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, 2009





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 has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such
files).  Yes o   No
o





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





Large
      Accelerated Filer  o
            Accelerated
      Filer  oNon-accelerated
      Filer  o
            Smaller
      Reporting Company  x(Do
      not check if a smaller reporting company)





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 8, 2009, there were 7,026,813
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,
      2009 and December 31, 2008
                3Consolidated Statements of Income for the three months ended
      March 31, 2009 and 2008
                4Consolidated Statements of Cash Flows for the three months
      ended March 31, 2009 and 2008
                5Notes to Unaudited Consolidated Financial
      Statements
                6Item 2.
                Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                15Liquidity and Capital Resources
                19Item 3.
                Quantitative and Qualitative Disclosures About Market
      Risk
                21Item 4.
                Controls and Procedures
                22Part II.
                Other InformationItem 1.
                Legal Proceedings
                22Item 1A.
                Risk Factors
                22Item 2.
                Unregistered Sales of Equity Securities and Use of
      Proceeds
                22Item 3.
                Defaults Upon Senior Securities
                23Item 4.
                Submission of Matters to a Vote of Security
      Holders
                23Item 5.
                Other Information
                23Item 6.
                Exhibits
                23SignaturesExhibits








Table of Contents


Part I - FINANCIAL INFORMATION








Item 1.  Financial Statements (Unaudited)



















2
 Table of Contents





Consolidated
Statements of Financial Condition


(In
thousands, except share data)


March
      31,
                                        
                                        
                                        December
      31,2009
                                        
                                        
                                        2008(Unaudited)ASSETSCash
      and due from depository institutions
                                        
                                        $
                                        6,456
                                        
                                        
                                        $
                                        8,214Investment
      in federal funds
                                        
                                        
                                        11,728
                                        
                                        
                                        
                                        33Investment
      securities available for sale
                                        
                                        
                                        53,185
                                        
                                        
                                        
                                        63,844Loans
      receivable, net
                                        
                                        
                                        440,010
                                        
                                        
                                        
                                        431,976Accrued
      income receivable
                                        
                                        
                                        1,974
                                        
                                        
                                        
                                        2,099Premises
      and equipment, net
                                        
                                        
                                        10,385
                                        
                                        
                                        
                                        10,565Bank
      owned life insurance
                                        
                                        
                                        8,662
                                        
                                        
                                        
                                        8,579Federal
      Home Loan Bank stock
                                        
                                        
                                        6,252
                                        
                                        
                                        
                                        6,252Other
      assets
                                        
                                        
                                        4,082
                                        
                                        
                                        
                                        3,824Total
      assets
                                        
                                        $
                                        542,734
                                        
                                        
                                        $
                                        535,386LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesDeposits
                                        
                                        $
                                        379,722
                                        
                                        
                                        $
                                        363,026Borrowed
      funds
                                        
                                        
                                        110,903
                                        
                                        
                                        
                                        119,148Mortgagors'
      escrow accounts
                                        
                                        
                                        2,533
                                        
                                        
                                        
                                        4,562Other
      liabilities
                                        
                                        
                                        1,920
                                        
                                        
                                        
                                        3,061Total
      liabilities
                                        
                                        
                                        495,078
                                        
                                        
                                        
                                        489,797Commitments
      and contingenciesStockholders'
      equityPreferred
      stock, $.01 par value; 1,000,000 shares authorized;no
      shares issued or outstandingCommon
      stock, $.01 par value; 25,000,000 shares authorized;
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -7,604,375
      shares issued, 7,026,813 shares outstanding at March31,
      2009 and 7,026,894 shares outstanding at December 31, 2008
                                        
                                        
                                        76
                                        
                                        
                                        
                                        76Paid-in
      capital
                                        
                                        
                                        33,691
                                        
                                        
                                        
                                        33,637Retained
      earnings
                                        
                                        
                                        23,514
                                        
                                        
                                        
                                        23,303Unearned
      ESOP shares (213,624 shares at March 31, 2009and
      December 31, 2008)
                                        
                                        
                                        (2,136
                                        )
                                        
                                        
                                        (2,136
                                        )Unearned
      stock awards (61,080 shares at March 31, 2009and
      61,780 shares at December 31, 2008)
                                        
                                        
                                        (672
                                        )
                                        
                                        
                                        (680
                                        )Treasury
      stock, at cost (579,395 shares at March 31, 2009and
      579,314 shares at December 31, 2008)
                                        
                                        
                                        (6,108
                                        )
                                        
                                        
                                        (6,107
                                        )Accumulated
      other comprehensive loss
                                        
                                        
                                        (709
                                        )
                                        
                                        
                                        (2,504
                                        )Total
      stockholders' equity
                                        
                                        
                                        47,656
                                        
                                        
                                        
                                        45,589Total
      liabilities and stockholders' equity
                                        
                                        $
                                        542,734
                                        
                                        
                                        $
                                        535,386


See notes
to consolidated financial statements.


3
 Table of Contents





Consolidated
Statements of Income


(In
thousands, except per share data)


Three
      Months EndedMarch
      31,2009
                                            
                                            
                                            2008(Unaudited)Interest
      incomeInterest
      on loans
                                            
                                            $
                                            6,378
                                            
                                            
                                            $
                                            5,918Interest
      and dividends on investments and deposits
                                            
                                            
                                            710
                                            
                                            
                                            
                                            928Total
      interest income
                                            
                                            
                                            7,088
                                            
                                            
                                            
                                            6,846Interest
      expenseInterest
      on deposits
                                            
                                            
                                            2,300
                                            
                                            
                                            
                                            2,481Interest
      on borrowed funds
                                            
                                            
                                            1,115
                                            
                                            
                                            
                                            1,065Total
      interest expense
                                            
                                            
                                            3,415
                                            
                                            
                                            
                                            3,546Net
      interest income
                                            
                                            
                                            3,673
                                            
                                            
                                            
                                            3,300Provision
      for loan losses
                                            
                                            
                                            285
                                            
                                            
                                            
                                            162Net
      interest income after provision for loan losses
                                            
                                            
                                            3,388
                                            
                                            
                                            
                                            3,138Noninterest
      incomeFees
      for services related to deposit accounts
                                            
                                            
                                            234
                                            
                                            
                                            
                                            244Gain
      on investments
                                            
                                            
                                            176
                                            
                                            
                                            
                                            59Fees
      for other services
                                            
                                            
                                            125
                                            
                                            
                                            
                                            117Income
      from bank owned life insurance
                                            
                                            
                                            84
                                            
                                            
                                            
                                            75Income
      from investment advisory services, net
                                            
                                            
                                            56
                                            
                                            
                                            
                                            82Other
      income
                                            
                                            
                                            31
                                            
                                            
                                            
                                            50Total
      noninterest income
                                            
                                            
                                            706
                                            
                                            
                                            
                                            627Noninterest
      expenseCompensation,
      taxes and benefits
                                            
                                            
                                            1,884
                                            
                                            
                                            
                                            1,808Office
      occupancy
                                            
                                            
                                            534
                                            
                                            
                                            
                                            523FDIC
      insurance premiums
                                            
                                            
                                            235
                                            
                                            
                                            
                                            9Computer
      processing
                                            
                                            
                                            222
                                            
                                            
                                            
                                            195Directors
      compensation
                                            
                                            
                                            199
                                            
                                            
                                            
                                            183Advertising
                                            
                                            
                                            55
                                            
                                            
                                            
                                            81Loss
      on foreclosed real estate, net
                                            
                                            
                                            6
                                            
                                            
                                            
                                            3Other
      expenses
                                            
                                            
                                            463
                                            
                                            
                                            
                                            403Total
      noninterest expense
                                            
                                            
                                            3,598
                                            
                                            
                                            
                                            3,205Income
      before provisionfor
      income taxes
                                            
                                            
                                            496
                                            
                                            
                                            
                                            560Provision
      for income taxes
                                            
                                            
                                            127
                                            
                                            
                                            
                                            106Net
      income
                                            
                                            $
                                            369
                                            
                                            
                                            $
                                            454Earnings
      per common share - Basic and Diluted
                                            
                                            $
                                            0.05
                                            
                                            
                                            $
                                            0.06





See notes
to consolidated financial statements.


4
 Table of Contents





Consolidated Statements of Cash Flows(In
thousands)


Three
      Months EndedMarch
      31,2009
                                                
                                                
                                                2008Cash
      flows from operating activities
                                                
                                                (Unaudited)Net
      income
                                                
                                                $
                                                369
                                                
                                                
                                                $
                                                454Adjustments
      to reconcile net income to cash provided by operating
      activities:Provision
      for loan losses
                                                
                                                
                                                285
                                                
                                                
                                                
                                                162Depreciation
      and amortization expense
                                                
                                                
                                                218
                                                
                                                
                                                
                                                197Net
      amortization (accretion) from investments
                                                
                                                
                                                14
                                                
                                                
                                                
                                                18Amortization
      of intangible assets
                                                
                                                
                                                8
                                                
                                                
                                                
                                                8Stock-based
      compensation
                                                
                                                
                                                165
                                                
                                                
                                                
                                                173Gain
      on sale of investments
                                                
                                                
                                                (176
                                                )
                                                
                                                
                                                (59
                                                )Net
      change in:Accrued
      income receivable
                                                
                                                
                                                125
                                                
                                                
                                                
                                                (40
                                                )Deferred
      loan fees
                                                
                                                
                                                19
                                                
                                                
                                                
                                                71Cash
      surrender value of life insurance
                                                
                                                
                                                (83
                                                )
                                                
                                                
                                                (75
                                                )Other
      assets
                                                
                                                
                                                (86
                                                )
                                                
                                                
                                                216Other
      liabilities
                                                
                                                
                                                97
                                                
                                                
                                                
                                                (244
                                                )Net
      cash provided by operating activities
                                                
                                                
                                                955
                                                
                                                
                                                
                                                881Cash
      flows from investing activitiesProceeds
      from maturities and repayments of available-for-sale
      securities
                                                
                                                
                                                2,152
                                                
                                                
                                                
                                                2,630Proceeds
      from sale of available-for-sale securities
                                                
                                                
                                                10,508
                                                
                                                
                                                
                                                6,134Proceeds
      from maturities of held-to-maturity securities
                                                
                                                
                                                -
                                                
                                                
                                                
                                                190Purchase
      of available-for-sale securities
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (14,846
                                                )Purchase
      of Federal Home Loan Bank stock
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (938
                                                )Loan
      originations net of principal payments
                                                
                                                
                                                (8,563
                                                )
                                                
                                                
                                                (17,439
                                                )Purchase
      of property and equipment
                                                
                                                
                                                (38
                                                )
                                                
                                                
                                                (201
                                                )Net
      cash provided (used) by investing activities
                                                
                                                
                                                4,059
                                                
                                                
                                                
                                                (24,470
                                                )Cash
      flows from financing activitiesNet
      change in time deposits
                                                
                                                
                                                7,755
                                                
                                                
                                                
                                                (1,118
                                                )Net
      change in other deposit accounts
                                                
                                                
                                                8,941
                                                
                                                
                                                
                                                11,958Net
      change in mortgagors' escrow deposits
                                                
                                                
                                                (2,029
                                                )
                                                
                                                
                                                (1,742
                                                )Advances
      from Federal Home Loan Bank
                                                
                                                
                                                -
                                                
                                                
                                                
                                                26,415Repayment
      of advances from Federal Home Loan Bank
                                                
                                                
                                                (11,275
                                                )
                                                
                                                
                                                (5,668
                                                )Change
      in short term borrowings
                                                
                                                
                                                (1,340
                                                )
                                                
                                                
                                                -Net
      change in repurchase agreements
                                                
                                                
                                                3,029
                                                
                                                
                                                
                                                48Treasury
      stock acquired
                                                
                                                
                                                -
                                                
                                                
                                                
                                                (1,036
                                                )Dividends
      paid to stockholders
                                                
                                                
                                                (158
                                                )
                                                
                                                
                                                (142
                                                )Net
      cash provided by financing activities
                                                
                                                
                                                4,923
                                                
                                                
                                                
                                                28,715Net
      change in cash and cash equivalents
                                                
                                                
                                                9,937
                                                
                                                
                                                
                                                5,126Cash
      and cash equivalents at beginning of period
                                                
                                                
                                                8,247
                                                
                                                
                                                
                                                8,370Cash
      and cash equivalents at end of period
                                                
                                                $
                                                18,184
                                                
                                                
                                                $
                                                13,496Cash
      paid during the period for:Interest
                                                
                                                $
                                                10,427
                                                
                                                
                                                $
                                                9,635Income
      taxes
                                                
                                                
                                                818
                                                
                                                
                                                
                                                221Non-cash
      transactions:Transfer
      of loans to foreclosed real estate
                                                
                                                $
                                                223
                                                
                                                
                                                $
                                                -




See notes
to consolidated financial statements.


5
 Table of Contents





Notes
to ConsolidatedFinancial Statements











NOTE
1 – NATURE OF OPERATIONS





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





Originally
organized in 1922, the Bank is a federally chartered stock savings bank which is
headquartered in Naugatuck, Connecticut. The Bank provides a full range of
personal banking services to individual and small business customers located
primarily in the Naugatuck Valley and the immediate surrounding
vicinity.  It is subject to competition from other financial
institutions throughout the region.  The Bank is also subject to the
regulations of various federal agencies and undergoes periodic examinations by
those regulatory authorities.





The Bank
owns the Naugatuck Valley Mortgage Servicing Corporation, which qualifies and
operates as a Connecticut passive investment company pursuant to
legislation.








NOTE
2 - BASIS OF PRESENTATION





The
accompanying consolidated interim financial statements are unaudited and include
the accounts of the Company, the Bank, and the Bank’s wholly owned
subsidiary, Naugatuck Valley Mortgage Servicing Corporation. 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.





In
preparing the financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of the
date of the balance sheet, and income and expenses for the
period.  Actual results could differ from those
estimates.  Material estimates that are particularly susceptible to
significant change in the near-term relate to the determination of the allowance
for losses on loans, the valuation of real estate acquired in connection with
foreclosure or in satisfaction of loans, and the valuation of certain investment
securities.  While management uses available information to recognize
losses and properly value these assets, future adjustments may be necessary
based on changes in economic conditions both in Connecticut and
nationally.





Operating
results for the three months ended March 31, 2009 are not necessarily indicative
of the results that may be expected for the year ending December 31,
2009.





These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2008.  The year-end
condensed balance sheet data was derived from audited financial statements, but
does not include all disclosures required by GAAP.








6
 Table of Contents


NOTE
3 - 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:  other-than-temporary impairment, allowance for
loan losses and deferred income taxes.





Other-than-temporary
impairment. Each quarter, the Company reviews its investment portfolio to
determine whether unrealized losses are temporary, based on an evaluation of the
creditworthiness of the issuers/guarantors as well as the underlying collateral,
if applicable, as well as the continuing performance of the
securities.  Management also evaluates other facts and circumstances
that may be indicative of an other-than-temporary impairment
condition.  This includes, but is not limited to, an evaluation of the
type of security and length of time and extent to which the fair value has been
less than cost as well as certain collateral related
characteristics.





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 collectability
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
accounts for certain income and expense items differently for financial
reporting purposes than for income tax purposes.  Provisions for
deferred taxes are being made in recognition of these temporary differences. It
is the Company's policy to recognize interest and penalties related to
unrecognized tax liabilities within income tax expense in the consolidated
statements of income.








NOTE
4 – RECENT ACCOUNTING PRONOUNCEMENTS





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 standard establishes
a fair value hierarchy about the assumptions used to measure fair value and
clarifies assumptions about risk and the effect of a restriction on the sale or
use of an asset. SFAS No. 157 became effective for the Company on
January 1, 2008. See Note 5 to the consolidated financial statements for
additional information.








In
February 2008, the FASB issued FASB Staff Position No. 157-2. The
staff position delays the effective date of SFAS No. 157 for nonfinancial
assets and nonfinancial liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The
delay is intended to allow additional time to consider the effect of various
implementation issues with regard to the application of SFAS No. 157. The
new staff position defers the effective date of SFAS No. 157 to
January 1, 2009 for items within the scope of the staff position. The
Company is currently evaluating the impact of FSP SFAS No. 157-2 on the
consolidated financial statements.








In
October 2008, the FASB issued FASB Staff Position No. 157-3 (FSP 157-3),
“Determining the Fair Value of a Financial Asset When the Market for That Asset
is Not Active.” FSP 157-3 clarifies the application of SFAS 157 in a market that
is not active and provides an example to illustrate key considerations in
determining fair value of financial assets when the market for that financial
asset is not active. FSP 157-3 applies to financial assets within the scope of
accounting pronouncements that require or permit fair value measurements in
accordance with FAS 157.


7
 Table of Contents


FSP 157-3
was effective upon issuance and included prior periods for which financial
statements had not been issued. The application of FSP 157-3 did not have a
material impact on the Company’s consolidated financial statements.




In
April 2009, the FASB issued FASB Staff Position (FSP) No. 157-4
“Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly”.  This FSP provides additional guidance for estimating fair value
in accordance with FASB Statement No. 157, “Fair Value Measurements”, when
the volume and level of activity for the asset or liability have significantly
decreased, and also includes guidance on identifying circumstances that indicate
a transaction is not orderly.  The FSP is effective for interim and annual
reporting periods ending after June 15, 2009, and shall be applied
prospectively. The Company has elected to adopt this FSP for the quarter ended
March 31, 2009 as permitted.  The adoption of FSP No. 157-4
resulted in a decrease in the Company’s unrealized losses on available-for-sale
securities of $3.5 million.  This change affected the Company’s
statement of financial condition only and had no impact on the Company’s results
of operations for the quarter ended March 31, 2009.  For additional
information, see Note 5.





In
April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1 “Interim
Disclosures about Fair Value of Financial Instruments”.  This FSP amends
FASB Statement No. 107, Disclosures about Fair Value of Financial
Instruments, to require disclosures about fair value of financial instruments
for interim reporting periods of publicly traded companies as well as in annual
financial statements. This FSP also amends APB Opinion No. 28, Interim
Financial Reporting, to require those disclosures in summarized financial
information at interim reporting periods.  The FSP is effective for interim
and annual reporting periods ending after June 15, 2009, and shall be
applied prospectively. Early adoption is permitted for periods ending after
March 15, 2009.  The Company has elected not to adopt this FSP early.
The adoption of FSP No. 107-1 and APB 28-1 is not expected to have a
material impact on the Company’s consolidated financial statements.











NOTE
5 – FAIR VALUE





Fair
value is defined as the exchange price that would be received for an asset or
paid to transfer a liability (exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants on the measurement date.  Generally Accepted Accounting
Principles in the U.S. (“GAAP”) also establishes a fair value hierarchy which
requires an entity to maximize the use of observable inputs and minimize the use
of unobservable inputs when measuring fair value. The standard describes three
levels of inputs that may be used to measure fair values:





Level 1 —
Quoted prices (unadjusted) for identical assets or liabilities in active
markets that the entity has the ability to access as of the measurement
date.


Level 2 —
Significant other observable inputs other than Level 1 prices such as quoted
prices for similar assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated by observable
market data.


Level 3 —
Significant unobservable inputs that reflect a company’s own assumptions about
the assumptions that market participants would use in pricing an asset or
liability.





The
Company used the following methods and significant assumptions to estimate the
fair value of each type of financial instrument:





Available-for-sale
securities:Available-for-sale
securities are recorded at fair value on a recurring basis. Fair value
measurement is based upon quoted prices, if available. If quoted prices are not
available, fair values are determined by matrix pricing, which is a mathematical
technique widely used in the industry to value debt securities without relying
exclusively on quoted prices for the specific securities but rather by relying
on the securities’ relationship to other benchmark quoted securities. The
Company’s available-for-sale securities that are traded on an active exchange,
such as the New York Stock Exchange, are classified as Level 1.
Available-for-sale securities valued using matrix pricing are classified as
Level 2.  The Company’s investment in Auction-rate trust preferred
securities are classified as Level 3, as discussed below.


8
 Table of Contents





Auction-rate trust preferred
securities:  The Company owns approximately $9.3 million
par-value of auction-rate trust preferred securities (“ARP”).  These
securities were originally purchased by the Company because they represented
highly liquid, tax-preferred investments secured by preferred stock issued by
high-quality, investment grade companies, generally other financial institutions
(“collateral preferred shares”).  The ARP shares, or certificates,
purchased by the Company are Class A certificates, which, among other rights,
entitles the holder to priority claim on dividends paid into the trust holding
the preferred shares.





The
trusts which issued the ARP certificates own various callable preferred shares
of stock issued by a single entity.  In addition to the call dates for
redemption established by the collateral preferred shares, each trust has a
maturity date upon which the trust itself will terminate, and the value of the
remaining collateral preferred shares will be distributed to the owners of the
trust certificates. The value of the remaining collateral preferred shares is
not guaranteed, and may be more or less than the stated par value of the
collateral preferred shares, and is dependent on the market value of those
collateral preferred share on the date of the trust’s maturity.





The
certificates issued by the trusts traded in an active, open auction market, with
each individual trust establishing the frequency of its auctions, typically
every 90 days (the “reset date”).  The results of an auction would be
the exchange of certificates, at par, between participants entering or exiting
the market, and the resetting of the yield to be earned by holders of the Class
A certificates as well as the holders of other classes of trust
certificates.





During
2007, the periodic auctions for these types of securities began to fail, which
meant there were more sellers of existing securities than there were ready
buyers.  The auction failures did not result in the loss of any
principal value to the certificate holders, but prevented many sellers from
exiting, or redeeming, their certificates at the reset date.  These
unsuccessful sellers were required to continue to hold the certificates until
the next schedule reset date. To compensate these unsuccessful sellers, the
failed auctions triggered a penalty-rate feature which provided that owners of
the Class A certificates were entitled to a higher portion of the dividends, and
thus a higher yield, on the Class A certificates.





During
this time, the Company attempted to divest itself of the ARPs, but was prevented
from doing so due to the continued failure of the auction market.  The
Company periodically evaluated the ARPs for impairment, but determined that none
existed since successful auctions continued to occur, although with less
frequency, and those certificates continued to trade at par value.  In
addition, the Company continued to receive above-market yields on its ARPs due
to the penalty-rate feature described above.





In early
2008, Merrill Lynch and Bear Sterns, which were the dominant market makers for
the ARPs, stopped supporting the auctions, and the market became
inactive.  However, the trusts continued to pay the above-market
penalty rates on the Class A certificates owned by the Company.  The
Company continued to carry its investments at par value, despite the increased
liquidity risk, because the credit strength of the issuers of the collateral
preferred shares remained high, and the yield remained
above-market.  ARP pricing, as quoted by the Company’s investment
advisors supported management’s conclusions regarding the fair value of its
investments in the ARPs.





In
September, 2008, the turmoil in the financial markets caused the value of the
underlying collateral preferred shares to decline
dramatically.  Quoted prices for the ARPs from the Company’s
investment advisors also declined, and the Company recorded a temporary
impairment adjustment to the carrying value of the ARPs which are classified as
available-for-sale.  A temporary impairment reduces the carrying value
of the investment security with an offsetting reduction in the capital accounts
of the Company.





The
Company had difficulty identifying market prices of comparable instruments for
ARPs due to the inactive market.  As a result, during the fourth
quarter of 2008, and prior to the Company’s adoption of FSP 157-4, the Company
modified its methodology for determining the fair value of the ARPs (classified
as level 3), and used the quoted market values of the collateral preferred
shares, adjusted for the higher yield earned by the Company through the Class A
certificates compared with the nominal rate available to a direct owner of the
collateral preferred shares.  The Company continued to record a
temporary impairment adjustment on the ARPs, primarily due to the depressed
market values of the underlying collateral preferred shares.





The
Company adopted FSP157-4 in the first quarter of 2009, as permitted by the
FSP.  The Company concluded that the market value of the underlying
collateral preferred shares did not represent orderly transactions and adopted
the use of a discounted cash flow model to determine the value of its
investments in the ARPs.


9
 Table of Contents


The new
valuation model is based upon the expected value of the collateral preferred
shares, either at call dates or the maturity date of the trust, the credit
rating of the issuer of the preferred shares, the expected yield during the
holding period and current rates for U.S. Treasury securities matching the
expected remaining term of the trust.





Credit-ratings
for each of the issuers of the collateral preferred stock remain high, and the
expected value of the collateral preferred shares (either when called or upon
maturity of the trust) is assumed to range between current market prices and
par.  The resulting discounted cash flows for each of the ARPs
indicated little to no impairment in the fair value of the
securities.  Due to uncertainties inherent in the model, management
selected from within the projected range of values, approaching 95% of par value
for the ARP certificates secured by collateral preferred stock of issuers rated
at investment grade, to 80% of par value for two ARP certificates where the
issuer was recently downgraded but remains within the investment-grade rating
category.




Residential loans held for
sale: The fair value of loans held for sale is determined using quoted
prices for a similar asset, adjusted for specific attributes of that loan (Level
2).  There were no loans held for sale at March 31, 2009 or December
31, 2008.








Assets
and liabilities measured at fair value under SFAS No. 157 on a recurring
basis, including financial assets and liabilities for which the Company has
elected the fair value option, are summarized below:




Fair
      Value Measurements at March 31, 2009 Using:SignificantQuoted
      Prices in
                                
                                
                                Other
                                
                                
                                SignificantActive
      Markets for
                                
                                Observable
                                
                                
                                UnobservableCarrying
                                
                                
                                Identical
      Assets
                                
                                
                                Inputs
                                
                                
                                Inputs(In
      thousands)
                                
                                Amount
                                
                                
                                (Level
      1)
                                
                                
                                (Level
      2)
                                
                                
                                (Level
      3)Financial
      AssetsInvestment
      securities available for sale
                                
                                $
                                53,185
                                
                                
                                $
                                -
                                
                                
                                $
                                44,732
                                
                                
                                $
                                8,453Residential
      loans held for sale
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -




Financial
instruments recorded using the fair value option


Under
GAAP, the Company may elect to report most financial instruments and certain
other items at fair value on an instrument-by-instrument basis with changes in
fair value reported in net income. After the initial adoption, the election is
made at the acquisition of an eligible financial asset, financial liability or
firm commitment or when certain specified reconsideration events occur. The fair
value election may not be revoked once an election is made. The
Company has elected the fair value option prospectively for residential loans
held for sale.








10
 Table of Contents


NOTE
6 – INVESTMENT SECURITIES





At March
31, 2009, the composition of the investment portfolio was:





Amortized
                                  
                                  
                                  Gross
      Unrealized
                                  
                                  
                                  Fair(In
      thousands)
                                  
                                  Cost
      Basis
                                  
                                  
                                  Gains
                                  
                                  
                                  Losses
                                  
                                  
                                  ValueAvailable-for-sale
      securities:U.S.
      government and agency obligations
                                  
                                  $
                                  1,535
                                  
                                  
                                  $
                                  64
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  1,599Corporate
      bonds
                                  
                                  
                                  1,000
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (750
                                  )
                                  
                                  
                                  250Mortgage-backed
      securities
                                  
                                  
                                  38,730
                                  
                                  
                                  
                                  1,142
                                  
                                  
                                  
                                  (17
                                  )
                                  
                                  
                                  39,855Collateralized
      mortgage obligations
                                  
                                  
                                  3,298
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (270
                                  )
                                  
                                  
                                  3,028Total
      debt securities
                                  
                                  
                                  44,563
                                  
                                  
                                  
                                  1,206
                                  
                                  
                                  
                                  (1,037
                                  )
                                  
                                  
                                  44,732Auction-rate
      trust preferred securities
                                  
                                  
                                  9,273
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (820
                                  )
                                  
                                  
                                  8,453Total
      available-for-sale securities
                                  
                                  $
                                  53,836
                                  
                                  
                                  $
                                  1,206
                                  
                                  
                                  $
                                  (1,857
                                  )
                                  
                                  $
                                  53,185




At
December 31, 2008, the composition of the investment portfolio was:





Amortized
                              
                              
                              Gross
      Unrealized
                              
                              
                              Fair(In
      thousands)
                              
                              Cost
      Basis
                              
                              
                              Gains
                              
                              
                              Losses
                              
                              
                              ValueAvailable-for-sale
      securities:U.S.
      government and agency obligations
                              
                              $
                              1,537
                              
                              
                              $
                              67
                              
                              
                              $
                              -
                              
                              
                              $
                              1,604Municipal
      obligations
                              
                              
                              8,888
                              
                              
                              
                              113
                              
                              
                              
                              (8
                              )
                              
                              
                              8,993Corporate
      bonds
                              
                              
                              1,000
                              
                              
                              
                              -
                              
                              
                              
                              (710
                              )
                              
                              
                              290Mortgage-backed
      securities
                              
                              
                              42,297
                              
                              
                              
                              804
                              
                              
                              
                              (71
                              )
                              
                              
                              43,030Collateralized
      mortgage obligations
                              
                              
                              3,339
                              
                              
                              
                              -
                              
                              
                              
                              (156
                              )
                              
                              
                              3,183Total
      debt securities
                              
                              
                              57,061
                              
                              
                              
                              984
                              
                              
                              
                              (945
                              )
                              
                              
                              57,100Auction-rate
      trust preferred securities
                              
                              
                              9,273
                              
                              
                              
                              -
                              
                              
                              
                              (2,529
                              )
                              
                              
                              6,744Total
      available-for-sale securities
                              
                              $
                              66,334
                              
                              
                              $
                              984
                              
                              
                              $
                              (3,474
                              )
                              
                              $
                              63,844





The
Company had no securities classified as held-to-maturity at March 31, 2009 or
December 31, 2008.




The
Company has identified other investment securities in which the fair value of
the security is less than the cost of the security.  This can be from
an increase in interest rates since the time of purchase or from deterioration
in the credit quality of the issuer.  All investment securities which
have unrealized losses have undergone an internal impairment
review.





Management’s
review for impairment generally entails identification and analysis of
individual investments that have fair values less than amortized cost, including
consideration of the length of time the investment has been in an unrealized
loss position and the expected recovery period; discussion of evidential matter,
including an evaluation of factors or triggers that could cause individual
investments to qualify as having other-than-temporary impairment and those that
would not support other-than-temporary impairment; and documentation of the
results of these analyses. As a result of the reviews, management has determined
that there has been no deterioration in credit quality subsequent to purchase,
and believes that these unrealized losses are temporary and are the result of
changes in market interest rates and market conditions over the past several
years.





At March
31, 2009, these securities had an aggregate fair value of $13,373,000 which
resulted in an unrealized loss of $1,857,000 as compared with securities with an
aggregate fair value of $16,705,000 with an unrealized loss of $3,474,000 at
December 31, 2008.





11
 Table of Contents


NOTE
7 – LOANS RECEIVABLE





A summary
of loans receivable at March 31, 2009 and December 31, 2008 is as
follows:





March
      31,
                                  
                                  
                                  December
      31,(In
      thousands)
                                  
                                  2009
                                  
                                  
                                  2008Real
      estate loans:One-to-four
      family
                                  
                                  $
                                  217,940
                                  
                                  
                                  $
                                  216,201Construction
                                  
                                  
                                  52,148
                                  
                                  
                                  
                                  50,596Multi-family
      and commercial real estate
                                  
                                  
                                  108,350
                                  
                                  
                                  
                                  106,028Total
      real estate loans
                                  
                                  
                                  378,438
                                  
                                  
                                  
                                  372,825Commercial
      business loans
                                  
                                  
                                  24,692
                                  
                                  
                                  
                                  22,567Consumer
      loans:Savings
      accounts
                                  
                                  
                                  1,066
                                  
                                  
                                  
                                  1,093Personal
                                  
                                  
                                  211
                                  
                                  
                                  
                                  262Automobile
                                  
                                  
                                  258
                                  
                                  
                                  
                                  271Home
      equity
                                  
                                  
                                  40,123
                                  
                                  
                                  
                                  39,655Total
      consumer loans
                                  
                                  
                                  41,658
                                  
                                  
                                  
                                  41,281Totals
      loans
                                  
                                  
                                  444,788
                                  
                                  
                                  
                                  436,673Less:Allowance
      for loan losses
                                  
                                  
                                  3,143
                                  
                                  
                                  
                                  2,869Undisbursed
      construction loans
                                  
                                  
                                  1,087
                                  
                                  
                                  
                                  1,299Deferred
      loan origination fees
                                  
                                  
                                  548
                                  
                                  
                                  
                                  529Loans
      receivable, net
                                  
                                  $
                                  440,010
                                  
                                  
                                  $
                                  431,976





Nonperforming
loans totaled approximately $2.4 million at March 31, 2009 and approximately
$2.7 million at December 31, 2008.  These loans, primarily delinquent
90 days or more, were accounted for on a nonaccrual basis.  The amount
of income that was contractually due but not recognized on nonperforming loans
totaled $125,000 at March 31, 2009 and $140,000 at December 31,
2008.





At March
31, 2009, the Bank had approximately $66,000 of loans which were considered to
be impaired with an allocated allowance of $16,447 compared with approximately
$254,000 of such loans at December 31, 2008 with no allocated
allowance.  The decrease is primarily due to one residential mortgage
which was reclassified as other real estate owned during the
period.





Transactions
in the allowance for loan losses account were as follows for the periods
indicated:


March
      31,
                              
                              
                              December
      31,(In
      thousands)
                              
                              2009
                              
                              
                              2008Balance
      at beginning of year
                              
                              $
                              2,869
                              
                              
                              $
                              2,163Provision
      for loan losses
                              
                              
                              285
                              
                              
                              
                              675Loans
      written off
                              
                              
                              (11
                              )
                              
                              
                              (7
                              )Recoveries
      of loans written off
                              
                              
                              -
                              
                              
                              
                              38Balance
      at end of period
                              
                              $
                              3,143
                              
                              
                              $
                              2,869








NOTE
8 - 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 are comprised of 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, 2009, anti-dilutive options excluded from the
calculations totaled 345,930 options (with an exercise price of $11.10) and
7,500 options (with an exercise price of $12.49).


12
 Table of Contents


For the
three months ended March 31, 2008, anti-dilutive options excluded from the
calculations totaled 351,030 options (with an exercise price of $11.10) and
7,500 options (with an exercise price of $12.49).  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 EndedMarch
      31,2009
                                              
                                              
                                              2008Net
      income
                                              
                                              $
                                              369,000
                                              
                                              
                                              $
                                              454,000Weighted-average
      common shares outstanding:Basic
                                              
                                              
                                              6,813,263
                                              
                                              
                                              
                                              6,993,902Effect
      of dilutive stock optionsand
      restrictive stock awards
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Diluted
                                              
                                              
                                              6,813,263
                                              
                                              
                                              
                                              6,993,902Net
      income per common share:Basic
                                              
                                              $
                                              0.05
                                              
                                              
                                              $
                                              0.06Diluted
                                              
                                              $
                                              0.05
                                              
                                              
                                              $
                                              0.06








NOTE
9 - COMPREHENSIVE INCOME





Comprehensive
income is the net income of a company adjusted for 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
on its available-for-sale securities.





Three
      Months EndedMarch
      31,2009
                                                      
                                                      
                                                      2008(In
      thousands)Net
      income
                                                      
                                                      $
                                                      369
                                                      
                                                      
                                                      $
                                                      454Net
      unrealized gain onsecurities
      available for saleduring
      the period, net of tax
                                                      
                                                      
                                                      1,795
                                                      
                                                      
                                                      
                                                      506Total
      Comprehensive Income
                                                      
                                                      $
                                                      2,164
                                                      
                                                      
                                                      $
                                                      960








NOTE
10 - EQUITY INCENTIVE PLAN





Under the
Naugatuck Valley Financial Corporation 2005 Equity Incentive Plan (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.


13
 Table of Contents





The
amounts and terms of the awards granted under the Incentive Plan are summarized
in the following table.





Grant
      dateJuly
      26,
                                                                  
                                                                  
                                                                  December
      18,
                                                                  
                                                                  
                                                                  March
      20,
                                                                  
                                                                  
                                                                  March
      21,
                                                                  
                                                                  
                                                                  July
      26,2008
                                                                  
                                                                  
                                                                  2007
                                                                  
                                                                  
                                                                  2007
                                                                  
                                                                  
                                                                  2006
                                                                  
                                                                  
                                                                  2005Option
      awardsAwarded
                                                                  
                                                                  
                                                                  1,000
                                                                  
                                                                  
                                                                  
                                                                  2,000
                                                                  
                                                                  
                                                                  
                                                                  7,500
                                                                  
                                                                  
                                                                  
                                                                  6,500
                                                                  
                                                                  
                                                                  
                                                                  354,580Exercise
      price
                                                                  
                                                                  $
                                                                  11.10
                                                                  
                                                                  
                                                                  $
                                                                  11.10
                                                                  
                                                                  
                                                                  $
                                                                  12.49
                                                                  
                                                                  
                                                                  $
                                                                  11.10
                                                                  
                                                                  
                                                                  $
                                                                  11.10Maximum
      term
                                                                  
                                                                  
                                                                  10
                                                                  
                                                                  
                                                                  
                                                                  10
                                                                  
                                                                  
                                                                  
                                                                  10
                                                                  
                                                                  
                                                                  
                                                                  10
                                                                  
                                                                  
                                                                  
                                                                  10Restricted
      stock awardsAwarded
                                                                  
                                                                  
                                                                  1,000
                                                                  
                                                                  
                                                                  
                                                                  3,000
                                                                  
                                                                  
                                                                  
                                                                  2,000
                                                                  
                                                                  
                                                                  
                                                                  1,500
                                                                  
                                                                  
                                                                  
                                                                  139,712





To date,
stock option awards have been granted with an exercise price equal to the higher
of the market price of the Company’s stock at the date of grant or $11.10, which
was the market price of the Company’s stock at the date stock option awards were
initially granted under the Incentive Plan.  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 is recording share-based compensation expense related to outstanding
stock option and restricted stock awards based upon the fair value at the date
of grant over the vesting period of such awards on a straight-line
basis.  The fair value of each restricted stock allocation, based on
the market price at the date of grant, is recorded to unearned stock
awards.  Compensation expenses related to unearned restricted shares
are amortized to compensation, taxes and benefits expense over the vesting
period of the restricted stock awards.  The fair value of each stock
option award is estimated on the date of grant using the Black-Scholes option
pricing method as described below.  The Company recorded share-based
compensation expense of $135,880 for the three months ended March 31, 2009,
compared to $127,097 for the three months ended March 31, 2008, 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:


July
      26,
                              
                              
                              December
      18,
                              
                              
                              March
      20,
                              
                              
                              March
      21,
                              
                              
                              July
      26,Grant
      date
                              
                              2008
                              
                              
                              2007
                              
                              
                              2007
                              
                              
                              2006
                              
                              
                              2005Dividend
      yield
                              
                              
                              2.74
                              %
                              
                              
                              2.20
                              %
                              
                              
                              1.60
                              %
                              
                              
                              1.89
                              %
                              
                              
                              1.44
                              %Expected
      volatility
                              
                              
                              13.40
                              %
                              
                              
                              11.00
                              %
                              
                              
                              10.49
                              %
                              
                              
                              11.20
                              %
                              
                              
                              11.47
                              %Risk-free
      rate
                              
                              
                              3.56
                              %
                              
                              
                              3.63
                              %
                              
                              
                              4.48
                              %
                              
                              
                              4.61
                              %
                              
                              
                              4.18
                              %Expected
      life in years
                              
                              
                              6.5
                              
                              
                              
                              6.5
                              
                              
                              
                              6.5
                              
                              
                              
                              6.5
                              
                              
                              
                              6.5Weighted
      average fair valueof
      options at grant date
                              
                              $
                              1.51
                              
                              
                              $
                              1.18
                              
                              
                              $
                              2.55
                              
                              
                              $
                              2.25
                              
                              
                              $
                              2.47





14
 Table of Contents





NOTE
11 - DIVIDENDS





On
January 22, 2009, the Company's Board of Directors declared a cash dividend of
$0.06 per outstanding common share, which was paid on March 3, 2009, to
stockholders of record as of the close of business on February 4,
2009.





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











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, 2008 included in the
Company’s 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 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 Annual
Report on Form 10-K for the year ended December 31, 2008 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, 2009 and December 31, 2008





Total
assets increased by $7.3 million, or 1.4%, to $542.7 million during the period
from December 31, 2008 to March 31, 2009, primarily due to an increase of $11.7
million in federal funds, an increase of $8.0 million in loans, partially offset
by a $10.7 million decrease in investment securities.  The increase in
loans primarily reflects increases of $2.3 million in our commercial real estate
loans and $2.1 million in commercial business loans, followed by smaller
increases in residential mortgages, construction loans and consumer
loans.  These increases were primarily funded by increases in
deposits.





Total
liabilities were $495.1 million at March 31, 2009 compared to $489.8 million at
December 31, 2008.  Deposits at March 31, 2009 increased $16.7
million, or 4.6%, over December 31, 2008.  Borrowed funds, including
advances from the Federal Home Loan Bank of Boston and reverse repurchase
agreements, decreased $8.2 million, from $119.1 million at December 31, 2008 to
$110.9 million at March 31, 2009.  The increases in deposits were used
primarily to fund the growth in loans, and to a lesser extent, repay
borrowings.





Total
stockholders’ equity increased $2.1 million, from $45.6 million at December 31,
2008 to $47.7 million at March 31, 2009.  The increase in
stockholders’ equity was primarily due to a net decrease to the unrealized loss
on available-for-sale securities of $1.8 million, net income of $369,000 for the
three month period and $63,000 in capital adjustments related to the Company’s
2005 Equity Incentive Plan, partially offset by dividends of $158,000 paid to
stockholders.


15
 Table of Contents








Comparison
of Operating Results For the Three Months Ended March 31, 2009 and
2008





General.     For
the three months ended March 31, 2009, the Company recorded net income of
$369,000 compared to net income of $454,000 for the three months ended March 31,
2008, a decrease of $85,000, or 18.7%.  The decrease was primarily due
to a decrease in interest and dividends on investments, an increase in the
provision for loan losses and an increase in FDIC insurance
premiums.





Net Interest
Income.Net interest income
increased $373,000, or 11.3%, to $3.7 million for the three months ended March
31, 2009.  The increase in net interest income for the period resulted
from a $242,000, or 3.5%, increase in total interest income, combined with a
$131,000, or 3.7%, decrease in interest expense.  The Company
experienced an increase in the average balances of interest earning assets of
15.0% in the three month period, while the average rate earned on these assets
decreased by 61 basis points.  The increase in interest earning assets
is attributed primarily to an increase in the loan portfolio.  The
average balance in the loan portfolio increased by 17.5%, primarily in the
commercial mortgage and residential mortgage portfolios.





Interest
expense decreased by $131,000, or 3.7% for the three months ended March 31,
2009.  The decrease is due to a reduction of 59 basis points in the
average cost of interest bearing liabilities, from 3.35% to
2.76%.  The decrease in rate was partially offset by a $70.7 million
increase in the average balance.  The average balance of borrowed
funds increased by $23.1 million, or 24.6% over this period and the average
balance of interest-bearing deposits increased by $47.6 million, or
14.4%.








The
following table summarizes changes in interest income and interest expense for
the three months ended March 31, 2009 and 2008.





Three
      MonthsEnded
      March 31,2009
                                
                                
                                2008
                                
                                
                                %
      Change(Dollars
      in thousands)Interest
      income:Loans
                                
                                $
                                6,378
                                
                                
                                $
                                5,918
                                
                                
                                
                                7.77
                                %Fed
      Funds sold
                                
                                
                                3
                                
                                
                                
                                28
                                
                                
                                
                                (89.29
                                )
      %Investment
      securities
                                
                                
                                707
                                
                                
                                
                                833
                                
                                
                                
                                (15.13
                                )
      %Federal
      Home Loan Bank stock
                                
                                
                                -
                                
                                
                                
                                67
                                
                                
                                
                                (100.00
                                )
      %Total
      interest income
                                
                                
                                7,088
                                
                                
                                
                                6,846
                                
                                
                                
                                3.53
                                %Interest
      expense:Certificate
      accounts
                                
                                
                                2,096
                                
                                
                                
                                2,192
                                
                                
                                
                                (4.38
                                )
      %Regular
      savings accounts
                                
                                
                                96
                                
                                
                                
                                64
                                
                                
                                
                                50.00
                                %Checking
      and NOW accounts
                                
                                
                                12
                                
                                
                                
                                72
                                
                                
                                
                                (83.33
                                )
      %Money
      market savings accounts
                                
                                
                                96
                                
                                
                                
                                153
                                
                                
                                
                                (37.25
                                )
      %Total
      interest-bearing deposits
                                
                                
                                2,300
                                
                                
                                
                                2,481
                                
                                
                                
                                (7.30
                                )
      %FHLB
      advances
                                
                                
                                1,105
                                
                                
                                
                                1,063
                                
                                
                                
                                3.95
                                %Other
      borrowings
                                
                                
                                10
                                
                                
                                
                                2
                                
                                
                                
                                400.00
                                %Total
      interest expense
                                
                                
                                3,415
                                
                                
                                
                                3,546
                                
                                
                                
                                (3.69
                                )
      %Net
      interest income
                                
                                $
                                3,673
                                
                                
                                $
                                3,300
                                
                                
                                
                                11.30
                                %








16
 Table of Contents





The
following table summarizes average balances and average yields and costs for the
three months ended March 31, 2009 and 2008.





Three
      Months Ended March 31,2009
                                                    
                                                    
                                                    2008Average
                                                    
                                                    
                                                    Yield/
                                                    
                                                    
                                                    Average
                                                    
                                                    
                                                    Yield/Balance
                                                    
                                                    
                                                    Cost
                                                    
                                                    
                                                    Balance
                                                    
                                                    
                                                    Cost(Dollars
      in thousands)Interest-earning
      assetsLoans
                                                    
                                                    $
                                                    434,724
                                                    
                                                    
                                                    
                                                    5.87
                                                    %
                                                    
                                                    $
                                                    369,931
                                                    
                                                    
                                                    
                                                    6.40
                                                    %Fed
      Funds sold
                                                    
                                                    
                                                    11,444
                                                    
                                                    
                                                    
                                                    0.10
                                                    %
                                                    
                                                    
                                                    2,866
                                                    
                                                    
                                                    
                                                    3.91
                                                    %Investment
      securities
                                                    
                                                    
                                                    59,580
                                                    
                                                    
                                                    
                                                    4.75
                                                    %
                                                    
                                                    
                                                    67,456
                                                    
                                                    
                                                    
                                                    4.94
                                                    %Federal
      Home Loan Bank stock
                                                    
                                                    
                                                    6,252
                                                    
                                                    
                                                    
                                                    0.00
                                                    %
                                                    
                                                    
                                                    5,073
                                                    
                                                    
                                                    
                                                    5.28
                                                    %Total
      interest-earning assets
                                                    
                                                    $
                                                    512,000
                                                    
                                                    
                                                    
                                                    5.54
                                                    %
                                                    
                                                    $
                                                    445,326
                                                    
                                                    
                                                    
                                                    6.15
                                                    %Interest-bearing
      liabilitiesCertificate
      accounts
                                                    
                                                    $
                                                    240,824
                                                    
                                                    
                                                    
                                                    3.48
                                                    %
                                                    
                                                    $
                                                    202,738
                                                    
                                                    
                                                    
                                                    4.32
                                                    %Regular
      savings accounts & escrow
                                                    
                                                    
                                                    53,515
                                                    
                                                    
                                                    
                                                    0.72
                                                    %
                                                    
                                                    
                                                    43,997
                                                    
                                                    
                                                    
                                                    0.58
                                                    %Checking
      and NOW accounts
                                                    
                                                    
                                                    57,643
                                                    
                                                    
                                                    
                                                    0.08
                                                    %
                                                    
                                                    
                                                    55,098
                                                    
                                                    
                                                    
                                                    0.52
                                                    %Money
      market savings accounts
                                                    
                                                    
                                                    25,137
                                                    
                                                    
                                                    
                                                    1.53
                                                    %
                                                    
                                                    
                                                    27,724
                                                    
                                                    
                                                    
                                                    2.21
                                                    %Total
      interest-bearing deposits
                                                    
                                                    
                                                    377,119
                                                    
                                                    
                                                    
                                                    2.44
                                                    %
                                                    
                                                    
                                                    329,557
                                                    
                                                    
                                                    
                                                    3.01
                                                    %FHLB
      advances
                                                    
                                                    
                                                    115,332
                                                    
                                                    
                                                    
                                                    3.83
                                                    %
                                                    
                                                    
                                                    93,772
                                                    
                                                    
                                                    
                                                    4.53
                                                    %Other
      borrowings
                                                    
                                                    
                                                    1,784
                                                    
                                                    
                                                    
                                                    2.24
                                                    %
                                                    
                                                    
                                                    218
                                                    
                                                    
                                                    
                                                    3.67
                                                    %Total
      interest-bearing liabilities
                                                    
                                                    $
                                                    494,235
                                                    
                                                    
                                                    
                                                    2.76
                                                    %
                                                    
                                                    $
                                                    423,547
                                                    
                                                    
                                                    
                                                    3.35
                                                    %





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, 2009 and
2008.





Three
      MonthsEnded
      March 31,2009
                            
                            
                            2008(In
      thousands)Allowance
      at beginning of period
                            
                            $
                            2,869
                            
                            
                            $
                            2,163Provision
      for loan losses
                            
                            
                            285
                            
                            
                            
                            162Charge-offs
                            
                            
                            (11
                            )
                            
                            
                            -Recoveries
                            
                            
                            -
                            
                            
                            
                            -Net
      recoveries (charge-offs)
                            
                            
                            (11
                            )
                            
                            
                            -Allowance
      at end of period
                            
                            $
                            3,143
                            
                            
                            $
                            2,325





The
Company recorded a provision for loan losses of $285,000 for the three month
period ended March 31, 2009, compared to $162,000 for the 2008
period.  The increase in the provisions in the 2009 period is due
primarily to the increasing size of the loan portfolio and a change in the mix
of the portfolio towards commercial loans which are generally riskier than
one-to-four family loans, and general economic conditions.  The
charge-offs in the 2009 period were due to two unsecured personal loans and a
commercial line of credit.





The
following table provides information with respect to the Company’s nonperforming
assets at the dates indicated. The
Company modified the terms of one residential mortgage, four commercial
mortgages and two commercial loans during the quarter ended March 31, 2009
totaling $4.9 million.  These loans have been performing under the new
terms since the modification.  The Company did not have any accruing
loans past due 90 days or more at the dates presented.


17
 Table of Contents


At
      March 31,
                                  
                                  
                                  At
      December 31,2009
                                  
                                  
                                  2008
                                  
                                  
                                  %
      Change(Dollars
      in thousands)Nonaccrual
      loans
                                  
                                  $
                                  2,360
                                  
                                  
                                  $
                                  2,678
                                  
                                  
                                  
                                  (11.87
                                  )
      %Real
      estate owned
                                  
                                  
                                  223
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  N/ATotal
      nonperforming assets
                                  
                                  $
                                  2,583
                                  
                                  
                                  $
                                  2,678
                                  
                                  
                                  
                                  (3.55
                                  )
      %Total
      nonperforming loans to total loans
                                  
                                  
                                  0.53
                                  %
                                  
                                  
                                  0.62
                                  %
                                  
                                  
                                  (14.52
                                  )
      %Total
      nonperforming loans to total assets
                                  
                                  
                                  0.43
                                  %
                                  
                                  
                                  0.50
                                  %
                                  
                                  
                                  (14.00
                                  )
      %Total
      nonperforming assets to total assets
                                  
                                  
                                  0.48
                                  %
                                  
                                  
                                  0.50
                                  %
                                  
                                  
                                  (4.00
                                  )
      %




Noninterest
Income.The following
table summarizes noninterest income for the three months ended March 31, 2009
and 2008.




Three
      MonthsEnded
      March 31,2009
                      
                      
                      2008
                      
                      
                      %
      Change(Dollars
      in thousands)Fees
      for services related to deposit accounts
                      
                      $
                      234
                      
                      
                      $
                      244
                      
                      
                      
                      (4.10
                      )
      %Gain
      on investments
                      
                      
                      176
                      
                      
                      
                      59
                      
                      
                      
                      198.31
                      %Fees
      for other services
                      
                      
                      125
                      
                      
                      
                      117
                      
                      
                      
                      6.84
                      %Income
      from bank owned life insurance
                      
                      
                      84
                      
                      
                      
                      75
                      
                      
                      
                      12.00
                      %Income
      from investment advisory services, net
                      
                      
                      56
                      
                      
                      
                      82
                      
                      
                      
                      (31.71
                      )
      %Other
      income
                      
                      
                      31
                      
                      
                      
                      50
                      
                      
                      
                      (38.00
                      )
      %Total
                      
                      $
                      706
                      
                      
                      $
                      627
                      
                      
                      
                      12.60
                      %




Noninterest
income increased $79,000, or 12.6%, for the three months ended March 31, 2009
over the same 2008 period primarily as a result of an increase in the gain on
the sale of investments.  The increase in the gain on the sale of
investments was primarily a result of the sale of our entire municipal bond
portfolio during the 2009 quarter.  The Company also experienced
increases in the noninterest income from bank owned life insurance and fees for
other services.  These increases were partially offset by decreases in
income from investment advisory services and fees related to deposit
accounts.








Noninterest
Expense.  The following
table summarizes noninterest expense for the three months ended March 31, 2009
and 2008.





Three
      MonthsEnded
      March 31,2009
                      
                      
                      2008
                      
                      
                      %
      Change(Dollars
      in thousands)Compensation,
      taxes and benefits
                      
                      $
                      1,884
                      
                      
                      $
                      1,808
                      
                      
                      
                      4.20
                      %Office
      occupancy
                      
                      
                      534
                      
                      
                      
                      523
                      
                      
                      
                      2.10
                      %FDIC
      insurance premiums
                      
                      
                      235
                      
                      
                      
                      9
                      
                      
                      
                      2,511.11
                      %Computer
      processing
                      
                      
                      222
                      
                      
                      
                      195
                      
                      
                      
                      13.85
                      %Directors
      compensation
                      
                      
                      199
                      
                      
                      
                      183
                      
                      
                      
                      8.74
                      %Advertising
                      
                      
                      55
                      
                      
                      
                      81
                      
                      
                      
                      (32.10
                      )
      %Loss
      on foreclosed real estate, net
                      
                      
                      6
                      
                      
                      
                      3
                      
                      
                      
                      100.00
                      %Other
      expenses
                      
                      
                      463
                      
                      
                      
                      403
                      
                      
                      
                      14.89
                      %Total
                      
                      $
                      3,598
                      
                      
                      $
                      3,205
                      
                      
                      
                      12.26
                      %





18
 Table of Contents


Noninterest
expense increased in the three months ended March 31, 2009 primarily as a result
of an increase in FDIC insurance expense and computer processing costs over the
2008 period.  The Company also experienced smaller increases in
compensation costs and office occupancy costs during the period.  The
increase in FDIC insurance expense is largely related to higher premiums being
charged by the FDIC along with higher average balances over the 2008
period.  Additionally, the Bank used its’ final portion of the
one-time assessment credit in the quarter ended March 31, 2008.  The
increases in computer processing costs, compensation expenses and office
occupancy costs are partially due to the opening of our tenth office in July of
2008.  The increases were partially offset by 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 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 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.  The
levels of these assets depend on our operating, financing, lending and investing
activities during any given period.  At March 31, 2009, cash and cash
equivalents totaled $18.2 million, including federal funds of $11.7
million.  Securities classified as available-for-sale, which provide
additional sources of liquidity, totaled $53.2 million at March 31,
2009.  At March 31, 2009, the Company had the ability to borrow a
total of $153.0 million from the Federal Home Loan Bank of Boston, of which
$107.1 million in borrowings was outstanding, along with $3.8 million in
repurchase agreements.  At March 31, 2009, 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 as of that date.  In addition, at
March 31, 2009, the Company had the ability to borrow $3.5 million from a
correspondent bank.  The Company had no advances outstanding on this
line at March 31, 2009.





The
following table summarizes the commitments and contingent liabilities as of the
dates indicated:





March
      31,
                              
                              
                              December
      31,(In
      thousands)
                              
                              2009
                              
                              
                              2008Commitments
      to extend credit:Loan
      commitments
                              
                              $
                              17,826
                              
                              
                              $
                              5,807Unused
      lines of credit
                              
                              
                              20,850
                              
                              
                              
                              20,328Amounts
      due mortgagors on construction loans
                              
                              
                              24,425
                              
                              
                              
                              25,855Amounts
      due on commercial  loans
                              
                              
                              15,948
                              
                              
                              
                              15,384Commercial
      letters of credit
                              
                              
                              4,485
                              
                              
                              
                              5,125





Certificates
of deposit due within one year of March 31, 2009 totaled $131.8 million, or
34.7% 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, 2010.  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.


19
 Table of Contents


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 three months ended March 31, 2009,
the Company originated $19.9 million of loans, including renewals and
refinances.  The Company did not purchase any investments during this
period.  These activities were funded primarily by an increase of
$16.7 million in deposits and the proceeds from sales and maturities of
available-for-sale securities of $12.7 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 $16.7 million for the three months ended March 31,
2009.  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 repurchase
agreements of $12.6 million for the three months ended March 31,
2009.  The increases in deposit accounts primarily funded our 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, 2009, 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 March 31, 2009, 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 March 31, 2009.





Naugatuck
      ValleyOTS
      Regulation
                                  
                                  Savings
      and LoanAdequately
                                  
                                  
                                  Well(Dollars
      in thousands)
                                  
                                  Capitalized
                                  
                                  
                                  Capitalized
                                  
                                  
                                  Amount
                                  
                                  
                                  RatioTier
      I  Capital (to Adjusted Total Assets)
                                  
                                  
                                  4.00
                                  %
                                  
                                  
                                  5.00
                                  %
                                  
                                  $
                                  41,036
                                  
                                  
                                  
                                  7.59
                                  %Total
      Risk-Based Capital (to Risk-Weighted Assets)
                                  
                                  
                                  8.00
                                  %
                                  
                                  
                                  10.00
                                  %
                                  
                                  
                                  44,179
                                  
                                  
                                  
                                  11.13
                                  %Tier
      I Risk-Based Capital (to Risk-Weighted Assets)
                                  
                                  
                                  4.00
                                  %
                                  
                                  
                                  6.00
                                  %
                                  
                                  
                                  41,036
                                  
                                  
                                  
                                  10.33
                                  %Tangible
      Equity Capital (to Tangible Assets)
                                  
                                  
                                  1.50
                                  %
                                  
                                  
                                  2.00
                                  %
                                  
                                  
                                  41,036
                                  
                                  
                                  
                                  7.59
                                  %







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.


20
 Table of Contents





For the
three months ended March 31, 2009, 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 OTS 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 50 to 300 basis point increase or 50 to 100 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 OTS, presents the change in the Bank’s
net portfolio value at December 31, 2008 (the most current information
available) that would occur in the event of an immediate change in interest
rates based on OTS assumptions, with no effect given to any steps that the Bank
might take to counteract that change.


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
                                              
                                              $
                                              31,211
                                              
                                              
                                              $
                                              (12,815
                                              )
                                              
                                              
                                              (29
                                              )
      %
                                              
                                              
                                              5.94
                                              %
                                              
                                              
                                              (1.98
                                              )
      %200
                                              
                                              
                                              38,299
                                              
                                              
                                              
                                              (5,727
                                              )
                                              
                                              
                                              (13
                                              )
      %
                                              
                                              
                                              7.11
                                              %
                                              
                                              
                                              (0.81
                                              )
      %100
                                              
                                              
                                              43,041
                                              
                                              
                                              
                                              (985
                                              )
                                              
                                              
                                              (2
                                              )
      %
                                              
                                              
                                              7.84
                                              %
                                              
                                              
                                              (0.08
                                              )
      %50
                                              
                                              
                                              43,809
                                              
                                              
                                              
                                              (217
                                              )
                                              
                                              
                                              (0
                                              )
      %
                                              
                                              
                                              7.92
                                              %
                                              
                                              
                                              -
                                              %0
                                              
                                              
                                              44,026
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              7.92
                                              %
                                              
                                              
                                              -(50)
                                              
                                              
                                              43,240
                                              
                                              
                                              
                                              (786
                                              )
                                              
                                              
                                              (2
                                              )
      %
                                              
                                              
                                              7.74
                                              %
                                              
                                              
                                              (0.18
                                              )
      %(100)
                                              
                                              
                                              41,718
                                              
                                              
                                              
                                              (2,308
                                              )
                                              
                                              
                                              (5
                                              )
      %
                                              
                                              
                                              7.45
                                              %
                                              
                                              
                                              (0.47
                                              )
      %








The OTS
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.


21
 Table of Contents


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.





There
were no changes in the Company’s internal control over financial reporting
during the three months ended March 31, 2009 that have materially affected, or
are reasonable likely to materially affect, the Company’s internal control over
financial reporting.











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 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2008, 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 March 31, 2009, the Company repurchased 81 shares
of common stock for $482, at an average cost of $5.95 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
      ProgramsJanuary
                              
                              
                              -
                              
                              
                              $
                              -
                              
                              
                              
                              -
                              
                              
                              
                              163,704February
                              
                              
                              -
                              
                              
                              $
                              -
                              
                              
                              
                              -
                              
                              
                              
                              163,704March
                              
                              
                              81
                              
                              
                              $
                              5.95
                              
                              
                              
                              81
                              
                              
                              
                              163,623Total
                              
                              
                              81
                              
                              
                              $
                              5.95
                              
                              
                              
                              81
                              
                              
                              
                              163,623


22
 Table of Contents





The
Company announced on February 19, 2008, that the Board of Directors authorized
the Company to repurchase up to 361,207 shares, or approximately 5%, of the
outstanding shares including shares held by Naugatuck Valley Mutual Holding
Company.  The repurchases will be conducted through open-market
purchases or privately negotiated transactions and will be made from time to
time depending on market conditions and other factors.  No time limit
was placed on the duration of the share repurchase program.  Any
repurchased shares will be held as treasury stock and will be available for
general corporate purposes.




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)


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.





23
 Table of Contents





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 13,
      2009
            by:
            /s/ John C.
      RomanJohn
      C. RomanPresident
      and Chief Executive Officer(principal
      executive officer)Date:
      May 13,
      2009
            by:
            /s/ Lee R.
      SchlesingerLee
      R. SchlesingerSenior
      Vice President and Chief Financial Officer(principal
      financial officer)






24