UNITED
STATES




SECURITIES
AND EXCHANGE COMMISSION




WASHINGTON,
DC 20549


____________





FORM
10-Q


(Mark
One)





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





For the
quarterly period ended March 31, 2010





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 organization)
            
            (I.R.S.
      Employer Identification No.)





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 x    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
x





As of May
11, 2010, there were 7,022,659 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,
      2010 and December 31, 2009
            3Consolidated Statements of Income for the three months ended
      March 31, 2010 and 2009
            4Consolidated Statements of Cash Flows for the three months
      ended March 31, 2010 and 2009
            5Notes to Unaudited Consolidated Financial
      Statements
            6Item
      2.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            16Liquidity and Capital Resources
            21Item
      3.
            Quantitative and Qualitative Disclosures About Market
      Risk
            23Item
      4.
            Controls and Procedures
            24Part
      II. Other InformationItem
      1.
            Legal Proceedings
            24Item
      1A.
            Risk Factors
            24Item
      2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            24Item
      3.
            Defaults Upon Senior Securities
            25Item
      4.
            (Removed and Reserved)
            25Item
      5.
            Other Information
            25Item
      6.
            Exhibits
            25SignaturesExhibits





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,
              2010
            
            
            December
      31,
              2009(Unaudited)ASSETSCash
      and due from depository institutions
            
            $
            4,740
            
            
            $
            9,003Investment
      in federal funds
            
            
            4,523
            
            
            
            3,143Investment
      securities available-for-sale, at fair value
            
            
            40,432
            
            
            
            37,623Investment
      securities held-to-maturity, at amortized cost
            
            
            1,373
            
            
            
            1,451Loans
      held for sale, at fair value
            
            
            194
            
            
            
            -Loans
      receivable, net
            
            
            480,841
            
            
            
            473,304Accrued
      income receivable
            
            
            2,051
            
            
            
            2,074Foreclosed
      real estate, net
            
            
            120
            
            
            
            140Premises
      and equipment, net
            
            
            9,866
            
            
            
            9,948Bank
      owned life insurance
            
            
            9,005
            
            
            
            8,920Federal
      Home Loan Bank stock, at cost
            
            
            6,252
            
            
            
            6,252Other
      assets
            
            
            4,818
            
            
            
            5,097Total
      assets
            
            $
            564,215
            
            
            $
            556,955LIABILITIES
      AND STOCKHOLDERS' EQUITYLiabilitiesDeposits
            
            $
            388,077
            
            
            $
            380,931Borrowed
      funds
            
            
            120,933
            
            
            
            118,984Mortgagors'
      escrow accounts
            
            
            2,620
            
            
            
            4,888Other
      liabilities
            
            
            1,875
            
            
            
            1,844Total
      liabilities
            
            
            513,505
            
            
            
            506,647Commitments
      and contingenciesStockholders'
      equityPreferred
      stock, $.01 par value; 1,000,000 shares authorized;no
      shares issued or outstanding
            
            
            -
            
            
            
            -Common
      stock, $.01 par value; 25,000,000 shares authorized;7,604,375
      shares issued, 7,022,659 shares outstanding at March31,
      2010 and 7,022,866 shares outstanding at December 31, 2009
            
            
            76
            
            
            
            76Paid-in
      capital
            
            
            33,814
            
            
            
            33,756Retained
      earnings
            
            
            25,085
            
            
            
            24,849Unearned
      ESOP shares (193,735 shares at March 31, 2010and
      December 31, 2009)
            
            
            (1,937
            )
            
            
            (1,937
            )Unearned
      stock awards (31,640 shares at March 31, 2010and
      32,340 shares at December 31, 2009)
            
            
            (347
            )
            
            
            (355
            )Treasury
      stock, at cost (583,549 shares at March 31, 2010and
      583,342 shares at December 31, 2009)
            
            
            (6,134
            )
            
            
            (6,132
            )Accumulated
      other comprehensive gain (loss)
            
            
            153
            
            
            
            51Total
      stockholders' equity
            
            
            50,710
            
            
            
            50,308Total
      liabilities and stockholders' equity
            
            $
            564,215
            
            
            $
            556,955





See notes
to consolidated financial statements.





3
 Table of Contents











Consolidated Statements of Income


(In
thousands, except per share data)


Three
      Months Ended
              March
      31,2010
            
            
            2009(Unaudited)Interest
      incomeInterest
      on loans
            
            $
            6,684
            
            
            $
            6,378Interest
      and dividends on investments and deposits
            
            
            459
            
            
            
            710Total
      interest income
            
            
            7,143
            
            
            
            7,088Interest
      expenseInterest
      on deposits
            
            
            1,811
            
            
            
            2,300Interest
      on borrowed funds
            
            
            804
            
            
            
            1,115Total
      interest expense
            
            
            2,615
            
            
            
            3,415Net
      interest income
            
            
            4,528
            
            
            
            3,673Provision
      for loan losses
            
            
            809
            
            
            
            285Net
      interest income after provision for loan losses
            
            
            3,719
            
            
            
            3,388Noninterest
      incomeFees
      for services related to deposit accounts
            
            
            246
            
            
            
            234Fees
      for other services
            
            
            165
            
            
            
            125Income
      from bank owned life insurance
            
            
            84
            
            
            
            84Income
      from investment advisory services, net
            
            
            41
            
            
            
            56Gain
      on investments
            
            
            8
            
            
            
            176Other
      income
            
            
            27
            
            
            
            31Total
      noninterest income
            
            
            571
            
            
            
            706Noninterest
      expenseCompensation,
      taxes and benefits
            
            
            2,075
            
            
            
            1,884Office
      occupancy
            
            
            587
            
            
            
            534Computer
      processing
            
            
            229
            
            
            
            222Directors
      compensation
            
            
            216
            
            
            
            199FDIC
      insurance premiums
            
            
            162
            
            
            
            235Advertising
            
            
            73
            
            
            
            55Loss
      on foreclosed real estate, net
            
            
            18
            
            
            
            6Other
      expenses
            
            
            494
            
            
            
            463Total
      noninterest expense
            
            
            3,854
            
            
            
            3,598Income
      before provisionfor
      income taxes
            
            
            436
            
            
            
            496Provision
      for income taxes
            
            
            122
            
            
            
            127Net
      income
            
            $
            314
            
            
            $
            369Earnings
      per common share - Basic and Diluted
            
            $
            0.05
            
            
            $
            0.05





See notes
to consolidated financial statements.





4
 Table of Contents







Consolidated
Statements of Cash Flows(In
thousands)


Three
      Months Ended
              March
      31,2010
            
            
            2009Cash
      flows from operating activities
            
            (Unaudited)Net
      income
            
            $
            314
            
            
            $
            369Adjustments
      to reconcile net income to cash provided by operating
      activities:Provision
      for loan losses
            
            
            809
            
            
            
            285Depreciation
      and amortization expense
            
            
            197
            
            
            
            218Net
      amortization from investments
            
            
            8
            
            
            
            14Amortization
      of intangible assets
            
            
            8
            
            
            
            8Stock-based
      compensation
            
            
            169
            
            
            
            165Gain
      on sale of investments
            
            
            (8
            )
            
            
            (176
            )Net
      change in:Accrued
      income receivable
            
            
            23
            
            
            
            125Deferred
      loan fees
            
            
            (46
            )
            
            
            19Cash
      surrender value of life insurance
            
            
            (84
            )
            
            
            (83
            )Other
      assets
            
            
            210
            
            
            
            (86
            )Other
      liabilities
            
            
            (72
            )
            
            
            97Net
      cash provided by operating activities
            
            
            1,528
            
            
            
            955Cash
      flows from investing activitiesProceeds
      from maturities and repayments of available-for-sale
      securities
            
            
            1,578
            
            
            
            2,152Proceeds
      from sale of available-for-sale securities
            
            
            1,982
            
            
            
            10,508Proceeds
      from maturities of held-to-maturity securities
            
            
            75
            
            
            
            -Purchase
      of available-for-sale securities
            
            
            (6,204
            )
            
            
            -Loan
      originations net of principal payments
            
            
            (8,614
            )
            
            
            (8,563
            )Purchase
      of property and equipment
            
            
            (115
            )
            
            
            (38
            )Proceeds
      from the sale of other real estate owned
            
            
            140
            
            
            
            -Net
      cash provided (used) by investing activities
            
            
            (11,158
            )
            
            
            4,059Cash
      flows from financing activitiesNet
      change in time deposits
            
            
            3,065
            
            
            
            7,755Net
      change in other deposit accounts
            
            
            4,081
            
            
            
            8,941Net
      change in mortgagors' escrow deposits
            
            
            (2,268
            )
            
            
            (2,029
            )Advances
      from Federal Home Loan Bank
            
            
            3,000
            
            
            
            -Repayment
      of advances from Federal Home Loan Bank
            
            
            (8,782
            )
            
            
            (11,275
            )Change
      in short term borrowings
            
            
            -
            
            
            
            (1,340
            )Net
      change in repurchase agreements
            
            
            7,731
            
            
            
            3,029Treasury
      stock acquired
            
            
            (1
            )
            
            
            -Dividends
      paid to stockholders
            
            
            (79
            )
            
            
            (158
            )Net
      cash provided by financing activities
            
            
            6,747
            
            
            
            4,923Net
      change in cash and cash equivalents
            
            
            (2,883
            )
            
            
            9,937Cash
      and cash equivalents at beginning of period
            
            
            12,146
            
            
            
            8,247Cash
      and cash equivalents at end of period
            
            $
            9,263
            
            
            $
            18,184Cash
      paid during the period for:Interest
            
            $
            2,607
            
            
            $
            3,042Income
      taxes
            
            
            1
            
            
            
            226Non-cash
      transactions:Transfer
      of loans to foreclosed real estate
            
            $
            120
            
            
            $
            223





See notes
to consolidated financial statements.





5
 Table of Contents





Notes to Consolidated Financial 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.





Planned
acquisition and conversion.On February 23, 2010, the Company announced
it had entered into a definitive agreement to acquire Southern Connecticut
Bancorp, Inc (“SCBI”), the holding company for The Bank of Southern Connecticut.
The Company also announced its mutual holding company parent, Naugatuck Valley
Mutual Holding Company has adopted a Plan of Conversion and Reorganization to
convert to a stock holding company by selling to the public its approximate 60%
ownership interest in the Company in a transaction commonly referred to as a
second step conversion. The completion of the acquisition of SCBI is contingent
on the completion of the second step conversion. In addition to the completion
of the second step conversion, the acquisition is contingent on the receipt of
regulatory approvals, the approval of SCBI's stockholders and other customary
conditions. The acquisition is expected to be completed in the third calendar
quarter of 2010.





The
acquisition is expected to occur immediately following the completion of the
second step conversion. Upon completion of the conversion, Naugatuck Valley
Savings and Loan will become the wholly-owned subsidiary of a new stock holding
company (“Newco”). It is expected that Newco will retain the name “Naugatuck
Valley Financial Corporation”.





As a
result of the acquisition, SCBI will merge with and into Newco, with Newco as
the surviving entity. SCBI shareholders will be able to elect to receive cash,
shares of Newco common stock, or a combination of cash and stock, subject to
proration, if necessary, to assure that 50% of SCBI's outstanding shares are
exchanged for Newco common stock and the remainder are exchanged for cash. The
exchange ratio for determining the number of shares of Newco common stock to be
exchanged for each share of SCBI common stock will equal $7.25 divided by the
initial offering price per share to be established for Newco's common stock in
the second step conversion offering. SCBI stockholders who elect to receive
stock are not expected to be subject to federal income tax on their receipt of
Newco common stock. As part of the transaction, The Bank of Southern Connecticut
will merge with and into Naugatuck Valley Savings and Loan, with Naugatuck
Savings and Loan as the surviving entity. Naugatuck Valley Savings and Loan
intends to continue to operate the four acquired banking offices of The Bank of
Southern Connecticut, which are located in New Haven (two offices), Branford and
North Haven, Connecticut, under the name "The Bank of Southern
Connecticut."





Information,
including details of the stock offering and detailed business and financial
information about Newco, NVFC and SCBI, will be provided in a prospectus and
proxy statement when the stock offering commences, which is expected to occur
late in the second or early in the third calendar quarter of 2010.





6
 Table of Contents





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.




Management
has evaluated subsequent events for potential recognition or disclosure in the
financial statements. No subsequent events were identified that would have
required a change to the financial statements or disclosure in the notes to the
financial statements.





Operating
results for the three months ended March 31, 2010 are not necessarily indicative
of the results that may be expected for the year ending December 31,
2010.





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, 2009. The year-end condensed
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by GAAP.




Certain
reclassifications have been made to prior period financial statements to conform
to the March 31, 2010 financial statement presentation. These reclassifications
only changed the reporting categories but did not affect our results of
operations or financial position.








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 at least 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.





7
 Table of Contents








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 — Accounting Standards Updates





In 2010,
the FASB issued authoritative guidance expanding disclosures related to fair
value measurements including (i) the amounts of significant transfers of
assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the
reasons for the transfers, (ii) the reasons for transfers of assets or
liabilities in or out of Level 3 of the fair value hierarchy, with significant
transfers disclosed separately, (iii) the policy for determining when
transfers between levels of the fair value hierarchy are recognized and
(iv) for recurring fair value measurements of assets and liabilities in
Level 3 of the fair value hierarchy, a gross presentation of information about
purchases, sales, issuances and settlements. The new guidance further clarifies
that (i) fair value measurement disclosures should be provided for each class of
assets and liabilities (rather than major category), which would generally be a
subset of assets or liabilities within a line item in the statement of financial
position and (ii) disclosures should be provided about the valuation
techniques and inputs used to measure fair value for both recurring and
nonrecurring fair value measurements for each class of assets and liabilities
included in Levels 2 and 3 of the fair value hierarchy. The disclosures related
to the gross presentation of purchases, sales, issuances and settlements of
assets and liabilities included in Level 3 of the fair value hierarchy will be
required beginning January 1, 2011. The remaining disclosure requirements
and clarifications made by the new guidance became effective on January 1,
2010.







In February, 2010, the FASB issued ASU
No. 2010-09,Subsequent Events
(Topic 855): Amendments to Certain Recognition and Disclosure
Requirements. This update
amends the guidance to remove the requirement for SEC filers to disclose the
date through which subsequent events have been evaluated. SEC filers must
continue to evaluate subsequent events through the date the financial statements
are issued. The amendment was effective and has been adopted by the Company upon
issuance.





8
 Table of Contents





NOTE
5 – INVESTMENT SECURITIES





At March
31, 2010, 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
            
            $
            1,527
            
            
            $
            60
            
            
            $
            -
            
            
            $
            1,587Corporate
      bonds
            
            
            1,000
            
            
            
            -
            
            
            
            (267
            )
            
            
            733Mortgage-backed
      securities
            
            
            26,176
            
            
            
            1,061
            
            
            
            (21
            )
            
            
            27,216Collateralized
      mortgage obligations
            
            
            3,125
            
            
            
            -
            
            
            
            (97
            )
            
            
            3,028Total
      debt securities
            
            
            31,828
            
            
            
            1,121
            
            
            
            (385
            )
            
            
            32,564Auction-rate
      trust preferred securities
            
            
            8,200
            
            
            
            -
            
            
            
            (332
            )
            
            
            7,868Total
      available-for-sale securities
            
            $
            40,028
            
            
            $
            1,121
            
            
            $
            (717
            )
            
            $
            40,432








Amortized
            
            
            Gross
      Unrealized
            
            
            Fair(In
      thousands)
            
            Cost
      Basis
            
            
            Gains
            
            
            Losses
            
            
            ValueHeld-to-maturity
      securities:Mortgage-backed
      securities
            
            
            1,373
            
            
            
            25
            
            
            
            -
            
            
            
            1,398Total
      held-to-maturity securities
            
            $
            1,373
            
            
            $
            25
            
            
            $
            -
            
            
            $
            1,398





At
December 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
            
            $
            1,529
            
            
            $
            54
            
            
            $
            -
            
            
            $
            1,583Corporate
      bonds
            
            
            1,000
            
            
            
            -
            
            
            
            (340
            )
            
            
            660Mortgage-backed
      securities
            
            
            23,561
            
            
            
            939
            
            
            
            -
            
            
            
            24,500Collateralized
      mortgage obligations
            
            
            3,091
            
            
            
            13
            
            
            
            (104
            )
            
            
            3,000Total
      debt securities
            
            
            29,181
            
            
            
            1,006
            
            
            
            (444
            )
            
            
            29,743Auction-rate
      trust preferred securities
            
            
            8,200
            
            
            
            -
            
            
            
            (320
            )
            
            
            7,880Total
      available-for-sale securities
            
            $
            37,381
            
            
            $
            1,006
            
            
            $
            (764
            )
            
            $
            37,623








Amortized
            
            
            Gross
      Unrealized
            
            
            Fair(In
      thousands)
            
            Cost
      Basis
            
            
            Gains
            
            
            Losses
            
            
            ValueHeld-to-maturity
      securities:U.S.
      government and agency obligations
            
            
            1,451
            
            
            
            24
            
            
            
            -
            
            
            
            1,475Total
      held-to-maturity securities
            
            $
            1,451
            
            
            $
            24
            
            
            $
            -
            
            
            $
            1,475








The
Company has identified 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.





9
 Table of Contents











At March
31, 2010, these securities had an aggregate fair value of $9.9 million which
resulted in an unrealized loss of $717,000 as compared to an aggregate fair
value of $3.4 million with an unrealized loss of $764,000 at December 31,
2009.








NOTE
6 – LOANS RECEIVABLE





A summary
of loans receivable at March 31, 2010 and December 31, 2009 is as
follows:





(In
      thousands)
            
            March
      31,
              2010
            
            
            December
      31,
              2009Real
      estate loans:One-to-four
      family
            
            $
            230,913
            
            
            $
            229,693Construction
            
            
            35,318
            
            
            
            46,298Multi-family
      and commercial real estate
            
            
            153,159
            
            
            
            134,931Total
      real estate loans
            
            
            419,390
            
            
            
            410,922Commercial
      business loans
            
            
            30,278
            
            
            
            31,325Consumer
      loans:Savings
      accounts
            
            
            2,585
            
            
            
            1,113Personal
            
            
            207
            
            
            
            256Automobile
            
            
            203
            
            
            
            230Home
      equity
            
            
            36,161
            
            
            
            37,276Total
      consumer loans
            
            
            39,156
            
            
            
            38,875Totals
      loans
            
            
            488,824
            
            
            
            481,122Less:Allowance
      for loan losses
            
            
            4,795
            
            
            
            3,996Undisbursed
      construction loans
            
            
            2,687
            
            
            
            3,336Deferred
      loan origination fees
            
            
            501
            
            
            
            486Loans
      receivable, net
            
            $
            480,841
            
            
            $
            473,304




Nonperforming
loans totaled $11.2 million at March 31, 2010 and $6.0 million at December 31,
2009. 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 $421,000 for the quarter ended March
31, 2010 and $328,000 for the year ended December 31, 2009.





At March
31, 2010, the Bank had $7.9 million of loans which were considered to be
impaired, with an allocated allowance of $601,000, compared to $744,000 of such
loans at December 31, 2009 with an allowance of $98,000. The increase is
primarily due to five commercial loans secured by real estate, two residential
mortgage loans and one home equity loan which were classified during the
period.





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





(In
      thousands)
            
            Three
      months ended
              March
      31,
              2010
            
            
            For
      the year ended
              December
      31,
              2009Balance
      at beginning of year
            
            $
            3,996
            
            
            $
            2,869Provision
      for loan losses
            
            
            809
            
            
            
            1,144Charge-offs
            
            
            (10
            )
            
            
            (18
            )Recoveries
            
            
            -
            
            
            
            1Balance
      at end of period
            
            $
            4,795
            
            
            $
            3,996





10
 Table of Contents





NOTE
7 - 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
options 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 each of the three
months ended March 31, 2010 and 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). Unallocated common shares held
by the ESOP are not included in the weighted-average number of common shares
outstanding for purposes of calculating either basic or diluted net income per
common share.





Three
      Months Ended
              March
      31,2010
            
            
            2009Net
      income
            
            $
            314,000
            
            
            $
            369,000Weighted-average
      common shares outstanding:Basic
            
            
            6,829,108
            
            
            
            6,813,263Effect
      of dilutive stock optionsand
      restrictive stock awards
            
            
            -
            
            
            
            -Diluted
            
            
            6,829,108
            
            
            
            6,813,263Net
      income per common share:Basic
            
            $
            0.05
            
            
            $
            0.05Diluted
            
            $
            0.05
            
            
            $
            0.05







NOTE
8 - COMPREHENSIVE INCOME





Comprehensive
income is net income 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.





11
 Table of Contents




Three
      Months Ended
              March
      31,2010
            
            
            2009(In
      thousands)Net
      income
            
            $
            314
            
            
            $
            369Other
      comprehensive income:Unrealized
      gain on securities available-for-sale
            
            
            169
            
            
            
            2,015Reclassification
      adjustment for gainsrealized
      in net income
            
            
            (8
            )
            
            
            (176
            )Other
      comprehensive income before tax effect
            
            
            161
            
            
            
            1,839Income
      tax expense related to items of othercomprehensive
      income
            
            
            59
            
            
            
            44Other
      comprehensive income net of tax effect
            
            
            102
            
            
            
            1,795Total
      comprehensive income
            
            $
            416
            
            
            $
            2,164







NOTE
9 - 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.





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





Grant
      dateJuly
      26,
              2008
            
            
            December
      18,
              2007
            
            
            March
      20,
              2007
            
            
            March
      21,
              2006
            
            
            July
      26,
              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 $138,940 for the three months ended March
31, 2010, compared to $135,880 for the three months ended March 31, 2009, in
connection with the stock option and restricted stock awards.





12
 Table of Contents





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. 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:





Grant
      date
            
            July
      26,
              2008
            
            
            December
      18,
              2007
            
            
            March
      20,
              2007
            
            
            March
      21,
              2006
            
            
            July
      26,
              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





NOTE
10 - DIVIDENDS





On
January 19, 2010, the Company's Board of Directors declared a cash dividend of
$0.03 per outstanding common share, which was paid on March 2, 2010, to
stockholders of record as of the close of business on February 5,
2010.





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").








NOTE
11 – FAIR VALUE





The
following is a summary of the carrying value and estimated fair value of the
Company’s significant financial instruments as of March 31, 2010 and December
31, 2009:





March
      31, 2010
            
            
            December
      31, 2009(In
      thousands)
            
            Carrying
              Amount
            
            
            Estimated
              Fair
      Value
            
            
            Carrying
              Amount
            
            
            Estimated
              Fair
      ValueFinancial
      AssetsCash
      and cash equivalents
            
            $
            9,263
            
            
            $
            9,263
            
            
            $
            12,146
            
            
            $
            12,146Investment
      securities available for sale
            
            
            40,432
            
            
            
            40,432
            
            
            
            37,623
            
            
            
            37,623Investment
      securities held-to-maturity
            
            
            1,373
            
            
            
            1,398
            
            
            
            1,451
            
            
            
            1,475Loans
      held for sale
            
            
            194
            
            
            
            194
            
            
            
            -
            
            
            
            -Loans
      receivable, net
            
            
            480,841
            
            
            
            486,839
            
            
            
            473,304
            
            
            
            476,665Accrued
      income receivable
            
            
            2,051
            
            
            
            2,051
            
            
            
            2,074
            
            
            
            2,074Financial
      LiabilitiesDeposits
            
            $
            388,077
            
            
            $
            378,850
            
            
            $
            380,931
            
            
            $
            379,176Borrowed
      funds
            
            
            120,933
            
            
            
            121,983
            
            
            
            118,984
            
            
            
            120,719Mortgagors'
      escrow accounts
            
            
            2,620
            
            
            
            2,620
            
            
            
            4,888
            
            
            
            4,888








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. 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:





13
 Table of Contents











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 uses 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.





Auction-rate trust preferred
securities: The Company owns approximately $8.2 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
Company uses a discounted cash flow model to determine the value of its
investments in the ARPs. The 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. 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.





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).





Assets
and liabilities measured at fair value, including financial assets and
liabilities for which the Company has elected the fair value option, are
summarized below:





14
 Table of Contents




March
      31, 2010
              Carrying
      Value(In
      thousands)
            
            Level
      1
            
            
            Level
      2
            
            
            Level
      3
            
            
            TotalAssets
      measured at fair value on a recurring basis:Available-for-sale
      investment securities
            
            $
            -
            
            
            $
            32,564
            
            
            $
            7,868
            
            
            $
            40,432Residential
      loans held for sale
            
            
            -
            
            
            
            194
            
            
            
            -
            
            
            
            194Assets
      measured at fair value on a non-recurring basis:Impaired
      loans
            
            
            -
            
            
            
            7,234
            
            
            
            18
            
            
            
            7,252Real
      estate owned
            
            
            -
            
            
            
            -
            
            
            
            120
            
            
            
            120




There
were no significant transfers of assets between Levels 1, 2 or 3 of the fair
value hierarchy during the three months ended March 31, 2010. In addition, there
were no purchases, sales, issuances or settlements of assets classified as Level
3 in the fair value hierarchy during the same period.





Impaired
loans are carried at fair value. Collateral dependent loans and real estate
owned are considered Level 3, as the fair value is based on an appraisal
prepared using observable inputs. Non-collateral dependent loans are measured
using a discounted cash flow technique and are considered to be Level 3
estimates.







The
following is a further description of the principal valuation methods used by
the Company to estimate the fair values of its financial
instruments.




Cash and cash
equivalents-
The carrying amounts reported in the statement of financial condition
approximate fair value of these assets.




Loans receivable - For
variable rate loans that reprice frequently and without significant change in
credit risk, fair values are based on carrying values. The fair value of other
loans are estimated using discounted cash flow analyses using interest rates
currently being offered for loans with similar terms to borrowers of similar
credit quality. The fair value of nonaccrual loans was estimated using the
estimated fair values of the underlying collateral.




Accrued income receivable -
The carrying amounts reported in the statement of financial condition
approximate these assets' fair value.




Deposits liabilities - The
fair values of non-interest-bearing demand and savings deposits are, by
definition, equal to the amount payable on demand at the reporting date, i.e.,
their carrying amounts. Fair values for time certificates of deposit are
estimated using a discounted cash flow technique that applies interest rates
currently being offered to a schedule of aggregated expected monthly maturities
on time deposits.




Borrowed Funds - Fair values
are estimated using discounted cash flow analyses based on the Bank's current
incremental borrowing rates for similar types of borrowing
arrangements.




Mortgagors’ escrow accounts –The carrying amounts reported in the statement of financialcondition approximate
the fair value of the mortgagors’ escrow accounts.








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 upon 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.





15
 Table of Contents





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, 2009 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, 2009 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, 2010 and December 31, 2009





Total
assets increased by $7.2 million, or 1.3%, to $564.2 million during the period
from December 31, 2009 to March 31, 2010, primarily due to an increase of $7.7
million in loans and an increase of $2.7 million in investments, partially
offset by a decrease in cash and cash equivalents of $2.9 million. The increase
in loans primarily reflects an increase of $18.2 million in multi-family and
commercial real estate loans, an increase of $1.4 million in residential
mortgages, partially offset by a decrease of $11.0 million in construction loans
and a decrease of $1.0 million in commercial business loans. These increases
were primarily funded by increases in deposits and borrowings. While the largest
segment of the loan portfolio is residential mortgages, the Bank continues to
grow its multi-family and commercial real estate portfolio.





Total
liabilities were $513.5 million at March 31, 2010 compared to $506.6 million at
December 31, 2009. Deposits at March 31, 2010 increased $7.1 million, or 1.9%,
over December 31, 2009. Borrowed funds, including advances from the Federal Home
Loan Bank of Boston and reverse repurchase agreements, increased $1.9 million,
from $119.0 million at December 31, 2009 to $120.9 million at March 31, 2010.
The increases in deposits and borrowings were used primarily to fund the growth
in loans and investments.





Total
stockholders’ equity increased $402,000, from $50.3 million at December 31, 2009
to $50.7 million at March 31, 2010. The increase in stockholders’ equity was
primarily due to net income of $314,000 for the three month period, a net
decrease to the unrealized loss on available-for-sale securities of $102,000,
and $66,000 in capital adjustments related to the Company’s 2005 Equity
Incentive Plan, partially offset by dividends of $79,000 paid to
stockholders.








Comparison
of Operating Results For the Three Months Ended March 31, 2010 and
2009





General.
For the three months ended March 31, 2010, the Company recorded net income of
$314,000 compared to net income of $369,000 for the three months ended March 31,
2009. The decrease was primarily due to a higher loan loss provision, lower
noninterest income and higher noninterest expense, partially offset by a higher
level of net interest income over the prior period.





16
 Table of Contents





Net Interest
Income.Net interest income
increased $855,000, or 23.3%, to $4.5 million for the three months ended March
31, 2010. The increase in net interest income for the period resulted from a
$800,000, or 23.4%, decrease in total interest expense, combined with a $55,000,
or 0.8%, increase in interest income. The Company experienced an increase in the
average balances of interest earning assets of 2.6% in the three month period,
while the average rate earned on these assets decreased by 10 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 9.3%
in the three month period, primarily in the commercial mortgage and residential
mortgage portfolios. The Company experienced a decrease in the average balance
of investment securities of 33.1%, due to the sale of a portion of our mortgage
backed securities portfolio during the third quarter of 2009, combined with
increasing prepayment speeds on mortgage backed securities.





Interest
expense decreased by $800,000, or 23.4% for the three months ended March 31,
2010, due to a reduction of 70 basis points in the average cost of interest
bearing liabilities, from 2.76% to 2.06%. The decrease in the average cost of
interest bearing liabilities, due primarily to the decreasing rate environment,
was partially offset by a $13.0 million increase in the average balance. The
average balance of interest-bearing deposits increased by $7.1 million, or 1.9%
and the average balance of borrowed funds increased by $5.9 million, or 5.1%
over this period.





The
following table summarizes changes in interest income and interest expense for
the three months ended March 31, 2010 and 2009.





Three
      Months
              Ended
      March 31,2010
            
            
            2009
            
            
            %
      Change(Dollars
      in thousands)Interest
      income:Loans
            
            $
            6,684
            
            
            $
            6,378
            
            
            
            4.80
            %Fed
      Funds sold
            
            
            1
            
            
            
            3
            
            
            
            (66.67
            )
      %Investment
      securities
            
            
            458
            
            
            
            707
            
            
            
            (35.22
            )
      %Total
      interest income
            
            
            7,143
            
            
            
            7,088
            
            
            
            0.78
            %Interest
      expense:Certificate
      accounts
            
            
            1,658
            
            
            
            2,096
            
            
            
            (20.90
            )
      %Regular
      savings accounts
            
            
            85
            
            
            
            96
            
            
            
            (11.46
            )
      %Checking
      and NOW accounts
            
            
            11
            
            
            
            12
            
            
            
            (8.33
            )
      %Money
      market savings accounts
            
            
            57
            
            
            
            96
            
            
            
            (40.63
            )
      %Total
      interest-bearing deposits
            
            
            1,811
            
            
            
            2,300
            
            
            
            (21.26
            )
      %FHLB
      advances
            
            
            772
            
            
            
            1,105
            
            
            
            (30.14
            )
      %Other
      borrowings
            
            
            32
            
            
            
            10
            
            
            
            220.00
            %Total
      interest expense
            
            
            2,615
            
            
            
            3,415
            
            
            
            (23.43
            )
      %Net
      interest income
            
            $
            4,528
            
            
            $
            3,673
            
            
            
            23.28
            %





17
 Table of Contents





The
following table summarizes average balances and average yields and costs for the
three months ended March 31, 2010 and 2009.





Three
      Months Ended March 31,2010
            
            2009Average
              Balance
            
            
            Yield/
              Cost
            
            Average
              Balance
            
            
            Yield/
              Cost(Dollars
      in thousands)Interest-earning
      assetsLoans
            
            $
            475,011
            
            
            
            5.63
            %
            
            $
            434,724
            
            
            
            5.87
            %Fed
      Funds sold
            
            
            4,128
            
            
            
            0.10
            %
            
            
            11,444
            
            
            
            0.10
            %Investment
      securities
            
            
            39,873
            
            
            
            4.59
            %
            
            
            59,580
            
            
            
            4.75
            %Federal
      Home Loan Bank stock
            
            
            6,252
            
            
            
            0.00
            %
            
            
            6,252
            
            
            
            0.00
            %Total
      interest-earning assets
            
            $
            525,264
            
            
            
            5.44
            %
            
            $
            512,000
            
            
            
            5.54
            %Interest-bearing
      liabilitiesCertificate
      accounts
            
            $
            233,657
            
            
            
            2.84
            %
            
            $
            240,824
            
            
            
            3.48
            %Regular
      savings accounts & escrow
            
            
            68,421
            
            
            
            0.50
            %
            
            
            53,515
            
            
            
            0.72
            %Checking
      and NOW accounts
            
            
            56,269
            
            
            
            0.08
            %
            
            
            57,643
            
            
            
            0.08
            %Money
      market savings accounts
            
            
            25,881
            
            
            
            0.88
            %
            
            
            25,137
            
            
            
            1.53
            %Total
      interest-bearing deposits
            
            
            384,228
            
            
            
            1.89
            %
            
            
            377,119
            
            
            
            2.44
            %FHLB
      advances
            
            
            109,895
            
            
            
            2.81
            %
            
            
            115,332
            
            
            
            3.83
            %Other
      borrowings
            
            
            13,170
            
            
            
            0.97
            %
            
            
            1,784
            
            
            
            2.24
            %Total
      interest-bearing liabilities
            
            $
            507,293
            
            
            
            2.06
            %
            
            $
            494,235
            
            
            
            2.76
            %











Allowance for
Loan Losses and Asset Quality. The allowance for loan losses is a
valuation allowance for the probable losses inherent in the loan portfolio. We
evaluate the need to establish allowances against losses on loans on a quarterly
basis, or more often if warranted. When additional allowances are needed a
provision for loan losses is charged against earnings. The recommendations for
increases or decreases to the allowance are presented by management to the Board
of Directors on a quarterly basis, or more often if warranted. The methodology
for assessing the appropriateness of the allowance for loan losses consists of
the following process:





On a
quarterly basis, or more often if warranted, management analyzes the loan
portfolio. For individually evaluated loans that are considered impaired, a
reserve will be established based on either the present value of expected future
cash flows discounted at the loan’s effective interest rate, the loan’s
observable market price, or for loans that are considered collateral dependant,
the fair value of the collateral. A loan is considered impaired when, based on
current information and events, it is probable that a creditor will be unable to
collect all amounts due under the contractual term of the loan
agreement.





All other
loans, including loans that are individually evaluated but not considered
impaired, are segregated into groups based on similar risk factors. Each of
these groups is then evaluated based on several factors to estimate credit
losses. Management will determine for each category of loans with similar risk
characteristics the historical loss rate. Historical loss rates provide a
reasonable starting point for the Bank’s analysis but analysis and trends in
losses do not form a sufficient basis to determine the appropriate level of the
loan loss reserve. Management also considers qualitative and environmental
factors likely to cause losses. These factors include but are not limited to:
changes in the amount and severity of past due, non-accrual and adversely
classified loans; changes in local, regional, and national economic conditions
that will affect the collectibility of the portfolio; changes in the nature and
volume of loans in the portfolio; changes in concentrations of credit, lending
area, industry concentrations, or types of borrowers; changes in lending
policies, procedures, competition, management, portfolio mix, competition,
pricing, loan to value trends, extension and modification requests; and loan
quality trends. This analysis establishes factors that are applied to each of
the segregated groups of loans to determine an acceptable level of loan loss
reserve.





18
 Table of Contents





In
addition, we engage an independent consultant to review our commercial loan
portfolio and consider recommendations based on their review of specific credits
in the portfolio for classifying and monitoring these loans.





Although
we believe that we use the best information available to establish the allowance
for loan losses, future adjustments to the allowance for loan losses may be
necessary and results of operations could be adversely affected if circumstances
differ substantially from the assumptions used in making the determinations. In
addition, because further events affecting borrowers and collateral cannot be
predicted with certainty, there can be no assurance that the existing allowance
for loan losses is adequate or that increases will not be necessary should the
quality of any loans deteriorate as a result of the factors discussed
above.





Furthermore,
while we believe we have established our allowance for loan losses in conformity
with generally accepted accounting principles, there can be no assurance that
regulators, in reviewing our loan portfolio during their examination process,
will not request us to increase our allowance for loan losses based on
information available to them at the time of their examination and their
judgment, which may differ from ours.





Any
material increase in the allowance for loan losses may adversely affect our
financial condition and results of operations.





The
following table summarizes the activity in the allowance for loan losses and
provision for loan losses for the three months ended March 31, 2010 and
2009.





Three
      Months
              Ended
      March 31,2010
            
            
            2009(In
      thousands)Allowance
      at beginning of period
            
            $
            3,996
            
            
            $
            2,869Provision
      for loan losses
            
            
            809
            
            
            
            285Charge-offs
            
            
            (10
            )
            
            
            (11
            )Recoveries
            
            
            -
            
            
            
            -Net
      recoveries (charge-offs)
            
            
            (10
            )
            
            
            (11
            )Allowance
      at end of period
            
            $
            4,795
            
            
            $
            3,143








The
Company recorded a provision for loan losses of $809,000 for the three month
period ended March 31, 2010, compared to $285,000 for the same 2009 period. The
increase in the provision in the 2010 period was due primarily to the allocation
of a specific reserve of $325,000 for one commercial real estate loan based
primarily on the results of a recent independent appraisal of the collateral
property. An increase in non-performing and classified loans, the growth of the
total loan portfolio, a change in the mix of the portfolio towards commercial
real estate loans which are generally inherently riskier than one-to-four family
loans, and general economic conditions also contributed to the increased
provision. The charge-off in the 2010 period was due to a write down of the
value of a property taken as a deed-in-lieu of foreclosure.





The
following table provides information with respect to the Company’s nonperforming
assets at the dates indicated. The
Company modified the terms of two commercial loans totaling $85,000 and two
residential mortgages totaling $632,000, during the quarter ended March 31,
2010. These loans have been performing under the new terms since the date of
modification. The Company did not have any accruing loans past due 90 days or
more at the dates presented.





19
 Table of Contents




At
      March 31,
              2010
            
            
            At
      December 31,
              2009
            
            
            %
      Change(Dollars
      in thousands)Nonaccrual
      loans
            
            $
            9,960
            
            
            $
            6,000
            
            
            
            66.00
            %Troubled
      debt restructurings
            
            
            1,190
            
            
            
            -
            
            
            
            N/AReal
      estate owned
            
            
            120
            
            
            
            140
            
            
            
            N/ATotal
      nonperforming assets
            
            $
            11,270
            
            
            $
            6,140
            
            
            
            83.55
            %Total
      nonperforming loans to total loans
            
            
            2.30
            %
            
            
            1.26
            %
            
            
            82.54
            %Total
      nonperforming loans to total assets
            
            
            1.98
            %
            
            
            1.08
            %
            
            
            83.33
            %Total
      nonperforming assets to total assets
            
            
            2.00
            %
            
            
            1.10
            %
            
            
            81.82
            %








Non-performing
loans totaled $11.2 million at March 31, 2010 compared to $6.0 million at
December 31, 2009. The increase was primarily the result of the placing of two
commercial mortgage relationships totaling $4.2 million on non-accrual status.
Management is working with the borrowers to return the loans to accrual
status.








Noninterest
Income.The
following table summarizes noninterest income for the three months ended March
31, 2010 and 2009.





Three
      Months
              Ended
      March 31,2010
            
            
            2009
            
            
            %
      Change(Dollars
      in thousands)Fees
      for services related to deposit accounts
            
            $
            246
            
            
            $
            234
            
            
            
            5.13
            %Fees
      for other services
            
            
            165
            
            
            
            125
            
            
            
            32.00
            %Income
      from bank owned life insurance
            
            
            84
            
            
            
            84
            
            
            
            -
            %Income
      from investment advisory services, net
            
            
            41
            
            
            
            56
            
            
            
            (26.79
            )
      %Gain
      on investments
            
            
            8
            
            
            
            176
            
            
            
            (95.45
            )
      %Other
      income
            
            
            27
            
            
            
            31
            
            
            
            (12.90
            )
      %Total
            
            $
            571
            
            
            $
            706
            
            
            
            (19.12
            )
      %




Noninterest
income was $571,000 for the three months ended March 31, 2010, compared to
$706,000 for the quarter ended March 31, 2009. The decrease in the three month
period was primarily due to a lower level of gains on the sale of investments,
income from investment advisory services and other income. These amounts were
partially offset by slightly higher levels of service fee income. The higher
amount of gain on the sale of investments in the 2009 period was primarily a
result of the sale of the entire municipal bond portfolio during this
period.








Noninterest
Expense. The
following table summarizes noninterest expense for the three months ended March
31, 2010 and 2009.





Three
      Months
              Ended
      March 31,2010
            
            
            2009
            
            
            %
      Change(Dollars
      in thousands)Compensation,
      taxes and benefits
            
            $
            2,075
            
            
            $
            1,884
            
            
            
            10.14
            %Office
      occupancy
            
            
            587
            
            
            
            534
            
            
            
            9.93
            %Computer
      processing
            
            
            229
            
            
            
            222
            
            
            
            3.15
            %Directors
      compensation
            
            
            216
            
            
            
            199
            
            
            
            8.54
            %FDIC
      insurance premiums
            
            
            162
            
            
            
            235
            
            
            
            (31.06
            )
      %Advertising
            
            
            73
            
            
            
            55
            
            
            
            32.73
            %Loss
      on foreclosed real estate, net
            
            
            18
            
            
            
            6
            
            
            
            200.00
            %Other
      expenses
            
            
            494
            
            
            
            463
            
            
            
            6.70
            %Total
            
            $
            3,854
            
            
            $
            3,598
            
            
            
            7.12
            %




Noninterest
expense increased in the three months ended March 31, 2010 primarily as a result
of an increase in all categories of expense other than FDIC insurance expense.
FDIC insurance expense included an accrual adjustment in the 2009 period. The
increase in compensation expense was primarily due to new employees and salary
adjustments to existing employees. Other expenses for the 2010 period also
include nonrecurring costs associated with the planned acquisition of Southern
Connecticut Bancorp, Inc.





20
 Table of Contents














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, 2010, cash and cash equivalents totaled
$9.3 million, including federal funds of $4.5 million. Securities classified as
available-for-sale, which provide additional sources of liquidity, totaled $40.4
million at March 31, 2010. At March 31, 2010, the Company had the ability to
borrow a total of $154.7 million from the Federal Home Loan Bank of Boston, of
which $106.8 million in borrowings was outstanding, along with $14.1 million in
repurchase agreements. At March 31, 2010, 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, 2010, 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, 2010.





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





(In
      thousands)
            
            March
      31,
              2010
            
            
            December
      31,
              2009Commitments
      to extend credit:Loan
      commitments
            
            $
            17,499
            
            
            $
            10,611Unused
      lines of credit
            
            
            21,087
            
            
            
            21,142Amounts
      due mortgagors on construction loans
            
            
            23,673
            
            
            
            28,843Amounts
      due on commercial loans
            
            
            19,903
            
            
            
            17,899Commercial
      letters of credit
            
            
            4,572
            
            
            
            4,332





Certificates
of deposit due within one year of March 31, 2010 totaled $107.8 million, or
27.8% 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, 2011. Based on past experience, however, the Company believes that a
significant portion of our certificates of deposit will remain with us. The
Company has the ability to attract and retain deposits by adjusting the interest
rates offered.





Historically,
the Company (on a consolidated basis) 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.





21
 Table of Contents











The
Company’s primary investing activities are the origination of loans and the
purchase of securities. For the three months ended March 31, 2010, the Company
originated $19.8 million of loans, including renewals and refinances, and
purchased $6.2 million of securities. These activities were funded primarily by
the proceeds from sales and maturities of available-for-sale securities and held
to maturity securities of $3.6 million and an increase of $7.1 million in
deposits.





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
$7.1 million for the three months ended March 31, 2010. 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
increase in Federal Home Loan Bank advances and repurchase agreements of $1.9
million for the three months ended March 31, 2010. The increases in deposit
accounts primarily funded our lending and investing activities.





The
Company is a separate legal entity from the Bank and must provide for its own
liquidity. In addition to its operating expenses, the Company, on a stand-alone
basis, is responsible for paying any dividends declared to its shareholders. The
Company also has repurchased shares of its common stock. The Company’s primary
source of income is dividends received from the Bank. The amount of dividends
that the Bank may declare and pay to the Company in any calendar year, without
the receipt of prior approval from the Office of Thrift Supervision (“OTS”) but
with prior notice to the OTS, cannot exceed net income for that year to date
plus retained net income (as defined) for the preceding two calendar years. On a
stand-alone basis, the Company had liquid assets of $2.8 million at March 31,
2010.





The
Company is not subject to separate regulatory capital requirements. At March 31,
2010, the Bank was subject to the regulatory capital requirements of the 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, 2010, the Bank exceeded all of its
regulatory capital requirements, and was 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, 2010.





OTS
      Regulation
            
            Naugatuck
      Valley
              Savings
      and Loan(Dollars
      in thousands)
            
            Adequately
              Capitalized
            
            Well
              Capitalized
            
            Amount
            
            
            RatioTotal
      Risk-Based Capital (to Risk-Weighted Assets)
            
            
            8.00
            %
            
            
            10.00
            %
            
            $
            48,303
            
            
            
            11.19
            %Tier
      I Risk-Based Capital (to Risk-Weighted Assets)
            
            
            4.00
            %
            
            
            6.00
            %
            
            
            43,508
            
            
            
            10.08
            %Tier
      I  Capital (to Adjusted Total Assets)
            
            
            4.00
            %
            
            
            5.00
            %
            
            
            43,508
            
            
            
            7.74
            %Tangible
      Equity Capital (to Tangible Assets)
            
            
            1.50
            %
            
            
            2.00
            %
            
            
            43,508
            
            
            
            7.74
            %








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.





22
 Table of Contents





For the
three months ended March 31, 2010, 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, 2009
(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.





Basis
      Point ("bp")
            
            Net
      Portfolio Value
            
            Net
      Portfolio Value as % of
              Present
      Value of AssetsChange
      in Rates
            
            $
      Amount
            
            $
      Change
            
            %
      Change
            
            NPV
      Ratio
            
            Change(Dollars
      in thousands)300
      bp
            
            $
            36,491
            
            
            $
            (20,597
            )
            
            
            (36
            )
      %
            
            
            6.74
            %
            
            
            (3.13
            )
      %200
            
            
            44,506
            
            
            
            (12,582
            )
            
            
            (22
            )
      %
            
            
            8.03
            %
            
            
            (1.84
            )
      %100
            
            
            51,817
            
            
            
            (5,271
            )
            
            
            (9
            )
      %
            
            
            9.13
            %
            
            
            (0.74
            )
      %50
            
            
            54,807
            
            
            
            (2,281
            )
            
            
            (4
            )
      %
            
            
            9.56
            %
            
            
            (0.31
            )
      %0
            
            
            57,088
            
            
            
            -
            
            
            
            -
            
            
            
            9.87
            %
            
            
            -(50)
            
            
            58,434
            
            
            
            1,346
            
            
            
            2
            %
            
            
            10.03
            %
            
            
            0.16
            %(100)
            
            
            58,348
            
            
            
            1,260
            
            
            
            2
            %
            
            
            9.96
            %
            
            
            0.09
            %







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.
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.





23
 Table of Contents











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, 2010 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, 2009, 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.
 
 The
following table sets forth information regarding the Company’s repurchases of
its common stock for the quarter ended March 31, 2010.


24
 Table of Contents




Period
            
            Total
      Number
              of
      Shares
              Purchased
      (1)
            
            
            Average
      Price
              Paid
              per
      Share
            
            
            Total
      Number of
              Shares
      Purchased as
              Part
      of Publicly
              Announced
      Plans
              or
      Programs
            
            
            Maximum
      Number
              of
      Shares that May
              Yet
      Be Purchased
              Under
      the Plans
              or
      ProgramsJanuary
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            
            159,676February
            
            
            -
            
            
            $
            -
            
            
            
            -
            
            
            
            159,676March
            
            
            207
            
            
            $
            6.98
            
            
            
            -
            
            
            
            159,676Total
            
            
            207
            
            
            $
            6.98
            
            
            
            -
            
            
            
            159,676




(1)
Included the withholding of 207 shares at $6.98 per share subject to restricted
stock awards under the Naugatuck Valley Financial Corporation 2005 Equity
Incentive Plan as payment of taxes due upon the vesting of the restricted stock
awards.





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. – (Removed and Reserved)








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.





25
 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 14,
    2010
            by:
            /s/
      John C. RomanJohn
      C. RomanPresident
      and Chief Executive Officer(principal
      executive officer)Date:
      May 14,
    2010
            by:
            /s/
      Lee R. SchlesingerLee
      R. SchlesingerSenior
      Vice President and Chief Financial Officer(principal
      financial officer)






26