Naugatuck Valley Financial 10-Q 2008 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

____________

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2008

OR

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

For the transition period from ______________ to _____________

Commission file number:   0-50876

         NAUGATUCK VALLEY FINANCIAL CORPORATION         

(Exact name of registrant as specified in its charter)

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

                                    (203) 720-5000                                    

(Registrant’s telephone number, including area code)

                                                                        N/A                                                       &# 160;                

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

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

Yes ý No o

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

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

Yes o No ý

As of August 1, 2008, there were 7,039,394 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 June 30, 2008 and December 31, 2007	3
		Consolidated Statements of Income for the three and six months ended June 30, 2008 and 2007	4
		Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007	5
		Notes to Unaudited Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13
		Liquidity and Capital Resources	17
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
	Item 4.	Controls and Procedures	20
Part II.  Other Information
	Item 1.	Legal Proceedings	21
	Item 1A.	Risk Factors	21
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 3.	Defaults Upon Senior Securities	22
	Item 4.	Submission of Matters to a Vote of Security Holders	22
	Item 5.	Other Information	22
	Item 6.	Exhibits	22
Signatures
Exhibits

Part I - FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited).

2

Consolidated Statements of Financial Condition

(In thousands, except share data)

	June 30,			December 31,
	2008			2007
	(Unaudited)
ASSETS
Cash and due from depository institutions	$	7,605		$	7,873
Investment in federal funds		612			497
Investment securities		71,017			66,454
Loans receivable, net		396,002			359,831
Accrued income receivable		1,993			2,033
Premises and equipment, net		10,737			10,624
Bank owned life insurance		8,417			8,264
Federal Home Loan Bank stock		5,965			4,632
Other assets		2,694			2,319
Total assets	$	505,042		$	462,527
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	336,926		$	321,398
Borrowed funds		113,205			85,107
Mortgagors' escrow accounts		4,255			3,871
Other liabilities		1,882			1,694
Total liabilities		456,268			412,070
Commitments and contingencies
Stockholders' equity
Common stock, $.01 par value; 25,000,000 shares authorized;
7,604,375 shares issued, 7,043,594 shares outstanding at June
30, 2008 and 7,268,734 shares outstanding at December 31, 2007		76			76
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued or outstanding		-			-
Paid-in capital		33,576			33,483
Retained earnings		24,988			24,233
Unearned ESOP shares (233,513 shares at June 30, 2008
and December 31, 2007)		(2,335	)		(2,335	)
Unearned stock awards (89,320 shares at June 30, 2008
and 90,020 shares at December 31, 2007)		(987	)		(995	)
Treasury stock, at cost (563,614 shares at June 30, 2008
and 338,474 shares at December 31, 2007)		(5,973	)		(3,889	)
Accumulated other comprehensive loss		(571	)		(116	)
Total stockholders' equity		48,774			50,457
Total liabilities and stockholders' equity	$	505,042		$	462,527

See notes to consolidated financial statements.

3

Consolidated Statements of Income

(In thousands, except per share data)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008		2007			2008		2007
	(Unaudited)
Interest income
Interest on loans	$	5,958	$	5,200		$	11,876	$	10,322
Interest and dividends on investments and deposits		919		830			1,848		1,691
Total interest income		6,877		6,030			13,724		12,013
Interest expense
Interest on deposits		2,165		2,399			4,646		4,653
Interest on borrowed funds		1,178		790			2,243		1,632
Total interest expense		3,343		3,189			6,889		6,285
Net interest income		3,534		2,841			6,835		5,728
Provision for loan losses		113		-			275		51
Net interest income after provision for loan losses		3,421		2,841			6,560		5,677
Noninterest income
Fees for services related to deposit accounts		273		232			517		441
Fees for other services		132		139			249		258
Income from investment advisory services, net		92		85			174		148
Income from bank owned life insurance		78		77			153		154
Gain on sale of investments		46		21			105		27
Other income		40		52			89		102
Total noninterest income		661		606			1,287		1,130
Noninterest expense
Compensation, taxes and benefits		1,837		1,743			3,684		3,484
Office occupancy		554		473			1,078		986
Computer processing		203		180			398		359
Directors compensation		142		115			287		284
Advertising		118		159			199		255
(Gain) loss on foreclosed real estate, net		-		(1	)		3		(1	)
Other expenses		403		427			815		792
Total noninterest expense		3,257		3,096			6,464		6,159
Income before provision
for income taxes		825		351			1,383		648
Provision for income taxes		223		39			328		61
Net Income	$	602	$	312		$	1,055	$	587
Earnings per common share - Basic and Diluted	$	0.09	$	0.04		$	0.15	$	0.08

See notes to consolidated financial statements.

4

Consolidated Statements of Cash Flows

(In thousands)

	Six Months Ended
	June 30,
	2008			2007
Cash flows from operating activities	(Unaudited)
Net income	$	1,055		$	587
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses		275			51
Depreciation and amortization expense		405			386
Net amortization (accretion) from investments		36			(15	)
Amortization of intangible assets		17			17
Stock-based compensation		346			356
Gain on sale of investments		(106	)		(27	)
Net change in:
Accrued income receivable		41			(34	)
Deferred loan fees		64			24
Cash surrender value of life insurance		(153	)		(153	)
Other assets		(144	)		210
Other liabilities		(56	)		(125	)
Net cash provided by operating activities		1,780			1,277
Cash flows from investing activities
Proceeds from maturities and repayments of available-for-sale securities		5,077			3,898
Proceeds from sale of available-for-sale securities		12,631			4,113
Proceeds from maturities of held-to-maturity securities		190			1,010
Purchase of available-for-sale securities		(23,082	)		(2,792	)
Purchase of held-to-maturity securities		-			(250	)
Purchase of Federal Home Loan Bank stock		(1,333	)		(159	)
Loan originations net of principal payments		(36,510	)		(18,324	)
Purchase of property and equipment		(532	)		(115	)
Net cash used by investing activities		(43,559	)		(12,619	)
Cash flows from financing activities
Net change in time deposits		9,026			14,099
Net change in other deposit accounts		6,502			677
Net change in mortgagors' escrow deposits		383			288
Advances from Federal Home Loan Bank		38,465			8,998
Repayment of advances from Federal Home Loan Bank		(10,903	)		(7,858	)
Net change in repurchase agreements		536			114
Treasury stock acquired		(2,083	)		(1,038	)
Dividends paid to stockholders		(300	)		(299	)
Options exercised		-			3
Net cash provided by financing activities		41,626			14,984
Net change in cash and cash equivalents		(153	)		3,642
Cash and cash equivalents at beginning of period		8,370			7,942
Cash and cash equivalents at end of period	$	8,217		$	11,584
Cash paid during the period for:
Interest	$	6,927		$	6,281
Income taxes		508			146

See notes to consolidated financial statements.

5

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.

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 and the valuation of real estate acquired in connection with foreclosure or in satisfaction of loans.  While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowance may be necessary based on changes in economic conditions, particularly in Connecticut.

Operating results for the six months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending December 31, 2008.

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, 2007.  The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.

6

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:  allowance for loan losses and deferred income taxes.

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

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

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

NOTE 4 – RECENT ACCOUNTING PRONOUNCEMENTS

In September of 2006, the FASB issued Statement No. 157 (SFAS No. 157), “Fair Value Measurements.” This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The standard establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. SFAS No. 157 became effective for the Company on January 1, 2008. See Note 11 to the consolidated financial statements for additional information.

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

In February of 2007, the FASB issued Statement No. 159 (SFAS No. 159), “The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115.” This statement permits the measurement of many financial instruments and certain other assets and liabilities at fair value on an instrument-by-instrument, irrevocable basis. On January 1, 2008, the date this pronouncement became effective, the Company elected the fair value option on newly originated residential mortgage loans held for sale on a prospective basis. See Note 11 to the consolidated financial statements for additional information.

In December 2007, the FASB issued Statement No. 141(R) – Business Combinations. This statement replaces FASB Statement No. 141 – Business Combinations. SFAS No. 141(R) establishes principles and requirements for how an acquiring company (1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree, (2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase, and (3) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The new standard is effective for the Company on January 1, 2009. The Company is currently evaluating the impact of adopting SFAS No. 141(R) on the consolidated financial statements.

7

NOTE 5 – INVESTMENT SECURITIES

At June 30, 2008, the composition of the investment portfolio was:

	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Available-for-sale securities:
U.S. government and agency obligations	$	250	$	1	$	-		$	251
Municipal obligations		9,114		6		(82	)		9,038
Corporate bonds		1,000		-		(68	)		932
Mortgage-backed securities		44,382		42		(694	)		43,730
Collateralized mortgage obligations		3,437		-		(71	)		3,366
Total debt securities		58,183		49		(915	)		57,317
Auction rate preferred securities		12,700		-		-			12,700
Total available-for-sale securities	$	70,883	$	49	$	(915	)	$	70,017

	Amortized		Gross Unrealized				Fair
(In thousands)	Cost Basis		Gains		Losses		Value
Held-to-maturity securities:
U.S. government and agency obligations	$	1,000	$	5	$	-	$	1,005
Total held-to-maturity securities	$	1,000	$	5	$	-	$	1,005

At December 31, 2007, the composition of the investment portfolio was:

	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Available-for-sale securities:
U.S. government and agency obligations	$	2,749	$	1	$	(6	)	$	2,744
Municipal obligations		14,092		82		(99	)		14,075
Corporate bonds		1,000		-		(10	)		990
Mortgage-backed securities		31,352		67		(158	)		31,261
Collateralized mortgage obligations		3,547		-		(53	)		3,494
Total debt securities		52,740		150		(326	)		52,564
Auction rate preferred securities		12,700		-		-			12,700
Total available-for-sale securities	$	65,440	$	150	$	(326	)	$	65,264

	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Held-to-maturity securities:
U.S. government and agency obligations	$	1,000	$	-	$	(2	)	$	998
Interest bearing balances		190		-		-			190
Total held-to-maturity securities	$	1,190	$	-	$	(2	)	$	1,188

8

The Company has certain investment securities in which the market value of the security is less than the cost of the security.  Management believes that these unrealized losses are temporary and are the result of changes in market interest rates.  In making this determination, management considered the period of time the securities have been in a loss position, the percentage decline in comparison to the securities’ amortized cost, the financial condition of the issuer and the Company’s ability and intent to hold these securities until their fair value recovers to their amortized cost.  At June 30, 2008, these securities had an aggregate fair value of $46,446,000 which resulted in unrealized losses of $915,000 as compared with securities with an aggregate fair value of $29,267,000 with an unrealized loss of $328,000 at December 31, 2007.

NOTE 6 – LOANS RECEIVABLE

A summary of loans receivable at June 30, 2008 and December 31, 2007 is as follows:

	June 30,		December 31,
(Dollars in thousands)	2008		2007
Loans secured by first mortgages on real estate:
Conventional:
Fixed rate mortgage loans	$	180,045	$	165,764
Adjustable rate mortgage loans		23,459		24,834
Construction loans		4,825		7,046
Commercial loans		150,027		123,925
Loans on savings accounts		1,425		1,272
Personal, auto and property improvement loans		40,015		41,146
		399,796		363,987
Less:   Allowance for loan losses		2,469		2,163
Undisbursed construction loans		801		1,532
Deferred loan origination fees		524		461
Loans receivable, net	$	396,002	$	359,831

Non performing loans totaled approximately $1.8 million at June 30, 2008 and approximately $970,000 at December 31, 2007.  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 $83,000 at June 30, 2008 and $45,000 at December 31, 2007.

At June 30, 2008, the Bank had approximately $299,000 of loans which were considered to be impaired with an allocated allowance of $64,279 compared with approximately $107,600 of such loans at December 31, 2007 with no allocated allowance.  The increase is primarily due to one residential mortgage which was modified during the quarter.  This mortgage has been performing under the new terms since the modification.

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

	June 30,			December 31,
(In thousands)	2008			2007
Balance at beginning of year	$	2,163		$	2,071
Provision for loan losses		275			151
Loans written off		(7	)		(61	)
Recoveries of loans written off		38			2
Balance at end of period	$	2,469		$	2,163

9

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 relate solely to stock option and restricted stock awards. Anti-dilutive shares are common stock equivalents with weighted-average exercise prices in excess of the weighted-average market value for the periods presented.  For the three and six months ended June 30, 2008, anti-dilutive options excluded from the calculations totaled 350,730 options (with an exercise price of $11.10) and 7,500 options (with an exercise price of $12.49).  For the three and six months ended June 30, 2007, anti-dilutive options excluded from the calculations totaled 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				Six Months Ended
	June 30,				June 30,
	2008		2007		2008		2007
	(Dollars in thousands, except share data)
Net income	$	602	$	312	$	1,055	$	587
Weighted-average common shares outstanding:
Basic		6,849,891		7,146,802		6,921,891		7,165,702
Effect of dilutive stock options
and restrictive stock awards		-		26,875		-		22,563
Diluted		6,849,891		7,173,677		6,921,891		7,188,265
Net income per common share:
Basic	$	0.09	$	0.04	$	0.15	$	0.08
Diluted	$	0.09	$	0.04	$	0.15	$	0.08

NOTE 8 - COMPREHENSIVE INCOME

Comprehensive income is the net income of a company adjusted for any changes in equity from non-owner sources that are not recorded in the income statement (such as changes in the net unrealized gain/loss on available-for-sale securities). The purpose of reporting comprehensive income is to provide a measure of all changes in equity that result from recognized transactions and other economic events of the period other than transactions with owners in their capacity as owners. The Company’s sole source of other comprehensive income is the net unrealized gain (loss) on its available-for-sale securities.

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
	(In thousands)
Net income	$	602		$	312		$	1,055		$	587
Net unrealized loss on
securities available for sale
during the period, net of tax		(962	)		(444	)		(455	)		(362	)
Total Comprehensive Income (Loss)	$	(360	)	$	(132	)	$	600		$	225

10

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

Stock option awards were granted with an exercise price equal to the market price of the Company’s stock at the date of grant with the exception of those granted on March 21, 2006 and December 18, 2007, which have an exercise price equal to those granted on July 26, 2005 ($11.10, which was higher than the market price of $10.56 on March 21, 2006 and $9.09 on December 18, 2007).  Both stock options and restricted stock awards vest at 20% per year beginning on the first anniversary of the date of grant.

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

The Company adopted Financial Accounting Standards Board’s SFAS No.123(R), “Share Based Payment”, during 2005.  In accordance with Statement No.123 (R), the Company is recording share-based compensation expense related to outstanding stock option and restricted stock awards based upon the fair value at the date of grant over the vesting period of such awards on a straight-line basis.  The fair value of each restricted stock allocation, based on the market price at the date of grant, is recorded to unearned stock awards.  Compensation expenses related to unearned restricted shares are amortized to compensation, taxes and benefits expense over the vesting period of the restricted stock awards.  The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing method as described below.  The Company recorded share-based compensation expense of $127,097 and $254,193 for the three and six months ended June 30, 2008, respectively, compared to $117,750 and $234,238 for the three and six months ended June 30, 2007, in connection with the stock option and restricted stock awards.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing method which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option award.  In determining the expected term of the option awards, the Company elected to follow the simplified method as permitted by the SEC Staff Accounting Bulletin 107, which was issued to provide guidance on the implementation of SFAS 123(R). Under this method, the Company has estimated the expected term of the options as being equal to the average of the vesting term plus the original contractual term. The Company estimated its volatility using the historical volatility of other, similar companies during a period of time equal to the expected life of the options. The risk-free rate for the periods within the contractual life of the options is based upon the U.S. Treasury yield curve in effect at the time of grant.  Assumptions used to determine the weighted-average fair value of stock options granted were as follows:

11

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

NOTE 10 - DIVIDENDS

On April 22, 2008, the Company's Board of Directors declared a cash dividend of $0.06 per outstanding common share, which was paid on June 1, 2008, to stockholders of record as of the close of business on May 5, 2008.

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

Effective January 1, 2008, the Company adopted SFAS No. 157 and SFAS No. 159. Both standards address aspects of the expanding application of fair value accounting.

SFAS No. 157 defines fair value 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. SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values:

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

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

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

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

Investment securities: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2).

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

12

				Fair Value Measurements at June 30, 2008 Using:
						Significant
				Quoted Prices in		Other		Significant
			Active Markets for			Observable		Unobservable
	Carrying			Identical Assets		Inputs		Inputs
(In thousands)	Amount			(Level 1)		(Level 2)		(Level 3)
Financial Assets
Investment securities available for sale	$	70,017		$	-	$	70,017	$	-
Residential loans held for sale		-			-		-		-

Financial instruments recorded using SFAS No. 159

Under SFAS No. 159, the Company may elect to report most financial instruments and certain other items at fair value on an instrument-by-instrument basis with changes in fair value reported in net income. After the initial adoption, the election is made at the acquisition of an eligible financial asset, financial liability or firm commitment or when certain specified reconsideration events occur. The fair value election may not be revoked once an election is made.

Additionally, the transaction provisions of SFAS No. 159 permit a one-time election for existing positions at the adoption date with a cumulative-effect adjustment included in beginning retained earnings and future changes in fair value reported in net income. The Company did not elect the fair value option for any existing position at January 1, 2008.

The Company did elect the fair value option under SFAS No. 159 prospectively for residential loans held for sale.

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, 2007 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, 2007 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.

13

Comparison of Financial Condition at June 30, 2008 and December 31, 2007

Total assets increased by $42.5 million, or 9.2%, to $505.0 million during the period from December 31, 2007 to June 30, 2008, primarily due to an increase of $36.2 million in loans and an increase in investment securities of $4.6 million.  The increase in loans primarily reflects increases of $26.1 million in our commercial real estate loans and $12.9 million in one-to-four family mortgages, partially offset by a decrease in construction loans.  The increase in commercial loans is due in part to an additional lender who was hired in 2007 with a strong commercial background.  These increases were primarily funded by increases in deposits and borrowings.

Total liabilities were $456.3 million at June 30, 2008 compared to $412.1 million at December 31, 2007.  Deposits at June 30, 2008 increased $15.5 million, or 4.8%, over December 31, 2007 primarily due to more aggressive pricing on promotional accounts.  Borrowed funds, including advances from the Federal Home Loan Bank of Boston and reverse repurchase agreements, increased $28.1 million, from $85.1 million to $113.2 million.  The increases in deposits and borrowings were used primarily to fund the growth in loans and investments.  In late January 2008 and early February 2008, the Company initiated a leverage strategy to take advantage of the favorable rate environment and increase earnings.

Total stockholders’ equity decreased $1.7 million, from $50.5 million at December 31, 2007 to $48.8 million at June 30, 2008.  The decrease in equity was primarily due to stock repurchases of $2.1 million, a net increase to the unrealized loss on available-for-sale securities of $455,000 and dividends of $300,000 paid to stockholders, partially offset by net income of $1.1 million for the six-month period and $101,000 in capital adjustments related to the Company’s 2005 Equity Incentive Plan.

Comparison of Operating Results For the Three and Six Months Ended June 30, 2008 and 2007

General.     For the three months ended June 30, 2008, the Company had net income of $602,000 compared to $312,000 for the three months ended June 30, 2007, an increase of $290,000.  Net income increased $468,000 to $1.1 million for the six months ended June 30, 2008 from $587,000 for the six months ended June 30, 2007.  The increases in both the three and six month periods were primarily due to increases in net interest income and noninterest income, partially offset by increases in noninterest expense, the provision for loan losses and the provision for income taxes.

Net Interest Income.Net interest income increased $693,000, or 24.4%, to $3.5 million for the three months ended June 30, 2008 and increased by $1.1 million, or 19.3%, to $6.8 million for the six months ended June 30, 2008.  The increase in net interest income for the three month period resulted from a $847,000, or 14.1%, increase in total interest income, partially offset by a $154,000, or 4.8%, increase in interest expense.  For the six month period ended June 30, 2008, total interest income increased $1.7 million, or 14.2%, partially offset by an increase of $604,000, or 9.6%, in total interest expense.  The Company experienced an increase in the average balances of interest earning assets of 18.0% in the three month period and an increase of 16.2% for the six month period, while the average rate earned on these assets decreased by 21 basis points and 10 basis points over the same periods.  The increase in interest earning assets for both periods is attributed primarily to an increase in the loan portfolio.  The average balance in the loan portfolio increased by 20.0% in the three month period, and by 19.0% in the six month period, primarily in the commercial mortgage and residential mortgage portfolios.

Interest expense increased by $154,000, or 4.8% for the three months ended June 30, 2008, due to an increase of $71.2 million in the average balance of interest-bearing liabilities partially offset by a decrease in the average cost of these liabilities from 3.43% to 3.02%.  The average balance of Federal Home Loan Bank advances increased by $43.6 million over this period and the average balance of interest-bearing deposits increased by 8.9%.  Interest expense also increased in the six month period ended June 30, 2008 by $604,000, or 9.6%, again as a result of an increase in the average balance of interest-bearing liabilities of $63.4 million, or 17.2%.  The average cost decreased by 22 basis points from 3.40% to 3.18% over this period.

14

The following table summarizes changes in interest income and interest expense for the three and six months ended June 30, 2008 and 2007.

	Three Months							Six Months
	Ended June 30,							Ended June 30,
	2008		2007		% change			2008		2007		% change
	(Dollars in thousands)
Interest income:
Loans	$	5,958	$	5,200		14.58	%	$	11,876	$	10,322		15.06	%
Fed Funds sold		7		35		-80.00	%		35		71		-50.70	%
Investment securities		862		728		18.41	%		1,695		1,487		13.99	%
Federal Home Loan Bank stock		50		67		-25.37	%		118		133		-11.28	%
Total interest income		6,877		6,030		14.05	%		13,724		12,013		14.24	%
Interest expense:
Certificate accounts		1,933		2,048		-5.62	%		4,126		3,935		4.85	%
Regular savings accounts		69		67		2.99	%		132		140		-5.71	%
Checking and NOW accounts		33		153		-78.43	%		105		342		-69.30	%
Money market savings accounts		130		131		-0.76	%		283		236		19.92	%
Total interest-bearing deposits		2,165		2,399		-9.75	%		4,646		4,653		-0.15	%
FHLB advances		1,173		787		49.05	%		2,237		1,627		37.49	%
Other borrowings		5		3		66.67	%		6		5		20.00	%
Total interest expense		3,343		3,189		4.83	%		6,889		6,285		9.61	%
Net interest income	$	3,534	$	2,841		24.39	%	$	6,835	$	5,728		19.33	%

The following table summarizes average balances and average yields and costs for the three and six months ended June 30, 2008 and 2007.

	Three Months Ended June 30,										Six Months Ended June 30,
	2008					2007					2008					2007
	Average		Yield/			Average		Yield/			Average		Yield/			Average		Yield/
	Balance		Cost			Balance		Cost			Balance		Cost			Balance		Cost
	(Dollars in thousands)
Interest-earning assets
Loans	$	384,792		6.19	%	$	320,470		6.49	%	$	377,361		6.29	%	$	317,124		6.51	%
Fed Funds sold		1,206		2.32	%		2,461		5.69	%		2,036		3.44	%		2,481		5.72	%
Investment securities		72,582		4.75	%		66,557		4.38	%		69,948		4.85	%		67,781		4.39	%
Federal Home Loan Bank stock		5,773		3.46	%		4,057		6.61	%		5,423		4.35	%		4,032		6.60	%
Total interest-earning assets	$	464,353		5.92	%	$	393,545		6.13	%	$	454,768		6.04	%	$	391,418		6.14	%
Interest-bearing liabilities
Certificate accounts	$	203,853		3.79	%	$	176,299		4.65	%	$	203,296		4.06	%	$	172,140		4.57	%
Regular savings accounts & escrow		49,734		0.55	%		47,675		0.56	%		46,865		0.56	%		47,501		0.59	%
Checking and NOW accounts		51,780		0.25	%		59,268		1.03	%		53,439		0.39	%		60,457		1.13	%
Money market savings accounts		28,534		1.82	%		23,375		2.24	%		28,129		2.01	%		22,351		2.11	%
Total interest-bearing deposits		333,901		2.59	%		306,617		3.13	%		331,729		2.80	%		302,449		3.08	%
FHLB advances		108,105		4.34	%		64,552		4.88	%		100,939		4.43	%		66,996		4.86	%
Other borrowings		656		3.05	%		339		3.54	%		437		2.75	%		257		3.89	%
Total interest-bearing liabilities	$	442,662		3.02	%	$	371,508		3.43	%	$	433,105		3.18	%	$	369,702		3.40	%

15

Provision for Loan Losses.  The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the three and six months ended June 30, 2008 and 2007.

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2008			2007		2008			2007
	(In thousands)
Allowance at beginning of period	$	2,325		$	2,072	$	2,163		$	2,071
Provision for loan losses		113			-		275			51
Charge-offs		(7	)		-		(7	)		(51	)
Recoveries		38			1		38			2
Net recoveries (charge-offs)		31			1		31			(49	)
Allowance at end of period	$	2,469		$	2,073	$	2,469		$	2,073

The Company recorded a provision for loan losses of $113,000 for the three month period ended June 30, 2008, compared to no provision in the 2007 period.  Provisions of $275,000 and $51,000 were recorded for the six months ended June 30, 2008 and 2007, respectively.  The increase in the provisions in the 2008 periods is due primarily to the increasing size of the loan portfolio and a change in the mix of the portfolio towards commercial loans which are generally riskier than one-to-four family loans, along with general economic conditions.  The charge-offs in the 2008 period were due to two unsecured personal loans and the charge-offs in the 2007 period were due to one home equity loan and two personal loans.

The following table provides information with respect to the Company’s nonperforming assets at the dates indicated. The Company modified the terms of one residential mortgage during the quarter ended June 30, 2008 in the amount of $115,000.  This mortgage has been performing under the new terms since the modification.  The Company did not have any accruing loans past due 90 days or more at the dates presented.

	At June 30,			At December 31,
	2008			2007			% change
	(Dollars in thousands)
Nonaccrual loans	$	1,790		$	970			84.54	%
Total nonperforming assets	$	1,790		$	970			84.54	%
Total nonperforming loans to total loans		0.45	%		0.27	%		66.67	%
Total nonperforming loans to total assets		0.35	%		0.21	%		66.67	%
Total nonperforming assets to total assets		0.35	%		0.21	%		66.67	%

16

Noninterest Income.  The following table summarizes noninterest income for the three and six months ended June 30, 2008 and 2007.

	Three Months							Six Months
	Ended June 30,							Ended June 30,
	2008		2007		% Change			2008		2007		% Change
	(Dollars in thousands)
Fees for services related to deposit accounts	$	273	$	232		17.67	%	$	517	$	441		17.23	%
Fees for other services		132		139		-5.04	%		249		258		-3.49	%
Income from investment advisory services, net		92		85		8.24	%		174		148		17.57	%
Income from bank owned life insurance		78		77		1.30	%		153		154		-0.65	%
Gain on sale of investments		46		21		119.05	%		105		27		288.89	%
Other income		40		52		-23.08	%		89		102		-12.75	%
Total	$	661	$	606		9.08	%	$	1,287	$	1,130		13.89	%

Noninterest income increased $55,000 or 9.1% for the three months ended June 30, 2008 and $157,000 or 13.9% for the six month period over the same periods in 2007, primarily as a result of increases in the gain on the sale of investments, fees for services related to deposit accounts and income from investment advisory services.  The increases in fees for services related to deposit accounts is due to product growth and the increase in income earned from investment advisory services is due to a higher level of referrals from branch employees and a general increase in activity.

Noninterest Expense.  The following table summarizes noninterest expense for the three and six months ended June 30, 2008 and 2007.

	Three Months								Six Months
	Ended June 30,								Ended June 30,
	2008		2007			% Change			2008		2007			% Change
	(Dollars in thousands)
Compensation, taxes and benefits	$	1,837	$	1,743			5.39	%	$	3,684	$	3,484			5.74	%
Office occupancy		554		473			17.12	%		1,078		986			9.33	%
Computer processing		203		180			12.78	%		398		359			10.86	%
Directors compensation		142		115			23.48	%		287		284			1.06	%
Advertising		118		159			-25.79	%		199		255			-21.96	%
(Gain) loss on foreclosed real estate, net		-		(1	)		-100.00	%		3		(1	)		-400.00	%
Other expenses		403		427			-5.62	%		815		792			2.90	%
Total	$	3,257	$	3,096			5.20	%	$	6,464	$	6,159			4.95	%

Noninterest expense increased in the three and six months ended June 30, 2008 primarily as a result of an increase in compensation costs, office occupancy costs and computer processing costs over the 2007 periods.  The increases in compensation costs were largely related to normal salary increases for existing staff.  Rental expense, increases in property taxes and general repairs and maintenance are the reasons for the increases in office occupancy, partially due to the opening of our tenth office.  The primary reason for the increase in computer processing costs was additional product offerings.  The increases were partially offset by decreases in advertising expenses.

Liquidity and Capital Resources

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

17

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 auction pass-through certificates and to a lesser extent, municipal securities.

The Company’s most liquid assets are cash and cash equivalents and interest-bearing deposits.  The levels of these assets depend on our operating, financing, lending and investing activities during any given period.  At June 30, 2008, cash and cash equivalents totaled $8.2 million, including federal funds of $612,000.  Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $70.0 million at June 30, 2008.  At June 30, 2008, the Company had the ability to borrow a total of $146.6 million from the Federal Home Loan Bank of Boston, of which $112.4 million in borrowings was outstanding, along with $765,000 in repurchase agreements.  At June 30, 2008, 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 June 30, 2008, the Company had the ability to borrow $3.5 million from a correspondent bank.  The Company had no advances outstanding on this line at June 30, 2008.

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

	June 30,		December 31,
(In thousands)	2008		2007
Commitments to extend credit:
Loan commitments	$	21,127	$	23,994
Unused lines of credit		20,359		22,067
Amounts due mortgagors on construction loans		28,515		22,783
Amounts due on commercial  loans		9,804		7,673
Commercial letters of credit		5,724		5,698

Certificates of deposit due within one year of June 30, 2008 totaled $154.7 million, or 45.9% 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 June 30, 2009.  Based on past experience, however, the Company believes that a significant portion of our certificates of deposit will remain with us.  The Company has the ability to attract and retain deposits by adjusting the interest rates offered.

Historically, the Company has remained highly liquid.  The Company is not aware of any trends and/or demands, commitments, events or uncertainties that could result in a material decrease in liquidity.  The Company expects that all of our liquidity needs, including the contractual commitments stated above, the estimated costs of our branch expansion plans and increases in loan demand can be met by our currently available liquid assets and cash flows.  In the event loan demand was to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we could access our borrowing capacity with the Federal Home Loan Bank of Boston.  The Company expects that our currently available liquid assets and our ability to borrow from the Federal Home Loan Bank of Boston would be sufficient to satisfy our liquidity needs without any material adverse effect on our liquidity.

The Company’s primary investing activities are the origination of loans and the purchase of securities.  For the six months ended June 30, 2008, the Company originated $56.1 million of loans, including renewals and refinances, and purchased $23.1 million of securities.  These activities were funded primarily by an increase of $28.1 million in borrowings, the proceeds from sales and maturities of available-for-sale and held-to-maturity securities of $17.9 million and an increase of deposits of $15.5 million.

18

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 $15.5 million for the six months ended June 30, 2008.  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 $28.1 million for the six months ended June 30, 2008.  The increases in deposit accounts and borrowings primarily funded our lending and investing activities.

The Company is not subject to separate regulatory capital requirements.  At June 30, 2008, the Bank was subject to the regulatory capital requirements of the Office of Thrift Supervision (OTS), including a risk-based capital measure.  The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.  At June 30, 2008, the Bank exceeded all of its regulatory capital requirements.  The Bank is considered “well capitalized” under regulatory guidelines.

The following table is a summary of the Bank’s actual capital as computed under the standards established by the OTS at June 30, 2008.

							Naugatuck Valley
	OTS Regulation						Savings and Loan
	Adequately			Well
(Dollars in thousands)	Capitalized			Capitalized			Amount		Ratio
Tier I  Capital (to Adjusted Total Assets)		4.00	%		5.00	%	$	41,706		8.29	%
Total Risk-Based Capital (to Risk-Weighted Assets)		8.00	%		10.00	%		44,175		12.16	%
Tier I Risk-Based Capital (to Risk-Weighted Assets)		4.00	%		6.00	%		41,706		11.48	%
Tangible Equity Capital (to Tangible Assets)		4.00	%		5.00	%		41,706		8.29	%

Off-Balance Sheet Arrangements

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

For the six months ended June 30, 2008, 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.

19

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

Quantitative Aspects of Market Risk.  The Bank uses an interest rate sensitivity analysis prepared by the Office of Thrift Supervision to review its level of interest rate risk.  This analysis measures interest rate risk by computing changes in net portfolio value of the Bank’s cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates.  Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items.  This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 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 Office of Thrift Supervision, presents the change in the Bank’s net portfolio value at March 31, 2008 (the most current information available) that would occur in the event of an immediate change in interest rates based on Office of Thrift Supervision assumptions, with no effect given to any steps that the Bank might take to counteract that change.  The Bank expects that its net portfolio value at June 30, 2008 is consistent with the table below.

										Net Portfolio Value as % of
Basis Point ("bp")		Net Portfolio Value								Present Value of Assets
Change in Rates		$ Amount		$ Change			% Change			NPV Ratio			Change
		(Dollars in thousands)
	300bp	$	30,991	$	(21,032	)		-40	%		6.51	%		-3.78	%
	200		38,833		(13,190	)		-25	%		7.98	%		-2.31	%
	100		46,440		(5,583	)		-11	%		9.34	%		-0.95	%
	50		49,730		(2,293	)		-4	%		9.91	%		-0.38	%
	0		52,023		-			-			10.29	%		-
	(50)		53,436		1,413			3	%		10.51	%		0.22	%
	(100)		54,301		2,278			4	%		10.62	%		0.33	%

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

Item 4. Controls and Procedures.

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based upon that evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

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There were no changes in the Company’s internal control over financial reporting during the six months ended June 30, 2008 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, 2007, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2. – Unregistered Sales of Equity Securities and Use of Proceeds.

During the three month period ended June 30, 2008, the Company repurchased 115,140 shares of common stock for $1,048,263, at an average cost of $9.10 per share as detailed in the following table:

					Total Number of		Maximum Number
					Shares Purchased as		of Shares that May
	Total Number		Average Price		Part of Publicly		Yet Be Purchased
	of Shares		Paid		Announced Plans		Under the Plans
Period	Purchased		per Share		or Programs		or Programs
April		140	$	9.10		140		295,404
May		110,000	$	9.10		110,000		185,404
June		5,000	$	9.20		5,000		180,404
Total		115,140	$	9.10		115,140		180,404

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.

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Item 3. – Defaults Upon Senior Securities.  Not applicable

Item 4. – Submission of Matters to a Vote of Security Holders.

The Annual Meeting of the Stockholders of the Company was held on May 8, 2008.  The results of the vote on the items of business considered at the Annual Meeting were as follows:

1. The following individuals were elected as directors, each for a three year term:

	VOTES FOR	VOTES WITHHELD
Carlos S. Batista	6,327,156	62,529
John C. Roman	6,244,097	145,588
Camilo P. Vieira	6,315,625	74,060

2. The appointment of Whittlesey & Hadley, P.C. as independent auditors of the Company for the year ended December 31, 2008 was ratified by the stockholders by the following vote:

FOR	AGAINST	ABSTAIN
6,333,882	47,020	8,783

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.

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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: August 5, 2008	by:	/s/ John C. Roman
		John C. Roman
		President and Chief Executive Officer
		(principal executive officer)
Date: August 5, 2008	by:	/s/ Lee R. Schlesinger
		Lee R. Schlesinger
		Senior Vice President and Chief Financial Officer
		(principal financial officer)

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