**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 March 31, 2006
 
 OR
 
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
                  ACT
                  OF 1934
 
 For
        the
        transition period from ______________ to _____________
  Commission
        file number: 0-50876
  
 **NAUGATUCK
        VALLEY FINANCIAL CORPORATION**
 (Exact
        name of registrant as specified in its charter)
 
 **UNITED
                  STATES**
              **65-1233977**(State
                  or other jurisdiction of incorporation or
              (I.R.S.
                  Employer Identification No.organization)
 
 
 **333
                  CHURCH STREET, NAUGATUCK, CONNECTICUT**
              **06770**(Address
                  of principal executive offices)
              (Zip
                  Code)
 
 
 **(203)
        720-5000**
 (Registrant’s
        telephone number, including area code)
 
 **N/A**
 (Former
        name, former address and former fiscal year, if changed since last
        report)
 
 Indicate
        by check mark whether the registrant: (1) has filed all reports required
        to be
        filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or such shorter period that the registrant was required
        to
        file such reports), and (2) has been subject to such filing requirements
        for the
        past 90 days.
 Yesý No o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer or a non-accelerated filer. (See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.)
 Large
                  accelerated filero
              Accelerated
                  filero
              Non-accelerated
                  filerý
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 Yes o  No ý
  As
        of May
        1, 2006, there were 7,604,375 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
                  March 31, 2006 andDecember
                  31, 2005
              3Consolidated
                  Statements of Income for the three months
                  endedMarch
                  31, 2006 and 2005
              4Consolidated
                  Statements of Cash Flows for the three
                  months endedMarch
                  31, 2006 and 2005
              5Notes
                  to Unaudited Consolidated Financial
                  Statements
              6Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and
                  Resultsof
                  Operations
              9Liquidity
                  and Capital Resources
              12Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market
                  Risk
              14Item
                  4.
              Controls
                  and Procedures
              15**Part
                  II. Other Information**Item
                  1.
              Legal
                  Proceedings
              16Item
                  1A.
              Risk
                  Factors
              16Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              16Item
                  3.
              Defaults
                  Upon Senior Securities
              16Item
                  4.
              Submission
                  of Matters to a Vote of Security
                  Holders
              16Item
                  5.
              Other
                  Information
              16Item
                  6.
              Exhibits
              16**Signatures****Exhibits**
  
  **Item
        1. Financial Statements.**
   
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            to Table of Contents
 2







**Condensed
        Consolidated Statements of Financial
        Condition**
 *(In
        thousands, except share data)*
 **March
                    31,**
                
                **December
                    31,****2006**
                
                **2005***(Unaudited)***ASSETS**Cash
                    and due from depository institutions
                
                $
                7,935
                
                $
                8,922Investment
                    in federal funds
                
                
                3,450
                
                
                29Investment
                    securities
                
                
                66,937
                
                
                63,049Loans
                    receivable, net
                
                
                263,237
                
                
                259,427Deferred
                    income taxes
                
                
                1,513
                
                
                1,331Other
                    assets
                
                
                23,081
                
                
                22,588**Total
                    assets**
                
                $
                366,153
                
                $
                355,346**LIABILITIES
                    AND STOCKHOLDERS' EQUITY**LiabilitiesDeposits
                
                $
                255,154
                
                $
                240,846Advances
                    from Federal Home Loan Bank of Boston
                
                
                56,506
                
                
                57,059Other
                    liabilities
                
                
                3,326
                
                
                6,477Total
                    liabilities
                
                
                314,986
                
                
                304,382Commitments
                    and contingenciesStockholders'
                    EquityCommon
                    stock, $.01 par value; 25,000,000 shares authorized;7,604,375
                    shares issued and outstanding
                
                
                76
                
                
                76Preferred
                    stock, $.01 par value; 1,000,000 shares authorized;no
                    shares issued or outstanding
                
                
                -
                
                
                -Paid-in
                    capital
                
                
                33,189
                
                
                33,157Retained
                    earnings
                
                
                22,897
                
                
                22,588Unearned
                    ESOP shares
                
                
                (2,733
                )
                
                (2,733
                )Unearned
                    stock awards
                
                
                (1,567
                )
                
                (1,551
                )Treasury
                    stock
                
                
                (102
                )
                
                (122
                )Accumulated
                    other comprehensive loss
                
                
                (593
                )
                
                (451
                )Total
                    stockholders' equity
                
                
                51,167
                
                
                50,964**Total
                    liabilities and stockholders' equity**
                $
                366,153
                
                $
                355,346






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 3







**Consolidated
        Statements of Income**
 *(In
        thousands, except share data)*
  **Three
                    Months Ended****March
                    31,****2006**
                
                **2005***(Unaudited)***Interest
                    and dividend income**Interest
                    on loans
                
                $
                4,030
                
                $
                3,029Interest
                    and dividends on investments and deposits
                
                
                757
                
                
                403Total
                    interest income
                
                
                4,787
                
                
                3,432**Interest
                    expense**Interest
                    on deposits
                
                
                1,273
                
                
                588Interest
                    on borrowed funds
                
                
                643
                
                
                225Total
                    interest expense
                
                
                1,916
                
                
                813**Net
                    interest income**
                
                
                2,871
                
                
                2,619**Provision
                    for loan losses**
                
                
                62
                
                
                15**Net
                    interest income after provision for loan losses**
                
                
                2,809
                
                
                2,604**Noninterest
                    income**Fees
                    for services
                
                
                311
                
                
                209Income
                    from bank owned life insurance
                
                
                76
                
                
                48Income
                    from investment advisory services, net
                
                
                34
                
                
                63Other
                    income
                
                
                29
                
                
                20Total
                    noninterest income
                
                
                450
                
                
                340**Noninterest
                    expense**Compensation,
                    taxes and benefits
                
                
                1,633
                
                
                1,390Office
                    occupancy
                
                
                400
                
                
                397Computer
                    processing
                
                
                142
                
                
                144Advertising
                
                
                125
                
                
                131Gain
                    on foreclosed real estate, net
                
                
                (2
                )
                
                (37
                )Other
                    expenses
                
                
                357
                
                
                355Total
                    noninterest expense
                
                
                2,655
                
                
                2,380**Income
                    before provision****for
                    income taxes**
                
                
                604
                
                
                564**Provision
                    for income taxes**
                
                
                134
                
                
                161**Net
                    Income**
                
                $
                470
                
                $
                403**Earnings
                    per common share - Basic and Diluted**
                $
                0.06
                
                $
                0.06






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 4







**Consolidated
        Statements of Cash Flows**
 *(In
        thousands)*
 **Three
                    Months Ended****March
                    31,****2006**
                
                **2005****Cash
                    flows from operating activities**
                
                *(Unaudited**)*Net
                    income
                
                $
                470
                
                $
                403Adjustments
                    to reconcile net income to cash provided by operating
                    activities:Provision
                    for loan losses
                
                
                62
                
                
                15Depreciation
                    and amortization expense
                
                
                155
                
                
                168Stock
                    based compensation
                
                
                162
                
                
                -Provision
                    for deferred taxes
                
                
                -
                
                
                (69
                )Net
                    gain on sale of real estate owned
                
                
                (4
                )
                
                (46
                )Increase
                    in accrued income receivable
                
                
                (11
                )
                
                (158
                )Decrease
                    in deferred loan fees
                
                
                (12
                )
                
                (10
                )Increase
                    in bank owned life insurance asset
                
                
                (76
                )
                
                (48
                )Decrease
                    in other assets
                
                
                28
                
                
                62Decrease
                    in other liabilities
                
                
                (1,867
                )
                
                (288
                )**Net
                    cash (used) provided by operating activities**
                
                
                (1,093
                )
                
                29**Cash
                    flows from investing activities**Proceeds
                    from maturities and repayments of available-for-sale
                    securities
                
                
                4,861
                
                
                740Proceeds
                    from maturities of held-to-maturity securities
                
                
                285
                
                
                190Purchase
                    of available-for-sale securities
                
                
                (9,247
                )
                
                (9,855
                )Purchase
                    of Federal Home Loan Bank stock
                
                
                (282
                )
                
                -Loan
                    originations net of principal payments
                
                
                (3,860
                )
                
                (6,801
                )Proceeds
                    from the sale of foreclosed real estate
                
                
                51
                
                
                113Proceeds
                    from sale of property and equipment
                
                
                2
                
                
                -Purchase
                    of property and equipment
                
                
                (467
                )
                
                (875
                )**Net
                    cash used by investing activities**
                
                
                (8,657
                )
                
                (16,488
                )**Cash
                    flows from financing activities**Net
                    change in time deposits
                
                
                9,804
                
                
                3,770Net
                    change in other deposit accounts
                
                
                4,504
                
                
                (2,628
                )Advances
                    from Federal Home Loan Bank
                
                
                18,650
                
                
                39,545Repayment
                    of advances from Federal Home Loan Bank
                
                
                (19,203
                )
                
                (21,447
                )Net
                    change in mortgagors' escrow accounts
                
                
                (1,414
                )
                
                (1,330
                )Dividends
                    paid to stockholders
                
                
                (157
                )
                
                (125
                )**Net
                    cash provided by financing activities**
                
                
                12,184
                
                
                17,785Increase
                    in cash and cash equivalents
                
                
                2,434
                
                
                1,326Cash
                    and cash equivalents at beginning of period
                
                
                8,951
                
                
                7,575**Cash
                    and cash equivalents at end of period**
                
                $
                11,385
                
                $
                8,901Cash
                    paid during the period for:Interest
                
                $
                1,923
                
                $
                818Income
                    taxes
                
                
                -
                
                
                68






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 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 those of
        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 of only 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 months ended March 31, 2006 are not necessarily indicative of the
        results that may be expected for the year ending December 31, 2006. These
        financial statements should be read in conjunction with the consolidated
        financial statements and notes thereto included in the Company’s 2005 Annual
        Report to Stockholders.
 
 The
        year-end condensed balance sheet data was derived from audited financial
        statements, but does not include all disclosures required by GAAP.
  
 **NOTE
        2 - EARNINGS PER SHARE**
 
 Basic
        net
        income per common share is calculated by dividing the net income available
        to
        common stockholders by the weighted-average number of common shares outstanding
        during the period. Diluted net income per common share is computed in a manner
        similar to basic net income per common share except that the weighted-average
        number of common shares outstanding is increased to include the incremental
        common shares (as computed using the treasury stock method) that would have
        been
        outstanding if all potentially dilutive common stock equivalents were issued
        during the period. The Company's common stock equivalents relate solely to
        stock
        option and restricted stock awards. Anti-dilutive shares are common stock
        equivalents with weighted-average exercise prices in excess of the
        weighted-average market value for the periods presented. For the three months
        ended March 31, 2006, anti-dilutive options excluded from the calculations
        totaled 361,080 options (with an exercise price of $11.10). There were no
        options issued as of March 31, 2005. Unallocated common shares held by the
        ESOP
        are not included in the weighted-average number of common shares outstanding
        for
        purposes of calculating either basic or diluted net income per common
        share.


**Three
                  Months Ended****March
                  31,****2006**
              
              **2005**Net
                  income
              
              $
              470
              
              $
              403Weighted-average
                  common shares outstanding:Basic
              
              
              7,331,084
              
              
              7,311,195Effect
                  of dilutive stock optionsand
                  restrictive stock awards
              
              
              -
              
              
              -Diluted
              
              
              7,331,084
              
              
              7,311,195Net
                  income per common share:Basic
              
              $
              0.06
              
              $
              0.06Diluted
              
              $
              0.06
              
              $
              0.06






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 6




**NOTE
        3 - COMPREHENSIVE INCOME**
 
 Statement
        of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
        Income," establishes standards for disclosure of comprehensive income, which
        includes net income and any changes in equity from non-owner sources that
        are
        not recorded in the income statement (such as changes in the net unrealized
        gain/loss on available-for-sale securities). The purpose of reporting
        comprehensive income is to report 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 one source
        of other comprehensive income is the net unrealized gain (loss) on its
        available-for-sale securities.
 **Three
                    Months Ended****March
                    31,****2006**
                
                **2005***(In
                    thousands)*Net
                    income
                
                $
                470
                
                $
                403Net
                    unrealized loss onsecurities
                    available for saleduring
                    the period, net of tax
                
                
                (142
                )
                
                (204
                )**Total
                    Comprehensive Income**
                
                $
                328
                
                $
                199




**NOTE
        4 -** **CRITICAL
        ACCOUNTING POLICIES**
 
 The
        Company considers accounting policies involving significant judgments and
        assumptions by management that have, or could have, a material impact on
        the
        carrying value of certain assets or on income to be critical accounting
        policies. The Company considers the following to be critical accounting
        policies: allowance for loan losses and deferred income taxes.
 
 ***Allowance
        for Loan Losses*** **.** Determining the amount of the allowance for loan losses necessarily involves
        a
        high degree of judgment. Management reviews the level of the allowance on
        a
        quarterly basis, at a minimum, and establishes the provision for loan losses
        based on the composition of the loan portfolio, delinquency levels, loss
        experience, economic conditions, and other factors related to the collectibility
        of the loan portfolio.
 
 Although
        the Company believes that it uses the best information available to establish
        the allowance for loan losses, future additions to the allowance may be
        necessary based on estimates that are susceptible to change as a result of
        changes in economic conditions and other factors. The Company engages an
        independent review of its commercial loan portfolio annually and adjusts
        its
        loan ratings based upon this review. In addition, the Company’s regulatory
        authorities, as an integral part of their examination process, periodically
        review the Company’s allowance for loan losses. Such an agency may require the
        Company to recognize adjustments to the allowance based on its judgments
        about
        information available to it at the time of its examination.
 
 ***Deferred
        Income Taxes*** **.** The
        Company uses the asset and liability method of accounting for income taxes.
        Under this method, deferred tax assets and liabilities are recognized for
        the
        future tax consequences attributable to differences between the financial
        statement carrying amounts of existing assets and liabilities and their
        respective tax bases. If current available information raises doubt as to
        the
        realization of the deferred tax assets, a valuation allowance is established.
        Deferred tax assets and liabilities are measured using enacted tax rates
        expected to apply to taxable income in the years in which those temporary
        differences are expected to be recovered or settled. The Company exercises
        significant judgment in evaluating the amount and timing of recognition of
        the
        resulting tax liabilities and assets, including projections of future taxable
        income. These judgments and estimates are reviewed continually as regulatory
        and
        business factors change.




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 7




**NOTE
        5 -** **EQUITY
        INCENTIVE PLAN**
 
 At
        the
        annual meeting of stockholders on May 5, 2005, stockholders of the Company
        approved the Naugatuck Valley Financial Corporation 2005 Equity Incentive
        Plan
        (the “Incentive Plan”). Under the Incentive Plan, the Company may grant up to
        372,614 stock options and 149,045 shares of restricted stock to its employees,
        officers and directors for an aggregate amount of up to 521,659 shares of
        the
        Company’s common stock for issuance upon the grant or exercise of awards. Both
        incentive stock options and non-statutory stock options may be granted under
        the
        Incentive Plan.
 
 On
        July
        26, 2005, the Company awarded 354,580 options to purchase the Company’s common
        stock and 139,712 shares of restricted stock. Stock option awards were granted
        with an exercise price equal to the market price of the Company’s stock at the
        date of grant ($11.10) with maximum term of ten years. On
        March
        21, 2006, the Company awarded an additional 6,500 options to purchase the
        Company’s common stock and 1,500 additional shares of restricted stock. The
        additional stock option awards were granted with an exercise price equal
        to
        those granted on July 26, 2005 ($11.10) with a maximum term of ten years.
        Both
        stock options and restricted stock awards vest at 20% per year beginning
        on the
        first anniversary of the date of grant.
 
 Stock
        options and restricted stock awards are considered common stock equivalents
        for
        the purpose of computing earnings per share on a diluted basis.
 
 The
        Company adopted Financial Accounting Standards Board’s SFAS No.123(R), “Share
        Based Payment”, beginning with the period ended September 30, 2005. In
        accordance with Statement No.123 (R), the Company has recorded share-based
        compensation expense related to outstanding stock option and restricted stock
        awards based upon the fair value at the date of grant over the vesting period
        of
        such awards on a straight-line basis. The fair value of each restricted stock
        allocation, based on the market price at the date of grant, is recorded to
        unearned stock awards. Compensation expenses related to unearned restricted
        shares are amortized to compensation, taxes and benefits expense over the
        vesting period of the restricted stock awards. The fair value of each stock
        option award is estimated on the date of grant using the Black-Scholes option
        pricing method which includes several assumptions such as volatility, expected
        dividends, expected term and risk-free rate for each stock option award.
        The
        Company recorded share-based compensation expense of $109,376 for the three
        months ended March 31, 2006 in connection with the stock option and restricted
        stock awards.
 
 The
        weighted-average fair value of stock options granted and the assumptions
        used in
        the Black-Scholes option pricing method are shown in the following table.


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




**NOTE
        6 - DIVIDENDS**
 
 On
        January 17, 2006, the Company's Board of Directors declared a cash dividend
        of
        $0.05 per outstanding common share, which was paid on March 1, 2006, to
        stockholders of record as of the close of business on February 6, 2006.
        Naugatuck Valley Mutual Holding Company, the Company's mutual holding company
        parent, waived receipt of its dividend upon non-objection from the Office
        of
        Thrift Supervision ("OTS").






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**Item
        2. Management’s Discussion and Analysis of Financial Condition and
        Results of Operations.**
 
 This
        discussion should be read in conjunction with the Company’s Consolidated
        Financial Statements for the year ended December 31, 2005 included in the
        Company’s 2005 Annual Report to Stockholders.
 
 **Forward-Looking
        Statements**
 
 This
        report contains forward-looking statements that are based on assumptions
        and may
        describe future plans, strategies and expectations of the Company. These
        forward-looking statements are generally identified by use of the words
“believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar
        expressions. The Company’s ability to predict results or the actual effect of
        future plans or strategies is inherently uncertain. Factors which could have
        a
        material adverse effect on the operations of the Company and its subsidiaries
        include, but are not limited to, changes in interest rates, national and
        regional economic conditions, legislative and regulatory changes, monetary
        and
        fiscal policies of the U.S. government, including policies of the U.S. Treasury
        and the Federal Reserve Board, the quality and composition of the loan or
        investment portfolios, demand for loan products, deposit flows, competition,
        demand for financial services in the Company’s market area, changes in real
        estate market values in the Company’s market area, and changes in relevant
        accounting principles and guidelines. Additional factors are discussed in
        the
        Company’s 2005 Annual Report to Stockholders 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 March 31, 2006 and December 31,
        2005**
 
 Total
        assets increased by $10.8 million, or 3.0% to $366.2 million during the period
        from December 31, 2005 to March 31, 2006, primarily due to an increase in
        loans
        of $3.8 million, an increase in investments of $3.9 million and an increase
        in
        cash and cash equivalents of $2.4 million. The increases in loans and
        investments were primarily funded by increases in deposits. The increase
        in
        loans primarily reflects an increase in our one-to-four family mortgages
        and
        home equity loans.
 
 Total
        liabilities were $315.0 million at March 31, 2006 compared to $304.4 million
        at
        December 31, 2005. Deposits at March 31, 2006 increased $14.3 million, or
        5.9%,
        over December 31, 2005 due to increased advertising and more aggressive pricing.
        Advances from the Federal Home Loan Bank of Boston decreased from $57.1 million
        to $56.5 million. The increases in deposits were used primarily to fund loans
        and investments and, to a lesser extent, repay advances and fund disbursements
        from mortgage tax escrow accounts.
 
 Total
        stockholders’ equity increased from $51.0 million at December 31, 2005 to $51.2
        million at March 31, 2006. The increase in equity was due to net income of
        $470,000 for the three month period, partially offset by dividends of $157,000
        paid to stockholders, a net increase to the unrealized loss on
        available-for-sale securities of $142,000 and $32,000 in capital adjustments
        related to the Company’s 2005 Equity Incentive Plan.
 
  **Comparison
        of Operating Results For the Three Months Ended March 31, 2006 and
        2005**
 
 ***General*** .
        For the
        three months ended March 31, 2006, the Company had net income of $470,000
        compared to $403,000 for the three months ended March 31, 2005. The increase
        was
        primarily due to an increase in net interest income and an increase in
        noninterest income which was partially offset by an increase in noninterest
        expense.
 
 ***Net
        Interest Income*** **.** **** Net
        interest income increased $252,000, or 9.6%, to $2.9 million for the three
        months ended March 31, 2006. The increase in net interest income during the
        three month period was the result of a 34.0% increase in the average balance
        of
        interest earning assets, along with an increase in the average rate earned
        on
        these assets of 23 basis points over the 2005 rates. The increases in interest
        income were partially offset by an increase in interest expense. Interest
        expense increased by 135.7% due to rising rates on deposits and borrowings
        along
        with increases in the average balances of deposits and
        borrowings.
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            to Table of Contents
 9
  The
        following table summarizes changes in interest income and interest expense
        for
        the three months ended March 31, 2006 and 2005.




**Three
                  months****Ended
                  March 31,****2006**
              
              **2005**
              
              **%
                  change***(Dollars
                  in thousands)***Interest
                  income:**Loans
              
              $
              4,030
              
              $
              3,029
              
              
              33.05
              %Fed
                  Funds sold
              
              
              10
              
              
              7
              
              
              42.86
              %Investment
                  securities
              
              
              704
              
              
              375
              
              
              87.73
              %Federal
                  Home Loan Bank stock
              
              
              43
              
              
              21
              
              
              104.76
              %Total
                  interest income
              
              
              4,787
              
              
              3,432
              
              
              39.48
              %**Interest
                  expense:**Certificate
                  accounts
              
              
              1,075
              
              
              457
              
              
              135.23
              %Regular
                  savings accounts
              
              
              116
              
              
              45
              
              
              157.78
              %Checking
                  and NOW accounts
              
              
              41
              
              
              11
              
              
              272.73
              %Money
                  market savings accounts
              
              
              41
              
              
              75
              
              
              -45.33
              %Total
                  interest-bearing deposits
              
              
              1,273
              
              
              588
              
              
              116.50
              %FHLB
                  advances
              
              
              641
              
              
              224
              
              
              186.16
              %Other
                  borrowings
              
              
              2
              
              
              1
              
              
              100.00
              %Total
                  interest expense
              
              
              1,916
              
              
              813
              
              
              135.67
              %Net
                  interest income
              
              $
              2,871
              
              $
              2,619
              
              
              9.62
              %




The
        following table summarizes average balances and average yields and costs
        for the
        three months ended March 31, 2006 and 2005.
 **Three
                    months ended March 31,****2006**
                
                
                **2005****Average**
                
                **Yield/**
                
                **Average**
                
                **Yield/****Balance**
                
                **Cost**
                
                **Balance**
                
                **Cost***(Dollars
                    in thousands)***Interest-earning
                    assets**Loans
                
                $
                261,258
                
                
                6.17
                %
                
                $
                206,050
                
                
                5.88
                %Fed
                    Funds sold
                
                
                804
                
                
                4.98
                %
                
                
                1,038
                
                
                2.70
                %Investment
                    securities
                
                
                66,139
                
                
                4.26
                %
                
                
                38,232
                
                
                3.92
                %Federal
                    Home Loan Bank stock
                
                
                3,320
                
                
                5.18
                %
                
                
                2,180
                
                
                3.85
                %Total
                    interest-earning assets
                
                $
                331,521
                
                
                5.78
                %
                
                $
                247,500
                
                
                5.55
                %**Interest-bearing
                    liabilities**Certificate
                    accounts
                
                $
                127,469
                
                
                3.37
                %
                
                $
                82,272
                
                
                2.22
                %Regular
                    savings accounts & escrow
                
                
                53,856
                
                
                0.86
                %
                
                
                45,946
                
                
                0.39
                %Checking
                    and NOW accounts
                
                
                47,061
                
                
                0.35
                %
                
                
                34,919
                
                
                0.13
                %Money
                    market savings accounts
                
                
                18,752
                
                
                0.87
                %
                
                
                29,652
                
                
                1.01
                %Total
                    interest-bearing deposits
                
                
                247,138
                
                
                2.06
                %
                
                
                192,789
                
                
                1.22
                %FHLB
                    advances
                
                
                59,067
                
                
                4.34
                %
                
                
                24,117
                
                
                3.72
                %Other
                    borrowings
                
                
                187
                
                
                4.28
                %
                
                
                90
                
                
                2.04
                %Total
                    interest-bearing liabilities
                
                $
                306,392
                
                
                2.50
                %
                
                $
                216,996
                
                
                1.50
                %
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 10




Interest
        and dividend income increased $1.4 million, or 39.5%, for the three months
        ended
        March 31, 2006 as a result of an increase in the average balance of
        interest-earning assets to $331.5 million from $247.5 million along with
        an
        increase in the average yield on interest-earning assets from 5.55% to
        5.78%.
 
 Interest
        expense increased by $1.1 million for the three months ended March 31, 2006,
        due
        to an increase of $54.3 million in the average balance of interest-bearing
        deposits along with an increase in the average cost of these deposits from
        1.22%
        to 2.06%. The average balance of Federal Home Loan Bank advances also increased
        by $34.9 million with a 62 basis point increase in the average cost from
        3.72%
        to 4.34%.
  ***Provision
        for Loan Losses*** **.** The
        following table summarizes the activity in the allowance for loan losses
        and
        provision for loan losses for the three months ended March 31, 2006 and
        2005.
 **Three
                    Months Ended****March
                    31,****2006**
                
                **2005***(In
                    thousands)*Allowance
                    at beginning of period
                
                $
                1,878
                
                $
                1,829Provision
                    for loan losses
                
                
                62
                
                
                15Charge-offs
                
                
                -
                
                
                (3
                )Recoveries
                
                
                -
                
                
                1Net
                    charge-offs
                
                
                -
                
                
                (2
                )Allowance
                    at end of period
                
                $
                1,940
                
                $
                1,842
  The
          Company recorded a provision for loan losses of $62,000 for the three month
          period ended March 31, 2006, compared to a provision of $15,000 for the
          three
          month period ended March 31, 2005. The increased provision in the 2006
          period is
          due to the increasing size of the loan portfolio and a change in the mix
          of the
          portfolio towards commercial loans which are riskier than one-to-four family
          loans.
 
 The
          following table provides information with respect to the Company’s nonperforming
          assets at the dates indicated. The Company did not have any troubled debt
          restructurings or any accruing loans past due 90 days or more at the dates
          presented.


**At
                  March 31,**
              
              **At
                  December 31,****2006**
              
              **2005**
              
              **%
                  change***(Dollars
                  in thousands)*Nonaccrual
                  loans
              
              $
              402
              
              $
              294
              
              
              36.73
              %Real
                  estate owned
              
              
              -
              
              
              47
              
              
              -100.00
              %Total
                  nonperforming assets
              
              $
              402
              
              $
              341
              
              
              17.89
              %Total
                  nonperforming loans to total loans
              
              
              0.15
              %
              
              0.11
              %
              
              36.36
              %Total
                  nonperforming loans to total assets
              
              
              0.11
              %
              
              0.08
              %
              
              37.50
              %Total
                  nonperforming assets to total assets
              
              
              0.11
              %
              
              0.10
              %
              
              10.00
              %
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 11
   ***Noninterest
          Income*** **.** The
          following table summarizes noninterest income for the three months ended
          March
          31, 2006 and 2005.
 **Three
                    Months****Ended
                    March 31,****2006**
                
                **2005**
                
                **%
                    Change***(Dollars
                    in thousands)*Fees
                    for services
                
                $
                311
                
                $
                209
                
                
                48.80
                %Income
                    from bank owned life insurance
                
                
                76
                
                
                48
                
                
                58.33
                %Income
                    from investment advisory services
                
                
                34
                
                
                63
                
                
                -46.03
                %Other
                    income
                
                
                29
                
                
                20
                
                
                45.00
                %Total
                
                $
                450
                
                $
                340
                
                
                32.35
                %
  Noninterest
          income increased 32.4% during the three months ended March 31, 2006 as
          a result
          of a $102,000 increase in fees for services, primarily related to checking
          account fees, combined with an increase in income from investments in Bank
          Owned
          Life Insurance of 58.3% over the 2005 period. Checking account fees increased
          due to new product offerings. These increases were partially offset by
          a
          decrease of $29,000 in income from investment advisory services.
  ***Noninterest
          Expense*** **.** The
          following table summarizes noninterest expense for the three months ended
          March
          31, 2006 and 2005.
 **Three
                      Months****Ended
                      March 31,****2006**
                  
                  **2005**
                  
                  **%
                      Change***(Dollars
                      in thousands)*Compensation,
                      taxes and benefits
                  
                  $
                  1,633
                  
                  $
                  1,390
                  
                  
                  17.48
                  %Office
                      occupancy
                  
                  
                  400
                  
                  
                  397
                  
                  
                  0.76
                  %Computer
                      processing
                  
                  
                  142
                  
                  
                  144
                  
                  
                  -1.39
                  %Advertising
                  
                  
                  125
                  
                  
                  131
                  
                  
                  -4.58
                  %Gain
                      on foreclosed real estate, net
                  
                  
                  (2
                  )
                  
                  (37
                  )
                  
                  -94.59
                  %Other
                      expenses
                  
                  
                  357
                  
                  
                  355
                  
                  
                  0.56
                  %Total
                  
                  $
                  2,655
                  
                  $
                  2,380
                  
                  
                  11.55
                  %  Noninterest
              expense increased in the three months ended March 31, 2006 primarily
              as a result
              of a $243,000 increase in compensation costs over the 2005 period.
              The increase
              in compensation costs were primarily due to additional lending staff
              and
              expenses related to the awards made under the equity incentive plan
              previously
              approved by shareholders. The increase in compensation related costs
              were
              partially offset by small decreases in computer processing costs and
              advertising.
 
  **Liquidity
              and Capital Resources**
 
 Liquidity
              is the ability to meet current and future short-term financial obligations.
              The
              Company’s primary sources of funds consist of deposit inflows, loan repayments,
              maturities and sales of investment securities and advances from the
              Federal Home
              Loan Bank of Boston. While maturities and scheduled amortization of
              loans and
              securities are predictable sources of funds, deposit flows and mortgage
              prepayments are greatly influenced by general interest rates, economic
              conditions and competition.
 
 Each
              quarter the Company projects liquidity availability and demands on
              this
              liquidity for the next 90 days. The Company regularly adjusts its investments
              in
              liquid assets based upon our assessment of (1) expected loan demand,
              (2) expected deposit flows, (3) yields available on interest-earning
              deposits and securities, and (4) the objectives of
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                  to Table of Contents
 12
  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.
 
 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 March 31, 2006,
              cash and
              cash equivalents totaled $11.4 million, including federal funds of
              $3.4 million.
              Securities classified as available-for-sale, which provide additional
              sources of
              liquidity, totaled $62.2 million at March 31, 2006. At March 31, 2006,
              the
              Company had the ability to borrow a total of $115.4 million from the
              Federal
              Home Loan Bank of Boston, of which $56.5 million was outstanding. At
              March 31,
              2006, the Company had arranged overnight lines of credit of $2.5 million
              with
              the Federal Home Loan Bank of Boston. The Company had no overnight
              advances
              outstanding with the Federal Home Loan Bank of Boston. In addition,
              at March 31,
              2006, the Company had the ability to borrow $2.5 million from a correspondent
              bank. The Company had no advances outstanding on these lines at March
              31,
              2006.
 
 At
              March
              31, 2006, the Company had commitments of $19.4 million in unused home
              equity
              lines of credit, $4.0 million in unadvanced commercial lines, $2.9
              million in
              mortgage commitments, $6.3 million in commercial loan commitments,
              $15.4 million
              in unadvanced construction mortgage commitments, $2.4 million in letters
              of
              credit and $94,000 in overdraft line of credit availability. Certificates
              of
              deposit due within one year of March 31, 2006 totaled $88.0 million,
              or 34.5% 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
              March 31,
              2007. Based on past experience, however, the Company believes that
              a significant
              portion of our certificates of deposit will remain with us. The Company
              has the
              ability to attract and retain deposits by adjusting the interest rates
              offered.
 
 Historically,
              the Company has remained highly liquid, with our liquidity position
              increasing
              substantially over the past two fiscal years. The Company is not aware
              of any
              trends and/or demands, commitments, events or uncertainties that could
              result in
              a material decrease in liquidity. The Company expects that all of our
              liquidity
              needs, including the contractual commitments stated above, the estimated
              costs
              of our branch expansion plans and increases in loan demand can be met
              by our
              currently available liquid assets and cash flows. In the event loan
              demand was
              to increase at a pace greater than expected, or any unforeseen demand
              or
              commitment were to occur, we could access our borrowing capacity with
              the
              Federal Home Loan Bank of Boston. The Company expects that our currently
              available liquid assets and our ability to borrow from the Federal
              Home Loan
              Bank of Boston would be sufficient to satisfy our liquidity needs without
              any
              material adverse effect on our liquidity.
 
 The
              Company’s primary investing activities are the origination of loans and the
              purchase of securities. For the three months ended March 31, 2006 the
              Company
              originated $14.1 million of loans, including renewals and refinances,
              and
              purchased $9.2 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 $5.1 million and an increase of deposits
              of $14.3
              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
              $14.3 million for the three months ended March 31, 2006. Deposit flows
              are
              affected by the overall level of interest rates, the interest rates
              and products
              offered by us and our local competitors and other factors. The Company
              generally
              manages the pricing of our 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 of $553,000 for the
              three months
              ended March 31, 2006. The increases in deposit accounts primarily funded
              our
              investing and lending activities and, to a lesser extent, repayment
              of Federal
              Home Loan Bank advances.
 
 The
              Company is not subject to separate regulatory capital requirements.
              At March 31,
              2006, the Bank was subject to the regulatory capital requirements of
              the Office
              of Thrift Supervision, including a risk-based capital measure. The
              risk-based
              capital guidelines include both a definition of capital and a framework
              for
              calculating risk-weighted assets by assigning balance sheet assets
              and
              off-balance sheet items to broad risk categories. At March 31, 2006,
              the Bank
              exceeded all of its regulatory capital requirements. The Bank is considered
              “well capitalized” under regulatory guidelines.
 
 
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                  to Table of Contents
 13
  **Off-Balance
              Sheet Arrangements**
 
 In
              the
              normal course of operations, the Company engages in a variety of financial
              transactions that, in accordance with generally accepted accounting
              principles,
              are not recorded in our financial statements. These transactions involve,
              to
              varying degrees, elements of credit, interest rate, and liquidity risk.
              Such
              transactions are used primarily to manage customers’ requests for funding and
              take the form of loan commitments, unused lines of credit, amounts
              due on
              construction loans, amounts due on commercial loans, commercial letters
              of
              credit and commitments to sell loans.
 
 For
              the
              three months ended March 31, 2006, the Company did not engage in any
              off-balance-sheet transactions reasonably likely to have a material
              effect on
              its financial condition, results of operations or cash flows.
 
 **Item
              3. Quantitative and Qualitative Disclosures About Market
              Risk.**
 
 **Qualitative
              Aspects of Market Risk.** **** The
              Company’s most significant form of market risk is interest rate risk. The
              Company manages the interest rate sensitivity of its interest-bearing
              liabilities and interest-earning assets in an effort to minimize the
              adverse
              effects of changes in the interest rate environment. Deposit accounts
              typically
              react more quickly to changes in market interest rates than mortgage
              loans
              because of the shorter maturities of deposits. As a result, sharp increases
              in
              interest rates may adversely affect the Company’s earnings while decreases in
              interest rates may beneficially affect the Company’s earnings. To reduce the
              potential volatility of the Company’s earnings, the Company has sought to
              improve the match between assets and liability maturities (or rate
              adjustment
              periods), while maintaining an acceptable interest rate spread, by
              originating
              adjustable-rate mortgage loans for retention in the loan portfolio,
              variable-rate home equity lines and variable-rate commercial loans
              and by
              purchasing variable-rate investments and investments with expected
              maturities of
              less than 10 years. The Company currently does not participate in hedging
              programs, interest rate swaps or other activities involving the use
              of
              off-balance sheet derivative financial instruments.
 
 The
              Bank’s Asset/Liability Committee communicates, coordinates and controls
              all
              aspects of asset/liability management. The committee establishes and
              monitors
              the volume and mix of assets and funding sources with the objective
              of managing
              assets and funding sources.
 
 **Quantitative
              Aspects of Market Risk.** The Bank
              uses an interest rate sensitivity analysis prepared by the Office of
              Thrift
              Supervision to review its level of interest rate risk. This analysis
              measures
              interest rate risk by computing changes in net portfolio value of the
              Bank’s
              cash flows from assets, liabilities and off-balance sheet items in
              the event of
              a range of assumed changes in market interest rates. Net portfolio
              value
              represents the market value of portfolio equity and is equal to the
              market value
              of assets minus the market value of liabilities, with adjustments made
              for
              off-balance sheet items. This analysis assesses the risk of loss in
              market risk
              sensitive instruments in the event of a sudden and sustained 100 to
              300 basis
              point increase or 100 to 200 basis point decrease in market interest
              rates with
              no effect given to any steps that we might take to counter the effect
              of that
              interest rate movement. The Bank measures interest rate risk by modeling
              the
              changes in net portfolio value over a variety of interest rate scenarios.
              The
              following table, which is based on information that the Bank provides
              to the
              Office of Thrift Supervision, presents the change in the Bank’s net portfolio
              value at December 31, 2005 (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 March 31, 2006 is consistent with the table below.
 Net
                          Portfolio Value as % ofBasis
                          Point ("bp")
                      
                      Net
                          Portfolio Value
                      
                      Present
                          Value of AssetsChange
                          in Rates
                      
                      $
                          Amount
                      
                      $
                          Change
                      
                      %
                          Change
                      
                      NPV
                          Ratio
                      
                      Change*(Dollars
                          in thousands)*300
                          bp
                      
                      
                      34,847
                      
                      
                      (17,063
                      )
                      
                      -33
                      %
                      
                      10.39
                      %
                      
                      -4.07
                      %200
                      
                      
                      40,579
                      
                      
                      (11,331
                      )
                      
                      -22
                      %
                      
                      11.83
                      %
                      
                      -2.63
                      %100
                      
                      
                      46,417
                      
                      
                      (5,493
                      )
                      
                      -11
                      %
                      
                      13.22
                      %
                      
                      -1.24
                      %0
                      
                      
                      51,910
                      
                      
                      -
                      
                      
                      -
                      
                      
                      14.46
                      %
                      
                      -(100)
                      
                      
                      55,471
                      
                      
                      3,561
                      
                      
                      7
                      %
                      
                      15.20
                      %
                      
                      0.74
                      %(200)
                      
                      
                      54,958
                      
                      
                      3,048
                      
                      
                      6
                      %
                      
                      14.98
                      %
                      
                      0.52
                      %
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 14
  
 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 their evaluation, the principal executive officer
        and principal financial officer concluded that, as of the end of the period
        covered by this report, the Company’s disclosure controls and procedures were
        effective for the purpose of ensuring that the information required to be
        disclosed in the reports that the Company files or submits under the Exchange
        Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded,
        processed, summarized and reported within the time periods specified in the
        SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s
        management, including its principal executive and principal financial officers,
        as appropriate to allow timely decisions regarding required
        disclosure.
 
 
  
 
 
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              to Table of Contents
 15
 
 **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.** There
        have been no material changes with respect to the Risk Factors disclosed
        in the  Company’s
        Annual Report on Form 10-K for the fiscal year ended December 31,
        2005.
 
 **Item
        2.- Unregistered Sales of Equity Securities and Use of
        Proceeds** .
        Not
        applicable
 
 **Item
        3.- Defaults Upon Senior Securities.** Not
        applicable
 
 **Item
        4. - Submission of Matters to a Vote of Security Holders.** Not
        applicable
 
 **Item
        5. - Other Information.** Not
        applicable
 
 **Item
        6. - Exhibits.**
 
 **Exhibits** -
  3.1  Charter
        of Naugatuck Valley Financial Corporation (1)
  3.2  Bylaws
        of
        Naugatuck Valley Financial Corporation (1)
  4.1  Specimen
        Stock Certificate of Naugatuck Valley Financial Corporation (2)
  31.1 Rule
        13a-14(a)/15d-14(a) Certification.
  31.2  Rule
        13a-14(a)/15d-14(a) Certification.
  32  Section
        1350 Certifications.
 ____________________
 (1)
        Incorporated by reference to the Company’s Form 10-Q for the three months ended
        September 30, 2004.
 
 (2)
        Incorporated herein by reference to the Exhibits to the Company’s Registration
        Statement on Form S-1, as amended, initially filed on June 18,
        2004.
 
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              to Table of Contents
 16
 
 
 **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:
              May
                  8, 2006
              
              by:
              /s/
                  John C. RomanJohn
                  C. RomanPresident
                  and Chief Executive OfficerDate:
              May
                  8, 2006
              
              by:
              /s/
                  Lee R. SchlesingerLee
                  R. SchlesingerVice
                  President and Treasurer(Principal
                  Financial Officer)
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 17