**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, 2007
 
 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 filer     o
              Accelerated
                  filer     o
              Non-accelerated
                  filer     ý
 
 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 2, 2007, there were
        7,303,734 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,
                  2007 and December 31, 2006
              3Consolidated
                  Statements of Income for the three and nine months
                  ended September 30, 2007 and 2006
              4Consolidated
                  Statements of Cash Flows for the nine months
                  ended  September 30, 2007 and 2006
              5Notes
                  to Unaudited Consolidated Financial
                  Statements
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Results of Operations
              10Liquidity
                  and Capital Resources
              14Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              16Item
                  4.
              Controls
                  and Procedures
              17**Part
                  II.**
              **Other
                  Information**Item
                  1.
              Legal
                  Proceedings
              18Item
                  1A.
              Risk
                  Factors
              18Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              18Item
                  3.
              Defaults
                  Upon Senior Securities
              18Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              18Item
                  5.
              Other
                  Information
              18Item
                  6.
              Exhibits
              18**Signatures****Exhibits**
  
  **Item
        1.  Financial Statements.**
 
  2
  
 **Condensed
        Consolidated Statements of Financial
        Condition**
 *(In
        thousands,except share data)*
 **September
                    30,**
                
                
                **December
                    31,****2007**
                
                
                **2006***(Unaudited)***ASSETS**Cash
                    and due from depository institutions
                
                $
                9,322
                
                
                $
                7,911Investment
                    in federal funds
                
                
                2,110
                
                
                
                31Investment
                    securities
                
                
                60,435
                
                
                
                70,267Loans
                    receivable, net
                
                
                345,315
                
                
                
                308,376Deferred
                    income taxes
                
                
                1,406
                
                
                
                1,450Other
                    assets
                
                
                26,113
                
                
                
                25,820**Total
                    assets**
                
                $
                444,701
                
                
                $
                413,855**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**LiabilitiesDeposits
                
                $
                325,076
                
                
                $
                292,693Borrowed
                    funds
                
                
                67,823
                
                
                
                68,488Other
                    liabilities
                
                
                1,605
                
                
                
                1,590Total
                    liabilities
                
                
                394,504
                
                
                
                362,771Commitments
                    and contingenciesStockholders'
                    equityCommon
                    stock, $.01 par value; 25,000,000 shares authorized;7,604,375
                    shares issued, 7,313,734 shares outstanding at September30,
                    2007 and 7,473,225 shares outstanding at December 31, 2006
                
                
                76
                
                
                
                76Preferred
                    stock, $.01 par value; 1,000,000 shares authorized;no
                    shares issued or outstanding
                
                
                -
                
                
                
                -Paid-in
                    capital
                
                
                33,417
                
                
                
                33,302Retained
                    earnings
                
                
                23,909
                
                
                
                23,415Unearned
                    ESOP shares
                
                
                (2,534
                )
                
                
                (2,534
                )Unearned
                    stock awards
                
                
                (968
                )
                
                
                (1,256
                )Treasury
                    stock, at cost (296,474 shares at September 30, 2007and
                    138,983 shares at December 31, 2006)
                
                
                (3,461
                )
                
                
                (1,593
                )Accumulated
                    other comprehensive loss
                
                
                (242
                )
                
                
                (326
                )Total
                    stockholders' equity
                
                
                50,197
                
                
                
                51,084**Total
                    liabilities and stockholders' equity**
                
                $
                444,701
                
                
                $
                413,855
   3
 **Consolidated
          Statements of Income**
 *(In
          thousands, except per share data)*
 **Three
                    Months Ended**
                
                
                **Nine
                    Months Ended****September
                    30,**
                
                
                **September
                    30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006***(Unaudited)***Interest
                    income**Interest
                    on loans
                
                $
                5,568
                
                
                $
                4,500
                
                
                $
                15,891
                
                
                $
                12,721Interest
                    and dividends on investments and deposits
                
                
                816
                
                
                
                829
                
                
                
                2,507
                
                
                
                2,384Total
                    interest income
                
                
                6,384
                
                
                
                5,329
                
                
                
                18,398
                
                
                
                15,105**Interest
                    expense**Interest
                    on deposits
                
                
                2,494
                
                
                
                1,731
                
                
                
                7,147
                
                
                
                4,440Interest
                    on borrowed funds
                
                
                900
                
                
                
                759
                
                
                
                2,532
                
                
                
                2,061Total
                    interest expense
                
                
                3,394
                
                
                
                2,490
                
                
                
                9,679
                
                
                
                6,501**Net
                    interest income**
                
                
                2,990
                
                
                
                2,839
                
                
                
                8,719
                
                
                
                8,604**Provision
                    for loan losses**
                
                
                -
                
                
                
                -
                
                
                
                51
                
                
                
                130**Net
                    interest income after provision for loan losses**
                
                
                2,990
                
                
                
                2,839
                
                
                
                8,668
                
                
                
                8,474**Noninterest
                    income**Fees
                    for services related to deposit accounts
                
                
                244
                
                
                
                222
                
                
                
                685
                
                
                
                637Fees
                    for other services
                
                
                163
                
                
                
                155
                
                
                
                422
                
                
                
                380Income
                    from bank owned life insurance
                
                
                78
                
                
                
                77
                
                
                
                231
                
                
                
                228Income
                    from investment advisory services, net
                
                
                25
                
                
                
                26
                
                
                
                173
                
                
                
                77Gain
                    on sale of investments
                
                
                9
                
                
                
                -
                
                
                
                36
                
                
                
                -Other
                    income
                
                
                58
                
                
                
                34
                
                
                
                160
                
                
                
                96Total
                    noninterest income
                
                
                577
                
                
                
                514
                
                
                
                1,707
                
                
                
                1,418**Noninterest
                    expense**Compensation,
                    taxes and benefits
                
                
                1,745
                
                
                
                1,690
                
                
                
                5,229
                
                
                
                4,814Office
                    occupancy
                
                
                492
                
                
                
                456
                
                
                
                1,479
                
                
                
                1,244Computer
                    processing
                
                
                182
                
                
                
                155
                
                
                
                541
                
                
                
                448Advertising
                
                
                171
                
                
                
                213
                
                
                
                426
                
                
                
                513Directors
                    compensation
                
                
                87
                
                
                
                105
                
                
                
                371
                
                
                
                303Loss
                    (gain) on foreclosed real estate, net
                
                
                -
                
                
                
                3
                
                
                
                (1
                )
                
                
                13Other
                    expenses
                
                
                481
                
                
                
                371
                
                
                
                1,274
                
                
                
                1,109Total
                    noninterest expense
                
                
                3,158
                
                
                
                2,993
                
                
                
                9,319
                
                
                
                8,444**Income
                    before provision (benefit)****for
                    income taxes**
                
                
                409
                
                
                
                360
                
                
                
                1,056
                
                
                
                1,448**Provision
                    (benefit) for income taxes**
                
                
                55
                
                
                
                (54
                )
                
                
                115
                
                
                
                150**Net
                    Income**
                
                $
                354
                
                
                $
                414
                
                
                $
                941
                
                
                $
                1,298**Earnings
                    per common share - Basic and Diluted**
                
                $
                0.05
                
                
                $
                0.06
                
                
                $
                0.13
                
                
                $
                0.18
  4
  
 **Consolidated
        Statements of Cash Flows**
 *(In
        thousands)*
 **Nine
                    Months Ended****September
                    30,****2007**
                
                
                **2006****Cash
                    flows from operating activities**
                
                *(Unaudited)*Net
                    income
                
                $
                941
                
                
                $
                1,298Adjustments
                    to reconcile net income to cash provided by operating
                    activities:Provision
                    for loan losses
                
                
                51
                
                
                
                130Depreciation
                    and amortization expense
                
                
                588
                
                
                
                463Stock-based
                    compensation
                
                
                529
                
                
                
                490Provision
                    for deferred taxes
                
                
                -
                
                
                
                (126
                )Net
                    gain on sale of real estate owned
                
                
                -
                
                
                
                (4
                )Gain
                    on sale of investments
                
                
                (36
                )
                
                
                -Increase
                    in accrued income receivable
                
                
                (82
                )
                
                
                (189
                )Increase
                    in deferred loan fees
                
                
                32
                
                
                
                17Increase
                    in bank owned life insurance asset
                
                
                (231
                )
                
                
                (228
                )Decrease
                    in other assets
                
                
                321
                
                
                
                294(Decrease)
                    increase in other liabilities
                
                
                (309
                )
                
                
                83**Net
                    cash provided by operating activities**
                
                
                1,804
                
                
                
                2,228**Cash
                    flows from investing activities**Proceeds
                    from maturities and repayments of available-for-sale
                    securities
                
                
                6,039
                
                
                
                12,498Proceeds
                    from sale of available-for-sale securities
                
                
                6,370
                
                
                
                -Proceeds
                    from maturities of held-to-maturity securities
                
                
                1,010
                
                
                
                1,995Purchase
                    of available-for-sale securities
                
                
                (3,156
                )
                
                
                (21,978
                )Purchase
                    of held-to-maturity securities
                
                
                (250
                )
                
                
                -Purchase
                    of Federal Home Loan Bank stock
                
                
                (492
                )
                
                
                (739
                )Loan
                    originations net of principal payments
                
                
                (37,022
                )
                
                
                (34,519
                )Proceeds
                    from the sale of foreclosed real estate
                
                
                -
                
                
                
                51Proceeds
                    from sale of property and equipment
                
                
                -
                
                
                
                2Purchase
                    of property and equipment
                
                
                (192
                )
                
                
                (2,406
                )**Net
                    cash used by investing activities**
                
                
                (27,693
                )
                
                
                (45,096
                )**Cash
                    flows from financing activities**Net
                    change in time deposits
                
                
                32,937
                
                
                
                33,945Net
                    change in other deposit accounts
                
                
                1,077
                
                
                
                12,264Net
                    change in mortgagors' escrow deposits
                
                
                (1,631
                )
                
                
                (1,425
                )Advances
                    from Federal Home Loan Bank
                
                
                25,927
                
                
                
                41,650Repayment
                    of advances from Federal Home Loan Bank
                
                
                (26,822
                )
                
                
                (34,964
                )Repayment
                    of other short-term borrowings
                
                
                -
                
                
                
                (1,899
                )Net
                    change in repurchase agreements
                
                
                230
                
                
                
                -Treasury
                    stock acquired
                
                
                (1,897
                )
                
                
                (1,201
                )Dividends
                    paid to stockholders
                
                
                (445
                )
                
                
                (467
                )Options
                    exercised
                
                
                3
                
                
                
                -**Net
                    cash provided by financing activities**
                
                
                29,379
                
                
                
                47,903Increase
                    in cash and cash equivalents
                
                
                3,490
                
                
                
                5,035Cash
                    and cash equivalents at beginning of period
                
                
                7,942
                
                
                
                8,951**Cash
                    and cash equivalents at end of period**
                $
                11,432
                
                
                $
                13,986Cash
                    paid during the period for:Interest
                
                $
                9,635
                
                
                $
                6,516Income
                    taxes
                
                
                221
                
                
                
                265
  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, 2007 are not
        necessarily indicative of the results that may be expected for the year ending
        December 31, 2007.
 
 These
        financial statements should be read in conjunction with the consolidated
        financial statements and notes thereto included in the Company’s 2006 Annual
        Report on Form 10-K.  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.  For the
        three months ended September 30, 2007, anti-dilutive options excluded from
        the
        calculations totaled 350,780 options (with an exercise price of
        $11.10).  For the three and nine months ended September 30, 2007,
        7,500 options (with an exercise price of $12.49) were excluded from the
        calculations.  There were no anti-dilutive options for either the
        three or nine months ended September 30, 2006.  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.
  6
  **Three
                    Months Ended**
                
                
                **Nine
                    Months Ended****September
                    30,**
                
                
                **September
                    30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006***(Dollars
                    in thousands, except share data)*Net
                    income
                
                $
                354
                
                
                $
                414
                
                
                $
                941
                
                
                $
                1,298Weighted-average
                    common shares outstanding:Basic
                
                
                7,101,126
                
                
                
                7,250,306
                
                
                
                7,143,940
                
                
                
                7,298,496Effect
                    of dilutive stock optionsand
                    restrictive stock awards
                
                
                -
                
                
                
                1,904
                
                
                
                22,375
                
                
                
                635Diluted
                
                
                7,101,126
                
                
                
                7,252,210
                
                
                
                7,166,315
                
                
                
                7,299,131Net
                    income per common share:Basic
                
                $
                0.05
                
                
                $
                0.06
                
                
                $
                0.13
                
                
                $
                0.18Diluted
                
                $
                0.05
                
                
                $
                0.06
                
                
                $
                0.13
                
                
                $
                0.18
  **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.
 **Three
                    Months Ended**
                
                
                **Nine
                    Months Ended****September
                    30,**
                
                
                **September
                    30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006***(In
                    thousands)*Net
                    income
                
                $
                354
                
                
                $
                414
                
                
                $
                941
                
                
                $
                1,298Net
                    unrealized gain onsecurities
                    available for saleduring
                    the period, net of tax
                
                
                446
                
                
                
                616
                
                
                
                84
                
                
                
                48**Total
                    Comprehensive Income**
                
                $
                800
                
                
                $
                1,030
                
                
                $
                1,025
                
                
                $
                1,346
  **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
  7
  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.
   **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.
 
 The
        amounts and terms of the awards granted under the Incentive Plan are summarized
        in the following table.
 
 **Grant
                    date****March
                    20,**
                
                
                **March
                    21,**
                
                
                **July
                    26,****2007**
                
                
                **2006**
                
                
                **2005**Option
                    awardsAwarded
                
                
                7,500
                
                
                
                6,500
                
                
                
                354,580Exercise
                    price *
                
                $
                12.49
                
                
                $
                11.10
                
                
                $
                11.10Maximum
                    term
                
                
                10
                
                
                
                10
                
                
                
                10Restricted
                    stock awardsAwarded
                
                
                2,000
                
                
                
                1,500
                
                
                
                139,712
  *
        Stock
        option awards were granted with an exercise price equal to the market price
        of
        the Company’s stock at the date of grant with the exception of those granted on
        March 21, 2006, which have an exercise price equal to those granted on July
        26,
        2005 ($11.10 which was higher than the market price of $10.56 on March 21,
        2006).  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
  8
  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 as described below.  The Company
        recorded share-based compensation expense of $118,164 and $352,402 for the
        three
        and nine months ended September 30, 2007, respectively, compared to $108,815
        and
        $327,670 for the three and nine months ended September 30, 2006, in connection
        with the stock option and restricted stock awards.
 
 The
        fair
        value of each stock option award is estimated on the date of grant using
        the
        Black-Scholes option pricing method which includes several assumptions such
        as
        volatility, expected dividends, expected term and risk-free rate for each
        stock
        option award.  In determining the expected term of the option awards,
        the Company elected to follow the simplified method as permitted by the SEC
        Staff Accounting Bulletin 107, which was issued to provide guidance on the
        implementation of SFAS 123(R). Under this method, the Company has estimated
        the
        expected term of the options as being equal to the average of the vesting
        term
        plus the original contractual term. The Company estimated its volatility
        using
        the historical volatility of other, similar companies during a period of
        time
        equal to the expected life of the options. The risk-free rate for the periods
        within the contractual life of the options is based upon the U.S. Treasury
        yield
        curve in effect at the time of grant.  Assumptions used to determine
        the weighted-average fair value of stock options granted were as
        follows:
 
 **March
                    20,**
                
                **March
                    21,**
                
                **July
                    26,****Grant
                    date**
                **2007**
                
                **2006**
                
                **2005**Dividend
                         yield
                
                
                1.60
                %
                
                
                1.89
                %
                
                
                1.44
                %Expected
                    volatility
                
                
                10.49
                %
                
                
                11.20
                %
                
                
                11.47
                %Risk-free
                    rate
                
                
                4.48
                %
                
                
                4.61
                %
                
                
                4.18
                %Expected
                    life in years
                
                
                6.5
                
                
                
                6.5
                
                
                
                6.5Weighted
                    average fair value of options at grant date
                
                $
                2.55
                
                
                $
                2.25
                
                
                $
                2.47
  **NOTE
        6 - DIVIDENDS**
 
 On
        July
        17, 2007, the Company's Board of Directors declared a cash dividend of $0.05
        per
        outstanding common share, which was paid on September 1, 2007, to stockholders
        of record as of the close of business on August 6, 2007.
 
 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**
 
 The
        Company adopted FASB Statement No. 156 (SFAS No. 156), “Accounting for
        Servicing of Financial Assets – an amendment of FASB Statement No. 140,”
effective January 1, 2007. SFAS No. 156 requires that all separately
        recognized servicing rights be initially measured at fair value, if practicable.
        For each class of separately recognized servicing assets and liabilities,
        the
        Company must choose to report servicing assets and liabilities either at
        1) fair
        value or 2) amortized cost (amortized cost is consistent with how the Company
        has historically recognized servicing rights). Under the fair value approach,
        servicing assets and liabilities will be recorded at fair value at each
        reporting date with changes in fair value recorded in earnings in the period
        in
        which the changes occur. Under the amortized cost method, servicing assets
        and
        liabilities are amortized in proportion to and over the period of estimated
        net
        servicing income or net servicing loss and are assessed for impairment based
        on
        fair value at each reporting date. The adoption of SFAS No. 156 did not
        have a material impact on the Consolidated Financial Statements of
        the
  9
  Company.
        At September 30, 2007, the Company had no servicing assets recorded in the
        Consolidated Financial Statements.
 
 The
        Company adopted the provisions of FIN 48, “Accounting for Uncertainty in Income
        Taxes – an interpretation of FASB Statement No. 109,” effective
        January 1, 2007. FIN 48 prescribes a recognition threshold and measurement
        attribute for the financial statement recognition and measurement of a tax
        position taken or expected to be taken in a tax return. This interpretation
        also
        provides guidance on derecognition, classification, interest and penalties,
        accounting in interim periods, disclosure, and transition. The Company does
        not
        anticipate any changes in its current accounting policies associated with
        the
        adoption of FIN 48. The adoption of FIN 48 did not have a material financial
        impact on the consolidated financial statements of the Company.
 
 The
        Company adopted EITF Issue No. 06-5, “Accounting for Purchases of Life
        Insurance – Determining the Amount That Could Be Realized in Accordance with
        FASB Technical Bulletin No. 85-4,” effective January 1, 2007. EITF
        Issue No. 06-5 includes various considerations regarding what should be
        included in the determination of the amount that could be realized under
        the
        insurance contracts. The adoption of EITF 06-5 did not have a material impact
        on
        the financial statements of the Company.
 
 In
        July
        of 2006, the Emerging Issues Task Force (“EITF”) of FASB issued a draft abstract
        for EITF Issue No. 06-4, “Accounting for Deferred Compensation and
        Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance
        Arrangements.” The EITF reached a consensus that for an endorsement split-dollar
        life insurance arrangement within the scope of this Issue, an employer should
        recognize a liability for future benefits. The Company has purchased bank-owned
        life insurance on certain of its employees. The cash surrender value of these
        policies is carried as an asset on the consolidated statements of financial
        condition in other assets, and the present value of the projected liability
        is
        included in other liabilities. Some of these life insurance policies are
        generally subject to endorsement split-dollar life insurance arrangements.
        These
        arrangements were designed to provide a pre-and postretirement benefit for
        certain officers of the Company and its subsidiaries. The Company is required
        to
        apply EITF Issue No. 06-4 beginning January 1, 2008, and does not
        expect the effect the implementation of EITF Issue No. 06-4 to have a
        material effect on its consolidated financial statements.
 
 In
        September of 2006, the FASB issued Statement No. 157 (SFAS No. 157),
“Fair Value Measurements.” This statement defines fair value, establishes a
        framework for measuring fair value in generally accepted accounting principles,
        and expands disclosures about fair value measurements. The Company is required
        to apply SFAS No. 157 beginning January 1, 2008, and is currently
        evaluating the effect the implementation of SFAS No. 157 will have on its
        consolidated financial statements.
 
 In
        February of 2007, the FASB issued Statement No. 159 (SFAS No. 159),
“The Fair Value Option for Financial Assets and Financial Liabilities –
Including an amendment of FASB Statement No. 115.” This statement permits
        the measurement of many financial instruments and certain other assets and
        liabilities at fair value on an instrument-by-instrument, irrevocable basis.
        The
        Company is required to apply SFAS No. 159 beginning January 1, 2008,
        and is currently evaluating the effect the implementation of SFAS No. 159
        will have on its consolidated financial statements.
 
  **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, 2006 included in the
        Company’s 2006 Annual Report on Form 10-K.
 
 **Forward-Looking
        Statements**
 
 This
        report contains forward-looking statements that are based on assumptions
        and may
        describe future plans, strategies and expectations of the
        Company.  These forward-looking statements are generally identified by
        use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”,
“project” or similar expressions.  The Company’s ability to predict
        results or the actual effect of future plans or strategies is inherently
        uncertain. Factors which could have a material adverse effect on the operations
        of the Company and its subsidiaries include, but are not limited to, changes
        in
        interest rates, national and regional economic conditions, legislative and
        regulatory changes, monetary
  10
  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 2006 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, 2007 and December 31,
        2006**
 
 Total
        assets increased by $30.8 million, or 7.4%, to $444.7 million during the
        period
        from December 31, 2006 to September 30, 2007, primarily due to an increase
        of
        $36.9 million in loans and an increase in investment in federal funds of
        $2.1
        million, partially offset by a decrease in investment securities of
        $9.8.  The increase in loans primarily reflects an increase in our
        commercial real estate loans and one-to-four family mortgages, partially
        offset
        by a decrease in home equity loans.  These increases were primarily
        funded by increases in deposits.
 
 Total
        liabilities were $394.5 million at September 30, 2007 compared to $362.8
        million
        at December 31, 2006.  Deposits at September 30, 2007 increased $32.4
        million, or 11.1%, over December 31, 2006 due to more aggressive pricing
        and the
        addition of three new branch offices during the third quarter of
        2006.  Borrowed funds, including advances from the Federal Home Loan
        Bank of Boston and reverse repurchase agreements, decreased $665,000, from
        $68.5
        million to $67.8 million.  The increases in deposits were used
        primarily to fund the growth in loans.
 
 Total
        stockholders’ equity decreased $887,000, from $51.1 million at December 31, 2006
        to $50.2 million at September 30, 2007.  The decrease in equity was
        due to stock repurchases of $1.9 million and dividends of $445,000 paid to
        stockholders, partially offset by net income of $941,000 for the nine month
        period, $432,000 in capital adjustments related to the Company’s 2005 Equity
        Incentive Plan, and a net decrease to the unrealized loss on available-for-sale
        securities of $84,000.
 
 
 **Comparison
        of Operating Results For the Three and Nine Months Ended September 30, 2007
        and
        2006**
 
 ***General***.     For
        the three months ended September 30, 2007, the Company had net income of
        $354,000 compared to $414,000 for the three months ended September 30, 2006,
        a
        decrease of $60,000.  Net income decreased $357,000 to $941,000 for
        the nine months ended September 30, 2007 from $1.3 million for the nine months
        ended September 30, 2006.  The decreases in both the three and nine
        month periods were primarily due to increases in noninterest expenses related
        to
        branch expansion, compensation and expenses associated with Sarbanes-Oxley
        compliance, partially offset by small increases in net interest income and
        small
        increases in noninterest income in both periods.
 
 
 ***Net
        Interest Income*****.******Net
        interest income increased $151,000, or 5.3%, to $3.0 million for the three
        months ended September 30, 2007 and increased by $115,000, or 1.3%, to $8.7
        million for the nine months ended September 30, 2007.  The Company
        experienced an increase in the average balances of interest earning assets
        of
        15.2% in the three month period and an increase of 16.2% in the nine month
        period, combined with an increase in the average rate earned on these assets
        of
        24 basis points in the three month period and 29 basis points in the nine
        month
        period, over the rates for the comparative periods in 2006.  The
        increase in interest earning assets for the three and nine month periods
        is
        attributed primarily to an increase in the loan portfolio.  The
        average balance in the loan portfolio increased by 19.9% in both the three
        month
        and nine month periods, primarily in the commercial mortgage and residential
        mortgage portfolios.  The increase in interest income was exceeded by
        the increases in interest expense for both the three and nine month periods
        in
        2007 compared to 2006.  Interest expense increased by $904,000, or
        36.3% in the three month period and increased by $3.2 million, or 48.9% in
        the
        nine month period due to rising rates on deposits and borrowings along with
        increases in the average balances of deposits and borrowings.  The
        average balances of deposits increased by 16.6% and 18.6% in the three and
        nine
        month periods respectively.  The largest increases in deposits were in
        certificates of deposit, money market accounts and checking accounts, partially
        offset by a decrease in savings accounts.  The average balance of
        borrowings increased by 16.4% in both periods.
  11
  
 The
        following table summarizes changes in interest income and interest expense
        for
        the three and nine months ended September 30, 2007 and 2006.
 
 **Three
                      Months**
                  
                  
                  
                  
                  
                  **Nine
                      Months****Ended
                      September 30,**
                  
                  
                  
                  
                  
                  **Ended
                      September 30,****2007**
                  
                  
                  **2006**
                  
                  
                  **%
                      change**
                  
                  **2007**
                  
                  
                  **2006**
                  
                  
                  **%
                      change***(Dollars
                      in thousands)***Interest
                      income:**Loans
                  
                  $
                  5,568
                  
                  
                  $
                  4,500
                  
                  
                  
                  23.73
                  %
                  
                  $
                  15,891
                  
                  
                  $
                  12,721
                  
                  
                  
                  24.92
                  %Fed
                      Funds sold
                  
                  
                  43
                  
                  
                  
                  21
                  
                  
                  
                  104.76
                  %
                  
                  
                  114
                  
                  
                  
                  51
                  
                  
                  
                  123.53
                  %Investment
                      securities
                  
                  
                  707
                  
                  
                  
                  758
                  
                  
                  
                  -6.73
                  %
                  
                  
                  2,194
                  
                  
                  
                  2,195
                  
                  
                  
                  -0.05
                  %Federal
                      Home Loan Bank stock
                  
                  
                  66
                  
                  
                  
                  50
                  
                  
                  
                  32.00
                  %
                  
                  
                  199
                  
                  
                  
                  138
                  
                  
                  
                  44.20
                  %Total
                      interest income
                  
                  
                  6,384
                  
                  
                  
                  5,329
                  
                  
                  
                  19.80
                  %
                  
                  
                  18,398
                  
                  
                  
                  15,105
                  
                  
                  
                  21.80
                  %**Interest
                      expense:**Certificate
                      accounts
                  
                  
                  2,175
                  
                  
                  
                  1,495
                  
                  
                  
                  45.48
                  %
                  
                  
                  6,110
                  
                  
                  
                  3,821
                  
                  
                  
                  59.91
                  %Regular
                      savings accounts
                  
                  
                  59
                  
                  
                  
                  107
                  
                  
                  
                  -44.86
                  %
                  
                  
                  199
                  
                  
                  
                  329
                  
                  
                  
                  -39.51
                  %Checking
                      and NOW accounts
                  
                  
                  93
                  
                  
                  
                  69
                  
                  
                  
                  34.78
                  %
                  
                  
                  434
                  
                  
                  
                  145
                  
                  
                  
                  199.31
                  %Money
                      market savings accounts
                  
                  
                  167
                  
                  
                  
                  60
                  
                  
                  
                  178.33
                  %
                  
                  
                  404
                  
                  
                  
                  145
                  
                  
                  
                  178.62
                  %Total
                      interest-bearing deposits
                  
                  
                  2,494
                  
                  
                  
                  1,731
                  
                  
                  
                  44.08
                  %
                  
                  
                  7,147
                  
                  
                  
                  4,440
                  
                  
                  
                  60.97
                  %FHLB
                      advances
                  
                  
                  898
                  
                  
                  
                  756
                  
                  
                  
                  18.78
                  %
                  
                  
                  2,525
                  
                  
                  
                  2,053
                  
                  
                  
                  22.99
                  %Other
                      borrowings
                  
                  
                  2
                  
                  
                  
                  3
                  
                  
                  
                  -33.33
                  %
                  
                  
                  7
                  
                  
                  
                  8
                  
                  
                  
                  -12.50
                  %Total
                      interest expense
                  
                  
                  3,394
                  
                  
                  
                  2,490
                  
                  
                  
                  36.31
                  %
                  
                  
                  9,679
                  
                  
                  
                  6,501
                  
                  
                  
                  48.88
                  %Net
                      interest income
                  
                  $
                  2,990
                  
                  
                  $
                  2,839
                  
                  
                  
                  5.32
                  %
                  
                  $
                  8,719
                  
                  
                  $
                  8,604
                  
                  
                  
                  1.34
                  %
  The
        following table summarizes average balances and average yields and costs
        for the
        three and nine months ended September 30, 2007 and 2006.
  **Three
                    Months Ended September 30,**
                
                **Nine
                    Months Ended September 30,****2007**
                
                **2006**
                
                **2007**
                
                **2006****Average**
                
                
                **Yield/**
                
                **Average**
                
                
                **Yield/**
                
                **Average**
                
                
                **Yield/**
                
                **Average**
                
                
                **Yield/****Balance**
                
                
                **Cost**
                
                **Balance**
                
                
                **Cost**
                
                **Balance**
                
                
                **Cost**
                
                **Balance**
                
                
                **Cost***(Dollars
                    in thousands)***Interest-earning
                    assets**Loans
                
                $
                337,421
                
                
                
                6.60
                %
                
                $
                281,366
                
                
                
                6.40
                %
                
                $
                323,964
                
                
                
                6.54
                %
                
                $
                270,246
                
                
                
                6.28
                %Fed
                    Funds sold
                
                
                3,179
                
                
                
                5.41
                %
                
                
                1,607
                
                
                
                5.23
                %
                
                
                2,716
                
                
                
                5.60
                %
                
                
                1,282
                
                
                
                5.30
                %Investment
                    securities
                
                
                61,873
                
                
                
                4.57
                %
                
                
                66,547
                
                
                
                4.56
                %
                
                
                65,790
                
                
                
                4.45
                %
                
                
                66,294
                
                
                
                4.41
                %Federal
                    Home Loan Bank stock
                
                
                4,209
                
                
                
                6.27
                %
                
                
                3,658
                
                
                
                5.47
                %
                
                
                4,092
                
                
                
                6.48
                %
                
                
                3,475
                
                
                
                5.29
                %Total
                    interest-earning assets
                
                $
                406,682
                
                
                
                6.28
                %
                
                $
                353,178
                
                
                
                6.04
                %
                
                $
                396,562
                
                
                
                6.19
                %
                
                $
                341,297
                
                
                
                5.90
                %**Interest-bearing
                    liabilities**Certificate
                    accounts
                
                $
                187,494
                
                
                
                4.64
                %
                
                $
                145,876
                
                
                
                4.10
                %
                
                $
                177,314
                
                
                
                4.59
                %
                
                $
                136,607
                
                
                
                3.73
                %Regular
                    savings accounts & escrow
                
                
                44,794
                
                
                
                0.53
                %
                
                
                52,563
                
                
                
                0.81
                %
                
                
                46,589
                
                
                
                0.57
                %
                
                
                53,543
                
                
                
                0.82
                %Checking
                    and NOW accounts
                
                
                54,486
                
                
                
                0.68
                %
                
                
                52,524
                
                
                
                0.53
                %
                
                
                58,445
                
                
                
                0.99
                %
                
                
                49,925
                
                
                
                0.39
                %Money
                    market savings accounts
                
                
                26,190
                
                
                
                2.55
                %
                
                
                17,463
                
                
                
                1.37
                %
                
                
                23,645
                
                
                
                2.28
                %
                
                
                17,909
                
                
                
                1.08
                %Total
                    interest-bearing deposits
                
                
                312,964
                
                
                
                3.19
                %
                
                
                268,426
                
                
                
                2.58
                %
                
                
                305,993
                
                
                
                3.11
                %
                
                
                257,984
                
                
                
                2.29
                %FHLB
                    advances
                
                
                72,309
                
                
                
                4.97
                %
                
                
                62,169
                
                
                
                4.86
                %
                
                
                68,787
                
                
                
                4.89
                %
                
                
                59,139
                
                
                
                4.63
                %Other
                    borrowings
                
                
                279
                
                
                
                2.87
                %
                
                
                192
                
                
                
                6.25
                %
                
                
                264
                
                
                
                3.54
                %
                
                
                202
                
                
                
                5.28
                %Total
                    interest-bearing liabilities
                
                $
                385,552
                
                
                
                3.52
                %
                
                $
                330,787
                
                
                
                3.01
                %
                
                $
                375,044
                
                
                
                3.44
                %
                
                $
                317,325
                
                
                
                2.73
                %
  12
  
 Interest
        income increased $1.1 million, or 19.8%, for the three months ended September
        30, 2007 as a result of a 15.2% increase in the average balance of
        interest-earning assets to $406.7 million from $353.2 million along with
        an
        increase in the average yield on interest-earning assets from 6.04% to
        6.28%.  Interest income also increased for the nine month period by
        21.8%, from $15.1 million to $18.4 million, again as a result of an increase
        in
        the average balance of interest-earning assets from $341.3 million to $396.6
        million, along with an increase in the average yield to 6.19% from
        5.90%.
 
 Interest
        expense increased by $904,000 for the three months ended September 30, 2007,
        due
        to an increase of $44.5 million in the average balance of interest-bearing
        deposits along with an increase in the average cost of these deposits from
        2.58%
        to 3.19%.  The average balance of Federal Home Loan Bank advances also
        increased by $10.1 million with an 11 basis point increase in the average
        cost
        from 4.86% to 4.97%.  Interest expense also increased in the nine
        month period ended September 30, 2007 by $3.2 million, or 48.9%, again as
        a
        result of an increase in the average balance of interest-bearing liabilities
        of
        $57.7 million, or 18.2%.  The average cost rose 71 basis points from
        2.73% to 3.44% 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,
        2007
        and 2006.
 
 **Three
                    Months Ended**
                
                
                **Nine
                    Months Ended****September
                    30,**
                
                
                **September
                    30,****2007**
                
                
                **2006**
                
                
                **2007**
                
                
                **2006***(In
                    thousands)*Allowance
                    at beginning of period
                
                $
                2,073
                
                
                $
                2,009
                
                
                $
                2,071
                
                
                $
                1,878Provision
                    for loan losses
                
                
                -
                
                
                
                -
                
                
                
                51
                
                
                
                130Charge-offs
                
                
                (2
                )
                
                
                -
                
                
                
                (53
                )
                
                
                (1
                )Recoveries
                
                
                -
                
                
                
                -
                
                
                
                2
                
                
                
                2Net
                    recoveries (charge-offs)
                
                
                (2
                )
                
                
                -
                
                
                
                (51
                )
                
                
                1Allowance
                    at end of period
                
                $
                2,071
                
                
                $
                2,009
                
                
                $
                2,071
                
                
                $
                2,009
 The
        Company did not record a provision for loan losses in either the three month
        period ended September 30, 2007, or September 30, 2006.  Provisions of
        $51,000 and $130,000 were recorded for the nine months ended September 30,
        2007
        and 2006, respectively.  The provisions in the 2007 periods were less
        than the 2006 periods due to management’s analysis of the allowance based on
        loss experience.  The charge-off in the three month period was due to
        one personal loan.  The charge-offs in the nine month period ended
        September 30, 2007 were due to one home equity loan and two personal
        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,****2007**
                
                
                **2006**
                
                
                **%
                    change***(Dollars
                    in thousands)*Nonaccrual
                    loans
                
                $
                744
                
                
                $
                2,010
                
                
                
                -62.99
                %Total
                    nonperforming assets
                
                $
                744
                
                
                $
                2,010
                
                
                
                -62.99
                %Total
                    nonperforming loans to total loans
                
                
                0.21
                %
                
                
                0.65
                %
                
                
                -67.69
                %Total
                    nonperforming loans to total assets
                
                
                0.17
                %
                
                
                0.49
                %
                
                
                -65.31
                %Total
                    nonperforming assets to total assets
                
                
                0.17
                %
                
                
                0.49
                %
                
                
                -65.31
                %
 13
 ***Noninterest
        Income*****.**The following table summarizes
        noninterest income for the three and nine months ended September 30, 2007
        and
        2006.
 
 **Three
                    Months**
                
                
                
                
                
                **Nine
                    Months****Ended
                    September 30,**
                
                
                
                
                
                **Ended
                    September 30,****2007**
                
                
                **2006**
                
                
                **%
                    Change**
                
                
                **2007**
                
                
                **2006**
                
                
                **%
                    Change***(Dollars
                    in thousands)*Fees
                    for services related to deposit accounts
                
                $
                244
                
                
                $
                222
                
                
                
                9.91
                %
                
                $
                685
                
                
                $
                637
                
                
                
                7.54
                %Fees
                    for other services
                
                
                163
                
                
                
                155
                
                
                
                5.16
                %
                
                
                422
                
                
                
                380
                
                
                
                11.05
                %Income
                    from bank owned life insurance
                
                
                78
                
                
                
                77
                
                
                
                1.30
                %
                
                
                231
                
                
                
                228
                
                
                
                1.32
                %Income
                    from investment advisory services, net
                
                
                25
                
                
                
                26
                
                
                
                -3.85
                %
                
                
                173
                
                
                
                77
                
                
                
                124.68
                %Gain
                    on sale of investments
                
                
                9
                
                
                
                -
                
                
                N/A
                
                
                
                36
                
                
                
                -
                
                
                N/AOther
                    income
                
                
                58
                
                
                
                34
                
                
                
                70.59
                %
                
                
                160
                
                
                
                96
                
                
                
                66.67
                %Total
                
                $
                577
                
                
                $
                514
                
                
                
                
                
                
                $
                1,707
                
                
                $
                1,418
                
                
                
                20.38
                %
  The
        increase in the three month period was primarily caused by an increase in
        fees
        for services, mainly related to fees
        from
        checking accounts due to new product offerings. The increase in the nine
        month
        period was primarily caused by an increase in income earned from investment
        advisory services due to a higher level of referrals from bank employees
        and
        general economic conditions.  The Company also experienced an increase
        in fees for services in the nine month period.
 
 
 ***Noninterest
        Expense*****.**  The following table
        summarizes noninterest expense for the three and nine months ended September
        30,
        2007 and 2006.
 **Three
                    Months**
                
                
                
                
                
                **Nine
                    Months****Ended
                    September 30,**
                
                
                
                
                
                **Ended
                    September 30,****2007**
                
                
                **2006**
                
                
                **%
                    Change**
                
                
                **2007**
                
                
                **2006**
                
                
                **%
                    Change***(Dollars
                    in thousands)*Compensation,
                    taxes and benefits
                
                $
                1,745
                
                
                $
                1,690
                
                
                
                3.25
                %
                
                $
                5,229
                
                
                $
                4,814
                
                
                
                8.62
                %Office
                    occupancy
                
                
                492
                
                
                
                456
                
                
                
                7.89
                %
                
                
                1,479
                
                
                
                1,244
                
                
                
                18.89
                %Computer
                    processing
                
                
                182
                
                
                
                155
                
                
                
                17.42
                %
                
                
                541
                
                
                
                448
                
                
                
                20.76
                %Advertising
                
                
                171
                
                
                
                213
                
                
                
                -19.72
                %
                
                
                426
                
                
                
                513
                
                
                
                -16.96
                %Directors
                    compensation
                
                
                87
                
                
                
                105
                
                
                
                -17.14
                %
                
                
                371
                
                
                
                303
                
                
                
                22.44
                %Loss
                    (gain) on foreclosed real estate, net
                
                
                -
                
                
                
                3
                
                
                
                -100.00
                %
                
                
                (1
                )
                
                
                13
                
                
                
                -107.69
                %Other
                    expenses
                
                
                481
                
                
                
                371
                
                
                
                29.65
                %
                
                
                1,274
                
                
                
                1,109
                
                
                
                14.88
                %Total
                
                $
                3,158
                
                
                $
                2,993
                
                
                
                5.51
                %
                
                $
                9,319
                
                
                $
                8,444
                
                
                
                10.36
                %
  Noninterest
        expense increased in the three and nine months ended September 30, 2007
        primarily as a result of an increase in compensation costs, office occupancy
        costs and computer processing costs over the 2006 periods.  These
        increases were largely related to the three new branch offices opened in
        the
        third quarter of 2006.  The Company also experienced increased other
        expenses in both 2007 periods due to costs associated with Sarbanes-Oxley
        compliance.  The increases in expenses were partially offset by small
        decreases in advertising expenses.
 
 **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
  14
  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 its 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, 2007, cash and cash equivalents totaled
        $11.4 million, including federal funds of $2.1 million.  Securities
        classified as available-for-sale, which provide additional sources of liquidity,
        totaled $58.8 million at September 30, 2007.  At September 30, 2007,
        the Company had the ability to borrow a total of $137.1 million from the
        Federal
        Home Loan Bank of Boston, of which $67.6 million in borrowings was outstanding,
        along with $230,000 in repurchase agreements.  At September 30, 2007,
        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, 2007, the Company had the ability to borrow $3.5
        million from a correspondent bank.  The Company had no advances
        outstanding on this line at September 30, 2007.
 
 At
        September 30, 2007, the Company had commitments of $26.7 million in unadvanced
        construction mortgages, $22.0 million in unused home equity lines of credit,
        $2.7 million in mortgage commitments, $8.8 million in commercial loan
        commitments, $6.4 million in unadvanced commercial lines, $5.8 million in
        letters of credit, $2.4 million in unadvanced commitments on other loans,
        and
        $84,000 in overdraft line of credit availability.  Certificates of
        deposit due within one year of September 30, 2007 totaled $180.4 million,
        or
        55.5% 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, 2008.  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.  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 nine months ended September 30, 2007,
        the Company originated $66.3 million of loans, including renewals and
        refinances, and purchased $3.4 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 $13.4 million and an
        increase of deposits of $32.4 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 $32.4 million for the nine months ended September 30,
        2007.  Deposit flows are affected by the overall level of interest
        rates, the interest rates and products offered by us and its 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 decrease in Federal Home Loan Bank advances and other
        borrowings of $665,000 for the nine months ended September 30,
        2007.  The
  15
  increases
        in deposit accounts primarily funded our lending activities, and to a much
        lesser extent, repayment of advances.
 
 The
        Company is not subject to separate regulatory capital
        requirements.  At September 30, 2007, 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, 2007, 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, 2007.
 
 *(Dollars
                    in Thousands)*
                
                Amount
                
                
                RatioTier
                    I  Capital (to Adjusted Total Assets)
                
                $
                39,965
                
                
                
                9.12
                %Total
                    Risk-Based Capital (to Risk-Weighted Assets)
                
                
                42,036
                
                
                
                13.27
                %Tier
                    I Risk-Based Capital (to Risk-Weighted Assets)
                
                
                39,965
                
                
                
                12.62
                %Tangible
                    Equity Capital (to Tangible Assets)
                
                
                39,965
                
                
                
                9.12
                %
 
 **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
        risks.  Such transactions are used primarily to manage customers’
requests for funding and take the form of loan commitments, unused lines
        of
        credit, amounts due on construction loans, amounts due on commercial loans,
        commercial letters of credit and commitments to sell loans.
 
 For
        the
        nine months ended September 30, 2007, 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.
 
 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
  16
  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, 2007 (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, 2007 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
                
                
                $
                21,509
                
                
                $
                (26,208
                )
                
                
                -55
                %
                
                
                5.37
                %
                
                
                -5.74
                %200
                
                
                
                30,356
                
                
                
                (17,361
                )
                
                
                -36
                %
                
                
                7.40
                %
                
                
                -3.71
                %100
                
                
                
                39,187
                
                
                
                (8,530
                )
                
                
                -18
                %
                
                
                9.33
                %
                
                
                -1.78
                %0
                
                
                
                47,717
                
                
                
                -
                
                
                
                -
                
                
                
                11.11
                %
                
                
                -(100)
                
                
                
                54,690
                
                
                
                6,973
                
                
                
                15
                %
                
                
                12.49
                %
                
                
                1.38
                %(200)
                
                
                
                58,894
                
                
                
                11,177
                
                
                
                23
                %
                
                
                13.28
                %
                
                
                2.17
                %
  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.
 
  17
  
 **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, 2006, 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, 2007, the Company repurchased
        77,617
        shares of common stock for $859,410, at an average cost of $11.07 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
                
                
                5,117
                
                
                $
                11.20
                
                
                
                5,117
                
                
                
                161,837August
                
                
                57,500
                
                
                $
                11.08
                
                
                
                57,500
                
                
                
                104,337September
                
                
                15,000
                
                
                $
                11.00
                
                
                
                15,000
                
                
                
                89,337Total
                
                
                77,617
                
                
                $
                11.07
                
                
                
                77,617
                
                
                
                89,337
  On
        May 2,
        2006, the Company announced that the Board of Directors authorized the Company
        to repurchase up to 380,218 shares, or approximately 5%, of the outstanding
        shares 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 (2)4.1
              Specimen
                  Stock Certificate of Naugatuck Valley Financial Corporation
                  (3)
 
  18
  
 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 Exhibits to the Company’s Form 10-Q for the three months
        ended September 30, 2004.
 
 (2)  Incorporated
        herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K
        filed on October 18, 2007.
 
 (3)  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.
 
  19
  
 **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 5, 2007
              by:
              /s/
                  John C. RomanJohn
                  C. RomanPresident
                  and Chief Executive OfficerDate:
                  November 5, 2007
              by:
              /s/
                  Lee R. SchlesingerLee
                  R. SchlesingerVice
                  President and Treasurer(Principal
                  Financial Officer)
 
 20