Naugatuck Valley Financial 10-Q 2009 Q3 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 September 30, 2009

OR

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

For the transition period from ______________ to _____________

Commission file number:   0-50876

       NAUGATUCK VALLEY FINANCIAL CORPORATION       

(Exact name of registrant as specified in its charter)

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

(203) 720-5000

(Registrant’s telephone number, including area code)

N/A

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

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý     No ¨

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 £   No £

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  ¨	Accelerated Filer  ¨
Non-accelerated Filer  ¨	Smaller Reporting Company  ý
(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 ¨    No ý

As of November 6, 2009, there were 7,022,866 shares of the registrant’s common stock outstanding.

NAUGATUCK VALLEY FINANCIAL CORPORATION

Table of Contents

Part I.	Financial Information		Page No.
	Item 1.	Financial Statements (Unaudited)
		Consolidated Statements of Financial Condition at September 30, 2009 and December 31, 2008	3
		Consolidated Statements of Income for the three and nine months ended September 30, 2009 and 2008	4
		Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008	5
		Notes to Unaudited Consolidated Financial Statements	6
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
		Liquidity and Capital Resources	21
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
	Item 4.	Controls and Procedures	24
Part II.	Other Information
	Item 1.	Legal Proceedings	24
	Item 1A.	Risk Factors	24
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	24
	Item 3.	Defaults Upon Senior Securities	25
	Item 4.	Submission of Matters to a Vote of Security Holders	25
	Item 5.	Other Information	25
	Item 6.	Exhibits	25
Signatures
Exhibits

Part I - FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

2

Consolidated Statements of Financial Condition

(In thousands, except share data)

	September 30,			December 31,
	2009			2008
	(Unaudited)
ASSETS
Cash and due from depository institutions	$	7,909		$	8,214
Investment in federal funds		2,253			33
Investment securities available-for-sale, at fair value		40,280			63,844
Investment securities held-to-maturity, at amortized cost		1,515			-
Loans receivable, net		459,510			431,976
Accrued income receivable		1,975			2,099
Premises and equipment, net		10,047			10,565
Bank owned life insurance		8,836			8,579
Federal Home Loan Bank stock, at cost		6,252			6,252
Other assets		3,700			3,824
Total assets	$	542,277		$	535,386
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$	375,679		$	363,026
Borrowed funds		112,726			119,148
Mortgagors' escrow accounts		2,514			4,562
Other liabilities		1,942			3,061
Total liabilities		492,861			489,797
Commitments and contingencies
Stockholders' equity
Preferred 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, 7,022,866 shares outstanding at September
30, 2009 and 7,026,894 shares outstanding at December 31, 2008		76			76
Paid-in capital		33,795			33,637
Retained earnings		24,245			23,303
Unearned ESOP shares (213,624 shares at September 30, 2009
and December 31, 2008)		(2,136	)		(2,136	)
Unearned stock awards (32,940 shares at September 30, 2009
and 61,780 shares at December 31, 2008)		(360	)		(680	)
Treasury stock, at cost (583,342 shares at September 30, 2009
and 579,314 shares at December 31, 2008)		(6,132	)		(6,107	)
Accumulated other comprehensive loss		(72	)		(2,504	)
Total stockholders' equity		49,416			45,589
Total liabilities and stockholders' equity	$	542,277		$	535,386

See notes to consolidated financial statements.

3

Consolidated Statements of Income

(In thousands, except per share data)
 

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009		2008
	(Unaudited)
Interest income
Interest on loans	$	6,514	$	6,287		$	19,279	$	18,163
Interest and dividends on investments and deposits		541		937			1,871		2,785
Total interest income		7,055		7,224			21,150		20,948
Interest expense
Interest on deposits		2,049		2,303			6,513		6,949
Interest on borrowed funds		1,019		1,196			3,236		3,440
Total interest expense		3,068		3,499			9,749		10,389
Net interest income		3,987		3,725			11,401		10,559
Provision for loan losses		302		200			859		475
Net interest income after provision for loan losses		3,685		3,525			10,542		10,084
Noninterest income
Fees for services related to deposit accounts		273		273			765		790
Gain (loss) on investments		203		(3,216	)		379		(3,111	)
Fees for other services		155		144			455		393
Income from bank owned life insurance		87		78			258		230
Income from investment advisory services, net		67		48			225		222
Other income		27		37			83		126
Total noninterest income (loss)		812		(2,636	)		2,165		(1,350	)
Noninterest expense
Compensation, taxes and benefits		1,858		1,897			5,685		5,580
Office occupancy		542		583			1,635		1,660
Computer processing		221		232			691		630
FDIC insurance premiums		151		54			776		76
Directors compensation		119		111			437		397
Advertising		96		162			281		361
Loss on foreclosed real estate, net		7		-			15		3
Other expenses		489		414			1,359		1,207
Total noninterest expense		3,483		3,453			10,879		9,914
Income (loss) before provision
for income taxes		1,014		(2,564	)		1,828		(1,180	)
Provision for income taxes		311		157			517		486
Net income (loss)	$	703	$	(2,721	)	$	1,311	$	(1,666	)
Earnings (loss) per common share - Basic and Diluted	$	0.10	$	(0.40	)	$	0.19	$	(0.24	)

See notes to consolidated financial statements.

4

Consolidated Statements of Cash Flows (In thousands)

	Nine Months Ended
	September 30,
	2009			2008
Cash flows from operating activities	(Unaudited)
Net income (loss)	$	1,311		$	(1,666	)
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses		859			475
Depreciation and amortization expense		627			620
Net amortization from investments		51			42
Amortization of intangible assets		25			25
Stock-based compensation		490			702
Gain on sale of investments		(379	)		(106	)
Other than temporary impariment charge		-			3,216
Net change in:
Accrued income receivable		124			(49	)
Deferred loan fees		(9	)		52
Cash surrender value of life insurance		(257	)		(230	)
Other assets		(4	)		(518	)
Other liabilities		320			(136	)
Net cash provided by operating activities		3,158			2,427
Cash flows from investing activities
Proceeds from maturities and repayments of available-for-sale securities		8,290			6,521
Proceeds from sale of available-for-sale securities		18,181			12,631
Proceeds from maturities of held-to-maturity securities		49			1,190
Purchase of held-to-maturity securities		(1,566	)		-
Purchase of available-for-sale securities		-			(24,621	)
Purchase of Federal Home Loan Bank stock		-			(1,333	)
Loan originations net of principal payments		(28,538	)		(56,087	)
Purchase of property and equipment		(109	)		(756	)
Net cash used by investing activities		(3,693	)		(62,455	)
Cash flows from financing activities
Net change in time deposits		(750	)		27,453
Net change in other deposit accounts		13,403			10,150
Net change in mortgagors' escrow deposits		(2,047	)		(1,699	)
Advances from Federal Home Loan Bank		17,150			42,465
Repayment of advances from Federal Home Loan Bank		(37,935	)		(17,508	)
Change in short term borrowings		(1,340	)		-
Net change in repurchase agreements		14,362			576
Treasury stock acquired		(25	)		(2,231	)
Dividends paid to stockholders		(368	)		(457	)
Net cash provided by financing activities		2,450			58,749
Net change in cash and cash equivalents		1,915			(1,279	)
Cash and cash equivalents at beginning of period		8,247			8,370
Cash and cash equivalents at end of period	$	10,162		$	7,091
Cash paid during the period for:
Interest	$	9,498		$	10,427
Income taxes		286			818
Non-cash transactions:
Transfer of loans to foreclosed real estate	$	223		$	-

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’swholly 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 through November 9, 2009, the day before the date on which this quarterly report on Form 10-Q was filed with the Securities and Exchange Commission. 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 nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

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

6

Certain reclassifications have been made to prior period financial statements to conform to the September 30, 2009 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 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 — Accounting Standards Updates

In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-01 (“ASU 2009-01”), Topic 105 – Generally Accepted Accounting Principles amendments based on Statement of Financial Accounting Standards No. 168 – The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles.  ASU 2009-01 amends the FASB Accounting Standards Codification for the issuance of FASB Statement No. 168 (“SFAS 168”), The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles. ASU 2009-01 includes SFAS 168 in its entirety, including the accounting standards update instructions contained in Appendix B of the Statement. The FASB Accounting Standards Codification (“Codification”) became the source of authoritative U.S. generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This Statement is effective for financial statements issued for interim and annual periods ended after September 15, 2009.

Following this Statement, the FASB will not issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates. The FASB does not consider Accounting Standards Updates as authoritative in their own right. Accounting Standards Updates serve only to update the Codification, provide background information about the guidance, and provide the bases for conclusions on the change(s) in the Codification. FASB Statement No. 162, The Hierarchy of Generally Accepted Accounting Principles, which became effective on November 13, 2008, identified the sources of accounting principles and the framework for selecting the principles used in preparing the financial statements of nongovernmental entities that are presented in conformity with GAAP. Statement 162 arranged these sources of GAAP in a hierarchy for users to apply accordingly. Upon becoming effective, all of the content of the Codification carries the same level of authority, effectively superseding Statement 162. In other words, the GAAP hierarchy has been modified to include only two levels of GAAP: authoritative and non-authoritative. As a result, this Statement replaces Statement 162 to indicate this change to the GAAP hierarchy. The adoption of the Codification and ASU 2009-01 did not have any effect on the Company’s consolidated financial condition or results of operations.

7

In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (“ASU 2009-05”), Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value. ASU 2009-05 applies to all entities that measure liabilities at fair value within the scope of ASC Topic 820. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following techniques:

1.) A valuation technique that uses:

a. The quoted price of the identical liability when traded as an asset.

b. Quoted prices for similar liabilities or similar liabilities when traded as assets.

2.) Another valuation technique that is consistent with the principles of ASC Topic 820. Two examples would be an income approach, such as a technique that is based on the amount at the measurement date that the reporting entity would pay to transfer the identical liability or would receive to enter into the identical liability.

The amendments in ASU 2009-05 also clarify that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. It also clarifies that both a quoted price in an active market for the identical liability at the measurement date and the quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 fair value measurements. The guidance provided in ASU 2009-05 is effective for the first reporting period beginning after issuance. The adoption of ASU 2009-05 did not have a material effect on the Company’s consolidated financial condition or results of operations.

NOTE 5 – INVESTMENT SECURITIES

At September 30, 2009, 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	$	1,531	$	61	$	-		$	1,592
Corporate bonds		1,000		-		(430	)		570
Mortgage-backed securities		25,232		975		(8	)		26,199
Collateralized mortgage obligations		3,157		-		(129	)		3,028
Total debt securities		30,920		1,036		(567	)		31,389
Auction-rate trust preferred securities		9,273		118		(500	)		8,891
Total available-for-sale securities	$	40,193	$	1,154	$	(1,067	)	$	40,280
	Amortized		Gross Unrealized					Fair
(In thousands)	Cost Basis		Gains		Losses			Value
Held-to-maturity securities:
Mortgage-backed securities		1,515		13		-			1,528
Total held-to-maturity securities	$	1,515	$	13	$	-		$	1,528

8

At December 31, 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	$	1,537	$	67	$	-		$	1,604
Municipal obligations		8,888		113		(8	)		8,993
Corporate bonds		1,000		-		(710	)		290
Mortgage-backed securities		42,297		804		(71	)		43,030
Collateralized mortgage obligations		3,339		-		(156	)		3,183
Total debt securities		57,061		984		(945	)		57,100
Auction-rate trust preferred securities		9,273		-		(2,529	)		6,744
Total available-for-sale securities	$	66,334	$	984	$	(3,474	)	$	63,844

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

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.

At September 30, 2009, these securities had an aggregate fair value of $5.7 million which resulted in an unrealized loss of $1.1 million as compared to an aggregate fair value of $16.7 million with an unrealized loss of $3.5 million at December 31, 2008.

9

NOTE 6 – LOANS RECEIVABLE

A summary of loans receivable at September 30, 2009 and December 31, 2008 is as follows:

	September 30,		December 31,
(In thousands)	2009		2008
Real estate loans:
One-to-four family	$	226,531	$	216,201
Construction		47,440		50,596
Multi-family and commercial real estate		120,701		106,028
Total real estate loans		394,672		372,825
Commercial business loans		31,038		22,567
Consumer loans:
Savings accounts		1,964		1,093
Personal		292		262
Automobile		221		271
Home equity		38,995		39,655
Total consumer loans		41,472		41,281
Totals loans		467,182		436,673
Less:
Allowance for loan losses		3,712		2,869
Undisbursed construction loans		3,440		1,299
Deferred loan origination fees		520		529
Loans receivable, net	$	459,510	$	431,976

Nonperforming loans totaled $4.6 million at September 30, 2009 and $2.7 million at December 31, 2008.  These loans, primarily delinquent 90 days or more, were accounted for on a nonaccrual basis.  The amount of income that was contractually due but not recognized on nonperforming loans totaled $241,000 for the period ended September 30, 2009 and $140,000 for the period ended December 31, 2008.

At September 30, 2009, the Bank had $945,000 of loans which were considered to be impaired, with an allocated allowance of $71,244, compared to $254,000 of such loans at December 31, 2008 with no allocated allowance.  The increase is primarily due to three commercial loans secured by real estate and one residential mortgage loan which were classified during the period.

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

	Nine months ended			For the year ended
	September 30,			December 31,
(In thousands)	2009			2008
Balance at beginning of year	$	2,869		$	2,163
Provision for loan losses		859			675
Charge-offs		(17	)		(7	)
Recoveries		1			38
Balance at end of period	$	3,712		$	2,869

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 the three and nine months ended September 30, 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).  For the three and nine months ended September 30, 2008, anti-dilutive options excluded from the calculations totaled 348,450 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.

10

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2009		2008			2009		2008
Net income (loss)	$	703,000	$	(2,721,000	)	$	1,311,000	$	(1,666,000	)
Weighted-average common shares outstanding:
Basic		6,810,357		6,801,792			6,812,259		6,881,565
Effect of dilutive stock options
and restrictive stock awards		-		-			-		-
Diluted		6,810,357		6,801,792			6,812,259		6,881,565
Net income (loss) per common share:
Basic	$	0.10	$	(0.40	)	$	0.19	$	(0.24	)
Diluted	$	0.10	$	(0.40	)	$	0.19	$	(0.24	)

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.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2009			2008			2009			2008
	(In thousands)
Net income (loss)	$	703		$	(2,721	)	$	1,311		$	(1,666	)
Other comprehensive income:
Unrealized gain (loss) on securities available-for-sale		878			(5,754	)		2,957			(6,340	)
Reclassification adjustment for (gains) losses
realized in net income		(203	)		3,216			(379	)		3,111
Other comprehensive income (loss) before tax effect		675			(2,538	)		2,578			(3,229	)
Income tax expense (benefit) related to items of other
comprehensive income		112			(97	)		146			(332	)
Other comprehensive income (loss) net of tax effect		563			(2,441	)		2,432			(2,897	)
Total comprehensive income (loss)	$	1,266		$	(5,162	)	$	3,743		$	(4,563	)

11

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
	July 26,		December 18,		March 20,		March 21,		July 26,
	2008		2007		2007		2006		2005
Option awards
Awarded		1,000		2,000		7,500		6,500		354,580
Exercise price	$	11.10	$	11.10	$	12.49	$	11.10	$	11.10
Maximum term		10		10		10		10		10
Restricted stock awards
Awarded		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 $131,168 and $402,928 for the three and nine months ended September 30, 2009, respectively, compared to $126,760 and $380,954 for the three and nine months ended September 30, 2008, in connection with the stock option and restricted stock awards.

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing method which includes several assumptions such as volatility, expected dividends, expected term and risk-free rate for each stock option award.  In determining the expected term of the option awards, the Company elected to follow the simplified method as permitted by the SEC Staff Accounting Bulletin 107.  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:

12

	July 26,			December 18,			March 20,			March 21,			July 26,
Grant date	2008			2007			2007			2006			2005
Dividend 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			6.5
Weighted average fair value
of options at grant date	$	1.51		$	1.18		$	2.55		$	2.25		$	2.47

NOTE 10 - DIVIDENDS

On July 21, 2009, the Company's Board of Directors declared a cash dividend of $0.03 per outstanding common share, which was paid on September 1, 2009, to stockholders of record as of the close of business on August 6, 2009.

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

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 September 30, 2009 and December 31, 2008:

	September 30, 2009				December 31, 2008
	Carrying		Estimated		Carrying		Estimated
(In thousands)	Amount		Fair Value		Amount		Fair Value
Financial Assets
Cash and cash equivalents	$	10,162	$	10,162	$	8,247	$	8,247
Investment securities available for sale		40,280		40,280		63,844		63,844
Investment securities held-to-maturity		1,515		1,528		-		-
Loans receivable, net		459,510		463,905		431,976		440,405
Accrued income receivable		1,975		1,975		2,099		2,099
Financial Liabilities
Deposits	$	375,679	$	374,546	$	363,026	$	358,474
Borrowed funds		112,726		114,608		119,148		120,811
Mortgagors' escrow accounts		2,514		2,514		4,562		4,562

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:

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.

13

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

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

During the first quarter of 2009, the Company adopted the use of 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.

Credit-ratings for each of the issuers of the collateral preferred stock remain high, with the exception of two ARP certificates where the issuer was downgraded but remains within the investment-grade rating category.  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).  There were no loans held for sale at September 30, 2009 or December 31, 2008.

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:

	September 30, 2009
	Carrying Value
(In thousands)	Level 1		Level 2		Level 3		Total
Assets measured at fair value on a recurring basis:
Available-for-sale investment securities	$	-	$	31,390	$	8,891	$	40,281
Residential loans held for sale		-		-		-		-
Assets measured at fair value on a non-recurring basis:
Impaired loans		-		859		15		874
Real estate owned		-		-		153		153

14

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 these assets' fair value.

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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This discussion should be read in conjunction with the Company’s Consolidated Financial Statements for the year ended December 31, 2008 included in the Company’s Annual Report on Form 10-K.

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company.  These forward-looking statements are generally identified by use of the words “believe”, “expect”, “intend”, “anticipate”, “estimate”, “project” or similar expressions.  The Company’s ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in interest rates, national and regional economic conditions, legislative and regulatory changes, monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality and composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company’s market area, changes in real estate market values in the Company’s market area, and changes in relevant accounting principles and guidelines.  Additional factors are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008 under “Item 1A. Risk Factors”. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements.�� Except as required by applicable law or regulation, the Company does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.

15

Non-GAAP Financial Measures

This report contains certain non-GAAP financial measures in addition to results presented in accordance with GAAP.  These measures include net income, noninterest income and earnings per share adjusted for the tax benefit on the Other Than Temporary Impairment (“OTTI”) charge on the Company’s auction-rate pass-through certificates collateralized by Fannie Mae perpetual preferred stock.  These measures should not be construed as a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information.  We believe that the exclusion of the OTTI charges, which represents events outside our normal operations, provides a meaningful period-to-period comparison and is more reflective of normalized operations.

Comparison of Financial Condition at September 30, 2009 and December 31, 2008

Total assets increased by $6.9 million, or 1.29%, to $542.3 million during the period from December 31, 2008 to September 30, 2009, primarily due to an increase of $27.5 million in loans, partially offset by a decrease in investment securities of $22.0 million.  The increase in loans primarily reflects an increase of $14.7 million in multi-family and commercial real estate loans, an increase of $10.3 million in residential mortgages and an increase of $8.5 million in commercial business loans, partially offset by a decrease in construction loans.  These increases were primarily funded by increases in deposits and the sale of investments.  While the largest segment of the loan portfolio is residential mortgages, the Bank continues to grow market share and attract new customers with respect to its increasing multi-family and commercial real estate and commercial business loan portfolios.  The decrease in the investment portfolio was primarily due to the sale of the entire municipal bond portfolio during the first quarter of 2009 and a portion of the mortgage backed securities portfolio in the third quarter of 2009.

Total liabilities were $492.9 million at September 30, 2009 compared to $489.8 million at December 31, 2008.  Deposits at September 30, 2009 increased $12.7 million, or 3.5%, over December 31, 2008.  Borrowed funds, including advances from the Federal Home Loan Bank of Boston and reverse repurchase agreements, decreased $6.4 million, from $119.1 million at December 31, 2008 to $112.7 million at September 30, 2009.  The increases in deposits were used primarily to fund the growth in loans.

Total stockholders’ equity increased $3.8 million, from $45.6 million at December 31, 2008 to $49.4 million at September 30, 2009.  The increase in stockholders’ equity was primarily due to a net decrease to the unrealized loss on available-for-sale securities of $2.4 million, net income of $1.3 million for the nine month period and $479,000 in capital adjustments related to the Company’s 2005 Equity Incentive Plan, partially offset by dividends of $368,000 paid to stockholders.

Comparison of Operating Results For the Three and Nine Months Ended September 30, 2009 and 2008

General.     For the three months ended September 30, 2009, the Company recorded net income of $703,000 compared to a net loss of $2.7 million for the three months ended September 30, 2008.  Net income for the nine months ended September 30, 2009 was $1.3 million, compared to a net loss of $1.7 million for the nine months ended September 30, 2008.  The losses in the 2008 periods resulted from the Company recording in the third quarter of 2008 an OTTI charge of $3.2 million on its investment in auction-rate pass-through certificates collateralized by Fannie Mae perpetual preferred stock.  Absent the OTTI charge, net income would have been $495,000 and $1.5 million for the three and nine months ended September 30, 2008, respectively.

Net Interest Income.Net interest income increased $262,000, or 7.0%, to $4.0 million for the three months ended September 30, 2009 and increased by $842,000, or 8.0%, to $11.4 million for the nine months ended September 30, 2009.  The increase in net interest income for the three month period resulted from a $431,000, or 12.3%, decrease in total interest expense, partially offset by a $169,000, or 2.3%, decrease in interest income.  For the nine month period ended September 30, 2009, total interest income increased $202,000, or 1.0%, combined with a decrease of $640,000, or 6.2%, in total interest expense.

16

The Company experienced an increase in the average balances of interest earning assets of 3.6% in the three month period and an increase of 9.2% in the nine month period, while the average rate earned on these assets decreased by 33 basis points and 45 basis points over the same periods, respectively.  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 10.8% in the three month period, and by 14.3% in the nine month period, primarily in the commercial mortgage and residential mortgage portfolios.  The Company experienced a decrease in the average balance of investment securities of 34.7% and 24.3% in the three and nine month periods, respectively, due to the sale of the entire municipal bond portfolio during the first quarter of 2009 and 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 $431,000, or 12.3% for the three months ended September 30, 2009, due to a reduction of 48 basis points in the average cost of interest bearing liabilities, from 2.99% to 2.51%.  The decrease in rate was partially offset by a $20.1 million increase in the average balance.  The average balance of interest-bearing deposits increased by $19.4 million, or 5.4%.  The average balance of borrowed funds decreased by $704,000, or 0.6% over this period.  The increase in the average balance of certificates of deposit and saving accounts was due primarily to competitive rate promotional accounts.  Interest expense also decreased in the nine month period ended September 30, 2009 by $640,000, or 6.2%, also as a result of a decrease of 46 basis points in the average cost of interest bearing liabilities, partially offset by an increase in the average balance of interest-bearing liabilities of $45.6 million, or 10.3%.

The following table summarizes changes in interest income and interest expense for the three and nine months ended September 30, 2009 and 2008.

	Three Months							Nine Months
	Ended September 30,							Ended September 30,
	2009		2008		% Change			2009		2008		% Change
	(Dollars in thousands)
Interest income:
Loans	$	6,514	$	6,287		3.61	%	$	19,279	$	18,163		6.14	%
Fed Funds sold		-		21		(100.00	) %		4		56		(92.86	) %
Investment securities		541		872		(37.96	) %		1,867		2,568		(27.30	) %
Federal Home Loan Bank stock		-		44		(100.00	) %		-		161		(100.00	) %
Total interest income		7,055		7,224		(2.34	) %		21,150		20,948		0.96	%
Interest expense:
Certificate accounts		1,874		2,071		(9.51	) %		5,949		6,197		(4.00	) %
Regular savings accounts		96		72		33.33	%		292		204		43.14	%
Checking and NOW accounts		12		37		(67.57	) %		35		142		(75.35	) %
Money market savings accounts		67		123		(45.53	) %		237		406		(41.63	) %
Total interest-bearing deposits		2,049		2,303		(11.03	) %		6,513		6,949		(6.27	) %
FHLB advances		967		1,190		(18.74	) %		3,133		3,428		(8.61	) %
Other borrowings		52		6		766.67	%		103		12		758.33	%
Total interest expense		3,068		3,499		(12.32	) %		9,749		10,389		(6.16	) %
Net interest income	$	3,987	$	3,725		7.03	%	$	11,401	$	10,559		7.97	%

17

The following table summarizes average balances and average yields and costs for the three and nine months ended September 30, 2009 and 2008.

	Three Months Ended September 30,										Nine Months Ended September 30,
	2009					2008					2009					2008
	Average		Yield/			Average		Yield/			Average		Yield/			Average		Yield/
	Balance		Cost			Balance		Cost			Balance		Cost			Balance		Cost
	(Dollars in thousands)
Interest-earning assets
Loans	$	450,859		5.78	%	$	407,075		6.18	%	$	442,725		5.81	%	$	387,338		6.25	%
Fed Funds sold		2,452		0.00	%		4,218		1.99	%		6,636		0.08	%		2,769		2.70	%
Investment securities		46,591		4.64	%		71,378		4.89	%		53,180		4.68	%		70,284		4.87	%
Federal Home Loan Bank stock		6,252		0.00	%		5,965		2.95	%		6,252		0.00	%		5,605		3.83	%
Total interest-earning assets	$	506,154		5.58	%	$	488,636		5.91	%	$	508,793		5.54	%	$	465,996		5.99	%
Interest-bearing liabilities
Certificate accounts	$	237,254		3.16	%	$	226,701		3.65	%	$	239,424		3.31	%	$	211,154		3.91	%
Regular savings accounts & escrow		62,341		0.62	%		48,091		0.60	%		58,679		0.66	%		47,277		0.58	%
Checking and NOW accounts		51,004		0.09	%		54,915		0.27	%		52,710		0.09	%		53,935		0.35	%
Money market savings accounts		25,831		1.04	%		27,324		1.80	%		25,590		1.23	%		27,859		1.94	%
Total interest-bearing deposits		376,430		2.18	%		357,031		2.58	%		376,403		2.31	%		340,225		2.72	%
FHLB advances		96,532		4.01	%		110,570		4.30	%		104,997		3.98	%		104,173		4.39	%
Other borrowings		15,609		1.33	%		867		2.77	%		9,193		1.49	%		581		2.75	%
Total interest-bearing liabilities	$	488,571		2.51	%	$	468,468		2.99	%	$	490,593		2.65	%	$	444,979		3.11	%

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 allowance for loan losses is established to recognize the inherent losses associated with lending activities.  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

Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan loss reserve.  The examination may require us to make additional provision for loan losses based on judgments different from ours.  In addition, we engage an independent consultant to review our commercial loan portfolio and make recommendations based on their review as to the specific credits in the portfolio.

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.  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, will not request us to increase our allowance for loan losses.  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.  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 and nine months ended September 30, 2009 and 2008.

	Three Months					Nine Months
	Ended September 30,					Ended September 30,
	2009			2008		2009			2008
	(In thousands)
Allowance at beginning of period	$	3,416		$	2,469	$	2,869		$	2,163
Provision for loan losses		302			200		859			475
Charge-offs		(6	)		-		(17	)		(7	)
Recoveries		-			-		1			38
Net recoveries (charge-offs)		(6	)		-		(16	)		31
Allowance at end of period	$	3,712		$	2,669	$	3,712		$	2,669

The Company recorded a provision for loan losses of $302,000 for the three month period ended September 30, 2009, compared to $200,000 for the same 2008 period.  Provisions of $859,000 and $475,000 were recorded for the nine months ended September 30, 2009 and 2008, respectively.  The increase in the provisions in the 2009 periods was due primarily to the 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.  The charge-offs in the 2009 period were due to two unsecured personal loans and two commercial lines of credit.

The following table provides information with respect to the Company’s nonperforming assets at the dates indicated. The Company modified the terms of two residential mortgages totaling $409,000, during the quarter ended September 30, 2009.  These loans have been performing under the new terms since the modification.  The Company did not have any accruing loans past due 90 days or more at the dates presented.

	At September 30,			At December 31,
	2009			2008			% Change
	(Dollars in thousands)
Nonaccrual loans	$	4,574		$	2,678			70.80	%
Troubled debt restructurings		145			-			N/A
Real estate owned		153			-			N/A
Total nonperforming assets	$	4,872		$	2,678			81.93	%
Total nonperforming loans to total loans		1.02	%		0.62	%		64.52	%
Total nonperforming loans to total assets		0.87	%		0.50	%		74.00	%
Total nonperforming assets to total assets		0.90	%		0.50	%		80.00	%

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Noninterest Income.  The following table summarizes noninterest income for the three and nine months ended September 30, 2009 and 2008.

	Three Months								Nine Months
	Ended September 30,								Ended September 30,
	2009		2008			% Change			2009		2008			% Change
	(Dollars in thousands)
Fees for services related to deposit accounts	$	273	$	273			-	%	$	765	$	790			(3.16	) %
Gain (loss) on investments		203		(3,216	)		(106.31	) %		379		(3,111	)		(112.18	) %
Fees for other services		155		144			7.64	%		455		393			15.78	%
Income from bank owned life insurance		87		78			11.54	%		258		230			12.17	%
Income from investment advisory services, net		67		48			39.58	%		225		222			1.35	%
Other income		27		37			(27.03	) %		83		126			(34.13	) %
Total	$	812	$	(2,636	)		(130.80	) %	$	2,165	$	(1,350	)		(260.37	) %

Noninterest income was $812,000 for the three months ended September 30, 2009, compared to a loss of $2.6 million for the quarter ended September 30, 2008.  For the nine months ended September 30, 2009, noninterest income was $2.2 million, compared to a loss of $1.4 million for the nine months ended September 30, 2008.  Excluding the OTTI charge, noninterest income was $580,000 and $1.9 million in the three and nine months ended September 30, 2008, respectively.  The increase in both the three and nine month periods was primarily due to gains on the sale of investments, combined with increased fees for other services.  Additionally, smaller increases in income from bank owned life insurance and income from investment advisory services were realized in both periods.  The increase in the gain on the sale of investments was primarily a result of the sale of the entire municipal bond portfolio and a portion of the mortgage backed securities portfolio in the 2009 period.

Noninterest Expense.  The following table summarizes noninterest expense for the three and nine months ended September 30, 2009 and 2008.

	Three Months							Nine Months
	Ended September 30,							Ended September 30,
	2009		2008		% Change			2009		2008		% Change
	(Dollars in thousands)
Compensation, taxes and benefits	$	1,858	$	1,897		(2.06	) %	$	5,685	$	5,580		1.88	%
Office occupancy		542		583		(7.03	) %		1,635		1,660		(1.51	) %
Computer processing		221		232		(4.74	) %		691		630		9.68	%
FDIC insurance premiums		151		54		179.63	%		776		76		921.05	%
Directors compensation		119		111		7.21	%		437		397		10.08	%
Advertising		96		162		(40.74	) %		281		361		(22.16	) %
Loss on foreclosed real estate, net		7		-		-	%		15		3		400.00	%
Other expenses		489		414		18.12	%		1,359		1,207		12.59	%
Total	$	3,483	$	3,453		0.87	%	$	10,879	$	9,914		9.73	%

Noninterest expense increased in the three and nine months ended September 30, 2009 primarily as a result of an increase in FDIC insurance expense over the 2008 periods.  In the second quarter of 2009, the FDIC announced a special assessment of five basis points on each insured institution’s assets minus Tier-1 capital.  This $247,000 special assessment was paid on September 30, 2009.  For the three months ended September 30, 2009, FDIC insurance expense was $151,000, compared to $54,000 for the three months ended September 30, 2008.  FDIC insurance expense was $776,000 for the nine months ended September 30, 2009, compared to $76,000 for the nine months ended September 30, 2008.The Company also experienced smaller increases in compensation expenses and computer processing costs in the nine month period.  These increases are partially due to the opening of our tenth office in July of 2008, combined with filling two vacant positions and variable incentive payments.  The increases were partially offset by decreases in advertising expenses in both the three and nine month periods.

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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 September 30, 2009, cash and cash equivalents totaled $10.2 million, including federal funds of $2.3 million.  Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $40.3 million at September 30, 2009.  At September 30, 2009, the Company had the ability to borrow a total of $158.9 million from the Federal Home Loan Bank of Boston, of which $97.6 million in borrowings was outstanding, along with $15.1 million in repurchase agreements.  At September 30, 2009, the Company had arranged overnight lines of credit of $2.5 million with the Federal Home Loan Bank of Boston.  The Company had no overnight advances outstanding with the Federal Home Loan Bank of Boston as of that date.  In addition, at September 30, 2009, the Company had the ability to borrow $3.5 million from a correspondent bank.  The Company had no advances outstanding on this line at September 30, 2009.

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

	September 30,		December 31,
(In thousands)	2009		2008
Commitments to extend credit:
Loan commitments	$	14,010	$	5,807
Unused lines of credit		20,695		20,328
Amounts due mortgagors on construction loans		29,457		25,855
Amounts due on commercial  loans		18,587		15,384
Commercial letters of credit		5,144		5,125

Certificates of deposit due within one year of September 30, 2009 totaled $121.9 million, or 32.4% of total deposits.  If these deposits do not remain with us, the Company will be required to seek other sources of funds, including other certificates of deposit and our available lines of credit.  Depending on market conditions, the Company may be required to pay higher rates on such deposits or other borrowings than are currently paid on the certificates of deposit due on or before September 30, 2010.  Based on past experience, however, the Company believes that a significant portion of our certificates of deposit will remain with us.  The Company has the ability to attract and retain deposits by adjusting the interest rates offered.

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.

The Company’s primary investing activities are the origination of loans and the purchase of securities.  For the nine months ended September 30, 2009, the Company originated $71.7 million of loans, including renewals and refinances, and purchased $1.6 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 $26.5 million and an increase of $12.7 million in deposits.

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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 $12.7 million for the nine months ended September 30, 2009.  Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and its local competitors and other factors.  The Company generally manages the pricing of deposits to be competitive and to increase core deposit relationships.  Occasionally, the Company offers promotional rates on certain deposit products in order to attract deposits.  The Company experienced a net decrease in Federal Home Loan Bank advances and repurchase agreements of $7.8 million for the nine months ended September 30, 2009.  The increases in deposit accounts primarily funded our lending activities and, to a lesser extent, repayment of Federal Home Loan Bank advances.

The Company is 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 $2.5 million at September 30, 2009.

The Company is not subject to separate regulatory capital requirements.  At September 30, 2009, the Bank was subject to the regulatory capital requirements of the Office of Thrift Supervision (“OTS”), including a risk-based capital measure.  The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.  At September 30, 2009, 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 September 30, 2009.

							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	%	$	42,199		7.81	%
Total Risk-Based Capital (to Risk-Weighted Assets)		8.00	%		10.00	%		45,911		11.20	%
Tier I Risk-Based Capital (to Risk-Weighted Assets)		4.00	%		6.00	%		42,199		10.29	%
Tangible Equity Capital (to Tangible Assets)		1.50	%		2.00	%		42,199		7.81	%

Off-Balance Sheet Arrangements

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

For the nine months ended September 30, 2009, the Company did not engage in any off-balance-sheet transactions reasonably likely to have a material effect on its financial condition, results of operations or cash flows.

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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 June 30, 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.

											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)
	300	bp	$	34,390	$	(13,700	)		(28	) %		6.54	%		(2.11	) %
	200			40,334		(7,756	)		(16	) %		7.51	%		(1.14	) %
	100			45,418		(2,672	)		(6	) %		8.30	%		(0.35	) %
	50			47,125		(965	)		(2	) %		8.54	%		(0.11	) %
	0			48,090		-			-			8.65	%		-
	(50	)		48,298		208			0	%		8.64	%		(0.01	) %
	(100	)		47,574		(516	)		(1	) %		8.47	%		(0.18	) %

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.

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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 September 30, 2009 that have materially affected, or are reasonable likely to materially affect, the Company’s internal control over financial reporting.

Part II - OTHER INFORMATION

Item 1. - Legal Proceedings.

The Company is not involved in any pending legal proceedings.  The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to its financial condition and results of operations.

Item 1A. – Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

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

During the three month period ended September 30, 2009, the Company repurchased 3,947 shares of common stock for $24,471, at an average cost of $6.20 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
July		3,947	$	6.20		3,947		159,757
August		-	$	-		-		159,757
September		-	$	-		-		159,757
Total		3,947	$	6.20		3,947		159,757

24

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

Item 3. – Defaults Upon Senior Securities.  Not applicable

Item 4. – Submission of Matters to a Vote of Security Holders.  Not applicable

Item 5. – Other Information.  Not applicable

Item 6. – Exhibits.

           Exhibits –

3.1 Charter of Naugatuck Valley Financial Corporation (1)

3.2 Bylaws of Naugatuck Valley Financial Corporation (2)

4.1 Specimen Stock Certificate of Naugatuck Valley Financial Corporation (3)

31.1 Rule 13a-14(a)/15d-14(a) Certification.

31.2 Rule 13a-14(a)/15d-14(a) Certification.

32 Section 1350 Certifications.

____________________

(1)  Incorporated by reference to the Exhibits to the Company’s Form 10-Q for the three months ended September 30, 2004.

(2)  Incorporated herein by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed on October 18, 2007.

(3)  Incorporated herein by reference to the Exhibits to the Company’s Registration Statement on Form S-1, as amended, initially filed on June 18, 2004.

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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: November 10, 2009	by:	/s/ John C. Roman
		John C. Roman
		President and Chief Executive Officer
		(principal executive officer)
Date: November 10, 2009	by:	/s/ Lee R. Schlesinger
		Lee R. Schlesinger
		Senior Vice President and Chief Financial Officer
		(principal financial officer)

26