      loan ratings based upon this review. In addition, the Company’s regulatory
      authorities, as an integral part of their examination process, periodically
      review the Company’s allowance for loan losses. Such an agency may require the
      Company to recognize adjustments to the allowance based on its judgments about
      information available to it at the time of its examination.





***Deferred
      Income Taxes*** **.** The
      Company uses the asset and liability method of accounting for income taxes.
      Under this method, deferred tax assets and liabilities are recognized for the
      future tax consequences attributable to differences between the financial
      statement carrying amounts of existing assets and liabilities and their
      respective tax bases. If current available information raises doubt as to the
      realization of the deferred tax assets, a valuation allowance is established.
      Deferred tax assets and liabilities are measured using enacted tax rates
      expected to apply to taxable income in the years in which those temporary
      differences are expected to be recovered or settled. The Company exercises
      significant judgment in evaluating the amount and timing of recognition of
      the
      resulting tax liabilities and assets, including projections of future taxable
      income. These judgments and estimates are reviewed continually as regulatory
      and
      business factors change.


*Table
          of Contents*
 7








**NOTE
      5 -** **EQUITY
      INCENTIVE PLAN**





At
      the
      annual meeting of stockholders on May 5, 2005, stockholders of the Company
      approved the Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan
      (the “Incentive Plan”). Under the Incentive Plan, the Company may grant up to
      372,614 stock options and 149,045 shares of restricted stock to its employees,
      officers and directors for an aggregate amount of up to 521,659 shares of the
      Company’s common stock for issuance upon the grant or exercise of awards. Both
      incentive stock options and non-statutory stock options may be granted under
      the
      Incentive Plan.





On
      July
      26, 2005, the Company awarded 354,580 options to purchase the Company’s common
      stock and 139,712 shares of restricted stock. Stock option awards were granted
      with an exercise price equal to the market price of the Company’s stock at the
      date of grant ($11.10 per share) with a maximum term of ten years. On March
      21,
      2006, the Company awarded an additional 6,500 options to purchase the Company’s
      common stock and 1,500 additional shares of restricted stock. The additional
      stock option awards were granted with an exercise price equal to those granted
      on July 26, 2005 ($11.10 which was higher than the market price of $10.56 on
      March 21, 2006) with a maximum term of ten years. Both stock options and
      restricted stock awards vest at 20% per year beginning on the first anniversary
      of the date of grant.





Stock
      options and restricted stock awards are considered common stock equivalents
      for
      the purpose of computing earnings per share on a diluted basis.





The
      Company adopted Financial Accounting Standards Board’s SFAS No.123(R), “Share
      Based Payment”, beginning with the period ended September 30, 2005. In
      accordance with Statement No.123 (R), the Company is recording share-based
      compensation expense related to outstanding stock option and restricted stock
      awards based upon the fair value at the date of grant over the vesting period
      of
      such awards on a straight-line basis. The fair value of each restricted stock
      allocation, based on the market price at the date of grant, is recorded to
      unearned stock awards. Compensation expenses related to unearned restricted
      shares are amortized to compensation, taxes and benefits expense over the
      vesting period of the restricted stock awards. The fair value of each stock
      option award is estimated on the date of grant using the Black-Scholes option
      pricing method which includes several assumptions such as volatility, expected
      dividends, expected term and risk-free rate for each stock option award. The
      Company recorded share-based compensation expense of $108,815 and $327,670
      for
      the three and nine months ended September 30, 2006, respectively, in connection
      with the stock option and restricted stock awards.





The
      weighted-average fair value of stock options granted and the assumptions used
      in
      the Black-Scholes option pricing method are shown in the following table.







**March
                  21,**
              
              **July
                  26,****Grant
                  date**
              **2006**
              
              **2005**Dividend
                  yield
              
              
              1.89
              %
              
              1.44
              %Expected
                  volatility
              
              
              11.20
              %
              
              11.47
              %Risk-free
                  rate
              
              
              4.61
              %
              
              4.18
              %Expected
                  life in years
              
              
              6.5
              
              
              6.5Weighted
                  average fair value of options at grant date
              
              $
              2.25
              
              $
              2.47














*Table
          of Contents*
 8


**NOTE
      6 - DIVIDENDS**





On
      July
      18, 2006, the Company's Board of Directors declared a cash dividend of $0.05
      per
      outstanding common share, which was paid on September 1, 2006, to stockholders
      of record as of the close of business on August 4, 2006.





Naugatuck
      Valley Mutual Holding Company, the Company's mutual holding company and majority
      stock holder, waived receipt of its dividend upon non-objection from the Office
      of Thrift Supervision ("OTS").





**NOTE
      7 - RECENT ACCOUNTING PRONOUNCEMENTS**





In
      September, 2006 the Financial Accounting Standards Board (“FASB”) issued
      Statement of Financial Accounting Standards No. 158, Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans, which includes
      amendments to Statements 87, 106, and 132 (R).When
      adopted, the Statement will require the Bank to fully recognize, as an asset
      or
      liability, the over-funded or under-funded status of its benefit plan in its
      2006 year-end balance sheet. This will result in the immediate recognition
      (on
      the balance sheet) of amounts that would have been recognized in subsequent
      years (off-balance sheet). Unrecognized prior service costs and credits, any
      unrecognized net actuarial gains or losses and transition obligations and assets
      will be recorded as components of other comprehensive income (“OCI”). In
      subsequent periods, these amounts will be reclassified from OCI and recognized
      in income as components of net periodic benefit cost pursuant to Statements
      87,
      88 and 106. Statement 158 will not change how these amounts are recognized
      in
      the income statement. Implementation of the new standard is required for public
      companies for the fiscal year ending after December 15, 2006. At this time,
      the
      Company is uncertain as to how the application of the new Standard will impact
      its financial statements.





In
      July
      2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. 48, “Accounting for Uncertainty in Income Tax Positions.”
This interpretation clarifies the application of SFAS. No. 109, “Accounting for
      Income Taxes,” by establishing a threshold condition that a tax position must
      meet for any part of the benefit of that position to be recognized in the
      financial statements. In addition to recognition, FASB Interpretation No. 48
      provides guidance concerning measurement, derecognition, classification, and
      disclosure of tax positions and is effective for fiscal years beginning after
      December 15, 2006. The Company is evaluating the impact of this Interpretation
      on results of operations and financial condition.





In
      March
      2006, the Financial Accounting Standards Board issued Statement No. 156,
“Accounting for Servicing of Financial Assets.” Statement 156, which is an
      amendment to SFAS No. 140, simplifies the accounting for servicing assets and
      liabilities, such as those common with mortgage securitization activities.
      The
      new Standard clarifies when an obligation to service financial assets should
      be
      separately recognized as a servicing asset or a servicing liability; requires
      that a separately recognized servicing asset or servicing liability be initially
      measured at fair value, if practicable; and permits an entity with a separately
      recognized servicing asset or servicing liability to choose either the
      Amortization Method or Fair Value Method for subsequent measurement. Statement
      No. 156 is effective for separately recognized servicing assets and liabilities
      acquired or issued after the beginning of an entity's fiscal year that begins
      after September 15, 2006, with early adoption permitted. Adoption of this
      statement is not expected to have a material effect on results of operations
      or
      financial condition.











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





This
      discussion should be read in conjunction with the Company’s Consolidated
      Financial Statements for the year ended December 31, 2005 included in the
      Company’s 2005 Annual Report to Stockholders.





**Forward-Looking
      Statements**





This
      report contains forward-looking statements that are based on assumptions and
      may
      describe future plans, strategies and expectations of the Company. These
      forward-looking statements are generally identified by use of the words
“believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar
      expressions. The Company’s ability to predict results or the actual effect of
      future plans or strategies is inherently uncertain. Factors which could have
      a
      material adverse effect on the operations of the Company and its subsidiaries
      include, but are not limited to,


*Table
          of Contents*
 9


changes
      in interest rates, national and regional economic conditions, legislative and
      regulatory changes, monetary and fiscal policies of the U.S. government,
      including policies of the U.S. Treasury and the Federal Reserve Board, the
      quality and composition of the loan or investment portfolios, demand for loan
      products, deposit flows, competition, demand for financial services in the
      Company’s market area, changes in real estate market values in the Company’s
      market area, and changes in relevant accounting principles and guidelines.
      Additional factors are discussed in the Company’s 2005 Annual Report on Form
      10-K under “Item 1A - Risk Factors”. These risks and uncertainties should be
      considered in evaluating forward-looking statements and undue reliance should
      not be placed on such statements. Except as required by applicable law or
      regulation, the Company does not undertake, and specifically disclaims any
      obligation, to release publicly the result of any revisions that may be made
      to
      any forward-looking statements to reflect events or circumstances after the
      date
      of the statements or to reflect the occurrence of anticipated or unanticipated
      events.








**Comparison
      of Financial Condition at September 30, 2006 and December 31, 2005**





Total
      assets increased by $49.7 million, or 14.0%, to $405.0 million during the period
      from December 31, 2005 to September 30, 2006, primarily due to an increase
      of
      $34.4 million in loans and an increase in investments of $7.6 million. The
      balance of the increase was due to the expansion of the Bank’s branch network
      resulting in increases to fixed assets. The increase in loans primarily reflects
      an increase in our one-to-four family mortgages and commercial real estate
      loans
      and, to a lesser extent, home equity loans. These increases were primarily
      funded by increases in deposits and to a lesser degree, increases in Federal
      Home Loan Bank advances.





Total
      liabilities were $354.0 million at September 30, 2006 compared to $304.4 million
      at December 31, 2005. Deposits at September 30, 2006 increased $46.2 million,
      or
      19.2%, over December 31, 2005 due to increased advertising, more aggressive
      pricing and the addition of three new branch offices during the third quarter
      of
      2006. Advances from the Federal Home Loan Bank of Boston increased $6.7 million,
      from $57.0 million to $63.7 million. The increases in deposits and borrowings
      were used primarily to fund the growth in loans and investments and, to a lesser
      extent, fund increases in fixed assets and disbursements from mortgage tax
      escrow accounts.





Total
      stockholders’ equity increased $83,000, from $50.96 million at December 31, 2005
      to $51.05 million at September 30, 2006. The increase in equity was due to
      net
      income of $1.3 million for the nine month period, a net decrease to the
      unrealized loss on available-for-sale securities of $48,000 and $403,000 in
      capital adjustments related to the Company’s 2005 Equity Incentive Plan,
      partially offset by stock repurchases of $1.2 million and dividends of $467,000
      paid to stockholders.








**Comparison
      of Operating Results For the Three and Nine Months Ended September 30, 2006
      and
      2005**





***General*** .
      For the
      three months ended September 30, 2006, the Company had net income of $414,000
      compared to $537,000 for the three months ended September 30, 2005, a decrease
      of $123,000. Net income decreased $61,000 to $1.3 million for the nine months
      ended September 30, 2006 from $1.4 million for the nine months ended September
      30, 2005. The decreases in both the three and nine month periods were primarily
      due to increases in noninterest expenses related to branch expansion and
      compensation.








***Net
      Interest Income*** **.** **** Net
      interest income increased $82,000, or 3.0%, to $2.8 million for the three months
      ended September 30, 2006 and increased by $513,000, or 6.3%, to $8.6 million
      for
      the nine months ended September 30, 2006. The increase in net interest income
      in
      both periods was the result of an increase in the average balances of interest
      earning assets of 20.3% and 25.4% in the three and nine month periods,
      respectively, partially offset by tightening margins. The Company also
      experienced a 42 basis point increase in the average rate earned on these assets
      in the three month period and a 33 basis point increase in the nine month period
      over the 2005 rates. The increase in interest earning assets for the three
      and
      nine month periods is attributed primarily to an increase in the loan and
      investment portfolios. The average balance in the loan portfolio increased
      by
      21.7% in the three month period and by 24.0% in the nine month period while
      the
      average balances in investments increased by 15.4% and 33.2% over the same
      periods. The increase in interest income was partially offset by an increase
      in
      interest expense. Interest expense increased by 82.2% in the three month period
      and by 98.7% in the nine month period due to the rising rate environment for
      deposits and borrowings, along with increases in the average balances of
      deposits and borrowings.


*Table
          of Contents*
 10


The
      following table summarizes changes in interest income and interest expense
      for
      the three and nine months ended September 30, 2006 and 2005.





**Three
                  months**
              
              
              
              
              **Nine
                  Months****Ended
                  September 30,**
              
              
              
              
              **Ended
                  September 30,****2006**
              
              **2005**
              
              **%
                  change**
              
              **2006**
              
              **2005**
              
              **%
                  change***(Dollars
                  in thousands)***Interest
                  income:**Loans
              
              $
              4,500
              
              $
              3,520
              
              
              27.84
              %
              
              $
              12,721
              
              $
              9,782
              
              
              30.04
              %Fed
                  Funds sold
              
              
              21
              
              
              15
              
              
              40.00
              %
              
              
              51
              
              
              46
              
              
              10.87
              %Investment
                  securities
              
              
              758
              
              
              562
              
              
              34.88
              %
              
              
              2,195
              
              
              1,461
              
              
              50.24
              %Federal
                  Home Loan Bank stock
              
              
              50
              
              
              27
              
              
              85.19
              %
              
              
              138
              
              
              74
              
              
              86.49
              %Total
                  interest income
              
              
              5,329
              
              
              4,124
              
              
              29.22
              %
              
              
              15,105
              
              
              11,363
              
              
              32.93
              %**Interest
                  expense:**Certificate
                  accounts
              
              
              1,495
              
              
              779
              
              
              91.91
              %
              
              
              3,821
              
              
              1,814
              
              
              110.64
              %Regular
                  savings accounts
              
              
              107
              
              
              107
              
              
              0.00
              %
              
              
              329
              
              
              234
              
              
              40.60
              %Checking
                  and NOW accounts
              
              
              69
              
              
              10
              
              
              590.00
              %
              
              
              145
              
              
              32
              
              
              353.13
              %Money
                  market savings accounts
              
              
              60
              
              
              58
              
              
              3.45
              %
              
              
              145
              
              
              195
              
              
              -25.64
              %Total
                  interest-bearing deposits
              
              
              1,731
              
              
              954
              
              
              81.45
              %
              
              
              4,440
              
              
              2,275
              
              
              95.16
              %FHLB
                  advances
              
              
              756
              
              
              412
              
              
              83.50
              %
              
              
              2,053
              
              
              996
              
              
              106.12
              %Other
                  borrowings
              
              
              3
              
              
              1
              
              
              200.00
              %
              
              
              8
              
              
              1
              
              
              700.00
              %Total
                  interest expense
              
              
              2,490
              
              
              1,367
              
              
              82.15
              %
              
              
              6,501
              
              
              3,272
              
              
              98.69
              %Net
                  interest income
              
              $
              2,839
              
              $
              2,757
              
              
              2.97
              %
              
              $
              8,604
              
              $
              8,091
              
              
              6.34
              %





The
      following table summarizes average balances and average yields and costs for
      the
      three and nine months ended September 30, 2006 and 2005.





**Three
                  months ended September 30,**
              
              **Nine
                  Months Ended September 30,****2006**
              
              **2005**
              
              **2006**
              
              **2005****Average**
              
              **Yield/**
              
              **Average**
              
              **Yield/**
              
              **Average**
              
              **Yield/**
              
              **Average**
              
              **Yield/****Balance**
              
              **Cost**
              
              **Balance**
              
              **Cost**
              
              **Balance**
              
              **Cost**
              
              **Balance**
              
              **Cost***(Dollars
                  in thousands)***Interest-earning
                  assets**Loans
              
              $
              281,366
              
              
              6.40
              %
              
              $
              231,229
              
              
              6.09
              %
              
              $
              270,246
              
              
              6.28
              %
              
              $
              217,868
              
              
              5.99
              %Fed
                  Funds sold
              
              
              1,607
              
              
              5.23
              %
              
              
              2,157
              
              
              2.78
              %
              
              
              1,282
              
              
              5.30
              %
              
              
              2,081
              
              
              2.95
              %Investment
                  securities
              
              
              66,547
              
              
              4.56
              %
              
              
              57,685
              
              
              3.90
              %
              
              
              66,294
              
              
              4.41
              %
              
              
              49,783
              
              
              3.91
              %Federal
                  Home Loan Bank stock
              
              
              3,658
              
              
              5.47
              %
              
              
              2,530
              
              
              4.27
              %
              
              
              3,475
              
              
              5.29
              %
              
              
              2,368
              
              
              4.17
              %Total
                  interest-earning assets
              
              $
              353,178
              
              
              6.04
              %
              
              $
              293,601
              
              
              5.62
              %
              
              $
              341,297
              
              
              5.90
              %
              
              $
              272,100
              
              
              5.57
              %**Interest-bearing
                  liabilities**Certificate
                  accounts
              
              $
              145,876
              
              
              4.10
              %
              
              $
              105,907
              
              
              2.94
              %
              
              $
              136,607
              
              
              3.73
              %
              
              $
              93,002
              
              
              2.60
              %Regular
                  savings accounts & escrow
              
              
              52,563
              
              
              0.81
              %
              
              
              52,918
              
              
              0.81
              %
              
              
              53,543
              
              
              0.82
              %
              
              
              50,075
              
              
              0.62
              %Checking
                  and NOW accounts
              
              
              52,524
              
              
              0.53
              %
              
              
              41,191
              
              
              0.10
              %
              
              
              49,925
              
              
              0.39
              %
              
              
              38,433
              
              
              0.11
              %Money
                  market savings accounts
              
              
              17,463
              
              
              1.37
              %
              
              
              23,628
              
              
              0.98
              %
              
              
              17,909
              
              
              1.08
              %
              
              
              26,373
              
              
              0.99
              %Total
                  interest-bearing deposits
              
              
              268,426
              
              
              2.58
              %
              
              
              223,644
              
              
              1.71
              %
              
              
              257,985
              
              
              2.29
              %
              
              
              207,884
              
              
              1.46
              %FHLB
                  advances
              
              
              62,169
              
              
              4.86
              %
              
              
              41,561
              
              
              3.97
              %
              
              
              59,139
              
              
              4.63
              %
              
              
              34,890
              
              
              3.81
              %Other
                  borrowings
              
              
              199
              
              
              5.66
              %
              
              
              109
              
              
              3.67
              %
              
              
              202
              
              
              5.29
              %
              
              
              73
              
              
              1.84
              %Total
                  interest-bearing liabilities
              
              $
              330,794
              
              
              3.01
              %
              
              $
              265,314
              
              
              2.06
              %
              
              $
              317,325
              
              
              2.73
              %
              
              $
              242,847
              
              
              1.80
              %


*Table
          of Contents*
 11





Interest
      and dividend income increased $1.2 million, or 29.2%, for the three months
      ended
      September 30, 2006 as a result of a 20.3% increase in the average balance of
      interest-earning assets to $353.2 million from $293.6 million along with an
      increase in the average yield on interest-earning assets from 5.62% to 6.04%.
      Interest and dividend income also increased for the nine month period by 32.9%,
      from $11.4 million to $15.1 million, again as a result of an increase in the
      average balance of interest-earning assets from $272.1 million to $341.3
      million, along with an increase in the average yield to 5.90% from
      5.57%.





Interest
      expense increased by $1.1 million for the three months ended September 30,
      2006,
      due to an increase of $44.8 million in the average balance of interest-bearing
      deposits along with an increase in the average cost of these deposits from
      1.71%
      to 2.58%. The average balance of Federal Home Loan Bank advances also increased
      by $20.6 million with an 89 basis point increase in the average cost from 3.97%
      to 4.86%. Interest expense also increased in the nine month period ended
      September 30, 2006 by $3.2 million, or 98.7%, again as a result of an increase
      in the average balance of interest-bearing liabilities of $74.5 million, or
      30.7%, in the nine month period. The average cost rose 93 basis points from
      1.80% to 2.73% over this period.




***Provision
      for Loan Losses*** **.** The
      following table summarizes the activity in the allowance for loan losses and
      provision for loan losses for the three and nine months ended September 30,
      2006
      and 2005.





**Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2006**
              
              **2005**
              
              **2006**
              
              **2005***(In
                  thousands)*Allowance
                  at beginning of period
              
              $
              2,009
              
              $
              1,877
              
              $
              1,878
              
              $
              1,829Provision
                  for loan losses
              
              
              -
              
              
              -
              
              
              130
              
              
              32Charge-offs
              
              
              -
              
              
              -
              
              
              (1
              )
              
              (3
              )Recoveries
              
              
              -
              
              
              1
              
              
              2
              
              
              20Net
                  recoveries
              
              
              -
              
              
              1
              
              
              1
              
              
              17Allowance
                  at end of period
              
              $
              2,009
              
              $
              1,878
              
              $
              2,009
              
              $
              1,878











The
      Company did not record a provision for loan losses in the three month periods
      ended September 30, 2006 or 2005 while provisions of $130,000 and $32,000 were
      recorded for the nine month periods ended September 30, 2006 and 2005
      respectively. The increased provision in the 2006 period is due to the
      increasing size of the loan portfolio and a change in the mix of the portfolio
      towards commercial real estate loans which are generally riskier than
      one-to-four family loans.




The
      following table provides information with respect to the Company’s nonperforming
      assets at the dates indicated. The Company did not have any troubled debt
      restructurings or any accruing loans past due 90 days or more at the dates
      presented.




**At
                  September 30,**
              
              **At
                  December 31,****2006**
              
              **2005**
              
              **%
                  change***(Dollars
                  in thousands)*Nonaccrual
                  loans
              
              $
              592
              
              $
              294
              
              
              101.36
              %Real
                  estate owned
              
              
              -
              
              
              47
              
              
              -100.00
              %Total
                  nonperforming assets
              
              $
              592
              
              $
              341
              
              
              73.61
              %Total
                  nonperforming loans to total loans
              
              
              0.20
              %
              
              0.11
              %
              
              81.82
              %Total
                  nonperforming loans to total assets
              
              
              0.15
              %
              
              0.08
              %
              
              87.50
              %Total
                  nonperforming assets to total assets
              
              
              0.15
              %
              
              0.10
              %
              
              50.00
              %


*Table
          of Contents*
 12







***Noninterest
      Income*** **.** The
      following table summarizes noninterest income for the three and nine months
      ended September 30, 2006 and 2005.





**Three
                  Months**
              
              
              
              
              **Nine
                  Months****Ended
                  September 30,**
              
              
              
              
              **Ended
                  September 30,****2006**
              
              **2005**
              
              **%
                  Change**
              
              **2006**
              
              **2005**
              
              **%
                  Change***(Dollars
                  in thousands)*Fees
                  for services
              
              $
              386
              
              $
              237
              
              
              62.87
              %
              
              $
              1,046
              
              $
              679
              
              
              54.05
              %Income
                  from bank owned life insurance
              
              
              77
              
              
              49
              
              
              57.14
              %
              
              
              228
              
              
              146
              
              
              56.16
              %Income
                  from investment advisory services
              
              
              26
              
              
              58
              
              -55.17
              %
              
              
              77
              
              
              149
              
              -48.32
              %Gain
                  on sale of investments
              
              
              -
              
              
              -
              
              
              0.00
              %
              
              
              -
              
              
              47
              
              -100.00
              %Other
                  income
              
              
              33
              
              
              28
              
              
              17.86
              %
              
              
              96
              
              
              71
              
              
              35.21
              %Total
              
              $
              522
              
              $
              372
              
              
              40.32
              %
              
              $
              1,447
              
              $
              1,092
              
              
              32.51
              %




The
      increases in both the three and nine month periods were caused by an increase
      in
      fees for services, primarily related to fees from checking accounts due to
      new
      product offerings. The Company also experienced an increase in income earned
      from investments in Bank Owned Life Insurance over the same periods due to
      the
      purchase of additional policies in the fourth quarter of 2005. These increases
      were partially offset by decreases in fees from investment advisory services.
      The decrease in this type of fee is attributed to greater rate competition
      on
      deposit products in the local market.





***Noninterest
      Expense*** **.** The
      following table summarizes noninterest expense for the three and nine months
      ended September 30, 2006 and 2005.





**Three
                  Months**
              
              
              
              
              **Nine
                  Months****Ended
                  September 30,**
              
              
              
              
              **Ended
                  September 30,****2006**
              
              **2005**
              
              **%
                  Change**
              
              **2006**
              
              **2005**
              
              **%
                  Change***(Dollars
                  in thousands)*Compensation,
                  taxes and benefits
              
              $
              1,795
              
              $
              1,546
              
              
              16.11
              %
              
              $
              5,117
              
              $
              4,364
              
              
              17.25
              %Office
                  occupancy
              
              
              456
              
              
              368
              
              
              23.91
              %
              
              
              1,244
              
              
              1,126
              
              
              10.48
              %Advertising
              
              
              213
              
              
              119
              
              
              78.99
              %
              
              
              513
              
              
              425
              
              
              20.71
              %Computer
                  processing
              
              
              154
              
              
              170
              
              
              -9.41
              %
              
              
              448
              
              
              473
              
              
              -5.29
              %Loss
                  (gain) on foreclosed real estate, net
              
              
              3
              
              
              (2
              )
              -250.00
              %
              
              
              13
              
              
              (34
              )
              -138.24
              %Other
                  expenses
              
              
              380
              
              
              393
              
              
              -3.31
              %
              
              
              1,138
              
              
              1,139
              
              
              -0.09
              %Total
              
              $
              3,001
              
              $
              2,594
              
              
              15.69
              %
              
              $
              8,473
              
              $
              7,493
              
              
              13.08
              %





Noninterest
      expense increased in the three and nine months ended September 30, 2006
      primarily as a result of an increase in compensation costs over the 2005
      periods. Increases in compensation costs resulted primarily from increased
      expenses related to the awards made under the equity incentive plan previously
      approved by shareholders. Share-based compensation expenses of $109,000 and
      $328,000 were recorded for the three and nine months ended September 30, 2006,
      respectively, compared to $81,000 for both the three and nine month periods
      ended September 30, 2005. In addition, the 2006 periods reflect normal annual
      salary increases for existing staff, as well as higher staffing levels related
      to branch expansion. Increases in both the office occupancy expenses and
      advertising expenses were largely related to the three new branch offices opened
      in the third quarter of 2006. These increases were partially offset by small
      decreases in computer processing costs.


*Table
            of Contents*
 13


**Liquidity
      and Capital Resources**





Liquidity
      is the ability to meet current and future short-term financial obligations.
      The
      Company’s primary sources of funds consist of deposit inflows, loan repayments,
      maturities and sales of investment securities and advances from the Federal
      Home
      Loan Bank of Boston. While maturities and scheduled amortization of loans and
      securities are predictable sources of funds, deposit flows and mortgage
      prepayments are greatly influenced by general interest rates, economic
      conditions and competition.





Each
      quarter the Company projects liquidity availability and demands on this
      liquidity for the next 90 days. The Company regularly adjusts its investments
      in
      liquid assets based upon our assessment of (1) expected loan demand,
      (2) expected deposit flows, (3) yields available on interest-earning
      deposits and securities, and (4) the objectives of our asset/liability
      management program. Excess liquid assets are invested generally in
      interest-earning deposits, federal funds, short- and intermediate-term U.S.
      Government agency obligations and to a lesser extent, municipal securities
      and
      auction pass-through certificates.





The
      Company’s most liquid assets are cash and cash equivalents and interest-bearing
      deposits. The levels of these assets depend on our operating, financing, lending
      and investing activities during any given period. At September 30, 2006, cash
      and cash equivalents totaled $14.0 million, including federal funds of $4.1
      million. Securities classified as available-for-sale, which provide additional
      sources of liquidity, totaled $65.6 million at September 30, 2006. At September
      30, 2006, the Company had the ability to borrow a total of $125.6 million from
      the Federal Home Loan Bank of Boston, of which $63.7 million in borrowings
      was
      outstanding. At September 30, 2006, the Company had arranged overnight lines
      of
      credit of $2.5 million with the Federal Home Loan Bank of Boston. The Company
      had no overnight advances outstanding with the Federal Home Loan Bank of Boston.
      In addition, at September 30, 2006, the Company had the ability to borrow $2.5
      million from a correspondent bank. The Company had no advances outstanding
      on
      this line at September 30, 2006.





At
      September 30, 2006, the Company had commitments of $23.9 million in unadvanced
      construction mortgages, $20.1 million in unused home equity lines of credit,
      $4.3 million in mortgage commitments, $5.6 million in letters of credit, $4.5
      million in commercial loan commitments, $4.4 million in unadvanced commercial
      lines, and $91,000 in overdraft line of credit availability. Certificates of
      deposit due within one year of September 30, 2006 totaled $127.8 million, or
      44.5% of total deposits. If these deposits do not remain with us, the Company
      will be required to seek other sources of funds, including other certificates
      of
      deposit and our available lines of credit. Depending on market conditions,
      the
      Company may be required to pay higher rates on such deposits or other borrowings
      than are currently paid on the certificates of deposit due on or before
      September 30, 2007. Based on past experience, however, the Company believes
      that
      a significant portion of our certificates of deposit will remain with us. The
      Company has the ability to attract and retain deposits by adjusting the interest
      rates offered.





Historically,
      the Company has remained highly liquid, with our liquidity position increasing
      substantially over the past two fiscal years. The Company is not aware of any
      trends and/or demands, commitments, events or uncertainties that could result
      in
      a material decrease in liquidity. The Company expects that all of our liquidity
      needs, including the contractual commitments stated above, the estimated costs
      of our branch expansion plans and increases in loan demand can be met by our
      currently available liquid assets and cash flows. In the event loan demand
      was
      to increase at a pace greater than expected, or any unforeseen demand or
      commitment were to occur, we
      could
      access our borrowing capacity with the Federal Home Loan Bank of Boston. The
      Company expects that our currently available liquid assets and our ability
      to
      borrow from the Federal Home Loan Bank of Boston would be sufficient to satisfy
      our liquidity needs without any material adverse effect on our
      liquidity. 
 The
        Company’s primary investing activities are the origination of loans and the
        purchase of securities. For the six months ended September 30, 2006, the
        Company
        originated $61.1 million of loans, including renewals and refinances, and
        purchased $22.0 million of securities. These activities were funded primarily
        by
        the proceeds from sales and maturities of available-for-sale and
        held-to-maturity securities of $14.5 million and an increase of deposits
        of
        $46.2 million.
 
 Financing
        activities consist primarily of activity in deposit accounts and in Federal
        Home
        Loan Bank advances. The Company experienced a net increase in total deposits
        of
        $46.2 million for the nine months ended September 30,


*Table
          of Contents*
 14


2006.
      Deposit flows are affected by the overall level of interest rates, the interest
      rates and products offered by us and our local competitors and other factors.
      The Company generally manages the pricing of deposits to be competitive and
      to
      increase core deposit relationships. Occasionally, the Company offers
      promotional rates on certain deposit products in order to attract deposits.
      The
      Company experienced a net increase in Federal Home Loan Bank advances of $6.7
      million for the nine months ended September 30, 2006. The increases in deposit
      accounts and Federal Home Loan Bank advances primarily funded our investing
      and
      lending activities and, to a lesser extent, funded increases in fixed assets
      and
      disbursements from mortgage tax escrow accounts.





The
      Company is not subject to separate regulatory capital requirements. At September
      30, 2006, the Bank was subject to the regulatory capital requirements of the
      Office of Thrift Supervision (OTS), including a risk-based capital measure.
      The
      risk-based capital guidelines include both a definition of capital and a
      framework for calculating risk-weighted assets by assigning balance sheet assets
      and off-balance sheet items to broad risk categories. At September 30, 2006,
      the
      Bank exceeded all of its regulatory capital requirements. The Bank is considered
      “well capitalized” under regulatory guidelines.





The
      following table is a summary of the Bank’s actual capital as computed under the
      standards established by the OTS at September 30, 2006.





*(Dollars
                  in Thousands)*
              Amount
              
              RatioTier
                  I Capital (to Adjusted Total Assets)
              
              $
              38,731
              
              
              9.69
              %Total
                  Risk-Based Capital (to Risk-Weighted Assets)
              
              
              40,740
              
              
              14.73
              %Tier
                  I Risk-Based Capital (to Risk-Weighted Assets)
              
              
              38,731
              
              
              14.01
              %Tangible
                  Equity Capital (to Tangible Assets)
              
              38,731
              
              
              9.69
              %








**Off-Balance
      Sheet Arrangements**





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





For
      the
      nine months ended September 30, 2006, the Company did not engage in any
      off-balance-sheet transactions reasonably likely to have a material effect
      on
      its financial condition, results of operations or cash flows.







**Item
      3. Quantitative and Qualitative Disclosures About Market
      Risk.**


**Qualitative
      Aspects of Market Risk.** **** The
      Company’s most significant form of market risk is interest rate risk. The
      Company manages the interest rate sensitivity of its interest-bearing
      liabilities and interest-earning assets in an effort to minimize the adverse
      effects of changes in the interest rate environment. Deposit accounts typically
      react more quickly to changes in market interest rates than mortgage loans
      because of the shorter maturities of deposits. As a result, sharp increases
      in
      interest rates may adversely affect the Company’s earnings while decreases in
      interest rates may beneficially affect the Company’s earnings. To reduce the
      potential volatility of the Company’s earnings, the Company has sought to
      improve the match between assets and liability maturities (or rate adjustment
      periods), while maintaining an acceptable interest rate spread, by originating
      adjustable-rate mortgage loans for retention in the loan portfolio,
      variable-rate home equity lines and variable-rate commercial loans and by
      purchasing variable-rate investments and investments with expected maturities
      of
      less than 10 years. The Company currently does not participate in hedging
      programs, interest rate swaps or other activities involving the use of
      off-balance sheet derivative financial instruments.


*Table
            of Contents*
 15


The
      Bank’s Asset/Liability Committee communicates, coordinates and controls all
      aspects of asset/liability management. The committee establishes and monitors
      the volume and mix of assets and funding sources with the objective of managing
      assets and funding sources.





**Quantitative
      Aspects of Market Risk.** The Bank
      uses an interest rate sensitivity analysis prepared by the Office of Thrift
      Supervision to review its level of interest rate risk. This analysis measures
      interest rate risk by computing changes in net portfolio value of the Bank’s
      cash flows from assets, liabilities and off-balance sheet items in the event
      of
      a range of assumed changes in market interest rates. Net portfolio value
      represents the market value of portfolio equity and is equal to the market
      value
      of assets minus the market value of liabilities, with adjustments made for
      off-balance sheet items. This analysis assesses the risk of loss in market
      risk
      sensitive instruments in the event of a sudden and sustained 100 to 300 basis
      point increase or 100 to 200 basis point decrease in market interest rates
      with
      no effect given to any steps that we might take to counter the effect of that
      interest rate movement. The Bank measures interest rate risk by modeling the
      changes in net portfolio value over a variety of interest rate scenarios. The
      following table, which is based on information that the Bank provides to the
      Office of Thrift Supervision, presents the change in the Bank’s net portfolio
      value at June 30, 2006 (the most current information available) that would
      occur
      in the event of an immediate change in interest rates based on Office of Thrift
      Supervision assumptions, with no effect given to any steps that the Bank might
      take to counteract that change. The Bank expects that its net portfolio value
      at
      September 30, 2006 is consistent with the table below.





Net
                  Portfolio Value as % ofBasis
                  Point ("bp")
              
              Net
                  Portfolio Value
              
              Present
                  Value of AssetsChange
                  in Rates
              
              $
                  Amount
              
              $
                  Change
              
              %
                  Change
              
              NPV
                  Ratio
              
              Change*(Dollars
                  in thousands)*300
                  bp
              
              
              28,026
              
              
              (20,797
              )
              
              -43
              %
              
              8.03
              %
              
              -5.02
              %200
              
              
              34,750
              
              
              (14,073
              )
              
              -29
              %
              
              9.73
              %
              
              -3.32
              %100
              
              
              41,798
              
              
              (7,025
              )
              
              -14
              %
              
              11.43
              %
              
              -1.62
              %0
              
              
              48,823
              
              
              -
              
              
              -
              
              
              13.05
              %
              
              -(100)
              
              
              54,818
              
              
              5,995
              
              
              12
              %
              
              14.35
              %
              
              1.30
              %(200)
              
              
              57,151
              
              
              8,328
              
              
              17
              %
              
              14.80
              %
              
              1.75
              %








The
      Office of Thrift Supervision uses certain assumptions in assessing the interest
      rate risk of savings associations. These assumptions relate to interest rates,
      loan prepayment rates, deposit decay rates, and the market values of certain
      assets under differing interest rate scenarios, among others. As with any method
      of measuring interest rate risk, certain shortcomings are inherent in the method
      of analysis presented in the foregoing table. For example, although certain
      assets and liabilities may have similar maturities or periods to repricing,
      they
      may react in different degrees to changes in market interest rates. Also, the
      interest rates on certain types of assets and liabilities may fluctuate
      in advance of changes in market interest rates, while interest rates on other
      types may lag behind changes in market rates. Additionally, certain assets,
      such
      as adjustable-rate mortgage loans, have features that restrict changes in
      interest rates on a short-term basis and over the life of the asset. Further,
      in
      the event of a change in interest rates, expected rates of prepayments on loans
      and early withdrawals from certificates could deviate significantly from those
      assumed in calculating the table.








**Item
      4. 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 that 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.




*Table
            of Contents*
 16


**Part
      II - OTHER INFORMATION**





**Item
      1. - Legal Proceedings** .





The
      Company is not involved in any pending legal proceedings. The Bank is not
      involved in any pending legal proceedings other than routine legal proceedings
      occurring in the ordinary course of business. Such routine legal proceedings,
      in
      the aggregate, are believed by management to be immaterial to its financial
      condition and results of operations.





**Item
      1A. - Risk Factors.**





In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part I, “Item 1.A. Risk Factors” in our Annual
      Report on Form 10-K for the year ended December 31, 2005, which could materially
      affect our business, financial condition or future results. The risks described
      in our Annual Report on Form 10-K are not the only risks that we face.
      Additional risks and uncertainties not currently known to us or that we
      currently deem to be immaterial also may materially adversely affect our
      business, financial condition and/or operating results.





**Item
      2. - Unregistered Sales of Equity Securities and Use of
      Proceeds** .





During
      the three month period ended September 30, 2006, the Company repurchased 50,350
      shares of common stock for $565,217, at an average cost of $11.23 per share
      as
      detailed in the following table:




Total
                  Number of
              
              Maximum
                  NumberShares
                  Purchased as
              
              of
                  Shares that MayTotal
                  Number
              
              Average
                  Price
              
              Part
                  of Publicly
              
              Yet
                  Be Purchasedof
                  Shares
              
              Paid
              
              Announced
                  Plans
              
              Under
                  the PlansPeriod
              Purchased
              
              per
                  Share
              
              or
                  Programs
              
              or
                  ProgramsJuly
              
              
              3,050
              
              $
              11.00
              
              
              58,050
              
              
              322,168August
              
              
              35,300
              
              $
              11.22
              
              
              93,350
              
              
              286,868September
              
              
              12,000
              
              $
              11.31
              
              
              105,350
              
              
              274,868Total
              
              
              50,350
              
              $
              11.23
              
              
              105,350
              
              
              274,868


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 held by persons other than 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.





**Item
      3. - Defaults Upon Senior Securities.**Not
      applicable





**Item
      4. - Submission of Matters to a Vote of Security Holders.**Not
      applicable





**Item
      5. - Other Information.**Not
      applicable





**Item
      6. - Exhibits.**





**Exhibits** -




3.1  Charter
      of Naugatuck Valley Financial Corporation (1)




3.2  Bylaws
      of
      Naugatuck Valley Financial Corporation (1)




*Table
          of Contents*
 17





4.1  Specimen
        Stock Certificate of Naugatuck Valley Financial Corporation (2)


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




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




32 Section
      1350 Certifications.


____________________


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





(2)
      Incorporated herein by reference to the Exhibits to the Company’s Registration
      Statement on Form S-1, as amended, initially filed on June 18,
      2004.


*Table
          of Contents*
 18





**SIGNATURES**





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





Naugatuck
      Valley Financial Corporation








Date:November
                9, 2006
            by:
            
            /s/
                John C. RomanJohn
                C. RomanPresident
                and Chief Executive OfficerDate:November
                9, 2006
            by:
            
            /s/
                Lee R. SchlesingerLee
                R. SchlesingerVice
                President and Treasurer(Principal
                Financial Officer)








*Table
      of
      Contents*


19