NAUGATUCK VALLEY FINANCIAL CORPORATION

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. þ

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. o


(1)	Includes shares to be issued to the Naugatuck Valley Savings and Loan Foundation, a private foundation.
(2)	Estimated solely for the purpose of calculating the registration fee.
(3)	In addition, pursuant to Rule 416(c) under the Securities Act, this registration statement also covers an indeterminate amount of interests to be offered or sold pursuant to the employee benefit plan described herein.
(4)	The securities of Naugatuck Valley Financial Corporation to be purchased by Naugatuck Valley Savings and Loan, S.B. Employee Savings Plan are included in the amount shown for common stock. Accordingly, no separate fee is required for the participation interests. In accordance with Rule 457(h) of the Securities Act, as amended, the registration fee has been calculated on the basis of the number of shares of common stock that may be purchased with the current assets of such Plan.

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

This prospectus supplement relates to the offer and sale to participants in the Naugatuck Valley Savings and Loan 401(k) Profit Sharing Plan and Trust of participation interests and shares of common stock of Naugatuck Valley Financial Corporation in connection with the Company’s initial public offering.

401(k) Plan participants may now direct the trustee of the 401(k) Plan to use their current account balances to subscribe for and purchase shares of Naugatuck Valley Financial Corporation common stock through the Naugatuck Valley Financial Corporation Stock Fund. Based upon the value of the 401(k) Plan assets as of , 2004, the trustee of the 401(k) Plan may purchase up to shares of Naugatuck Valley Financial Corporation common stock, assuming a purchase price of $10.00 per share. This prospectus supplement relates to the election of 401(k) Plan participants to direct the trustee of the 401(k) Plan to invest all or a portion of their 401(k) Plan accounts in Naugatuck Valley Financial Corporation common stock.

The prospectus dated , 2004 of Naugatuck Valley Financial Corporation, which we have attached to this prospectus supplement, includes detailed information regarding the offering of shares of Naugatuck Valley Financial Corporation common stock and the financial condition, results of operations and business of Naugatuck Valley Savings and Loan. This prospectus supplement provides information regarding the 401(k) Plan. You should read this prospectus supplement together with the prospectus and keep both for future reference.

Neither the Securities and Exchange Commission, the Office of Thrift Supervision, the Federal Deposit Insurance Corporation, nor any other state or federal agency or any state securities commission, has approved or disapproved these securities. Any representation to the contrary is a criminal offense.

These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

This prospectus supplement may be used only in connection with offers and sales by Naugatuck Valley Financial Corporation of interests or shares of common stock under the 401(k) Plan to employees of Naugatuck Valley Savings and Loan. No one may use this prospectus supplement to re-offer or resell interests or shares of common stock acquired through the 401(k) Plan.

You should rely only on the information contained in this prospectus supplement and the attached prospectus. Neither Naugatuck Valley Financial Corporation, Naugatuck Valley Mutual, MHC, Naugatuck Valley Savings and Loan nor the 401(k) Plan have authorized anyone to provide you with information that is different.

This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make such an offer or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and the prospectus nor any sale of common stock shall under any circumstances imply that there has been no change in the affairs of Naugatuck Valley Savings and Loan or the 401(k) Plan since the date of this prospectus supplement, or that the information contained in this prospectus supplement or incorporated by reference is correct as of any time after the date of this prospectus supplement.

The securities offered in connection with this prospectus supplement are participation interests in the 401(k) Plan. Assuming a purchase price of $10.00 per share, the trustee may acquire up to shares of Naugatuck Valley Financial Corporation common stock for the Naugatuck Valley Financial Corporation Stock Fund. The interests offered under this prospectus supplement are conditioned on the completion of the Reorganization and Stock Offering of Naugatuck Valley Savings and Loan. Certain subscription rights and purchase limitations also govern your investment in the Naugatuck Valley Financial Corporation Stock Fund in connection with the Reorganization and Stock Offering. See: Persons Who Can Order Stock in the Offering” and “Purchase Limitations” in the prospectus attached to this prospectus supplement for further discussion of these subscription rights and purchase limitations.

This prospectus supplement contains information regarding the 401(k) Plan. The attached prospectus contains information regarding the Reorganization and Stock Offering and the financial condition, results of operations and business of Naugatuck Valley Savings and Loan. The address of the principal executive office of Naugatuck Valley Savings and Loan is 333 Church Street, Naugatuck, Connecticut 06770. The telephone number of Naugatuck Valley Savings and Loan is (203) 720-5000.

Election to Purchase Naugatuck Valley Financial Corporation Common Stock in the Reorganization and Stock Offering

In connection with the Reorganization and Stock Offering of Naugatuck Valley Savings and Loan, you may direct the trustee of the 401(k) Plan to transfer all or part of the funds that represent your current beneficial interest in the assets of the 401(k) Plan to the Naugatuck Valley Financial Corporation Stock Fund. The 401(k) Plan trustee will subscribe for Naugatuck Valley Financial Corporation common stock offered for sale in connection with the Reorganization and Stock Offering in accordance with each participant’s direction. If there is not enough common stock in the Reorganization and Stock Offering to fill all subscriptions, the common stock will be apportioned and the trustee for the 401(k) Plan may not be able to purchase all of the common stock you requested. In such a case, if you elect, the trustee will purchase shares in the open market on your behalf, after the Reorganization and Stock Offering, to fulfill your initial request. The trustee may make such purchases at prices higher than the initial public offering price.

All plan participants are eligible to direct a transfer of funds to the Naugatuck Valley Financial Corporation Stock Fund. However, transfer directions are subject to subscription rights and purchase priorities. Your order for shares in the Stock Offering will be filled based on your subscription rights. Naugatuck Valley Financial Corporation has granted rights to subscribe for shares of Naugatuck Valley Financial Corporation common stock to the following persons in the following order of priority: (1) persons with $50 or more on deposit at Naugatuck Valley Savings and Loan as of April 30, 2003; (2) the Naugatuck Valley Savings and Loan Employee Stock Ownership Plan; (3) persons with $50 or more on deposit at Naugatuck Valley Savings and Loan as of , 2004; and (4) Naugatuck Valley Savings and Loan’s depositors as of . If you fall into one of the above subscription offering categories, you have subscription rights to purchase shares of common stock in the offering and you may use funds in your 401(k) Plan account to pay for your purchase of shares of Naugatuck Valley Financial Corporation common stock.

As of , 2004, the market value of the assets of the 401(k) Plan equaled approximately $ . The plan administrator has informed each participant of the value of his or her beneficial interest in the 401(k) Plan. The value of 401(k) Plan assets represents past contributions made to the 401(k) Plan on your behalf, plus or minus earnings or losses on the contributions, less previous withdrawals and loans.

The last two pages of this prospectus supplement contain a form for you to direct a transfer to the Naugatuck Valley Financial Corporation Stock Fund (the “Investment Form”). If you wish to transfer all, or part, in multiples of not less than 1%, of your beneficial interest in the assets of the 401(k) Plan to the Naugatuck Valley Financial Corporation Stock Fund, you should complete the Investment Form. If you do not wish to make such an election at this time, you do not need to take any action. The minimum investment in the Naugatuck Valley Financial Corporation Stock Fund during the initial public offering is $250.00.

You must submit your direction to transfer amounts to the Naugatuck Valley Financial Corporation Stock Fund in connection with the Reorganization and Stock Offering by the deadline of 5:00 p.m. on , 2004. You should return the Investment Form to Kathleen A. McPadden in the Human Resources Department.

You cannot change your direction to transfer amounts credited to your account under the 401(k) Plan to the Naugatuck Valley Financial Corporation Stock Fund prior to the completion of the Reorganization and Stock Offering. Following the closing of the Reorganization and Stock offering and the initial purchase of shares in the Naugatuck Valley Financial Corporation Stock Fund, you may change your investment directions, in accordance with the terms of the 401(k) Plan.

The trustee will use the funds transferred to the Naugatuck Valley Financial Corporation Stock Fund to purchase shares of Naugatuck Valley Financial Corporation common stock in the Reorganization and Stock Offering. The trustee will pay the same price for shares of Naugatuck Valley Financial Corporation common stock as all other persons who purchase shares of Naugatuck Valley Financial Corporation common stock in the offering. If there is not enough common stock in the offering to fill all subscriptions, the common stock will be apportioned and the trustee for the 401(k) Plan may not be able to purchase all of the common stock you requested. If you elect, the trustee will purchase shares on your behalf after the Reorganization and Stock Offering in the open market, to fulfill your initial request. The trustee may make such purchases at prices higher or lower than the $10.00 offering price.

Nature of a Participant’s Interest in Naugatuck Valley Financial Corporation Common Stock

The trustee will hold Naugatuck Valley Financial Corporation common stock in the name of the 401(k) Plan. The trustee will credit shares of common stock acquired at your direction to your account under the 401(k) Plan. Therefore, the investment designations of other 401(k) Plan participants should not affect earnings on your 401(k) Plan account.

Voting and Tender Rights of Naugatuck Valley Financial Corporation Common Stock

The trustee generally will exercise voting and tender rights attributable to all Naugatuck Valley Financial Corporation common stock held by the Naugatuck Valley Financial Corporation Stock Fund, as directed by participants with interests in the Naugatuck Valley Financial Corporation Stock Fund. With respect to each matter as to which holders of Naugatuck Valley Financial Corporation common stock have a right to vote, you will have voting instruction rights that reflect your proportionate interest in the Naugatuck Valley Financial Corporation Stock Fund. The number of shares of Naugatuck Valley Financial Corporation common stock held in the Naugatuck Valley Financial Corporation Stock Fund voted for and against each matter will be proportionate to the number of voting instruction rights exercised. If there is a tender offer for Naugatuck Valley Financial Corporation common stock, the 401(k) Plan allots each participant a number of tender instruction rights reflecting the participant’s proportionate

Naugatuck Valley Savings and Loan originally adopted the 401(k) Plan effective May 1, 1997. The 401(k) Plan was subsequently amended and restated, most recently, effective January 1, 2002. Naugatuck Valley Savings and Loan intends for the 401(k) Plan to comply, in form and in operation, with all applicable provisions of the Internal Revenue Code and the Employee Retirement Income Security Act of 1974, as amended, or “ERISA.” Naugatuck Valley Savings and Loan may change the 401(k) Plan from time to time in the future to ensure continued compliance with these laws. Naugatuck Valley Savings and Loan may also amend the 401(k) Plan from time to time in the future to add, modify, or eliminate certain features of the plan, as it sees fit. Federal law provides you with various rights and protections as a participant in the 401(k) Plan, which is governed by ERISA. However, the Pension Benefit Guaranty Corporation does not guarantee your benefits under the 401(k) Plan.

Reference to Full Text of the Plan. The following portions of this prospectus supplement summarize the material provisions of the 401(k) Plan. Naugatuck Valley Savings and Loan qualifies this summary in its entirety by reference to the full text of the 401(k) Plan. You may obtain copies of the full 401(k) Plan document including any amendments to the plan and a summary plan description for the 401(k) Plan, by contacting Kathleen A. McPadden in the Human Resources Department. You should carefully read the 401(k) Plan documents to understand your rights and obligations under the plan.

Eligible employees of Naugatuck Valley Savings and Loan who have attained age 21 and completed 6 months of employment with Naugatuck Valley Savings and Loan may begin to make pre-tax salary deferrals into the 401(k) Plan as of the January 1st or July 1st coinciding with or earlier of next following the date they have satisfied the eligibility requirements.

As of , 2004, of the employees of Naugatuck Valley Savings and Loan participated in the 401(k) Plan.

Employee Pre-Tax Salary Deferrals. Subject to certain IRS limitations, the 401(k) Plan permits each participant to make pre-tax salary deferrals to the 401(k) Plan each payroll period of up to 100% of the participant’s pay. For purposes of the 401(k) Plan, a participant’s “pay” is defined as a participant’s wages, tips, and other compensation reportable on IRS Form W-2, including salary elective deferrals and excluding compensation paid while not a participant in the 401(k) Plan. Participants may change their rate of pre-tax deferrals on the first day of January and July by completing a form and submitting it to the Human Resources Department.

Naugatuck Valley Savings and Loan Matching Contributions. The 401(k) Plan provides that Naugatuck Valley Savings and Loan will make matching contributions on behalf of each participant equal to a discretionary percentage of a participant’s elective deferrals to the 401(k) Plan. Naugatuck Valley Savings and Loan makes matching contributions only for those participants who make elective deferrals to

Naugatuck Valley Savings and Loan Discretionary Contributions. Naugatuck Valley Savings and Loan, in its sole discretion, may also make additional discretionary contributions, in amounts specified by the Board of Directors of Naugatuck Valley Savings and Loan. These discretionary contributions are allocated to each participant in the 401(k) Plan who is actively employed by Naugatuck Valley Savings and Loan on the last business day of the Plan Year and has completed a year of service for Naugatuck Valley Savings and Loan during the Plan Year.

Rollover Contributions. Naugatuck Valley Savings and Loan allows employees who receive a distribution from a previous employer’s tax-qualified employee benefit plan to deposit that distribution into a Rollover Contribution account under the 401(k) Plan, provided the rollover contribution satisfies IRS requirements.

Limitation on Employee Salary Deferrals. Although the 401(k) Plan permits you to defer up to 100% of your pay, by law your total deferrals under the 401(k) Plan, together with similar plans, may not exceed $13,000 for 2004. Employees who are age 50 and over may also make additional, “catch-up” contributions to the plan, up to a maximum of $3,000 for 2004. The Internal Revenue Service periodically increases these limitations. A participant who exceeds these limitations must include any excess deferrals in gross income for federal income tax purposes in the year of deferral. In addition, the participant must pay federal income taxes on any excess deferrals when distributed by the 401(k) Plan to the participant, unless the plan distributes the excess deferrals and any related income no later than the first April 15th following the close of the taxable year in which the participant made the excess deferrals. Any income on excess deferrals distributed before such date is treated, for federal income tax purposes, as earned and received by the participant in the taxable year of the distribution.

Limitation on Annual Additions and Benefits. As required by the Internal Revenue Code, the 401(k) Plan provides that the total amount of contributions and forfeitures (annual additions) credited to a participant during any year under all defined contribution plans of Naugatuck Valley Savings and Loan (including the 401(k) Plan and the proposed Naugatuck Valley Savings and Loan Employee Stock Ownership Plan) may not exceed the lesser of 100% of the participant’s annual compensation or $41,000 for 2004.

Limitation on Plan Contributions for Highly Compensated Employees. Special provisions of the Internal Revenue Code limit the amount of pre-tax and matching contributions that may be made to the 401(k) Plan in any year on behalf of highly compensated employees, in relation to the amount of pre-tax and matching contributions made by or on behalf of all other employees eligible to participate in the 401(k) Plan. If pre-tax and matching contributions exceed these limitations, the plan must adjust the contribution levels for highly compensated employees.

In general, a highly compensated employee includes any employee who (1) was a five percent owner of the sponsoring employer at any time during the year or the preceding year, or (2) had compensation for the preceding year in excess of $90,000 and, if the sponsoring employer so elects, was in the top 20% of employees by compensation for such year. The preceding dollar amount applies for 2004, and may be adjusted periodically by the IRS.

Top-Heavy Plan Requirements. If the 401(k) Plan is a Top-Heavy Plan for any calendar year, Naugatuck Valley Savings and Loan may be required to make certain minimum contributions to the 401(k) Plan on behalf of non-key employees. In general, the 401(k) Plan will be treated as a “Top-Heavy Plan” for any calendar year if, as of the last day of the preceding calendar year, the aggregate balance of the accounts of Key Employees exceeds 60% of the aggregate balance of the accounts of all employees


	(1) an officer of Naugatuck Valley Savings and Loan whose annual compensation exceeds $130,000;

	(2) a 5% owner of the employer, meaning an employee who owns more than 5% of the outstanding stock of Naugatuck Valley Financial Corporation, or who owns stock that possesses more than 5% of the total combined voting power of all stock of Naugatuck Valley Financial Corporation; or

	(3) a 1% owner of the employer, meaning an employee who owns more than 1% of the outstanding stock of Naugatuck Valley Financial Corporation, or who owns stock that possesses more than 1% of the total combined voting power of all stock of Naugatuck Valley Financial Corporation, and whose annual compensation exceeds $150,000.

Assets in the 401(k) Plan Trust are currently invested in the funds specified below. The annual percentage return on these funds (net of fees) for the prior three years was:


*	VP refers to Variable Portfolio

*	VI refers to Variable Insurance

*	VIP refers to Variable Insurance Product Fund

ING VP International Value Portfolio — Class R. Investments primarily in foreign companies with market capitalizations greater than $1 billion, but may hold up to 25 percent of assets in companies with smaller market capitalization. Applies the technique of “value investment” by seeking stocks that research indicates are priced below their long-term value.

Janus Aspen Series Worldwide Growth Portfolio — Institutional Shares. Seeks long-term growth of capital in a manner consistent with the preservation of capital.

AIM V.I. Capital Appreciation Fund — Series I Shares. Seeks growth of capital by investing principally in common stocks of companies the portfolio managers believe are likely to benefit from new or innovative products, services or processes as well as those that have experienced above-average, long-term growth in earnings and have excellent prospects for future growth.

FTVIP Franklin Small Cap Value Securities Fund — Class 2. Seeks long-term total return. The fund normally invests at least 80 percent of its net assets in investments of small capitalization companies.

ING Baron Small Cap Growth Portfolio — Initial Class. Seeks capital appreciation. Investments primarily (at least 80 percent of total assets under normal circumstances) in securities of small companies with market values under $2.5 billion as measured at the time of purchase.

Lord Abbett Mid-Cap Value Portfolio — Class VC. Seeks capital appreciation through investments, primarily in equity securities, which are believed to be undervalued in the marketplace.

Fidelity VIP Contrafund Portfolio — Initial Class. Seeks long-term capital appreciation and normally invests primarily in common stocks of companies whose value it believes is not fully recognized by the public.

ING T. Rowe Price Growth Equity Portfolio — Initial Class. Seeks long-term capital growth, and secondarily, increasing dividend income. Invests primarily (at least 80 percent of net assets under normal circumstances) in common stocks. The Portfolio concentrates its investments in growth companies.

ING VP Index Plus LargeCap Portfolio — Class R. Seeks to outperform the total return performance of the standard & Poor’s 500 Composite Index (S&P 500), while maintaining a market level of risk.

Lord Abbett Growth and Income Portfolio — Class VC. Seeks long-term growth of capital and income without excessive fluctuations in market value.

Calvert Social Balanced Portfolio. Seeks to achieve a competitive total return through an actively managed nondiversified portfolio of stocks, bonds and money market instruments which offer income and capital growth opportunity and which satisfy the investment and social criteria for the Portfolio.

ING VP Strategic Allocation Balanced Portfolio — Class R. Seeks to provide total return (i.e., income and capital appreciation, both realized and unrealized).

ING VP Strategic Allocation Growth Portfolio — Class R. Seeks to provide capital appreciation for investors seeking capital appreciation who generally have an investment horizon exceeding 15 years and a high level of risk tolerance.

ING VP Strategic Allocation Income Portfolio — Class R. Seeks to provide total return consistent with preservation of capital for investors primarily seeking total return consistent with capital preservation who generally have an investment horizon exceeding five years and a low level of risk tolerance.

ING PIMCO Total Return Portfolio — Initial Class. Seeks maximum total return, consistent with capital preservation and prudent investment management.

ING Fixed Account. Stability of principal is the primary objective of this investment option. The ING Fixed Account guarantees a minimum rate of interest for the life of the contract, and may credit a higher interest rate, from time to time.

ING VP Money Market Portfolio — Class R. Seeks to provide high current return, consistent with preservation of capital and liquidity, through investment in high-quality money market instruments.

The 401(k) Plan now offers the Naugatuck Valley Financial Corporation Stock Fund as an additional choice to the investment alternatives described above. The Naugatuck Valley Financial Corporation Stock Fund invests primarily in the common stock of Naugatuck Valley Financial Corporation. Participants in the 401(k) Plan may direct the trustee to invest all or a portion of their 401(k) Plan account balances in the Naugatuck Valley Financial Corporation Stock Fund.

The Naugatuck Valley Financial Corporation Stock Fund consists of investments in the common stock of Naugatuck Valley Financial Corporation made on the effective date of the Reorganization and Stock Offering. Each participant’s proportionate undivided beneficial interest in the Naugatuck Valley Financial Corporation Stock Fund is measured by units. The daily unit value is calculated by determining the market value of the common stock held and adding to that any cash held by the trustee. This total will be divided by the number of units outstanding to determine the unit value of the Naugatuck Valley Financial Corporation Stock Fund.

Upon payment of a cash dividend, the trustee will determine the unit value prior to distributing the dividend. The trustee may use the dividend to purchase shares of Naugatuck Valley Financial Corporation common stock. The Trustee will, to the extent practicable, use amounts held in the Naugatuck Valley Financial Corporation Stock Fund to purchase shares of the common stock. Pending investment in the common stock, assets held in the Naugatuck Valley Financial Corporation Stock Fund will be placed in bank deposits and other short-term investments.

As of the date of this prospectus supplement, no shares of Naugatuck Valley Financial Corporation common stock have been issued or are outstanding, and there is no established market for Naugatuck Valley Financial Corporation common stock. Accordingly, there is no record of the historical performance of the Naugatuck Valley Financial Corporation Stock Fund. Performance of the Naugatuck Valley Financial Corporation Stock Fund depends on a number of factors, including the financial condition and profitability of Naugatuck Valley Savings and Loan and general stock market conditions.

Once you have submitted your Investment Form, you may not change your investment directions until after the completion of the Reorganization and Stock Offering. After the Reorganization and Stock Offering, you may change your investment directions in accordance with the terms of the 401(k) Plan.

Vesting. All participants are 100% vested in their pre-tax salary deferral and matching contribution account balances in the 401(k) Plan. This means that participants have a non-forfeitable right to these funds and any earnings on the funds at all times. Plan participants vest in their discretionary contributions (if any) at a rate of 20% after the first two years of employment and 20% each additional year thereafter.

Withdrawals Before Termination of Employment. You may receive in-service distributions from the 401(k) Plan under limited circumstances in the form hardship withdrawals and participant loans.

In order to qualify for a hardship withdrawal, you must have an immediate and substantial need to meet certain expenses and have no other reasonably available resources to meet the financial need. If you qualify for a hardship distribution, the trustee will make the distribution proportionately from the investment funds in which you have invested your account balances.

Participant loans are approved by the 401(k) Plan Administrator. If you qualify for a participant loan, the trustee will make a distribution proportionately from the investment funds in which you have invested your account balances. You may obtain information on the participant loan program from the Human Resources Department.

Distribution Upon Retirement or Disability. The standard form of benefit upon retirement or disability is a lump sum payment. However, if the value of a participant’s accounts under the 401(k) Plan exceeds $5,000, the participant may elect to defer the lump sum payment until after retirement. However, the IRS requires that participants receive at least a portion of their plan accounts by the April 1st of the calendar year following the calendar year in which they retire (or terminate service due to a disability) or the calendar year in which they reach age 70 1/2. Participants may also choose to roll over all or a portion of their plan accounts to an Individual Retirement Account (IRA), or to another employer’s qualified plan, if the other employer’s plan permits rollover contributions.

Distribution Upon Death. A participant’s designated beneficiary will receive the full value of a participant’s accounts under the 401(k) Plan upon the participant’s death. If the participant did not make a valid election regarding the form of payment prior to death, the beneficiary will receive a lump sum payment as soon as administratively possible. If the participant made a valid payment election, or was otherwise scheduled to receive a deferred lump sum payment, the beneficiary will generally receive a lump sum payment on the date elected by the participant. Under certain circumstances, however, payment may be made on an earlier date.

Distribution Upon Termination for Any Other Reason. If your 401(k) Plan accounts total $5,000 or less, you will receive a lump sum payment as soon as administratively possible after your termination of employment. If the value of your 401(k) Plan accounts exceeds $5,000, you will receive a lump sum payment on your normal retirement date. However, you may elect to receive the value of your vested accounts in a lump sum payment prior to your normal retirement date. You may also request that the trustee transfer the value of your accounts to an Individual Retirement Account (IRA) or to another employer’s qualified plan, if the other employer’s plan permits rollover contributions.

Nonalienation of Benefits. Except with respect to federal income tax withholding, and as provided for under a qualified domestic relations order, benefits payable under the 401(k) Plan will not be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any rights to benefits payable under the 401(k) Plan will be void.

Applicable federal tax law requires the 401(k) Plan to impose substantial restrictions on your right to withdraw amounts held under the plan before your termination of employment with Naugatuck Valley Savings and Loan. Federal law may also impose an excise tax on withdrawals from the 401(k) Plan before you attain 59 1/2 years of age, regardless of whether the withdrawal occurs during your employment with Naugatuck Valley Savings and Loan or after your termination of employment.

The trustee of the 401(k) Plan is the named fiduciary of the 401(k) Plan for purposes of ERISA. The board of directors of Naugatuck Valley Savings and Loan appoints the trustee to serve at its pleasure. The board of directors has appointed as the trustee for the Naugatuck Valley Financial Corporation Stock Fund.

The trustee receives, holds and invests the contributions to the 401(k) Plan in trust and distributes them to participants and beneficiaries in accordance with the terms of the 401(k) Plan and the directions of the plan administrator. The trustee is responsible for the investment of the trust assets, as directed by the participants.

The plan administrator furnishes participants quarterly statements that show the balance in their accounts as of the statement date, contributions made to their accounts during that period and any additional adjustments required to reflect earnings or losses.

Naugatuck Valley Savings and Loan currently acts as plan administrator for the 401(k) Plan. The plan administrator handles the following administrative functions: interpreting the provisions of the plan, prescribing procedures for filing applications for benefits, preparing and distributing information explaining the plan, maintaining plan records, books of account and all other data necessary for the proper administration of the plan, preparing and filing all returns and reports required by the U.S. Department of

Naugatuck Valley Savings and Loan expects to continue the 401(k) Plan indefinitely. Nevertheless, Naugatuck Valley Savings and Loan may terminate the 401(k) Plan at any time. If Naugatuck Valley Savings and Loan terminates the 401(k) Plan in whole or in part, all affected participants become fully vested in their accounts, regardless of other provisions of the 401(k) Plan. Naugatuck Valley Savings and Loan reserves the right to make, from time to time, changes which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries. Naugatuck Valley Savings and Loan may amend the plan, however, as necessary or desirable, in order to comply with ERISA or the Internal Revenue Code.

If the 401(k) Plan merges or consolidates with another plan or transfers the trust assets to another plan, and either the 401(k) Plan or the other plan is subsequently terminated, the 401(k) Plan requires that you receive a benefit immediately after the merger, consolidation or transfer that would equal or exceed the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer, if the 401(k) Plan had terminated at that time.

The following summarizes only briefly the material federal income tax aspects of the 401(k) Plan. You should not rely on this summary as a complete or definitive description of the material federal income tax consequences of the 401(k) Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, applicable state and local income tax laws may have different tax consequences than the federal income tax laws. 401(k) Plan participants should consult a tax advisor with respect to any transaction involving the 401(k) Plan, including any distribution from the 401(k) Plan.

As a “tax-qualified retirement plan,” the Internal Revenue Code affords the 401(k) Plan certain tax advantages, including the following:


	(1) The sponsoring employer may take an immediate tax deduction for the amount contributed to the plan each year;

	(2) participants pay no current income tax on amounts contributed by the employer on their behalf; and

	(3) earnings of the plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments.

Naugatuck Valley Savings and Loan administers the 401(k) Plan to comply in operation with the requirements of the Internal Revenue Code as of the applicable effective date of any change in the law. If Naugatuck Valley Savings and Loan should receive an adverse determination letter from the IRS regarding the 401(k) Plan’s tax exempt status, all participants would generally recognize income equal to their vested interests in the 401(k) Plan, the participants would not be permitted to transfer amounts distributed from the 401(k) Plan to an Individual Retirement Account or to another qualified retirement plan, and Naugatuck Valley Savings and Loan would be denied certain tax deductions taken in connection with the 401(k) Plan.

Lump Sum Distribution. A distribution from the 401(k) Plan to a participant or the beneficiary of a participant qualifies as a lump sum distribution if it is made within one taxable year, on account of the participant’s death, disability or separation from service, or after the participant attains age 59 1/2; and consists of the balance credited to the participant under this plan and all other profit sharing plans, if any,

Naugatuck Valley Financial Corporation Common Stock Included in Lump Sum Distribution. If a lump sum distribution includes Naugatuck Valley Financial Corporation common stock, the distribution generally is taxed in the manner described above. The total taxable amount is reduced, however, by the amount of any net unrealized appreciation on Naugatuck Valley Financial Corporation common stock; that is, the excess of the value of Naugatuck Valley Financial Corporation common stock at the time of the distribution over the cost or other basis of the securities to the trust. The tax basis of Naugatuck Valley Financial Corporation common stock, for purposes of computing gain or loss on a subsequent sale, equals the value of Naugatuck Valley Financial Corporation common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of Naugatuck Valley Financial Corporation common stock, to the extent of the net unrealized appreciation at the time of distribution, is long-term capital gain, regardless of how long you hold the Naugatuck Valley Financial Corporation common stock, or the “holding period.” Any gain on a subsequent sale or other taxable disposition of Naugatuck Valley Financial Corporation common stock that exceeds the amount of net unrealized appreciation upon distribution is considered long-term capital gain, regardless of the holding period. Any gain on a subsequent sale or other taxable disposition of Naugatuck Valley Financial Corporation common stock that exceeds the amount of net unrealized appreciation at the time of distribution is considered either short-term or long-term capital gain, depending upon the length of the holding period. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent allowed under IRS regulations.

We have provided you with a brief description of the material federal income tax aspects of the 401(k) Plan that are generally applicable under the Internal Revenue Code. We do not intend this description to be a complete or definitive description of the federal income tax consequences of participating in or receiving distributions from the 401(k) Plan. Accordingly, you should consult a tax advisor concerning the federal, state and local tax consequences of participating in and receiving distributions from the 401(k) Plan.

Any “affiliate” of Naugatuck Valley Financial Corporation under Rules 144 and 405 of the Securities Act of 1933, as amended, who receives a distribution of common stock under the 401(k) Plan, may re-offer or resell such shares only under a registration statement filed under the Securities Act of 1933, as amended, assuming the availability of a registration statement, or under Rule 144 or some other exemption from these registration requirements. An “affiliate” of Naugatuck Valley Savings and Loan is someone who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, Naugatuck Valley Savings and Loan. Generally, a director, principal officer or major shareholder of a corporation is deemed to be an “affiliate” of that corporation.

Any person who may be an “affiliate” of Naugatuck Valley Savings and Loan may wish to consult with counsel before transferring any common stock they own. In addition, participants should consult with counsel regarding the applicability to them of Section 16 of the Securities Exchange Act of 1934, as amended, which may restrict the sale of Naugatuck Valley Financial Corporation common stock acquired under the 401(k) Plan or other sales of Naugatuck Valley Financial Corporation common stock.

Persons who are not deemed to be “affiliates” of Naugatuck Valley Savings and Loan at the time of resale may resell freely any shares of Naugatuck Valley Financial Corporation common stock distributed to them under the 401(k) Plan, either publicly or privately, without regard to the registration and prospectus delivery requirements of the Securities Act of 1933, as amended, or compliance with the restrictions and conditions contained in the exemptions available under federal law. A person deemed an “affiliate” of Naugatuck Valley Savings and Loan at the time of a proposed resale may publicly resell common stock

only under a “re-offer” prospectus or in accordance with the restrictions and conditions contained in Rule 144 of the Securities Act of 1933, as amended, or some other exemption from registration, and may not use this prospectus in connection with any such resale. In general, Rule 144 restricts the amount of common stock which an affiliate may publicly resell in any three-month period to the greater of one percent of Naugatuck Valley Financial Corporation common stock then outstanding or the average weekly trading volume reported on the Nasdaq Stock Market during the four calendar weeks before the sale. Affiliates may sell only through brokers without solicitation and only at a time when Naugatuck Valley Financial Corporation is current in filing all required reports under the Securities Exchange Act of 1934, as amended.

Section 16 of the Securities Exchange Act of 1934, as amended, imposes reporting and liability requirements on officers, directors and persons who beneficially own more than ten percent of public companies such as Naugatuck Valley Financial Corporation Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the filing of reports of beneficial ownership. Within ten days of becoming a person required to file reports under Section 16(a), such person must file a Form 3 reporting initial beneficial ownership with the Securities and Exchange Commission. Such persons must also report periodically certain changes in beneficial ownership involving the allocation or reallocation of assets held in their 401(k) Plan accounts, either on a Form 4 within two days after a transaction, or annually on a Form 5 within 45 days after the close of a company’s fiscal year.

In addition to the reporting requirements described above, Section 16(b) of the Securities Exchange Act of 1934, as amended, provides for the recovery by Naugatuck Valley Financial Corporation of profits realized from the purchase and sale or sale and purchase of its common stock within any six-month period by any officer, director or person who beneficially owns more than ten percent of the common stock.

The SEC has adopted rules that exempt many transactions involving the 401(k) Plan from the “short-swing” profit recovery provisions of Section 16(b). The exemptions generally involve restrictions upon the timing of elections to buy or sell employer securities for the accounts of any officer, director or person who beneficially owns more than ten percent of the common stock.

Except for distributions of the common stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons who are subject to Section 16(b) may be required, under limited circumstances involving the purchase of common stock within six months of the distribution, to hold the shares of common stock distributed from the 401(k) Plan for six months after the distribution date.

The validity of the issuance of the common stock of Naugatuck Valley Financial Corporation will be passed upon by Muldoon Murphy Faucette & Aguggia LLP, Washington, D.C. Muldoon Murphy Faucette & Aguggia LLP acted as special counsel for Naugatuck Valley Savings and Loan in connection with the Stock Offering.

1. Instructions. In connection with the offering to the public of the common stock of Naugatuck Valley Savings and Loan 401(k) Profit Sharing Plan and Trust (the “Plan”) now permits participants to direct their current Plan account balances into a new fund: the Naugatuck Valley Financial Corporation Stock Fund (“Employer Stock Fund”). The percentage of a participant’s account transferred at the direction of the participant into the Employer Stock Fund will be used to purchase shares of common stock of Naugatuck Valley Financial Corporation (the “Common Stock”).

To direct a transfer of all or a part of the funds credited to your accounts to the Employer Stock Fund, you should complete and file this form with the Human Resources Department no later than 10 days prior to the expiration date of the stock offering. A representative for the Plan Administrator will retain a copy of this form and return a copy to you. If you need any assistance in completing this form, please contact Kathleen A. McPadden at (203) 720-5000, ext. 209. If you do not complete and return this form to the Human Resources Department by 5:00 p.m. on , 2004, the funds credited to your accounts under the Plan will continue to be invested in accordance with your prior investment directions, or in accordance with the terms of the Plan if no investment directions have been provided.

2. Investment Directions. I hereby authorize the Plan Administrator to direct the Trustees to invest the following percentages (in multiples of not less than 5%) of my 401(k) Plan account balance in the Employer Stock Fund:

Note: The total percentage of directed investments, above, may not exceed 100%

If there is not enough Common Stock in the stock offering to fill my subscription pursuant to the investment directions above, I hereby instruct the Plan Trustee to purchase shares of Common Stock in the open market after the Reorganization and Stock Offering to the extent necessary to fulfill my investment directions indicated on this form. I understand that if I do not direct the Trustee by checking the box below, the excess funds will be invested in the same manner as new deposits have been directed.

3. Purchaser Information. The ability of participants in the Plan to purchase Common Stock and to direct their current account balances into the Employer Stock Fund is based upon the participant’s subscription rights. Please indicate your status.


	o	Check here if you had $50.00 or more on deposit with Naugatuck Valley Savings and Loan as of April 30, 2003.

	o	Check here if you had $50.00 or more on deposit with Naugatuck Valley Savings and Loan as of , 2004.

	o	Check here if you had $50 or more on deposit with Naugatuck Valley Savings and Loan as of , 2004.

4. Acknowledgment of Participant. I understand that this Investment Form shall be subject to all of the terms and conditions of the Plan. I acknowledge that I have received a copy of the Prospectus and the Prospectus Supplement.

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Acknowledgment of Receipt by Administrator. This Investment Form was received by the Plan Administrator and will become effective on the date noted below.

THE PARTICIPATION INTERESTS REPRESENTED BY THE COMMON STOCK OFFERED HEREBY ARE NOT DEPOSIT ACCOUNTS AND ARE NOT INSURED BY THE BANK INSURANCE FUND OR THE SAVINGS ASSOCIATION INSURANCE FUND OF THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY AND ARE NOT GUARANTEED BY NAUGATUCK VALLEY FINANCIAL CORPORATION, NAUGATUCK VALLEY MUTUAL, MHC, OR NAUGATUCK VALLEY SAVINGS AND LOAN. THE COMMON STOCK IS SUBJECT TO AN INVESTMENT RISK, INCLUDING THE POSSIBLE LOSS OF THE PRINCIPAL INVESTED.

Naugatuck Valley Financial Corporation is offering common stock for sale in connection with the reorganization of Naugatuck Valley Savings and Loan, S.B. into the mutual holding company form of organization. The shares we are offering represent 43% of the outstanding common stock of Naugatuck Valley Financial. Naugatuck Valley Savings and Loan will form Naugatuck Valley Financial to own Naugatuck Valley Savings and Loan as part of the reorganization. Naugatuck Valley Mutual Holding Company, the federally chartered mutual holding company parent to be formed by Naugatuck Valley Savings and Loan, will own 55% of the outstanding common stock of Naugatuck Valley Financial. As part of the reorganization, we also intend to contribute 2% of the common stock issued in the reorganization to the Naugatuck Valley Savings and Loan Foundation, a charitable foundation we will form in connection with the reorganization. We have applied to have our common stock listed for trading on the Nasdaq National Market under the symbol “NVSL.”

If you are a participant in the Naugatuck Valley Savings and Loan, S.B. Employee Savings Plan:


	•	You may direct that all or part of your current account balances in this plan be invested in shares of common stock.

	•	You will be receiving separately a supplement to this prospectus that describes your rights under this plan.

If you fit none of the categories above, but are interested in purchasing shares of our common stock:


	•	You may have an opportunity to purchase shares of common stock after priority orders are filled.

We are offering up to 2,472,500 shares of common stock for sale on a best efforts basis, subject to certain conditions. We must sell a minimum of 1,827,500 shares to complete the offering. We may sell up to 2,843,375 shares without resoliciting subscribers because of regulatory considerations, demand for the shares or changes in market conditions. The offering is expected to terminate at 10:00 a.m., Eastern Time, on [Expiration Date]. We may extend this expiration date without notice to you until [Extension Date #1], unless the Office of Thrift Supervision approves a later date, which will not be beyond [Extension Date #2].

Ryan Beck & Co., Inc. will use its best efforts to assist us in our selling efforts, but is not required to purchase any of the common stock being offered for sale. Purchasers will not pay a commission to purchase shares of common stock in the offering. All shares are offered for sale at a price of $10.00 per share.

The minimum purchase is 25 shares. Once submitted, orders are irrevocable unless the offering is terminated or extended beyond [Extension Date #1]. If the offering is extended beyond [Extension Date #1], subscribers will have the right to modify or rescind their purchase orders. Funds received before completion of the offering will be held in an escrow account at Naugatuck Valley Savings and Loan and will earn interest at our passbook rate. If we terminate the offering, or if we extend the offering beyond [Extension Date #1] and you rescind your order, we will promptly return your funds with interest at our passbook rate.

We expect our directors and executive officers, together with their associates, to subscribe for 875,000 shares, which equals 3.89% of the shares that will be sold in the offering at the midpoint of the offering range and issued to our charitable foundation.

This investment involves a degree of risk, including the possible loss of principal.

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Neither the Securities and Exchange Commission, the Office of Thrift Supervision nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

[map of Connecticut showing office locations of Naugatuck Valley Savings and Loan appears here]

The following are answers to frequently asked questions. You should read this entire prospectus, including “Risk Factors” beginning on page . The sections entitled “Summary” and “The Reorganization and Stock Offering” beginning on page and page , respectively, provide detailed information about the stock offering.

SUMMARY

This summary highlights selected information from this document and may not contain all the information that is important to you.
To understand the stock offering fully, you should read this entire document carefully. In certain instances where appropriate, the terms “we,” “us” and “our” refer collectively to Naugatuck Valley Mutual, Naugatuck Valley Financial and Naugatuck Valley Savings and Loan or any of these entities, depending on the context. For assistance, please contact our Stock Information Center at ( ) - .

The Companies


Naugatuck Valley Mutual Holding Company 333 Church Street Naugatuck, Connecticut 06770 (203) 720-5000		Naugatuck Valley Mutual will be formed upon completion of the reorganization. After completion of the reorganization, Naugatuck Valley Mutual will become our federally chartered mutual holding company parent and will own 55% of Naugatuck Valley Financial’s common stock. So long as Naugatuck Valley Mutual exists, it will own a majority of the voting stock of Naugatuck Valley Financial. Naugatuck Valley Mutual is not currently an operating company. Naugatuck Valley Mutual will have no stockholders and depositors of Naugatuck Valley Savings and Loan will become members of Naugatuck Valley Mutual. We do not expect that Naugatuck Valley Mutual will engage in any business activity other than owning a majority of the common stock of Naugatuck Valley Financial.

Naugatuck Valley Financial Corporation 333 Church Street Naugatuck, Connecticut 06770 (203) 720-5000		This offering is made by Naugatuck Valley Financial. Naugatuck Valley Financial will be formed upon completion of the reorganization. After completion of the reorganization, Naugatuck Valley Financial will become our federally chartered mid-tier stock holding company. Naugatuck Valley Financial is not currently an operating company. After the reorganization, Naugatuck Valley Financial will own all of Naugatuck Valley Savings and Loan’s capital stock and will direct, plan and coordinate Naugatuck Valley Savings and Loan’s business activities. In the future, Naugatuck Valley Financial might also acquire or organize other operating subsidiaries, including other financial institutions or financial services companies, although it currently has no specific plans or agreements to do so.

Naugatuck Valley Savings and Loan, S.B 333 Church Street Naugatuck, Connecticut 06770 (203) 720-5000		Naugatuck Valley Savings and Loan is a community-oriented financial institution dedicated to serving the financial service needs of consumers and businesses within our market area. We engage primarily in the business of attracting deposits from the general public and using such funds to originate loans. We emphasize the origination of loans secured by first mortgages on owner-occupied, residential real estate. To a lesser extent, we originate other types of real estate loans, commercial loans and consumer loans. We currently operate from our main office in Naugatuck, Connecticut and four branch offices in New Haven and Fairfield Counties. At March 31, 2004, we had total assets of $242.1 million, deposits of $187.5 million and total capital of $21.7 million.


Our Operating Strategy (page )		Our mission is to operate and grow a profitable community-oriented financial institution serving primarily retail customers and small businesses in our market area. After the reorganization, we plan to continue our strategy of:

		• operating as an independent community-oriented financial institution;

		• expanding our branch network and upgrading our existing branches;

		• pursuing opportunities to increase and diversify lending in our market area;

		• applying conservative underwriting practices to maintain the high quality of our loan portfolio;

		• managing our net interest margin and interest rate risk;

		• increasing core deposits; and

		• increasing noninterest income.

The Reorganization


Description of the Reorganization (page )		Currently, we are a Connecticut-chartered mutual savings bank with no stockholders. Our board of corporators currently has the right to vote on certain matters such as the election of directors.

		The mutual holding company reorganization and charter conversion process that we are now undertaking involves a series of transactions by which we will convert our organization from the state-chartered mutual form of organization to the federally chartered mutual holding company form of organization. In the mutual holding company structure, Naugatuck Valley Savings and Loan will be a federally chartered stock savings bank and all of its stock will be owned by Naugatuck Valley Financial. In addition, 45% of Naugatuck Valley Financial’s stock will be owned by the public, our employee stock ownership plan and our charitable foundation and 55% of Naugatuck Valley Financial’s stock will be owned by Naugatuck Valley Mutual. Our depositor members on the closing date of the reorganization will become members of Naugatuck Valley Mutual and will have similar voting rights in Naugatuck Valley Mutual as the board of corporators currently has in Naugatuck Valley Savings and Loan.


		After the reorganization, our ownership structure will be as follows:

(CHART)


		Our normal business operations will continue without interruption during the reorganization and the same officers and directors who currently serve us will continue to serve us after the reorganization.

Reasons for the Reorganization (page )		Our primary reasons for the reorganization are to:

		• structure our business in a form that will enable us to access capital markets;

		• permit us to control the amount of capital being raised to enable us to prudently deploy the proceeds of the offering;

		• support future lending and growth;

		• enhance our ability to attract and retain qualified directors, management and other employees through stock-based compensation plans; and

		• support future branching activities and/or the acquisition of other financial institutions or financial services companies or their assets.

		We expect to open a branch in Seymour, Connecticut in the fourth quarter of 2004. We have signed an agreement for the purchase of a parcel of land in Southbury, Connecticut where we expect to open a branch by the third quarter of 2005. We have also leased property in Shelton, Connecticut where we expect to relocate our current Shelton branch by the fourth quarter of 2005. Although we are interested in finding new possible branch locations, we do not have any other specific plans or arrangements for further expansion and we do not now have any specific acquisition plans.

Purchase Price		The purchase price is $10.00 per share. We determined this per share price in order to achieve as wide a distribution of stock as possible. You will not pay a commission to buy any shares in the offering.

Number of Shares to be Sold		We are offering for sale between 1,827,500 and 2,472,500 shares of common stock in this offering. With regulatory approval, we may increase the number of shares to be sold to 2,843,375 shares


		without giving you further notice or the opportunity to change or cancel your order. The Office of Thrift Supervision will consider the level of subscriptions, our financial condition and results of operations and changes in market conditions in connection with a request to increase the offering size.

How We Determined the Offering Range (page )		The offering range is based on an independent appraisal of Naugatuck Valley Savings and Loan by Keller & Company, Inc., an appraisal firm experienced in appraisals of savings institutions. Keller & Company’s estimate of our market value was based in part upon our financial condition and results of operations and the effect of the capital raised in this offering. Keller & Company’s appraisal, dated as of May 21, 2004, estimated our pro forma market value on a fully converted basis to be between $42,500,000 and $57,500,000, with a midpoint of $50,000,000. Subject to regulatory approval, we may increase the pro forma market value on a fully converted basis to $66,125,000 without notice to you. Based on the sale of 43% of our common stock in the offering, Keller & Company estimated the pro forma market value of our common stock being offered to be between $18,275,000 and $24,725,000, with a midpoint of $21,500,000. Subject to regulatory approval, we may increase the pro forma market value of our common stock being offered to $28,433,750 without notice to you.

		The independent appraisal does not indicate market value. We cannot guarantee that anyone who purchases shares in the offering will be able to sell their shares at or above the $10.00 purchase price.

		The Office of Thrift Supervision will consider the appraisal and may require adjustments to the ratio and/or appraisal value.

		The following table summarizes the fully converted pricing ratios as of May 21, 2004 and price to pro forma per share data for us. Fully converted equivalent ratios and data assume the sale of 100% of the company’s stock to the public. See “Pro Forma Data” for a description of the assumptions we used in making these calculations.



		Fully Converted
		Equivalent Pro Forma

		Price To		Price To
		Core Earnings		Book Value
		Per Share		Per Share

Peer group company trading multiples
	Average		17.78x		120.40	%
	Median		16.97x		117.58	%
Naugatuck Valley Financial upon issuance of 100% of its stock for the twelve months ended March 31, 2004
	Minimum		24.11x		70.93	%
	Maximum		32.17x		78.08	%


Mutual Holding Company Trading Multiples		Two measures that some investors use to analyze whether a stock might be a good investment are the ratio of the offering price to the issuer’s “book value” and the ratio of the offering price to the issuer’s annual core net income. Keller & Company, in preparing its appraisal, and our Board of Directors, in approving the appraisal, considered these ratios, among other factors. Book value is the same as total equity and represents the difference between the issuer’s assets and liabilities. Keller & Company’s appraisal also incorporates an analysis of a peer group of publicly traded mutual holding companies that Keller & Company considered comparable to us.



		The following table summarizes mutual holding company trading multiples as of May 21, 2004 and price to pro forma per share data for us. See “Pro Forma Data” for a description of the assumptions we used in making these calculations.


		Price to		Price To
		Core Earnings		Book Value
		Per Share		Per Share

National mutual holding company trading multiples
	Average(1)		32.52x		198.92	%
	Median(1)		29.46x		181.22	%
Naugatuck Valley Financial upon sale of 43% of its stock for the three months ended March 31, 2004
	Minimum		27.78x		116.41	%
	Maximum		35.71x		137.17	%
Naugatuck Valley Financial upon sale of 43% of its stock for the year ended December 31, 2003
	Minimum		24.39x		117.92	%
	Maximum		33.33x		138.70	%




		(1) The information for national mutual holding companies may not be meaningful for investors because it presents average and median information for mutual holding companies that may have issued a different percentage of their stock in their offerings than the 43% that we are offering. In addition, stock repurchases also affect the ratios to a greater


		or lesser degree depending upon repurchase activity. Additionally, many factors that historically have affected pricing for mutual holding companies may not impact our trading price. See “Summary — After-Market Performance Information Provided By Independent Appraiser” and “Risk Factors — As a result of the amount of capital we are raising, we expect our return on equity and our stock price performance to be negatively affected.”

After-Market Performance Information Provided by Independent Appraiser		As part of its appraisal, Keller & Company provided the following information to our Board of Directors and to the Office of Thrift Supervision. The table presents for all mutual holding company minority stock issuances and mutual-to-stock conversions from January 1, 2003 to May 21, 2004 the average and median percentage stock price appreciation from the initial stock trading date to the dates presented in the table. We did not consider this data particularly relevant to the appraisal given that the information relates to stock price appreciation experienced by other companies that sold in different market conditions. In addition, these companies may have no similarities to Naugatuck Valley Savings and Loan with regard to the market in which Naugatuck Valley Savings and Loan competes, earnings quality and growth potential, among other factors.

		This table is not intended to be indicative of how our stock price may perform. Many factors affect stock price appreciation, including, but not limited to, the factors set forth below. Before you make an investment decision, we urge you to carefully read this prospectus, including, but not limited to, the Risk Factors beginning on page .



				Average Percentage Stock Price Appreciation from												Median Percentage Stock Price Appreciation from
Year of				IPO Price												IPO Price
Initial
Trading		Number of		After One			After One			After One			Through			After One			After One			After One			Through
Date		Transactions		Day			Week			Month			May 21, 2004			Day			Week			Month			May 21, 2004

	2004		10		23.90	%		24.91	%		20.00	%		12.51	%		23.10	%		27.50	%		15.10	%		15.30	%
	2003		13		34.69			35.28			36.53			42.50			20.00			23.10			25.00			47.00


		While stock prices of other institutions that have engaged in similar transactions have, on average, increased for the periods presented, we cannot assure you that our stock price will appreciate the same amount, if at all. We also cannot assure you that our stock price will not trade below $10.00 per share, as has been the case for some reorganized and converted thrift institutions. In addition, the transactions underlying the data occurred primarily during a falling interest rate environment, during which market prices for financial institutions typically increase. If interest rates continue to rise, our net interest income and the value of our assets could be reduced, negatively affecting our stock price. See “Risk Factors — Rising interest rates may hurt our profits and asset value.”

		The increase in a company’s stock price is subject to various factors, including the amount of proceeds a company raises (see “Risk Factors — As a result of the amount of capital we are raising, we expect our return on equity and our stock price performance to be negatively affected”), the quality of management and management’s ability to deploy proceeds (such as through investments, the acquisition of other financial institu-


		tions or other businesses, the payment of dividends and common stock repurchases). See “Risk Factors — We have broad discretion in allocating the proceeds of the offering. Our failure to effectively utilize such proceeds would reduce our profitability.” In addition, stock prices may be affected by general market conditions, the interest rate environment, the market for financial institutions and merger or acquisition transactions, the presence of professional and other investors who purchase stock on speculation, regulatory developments, as well as other unforeseeable events not necessarily in the control of management.

		Finally, you should be aware that historically savings associations could be acquired within a three year period following a full conversion. Regulatory restrictions now generally prohibit a holding company regulated by the Office of Thrift Supervision, like us, from being acquired within three years following its full conversion from mutual to stock form, which may also have a negative impact on stock price performance.

		We carefully reviewed the information that Keller & Company provided us through the appraisal process, but did not make any determinations regarding whether or not prior mutual holding company minority stock issuances have been undervalued on a price to book basis, nor did we draw any conclusions regarding how the historical data reflected above may have an impact on the appraisal. Instead, we hired Keller & Company to help us understand the regulatory process and to advise us as to how much capital we would likely be required to raise in the offering under the Office of Thrift Supervision’s appraisal guidelines. Our ability to control the amount of capital we will raise is limited by the regulatory framework established by the Office of Thrift Supervision, which requires that we hire an independent appraiser and permit the independent appraiser to arrive at a value without undue influence from outside parties, including us. We fully complied with the Office of Thrift Supervision’s guidelines and permitted Keller & Company to arrive at the appraised value independently, which we also understood would be subject to Office of Thrift Supervision review and approval. Keller & Company is an independent appraisal firm expert in the appraisal guidelines of the Office of Thrift Supervision and considered all factors that may appropriately be considered under the Office of Thrift Supervision’s appraisal guidelines when arriving at our appraised value.

		Our Board of Directors recognize the duty of care it owes to Naugatuck Valley Savings and Loan and its depositors to proceed with the reorganization transaction in an informed manner and with the best interests of Naugatuck Valley Savings and Loan and its depositors paramount in its deliberations and decision making. We worked closely with Keller & Company to understand the methodology used by Keller & Company and to consider the appropriateness of the assumptions used by Keller & Company in determining the appraised value with the understanding that assuming the assumptions used were appropriate and the methodology employed was consistent with the Office of Thrift Supervision’s appraisal guidelines, the appraisal, once approved by the Office of Thrift Supervision, would fairly estimate our pro forma market value.


		The Board has a business plan that reflects how we could deploy the net proceeds in a prudent manner consistent with safety and soundness principles.

Possible Change in Offering Range (page )		Keller & Company’s independent appraisal will be updated before the reorganization is completed. If the pro forma market value of the common stock being offered at that time is either below $18,275,000 or above $28,433,750, we will notify subscribers, who will have the opportunity to confirm, modify or cancel their order. Each subscriber would be required to affirmatively confirm or modify his or her order within a specified resolicitation period or else it would be cancelled. If we are unable to sell at least the number of shares at the minimum of the offering range, as the range may be amended, the reorganization would be terminated and all subscriptions would be cancelled and funds returned promptly with interest.

Conditions to Completing the Reorganization and Charter Conversion		We are conducting the reorganization under the terms of our plan of reorganization. We cannot complete the reorganization and related offering unless:

		• the plan of reorganization is approved by at least a majority of votes eligible to be cast by depositors of Naugatuck Valley Savings and Loan;

		• we sell at least the minimum number of shares offered; and

		• we receive the final approval of the Office of Thrift Supervision to complete the reorganization and offering.

		We are conducting the charter conversion under the terms of our plan of charter conversion. We cannot complete the charter conversion unless:

		• the plan of charter conversion is approved by at least two-thirds of our board of corporators;

		• we receive the final approval of the Office of Thrift Supervision to complete the charter conversion; and

		• we receive the final approval of the State of Connecticut Department of Banking to complete the charter conversion.

Naugatuck Valley Savings and Loan Foundation (page )		To continue our long-standing commitment to our local communities, we intend to establish a charitable foundation, the Naugatuck Valley Savings and Loan Foundation, as a non-stock Delaware corporation in connection with the reorganization. We will fund the foundation with 2% of the shares of our common stock issued in the reorganization. Based on the purchase price of $10.00 per share, we would fund the foundation with $1.0 million of common stock at the midpoint of the offering. Our contribution to the foundation would reduce net earnings by $660,000, after tax, in the year in which the foundation is established, which is expected to be fiscal 2004. The Naugatuck Valley Savings and Loan Foundation will make grants and donations to non-profit and community groups and projects located within our market area. The amount of common stock that we would offer for sale would be greater if the stock offering were to be completed without the formation of the Naugatuck Valley Savings and Loan Foundation. The establishment of the foundation requires the affirmative vote of a majority of the votes eligible to be cast by our depositors. For a further discussion of


		the financial impact of the foundation, including its effect on those who purchase shares in the offering, see “Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation.”

Benefits of the Reorganization to Management (page )		We intend to adopt the following benefit plans and employment agreements:

		• Employee Stock Ownership Plan. We intend to establish an employee stock ownership plan that will purchase 3.6% of the shares issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation. We will allocate these shares to our employees over a period of 15 years in proportion to their compensation. Non-employee directors are not eligible to participate in the employee stock ownership plan. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan.

		• Stock-Based Incentive Plan. We intend to implement a stock-based incentive plan no earlier than six months after the reorganization. Approval of this plan by a majority of the total votes eligible to be cast by our stockholders, other than by Naugatuck Valley Mutual, will be required. Under this plan, we may award stock options and shares of restricted stock to key employees and directors. Shares of restricted stock, in an amount up to 3.21% of the shares issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation, will be awarded at no cost to the recipient. Stock options, in an amount up to 8.03% of the shares issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation, will be granted at an exercise price equal to 100% of the fair market value of our common stock on the option grant date. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan. We have not yet decided if we intend to expense any stock options that we may grant. However, the Financial Accounting Standards Board has issued an exposure draft of a new accounting standard that would require expensing of stock options beginning in fiscal 2005. If this standard is adopted or, if we decide to expense options, it would negatively affect net income.

		• Employment and Change in Control Agreements. We intend to enter into a three-year employment agreement with John C. Roman, our President and Chief Executive Officer. We also intend to enter into two- and three-year change in control agreements with several senior executive officers. These agreements will provide for severance benefits if the executives are terminated following a change in control involving us, such as an acquisition of Naugatuck Valley Financial. Based solely on current cash compensation and excluding any benefits that would be payable under any employee benefit plan, if a change in control occurred, and we terminated all officers covered by the employment agreements and the change in control agreements, the total payments due under the employment agreements and the change in control agreements would equal approximately $ million and $ , respectively.


		• Employee Severance Compensation Plan. This plan will provide severance benefits to eligible employees if there is a change in control involving us. Based solely on current cash compensation and excluding any benefits that would be payable under any employee benefit plan, if a change in control occurred, and we terminated all employees, the total payment due under the employee severance compensation plan would equal approximately $ million.

		The following table summarizes at the maximum of the offering range the total number and value of the shares of common stock that the employee stock ownership plan expects to acquire and the total value of all restricted stock awards that are expected to be available under the stock-based incentive plan. The table does not include a value for the options because their exercise price would be equal to the fair market value of the common stock on the day that the options are granted. As a result, financial gains can be realized on an option only if the market price of the common stock increases above the price at which the option is granted.



		Number of Shares to be
		Granted or Purchased

				As a % of
		At		Common
		Maximum		Stock			Total
		of		Outstanding			Estimated
		Offering		After			Value of
		Range		Reorganization			Grants(1)

Employee stock ownership plan			207,000		3.60	%	$	2,070,000
Restricted stock awards			184,805		3.21			1,848,050
Stock options			461,725		8.03			—

	Total		853,530		14.84	%	$	3,918,160





		(1) Assumes the value of our common stock is $10.00 per share. Ultimately, the value of the grants will depend on the actual trading price of our common stock, which depends on numerous factors. There can be no assurance that our stock price will appreciate in the same manner as other mutual holding companies, if at all. See “Summary — After-Market Performance Information Provided by Independent Appraiser” and “Risk Factors — As a result of the amount of capital we are raising, we expect our return on equity and our stock price performance to be negatively affected” for more information regarding factors that could negatively affect our stock appreciation.

Tax Consequences (page )		As a general matter, the reorganization will not be a taxable transaction for purposes of federal or state income taxes to us or to persons who receive or exercise subscription rights. Our special counsel, Muldoon Murphy Faucette & Aguggia LLP, has issued an opinion to us that, among other items, for federal income tax purposes:

		• the reorganization will qualify as a tax free reorganization and no gain or loss will be recognized by us as a result of the reorganization;


		• no gain or loss will be recognized by our account holders upon the issuance to them of deposit accounts in Naugatuck Valley Savings and Loan immediately after the reorganization;

		• it is more likely than not that the fair market value of the rights to subscribe for shares of our common stock is zero and, accordingly, that no income will be realized by our depositors upon the issuance or exercise of the subscription rights;

		• it is more likely than not that the tax basis to the purchasers in the offering will be the amount paid for our common stock, and that the holding period for shares of common stock will begin on the date of completion of the offering; and

		• the holding period for shares of common stock purchased in the community offering or syndicated community offering will begin on the day after the date of the purchase.

		We have also received an opinion from Snyder & Haller, P.C. stating that, assuming the reorganization does not result in any federal income tax liability to us, or our account holders, implementation of the plan of reorganization will not result in any Connecticut income tax liability to those entities or persons. See “The Reorganization and Stock Offering — Material Income Tax Consequences.”

The Offering


Persons Who Can Order Stock in the Offering (page )		We have granted rights to subscribe for our shares of common stock in a “subscription offering” to the following persons in the following order of priority:

		1. Persons with $50 or more on deposit at Naugatuck Valley Savings and Loan as of April 30, 2003.

		2. Our employee stock ownership plan, which provides retirement benefits to our employees.

		3. Persons with $50 or more on deposit at Naugatuck Valley Savings and Loan as of [Supplemental ERD].

		4. Naugatuck Valley Savings and Loan’s depositors as of [Voting Record Date].

		We may offer shares not sold in the subscription offering to the general public in a community offering. People who are residents of New Haven and Fairfield Counties, Connecticut, will have first preference to purchase shares in a community offering. The community offering, if held, may begin concurrently, during or immediately after the end of the subscription offering.

		If we receive subscriptions for more shares than are to be sold in this offering, we may be unable to fill or partially fill your order. Shares will be allocated first to categories in the subscription offering under a formula outlined in the plan of reorganization and as described in “The Reorganization and Stock Offering.”

Deadline for Ordering Stock (page )		The offering will end at 10:00 a.m., Eastern Time, on [Expiration Date]. We must receive at our Stock Information Center a properly signed and completed order form with the required


		payment no later than 10:00 a.m., Eastern Time, on [Expiration Date]. You may submit your order form using the enclosed return envelope, by bringing your order form to the Stock Information Center or by overnight delivery to the address noted on the order form. Order forms may not be delivered to our branch offices.

Purchase Limitations (page )		Our plan of reorganization establishes limitations on the purchase of stock in the offering. These limitations include the following:

		The minimum purchase is 25 shares.

		No individual may purchase more than $150,000 of common stock (which equals 15,000 shares). If any of the following persons purchase stock, their purchases when combined with your purchases cannot exceed $200,000 of common stock (which equals 20,000 shares):

		• Your spouse or relatives of you or your spouse living in your house;

		• Companies, trusts or other entities in which you have a controlling interest or hold a position; or

		• Other persons who may be acting in concert with you.

		Subject to the Office of Thrift Supervision’s approval, we may increase or decrease the purchase limitations at any time.

How to Purchase Common Stock (page )		If you want to place an order for shares in the offering, you must complete an original stock order form and send it to us together with full payment. You must sign the certification that is on the reverse side of the stock order form. Once we receive your order, you cannot cancel or change it.

		We may, in our sole discretion, reject orders received in the community offering either in whole or in part.

		You may pay for shares in the subscription offering or the community offering in the following ways:

		• By personal or bank check or money order made payable to Naugatuck Valley Financial Corporation; or

		• By authorizing withdrawal from a deposit account without checkwriting privileges at Naugatuck Valley Savings and Loan. To use funds in an Individual Retirement Account at Naugatuck Valley Savings and Loan, you may not authorize direct withdrawal on the order forms. You must transfer your funds to an unaffiliated institution able to hold self-directed IRAs. Please promptly contact the Stock Information Center for assistance with IRA related orders.

		Checks and money orders will be deposited upon receipt. We will pay interest on your funds submitted by check or money order at the rate we pay on passbook accounts from the date we receive your funds until the offering is completed or terminated. All funds authorized for withdrawal from deposit accounts with


		us will remain in the accounts and continue to earn interest at the applicable account rate and will be withdrawn upon completion of the offering. A hold will be placed on those funds when your stock order is received, making the designated funds otherwise unavailable to you during the offering period. If, as a result of a withdrawal from a certificate of deposit, the balance falls below the minimum balance requirement, the remaining funds will earn interest at our passbook rate. There will be no early withdrawal penalty for withdrawals from certificates of deposit used to pay for stock.

Subscription Rights Are Not Transferable		You are not allowed to transfer or sell your subscription rights and we will act to ensure that you do not do so. We will not accept any stock orders that we believe involve the transfer of subscription rights.

Delivery of Stock Certificates		Certificates representing shares of common stock sold in the offering will be mailed to the persons entitled to the certificates at the certificate registration address noted on the order form as soon as practicable following consummation of the offering. It is possible that, until certificates for the common stock are delivered to purchasers, purchasers might not be able to sell the shares of common stock which they ordered, even though the common stock will have begun trading.

How We Will Use the Proceeds of this Offering (page )		The following table summarizes how we will use the proceeds of this offering, based on the sale of shares at the minimum and maximum of the offering range.


		1,827,500		2,472,500
		Shares at		Shares at
		$10.00		$10.00
		Per Share		Per Share


		(In thousands)
Offering proceeds		$	18,275	$	24,725
Less: offering expenses			777		837

Net offering proceeds			17,498		23,888
Less:
	Proceeds contributed to Naugatuck Valley Savings and Loan		8,749		11,944
	Proceeds used for loan to employee stock ownership plan		1,530		2,070
	Proceeds to Naugatuck Valley Mutual		100		100

Proceeds remaining for Naugatuck Valley Financial		$	7,119	$	9,774


		We may use the portion of the proceeds that we do not contribute to Naugatuck Valley Savings and Loan to, among other things, invest in securities, pay cash dividends or buy back shares of common stock, subject to regulatory restrictions. Naugatuck Valley Savings and Loan may use the portion of the proceeds that it receives to fund new loans, open or acquire new branches, invest in securities and expand its business activities. We may also use the proceeds of the offering to diversify our


		business and acquire other companies, although we have no specific plans to do so at this time.

Purchases by Directors and Executive Officers (page )		We expect that our directors and executive officers, together with their associates, will subscribe for 875,000 shares, which equals 3.89% of the shares that would be sold in the offering at the midpoint of the offering range and issued to our charitable foundation. Directors and executive officers will pay the same $10.00 per share price as everyone else who purchases shares in the offering.

Market for Naugatuck Valley Financial Common Stock (page )		We have applied to list our common stock for trading on the Nasdaq National Market under the symbol “NVSL.” Ryan Beck & Co. currently intends to become a market maker in the common stock and will assist us in obtaining additional market makers. After shares of the common stock begin trading, you may contact a firm offering investment services in order to buy or sell shares.

Naugatuck Valley Financial’s Dividend Policy (page )		After the reorganization, we intend to adopt a policy of paying regular cash dividends, but have not yet decided on the amount or frequency of payments or when payments may begin. Based upon our estimate of offering expenses and other assumptions described in “Pro Forma Data,” we expect to have between $7.1 million and $9.8 million in net proceeds, at the minimum and the maximum of the offering, respectively, that, subject to annual earnings and expenses, we could potentially use to pay dividends.

Possible Conversion of Naugatuck Valley Mutual to Stock Form (page )		In the future, Naugatuck Valley Mutual may convert from the mutual (meaning no stockholders) to capital stock form of organization, in a transaction commonly known as a “second-step conversion.” In a second-step conversion, members of Naugatuck Valley Mutual would have subscription rights to purchase common stock of Naugatuck Valley Financial or its successor, and the public stockholders of Naugatuck Valley Financial would be entitled to exchange their shares of common stock for an equal percentage of shares of the converted Naugatuck Valley Mutual. This percentage may be adjusted to reflect any assets owned by Naugatuck Valley Mutual. Naugatuck Valley Financial’s public stockholders, therefore, would own approximately the same percentage of the resulting entity as they owned before the second-step conversion. We have no current plan to undertake a second-step conversion transaction.

Delivery of Prospectus		To ensure that you receive a prospectus at least 48 hours before the offering deadline, we may not mail prospectuses any later than five days before such date or hand-deliver any prospectuses later than two days before that date. Stock order forms may only be distributed with or preceded by a prospectus. Subscription rights expire at 10:00 a.m., Eastern Time, on [Expiration Date], whether or not we have located each person entitled to such rights.

Stock Information Center		If you have any questions regarding the offering or our reorganization, please call the Stock Information Center at ( ) - . You may also visit our Stock Information Center, which is located at our main office in Naugatuck, Connecticut. The Stock Information Center is open Monday through Friday, except for bank holidays, from 9:30 a.m. to 4:00 p.m., Eastern Time.

You should consider carefully the following risk factors before purchasing Naugatuck Valley Financial common stock.

Our increased emphasis on commercial and construction lending and the unseasoned nature of these loans may expose us to increased lending risks and could impact the level of our allowance for loan losses.

Since December 31, 2000, our commercial real estate, commercial business and residential construction loan portfolio has increased $26.4 million, or 335.0% and at March 31, 2004, $34.3 million, or 18.4%, of our loan portfolio consisted of these real estate, construction and commercial business loans. We intend to continue to emphasize these types of lending. These types of loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property, the income stream of the borrowers for commercial business loans and for construction loans, the accuracy of the estimate of the property’s value at completion of construction and the estimated cost of construction. These factors can be impacted by many variables including economic events beyond the borrowers’ control. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Also, many of our commercial and construction borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

Because of our planned continued emphasis on commercial and construction lending and the unseasoned nature of many of these loans, we may determine it necessary to increase the level of our allowance for loan losses. We make various judgments about the collectibility of our loans, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for our loans. In determining the amount of the allowance for loan losses, we review our loans and our loan loss and delinquency experience, and we evaluate economic conditions. However, as a result of our recent expansion, a significant portion of our commercial and construction loans are unseasoned, with the risk that these loans may not have had sufficient time to perform to properly indicate the potential magnitude of losses. If our judgments are incorrect, our allowance for loan losses may not be sufficient to cover future losses, which will result in additions to our allowance through increased provisions for loan losses. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Increased provisions for loan losses would increase our expenses and reduce our profits. Finally, during our recent expansion, we have also experienced a historically low interest rate environment. Our unseasoned adjustable rate loans have not, therefore, been subject to a rising interest rate environment which could cause them to adjust to their maximum interest rate level. Such an increase could increase collection risks resulting from potentially higher payment obligations by the borrower.

Interest rates are at historically low levels, but have risen recently. If interest rates continue to rise, our net interest income likely would be reduced since, due to the generally shorter terms of interest-bearing liabilities, interest expense paid on interest-bearing liabilities, such as deposits and borrowings, increase more quickly than interest income earned on interest-earning assets, such as loans and investments. In addition, rising interest rates may hurt our income because they may reduce the demand for new loans, the demand for refinancing loans and the interest and fee income earned on such loans and refinancings. If there is an increasing interest rate environment, our interest rate spread and net interest margin could be compressed, which would have a negative effect on our profitability until our loan portfolio reprices with higher rates.

Changes in interest rates also affect the value of our interest-earning assets, and in particular our securities portfolio. Generally, the value of securities fluctuates inversely with changes in interest rates. Unrealized gains and losses on securities available for sale are reported as separate component of equity. Decreases in the fair value of securities available for sale resulting from increases in interest rates therefore could have an adverse effect on shareholders’ equity.

If we do not achieve profitability on new branches, the new branches may negatively impact our earnings.

We have received regulatory approval for a new branch in Seymour, Connecticut which we expect will open in the fourth quarter of 2004. We have also signed an agreement for the purchase of a parcel of land in Southbury, Connecticut where we expect to open a new branch by the third quarter of 2005. We intend to continue to pursue opportunities to pursue expansion of our branch network, as well as to upgrade our current branch facilities. We cannot assure you that our this branch expansion strategy and our branch upgrading will be accretive to our earnings, or that it will be accretive to earnings within a reasonable period of time. Numerous factors contribute to the performance of a new branch, such as a suitable location, qualified personnel and an effective marketing strategy. Additionally, it takes time for a new branch to generate significant deposits and make sufficient loans to produce enough income to offset expenses, some of which, like salaries and occupancy expense, are relatively fixed costs. In addition to branch employees, we will hire lending and other employees to support our expanded infrastructure.

As a result of the amount of capital we are raising, we expect our return on equity and our stock price performance to be negatively affected.

We are raising net proceeds of up to $27.6 million at the maximum, as adjusted, of the offering. The amount of capital we are raising may have several consequences, including the following:


	•	Return on equity may decline. Return on equity, which equals net income divided by average equity, is a ratio that many investors use to compare the performance of a particular company with other companies. For the three months ended March 31, 2004, our annualized return on average equity was 6.99%. For the year ended December 31, 2003, our return on average equity was 8.45%. These returns are lower than returns on equity for comparable publicly traded companies. The net proceeds from the reorganization will significantly increase our equity capital, which will further decrease our return on equity, which on a pro forma basis at the midpoint of the offering is 3.47% for the three months ended March 31, 2004 (annualized) and 4.28% for the year ended December 31, 2003 compared to a 7.30% median for our peer group. It will take time for us to fully use the new capital in our business operations to increase net income. Consequently, you should not expect a competitive return on equity in the near future.

	•	Stock price may decline. Failure to achieve a competitive return on equity might make an investment in our common stock unattractive to some investors and might cause our common stock to trade at lower prices than comparable companies with higher returns on equity. See “Pro Forma Data” for an illustration of the financial impact of this offering.

Additional expenses following the reorganization may reduce our profitability and stockholders’ equity.

Following the reorganization, our noninterest expense is likely to increase as a result of the financial accounting, legal and various other additional expenses usually associated with operating as a public company, which will adversely affect our profitability and stockholders’ equity. In addition, we will recognize additional annual material employee compensation and benefit expenses stemming from the shares granted to employees and executives under new benefit plans. We cannot predict the actual amount of these new expenses because applicable accounting practices require that they be based on the fair market value of the shares of common stock at specific points in the future. We would recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts and would recognize expenses for restricted stock awards over the vesting period of the awards. These expenses in the first year following the reorganization have been estimated to be approximately $335,000 at

Strong competition within our market area could hurt our profits and slow growth.

Although we consider ourselves competitive in the Greater Naugatuck Valley, which we consider our market area, we face intense competition both in making loans and attracting deposits. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area. For more information about our market area and the competition we face, see “Our Business — Market Area” and “Our Business — Competition.”

We have broad discretion in allocating the proceeds of the offering. Our failure to effectively utilize such proceeds would reduce our profitability.

We intend to contribute approximately 50% of the net proceeds of the offering to Naugatuck Valley Savings and Loan. We expect to use a portion of the net proceeds to fund the employee stock ownership plan’s purchases of shares in the offering and to capitalize Naugatuck Valley Mutual. We may use the remaining net proceeds to pay dividends to shareholders, repurchase common stock, purchase investment securities, finance the acquisition of other financial institutions or other businesses that are related to banking, or for other general corporate purposes. Naugatuck Valley Savings and Loan may use the proceeds it receives to fund new loans, purchase investment securities, establish or acquire new branches, acquire financial institutions or other businesses that are related to banking, or for general corporate purposes. We have not allocated specific amounts of proceeds for any of these purposes, and we will have significant flexibility in determining how much of the net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively would reduce our profitability.

We intend to adopt a stock-based incentive plan following the offering. If our stockholders approve the new stock-based incentive plan, we intend to issue shares to our officers and directors through this plan. If the restricted stock awards under the stock-based incentive plan are funded from authorized but unissued stock, your ownership interest in shares held by persons other than Naugatuck Valley Mutual could be diluted by up to approximately 6.66%, assuming awards of common stock equal to 3.21% of the shares issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation, are awarded under the plan. If the shares issued upon the exercise of stock options under the stock-based incentive plan are issued from authorized but unissued stock, your ownership interest in shares held by persons other than Naugatuck Valley Mutual could be diluted by up to approximately 15.15%, assuming stock option grants equal to 8.03% of the shares issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation, are granted under the plan. See “Pro Forma Data” and “Our Management — Benefit Plans.”

Naugatuck Valley Mutual will own a majority of our common stock and will be able to exercise voting control over most matters put to a vote of stockholders, including preventing sale or merger transactions you may like or a second-step conversion by Naugatuck Valley Mutual.

Naugatuck Valley Mutual will own a majority of our common stock after the reorganization and, through its Board of Directors, will be able to exercise voting control over most matters put to a vote of

stockholders. The same directors and officers will manage Naugatuck Valley Financial, Naugatuck Valley Savings and Loan and Naugatuck Valley Mutual. As a federally chartered mutual holding company, the Board of Directors of Naugatuck Valley Mutual must ensure that the interests of depositors of Naugatuck Valley Savings and Loan are represented and considered in matters put to a vote of stockholders of Naugatuck Valley Financial. Therefore, the votes cast by Naugatuck Valley Mutual may not be in your personal best interests as a stockholder. For example, Naugatuck Valley Mutual may exercise its voting control to prevent a sale or merger transaction in which stockholders could receive a premium for their shares, prevent a second-step conversion transaction by Naugatuck Valley Mutual or defeat a stockholder nominee for election to the Board of Directors of Naugatuck Valley Financial. The matters as to which stockholders other than Naugatuck Valley Mutual will be able to exercise voting control are limited and include any proposal to implement a stock-based incentive plan.

In addition, Office of Thrift Supervision regulations prohibit, for three years following the completion of a stock offering by a company such as Naugatuck Valley Financial, the acquisition of more than 10% of any class of equity security of the company without the prior approval of the Office of Thrift Supervision. Even after this three-year period, Office of Thrift Supervision regulations would likely prevent an acquisition of Naugatuck Valley Financial other than by another mutual holding company.

Office of Thrift Supervision policy on remutualization transactions could prohibit the merger or an acquisition of us, which may lower our stock price.

Current Office of Thrift Supervision regulations permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction. The possibility of a remutualization transaction has recently resulted in a degree of takeover speculation for mutual holding companies which is reflected in the stock prices of mutual holding companies. However, the Office of Thrift Supervision has issued a policy statement indicating that it views remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and mutual members of the target entity and as raising issues concerning the effect on the mutual members of the acquiring entity. Under certain circumstances, the Office of Thrift Supervision intends to give these issues special scrutiny and reject applications for the remutualization of a mutual holding company unless the applicant can clearly demonstrate that the Office of Thrift Supervision’s concerns are not warranted in the particular case. Should the Office of Thrift Supervision prohibit or otherwise restrict these transactions in the future, our stock price may be adversely affected. We have no current plans to undertake a remutualization transaction.

The contribution to the Naugatuck Valley Savings and Loan Foundation will hurt our profits for fiscal year 2004 and means that a stockholder’s ownership interest will be up to 4.44% less after the contribution.

We intend to contribute 2% of the shares of our common stock issued in the reorganization to the Naugatuck Valley Savings and Loan Foundation. This contribution will be an additional operating expense and will reduce net income during the fiscal year in which the Naugatuck Valley Savings and Loan Foundation is established, which is expected to be the year ending December 31, 2004. Based on the pro forma assumptions, the contribution to the Naugatuck Valley Savings and Loan Foundation would reduce net earnings by $660,000 at the midpoint of the offering, after tax, in fiscal year 2004. In addition, purchasers of shares in the offering will have their ownership and voting interests diluted by up to 4.44% at the close of the offering when we contribute the shares of our common stock to the Naugatuck Valley Savings and Loan Foundation. For a further discussion regarding the effect of the contribution to the charitable foundation, see “Pro Forma Data” and “Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation.”

Our contribution to the Naugatuck Valley Savings and Loan Foundation may not be tax deductible, which could hurt our profits.

We believe that our contribution to the Naugatuck Valley Savings and Loan Foundation, valued at $1.0 million at the midpoint of the offering, pre-tax, will be deductible for federal income tax purposes.

Failure to approve the Naugatuck Valley Savings and Loan Foundation may materially affect our pro forma market value, which may delay the completion of the reorganization.

The establishment and funding of the foundation as part of the reorganization is subject to the approval of our depositors. If our depositors approve the reorganization, but not the foundation, we may determine to complete the reorganization without the establishment of the foundation and may do so without amending the plan of reorganization or obtaining any further vote of our depositors. Keller & Company, which performed the appraisal of us on which this offering is based, has informed us that our value would be greater if we did not form the charitable foundation and fund it with shares of our common stock. Therefore, if our depositors do not approve the foundation, our pro forma market value will increase. If our pro forma market value increases above $28,433,750 for any reason, all subscribers will be resolicited and given the chance to change or cancel their orders. A resolicitation would delay the completion of the stock offering.

We cannot guarantee that if you purchase shares in the offering that you will be able to sell them at or above the $10.00 offering price. After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace, and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions of Naugatuck Valley Financial, and general industry, geopolitical and economic conditions. Publicly traded stocks, including stocks of financial institutions, have recently experienced substantial market price volatility. These market fluctuations might not be related to the operating performance of particular companies whose shares are traded.

There may be a limited market for our common stock, which may lower our stock price.

We have applied to list our shares of common stock for trading on the Nasdaq National Market. We cannot guarantee that the shares will be regularly traded. If an active trading market for our common stock does not develop, you may not be able to sell all of your shares of common stock on short notice and the sale of a large number of shares at one time could temporarily depress the market price.

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

We are subject to extensive government regulation, supervision and examination. Such regulation, supervision and examination govern the activities in which we may engage, and is intended primarily for the protection of the deposit insurance fund and our depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

This prospectus contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include:


	•	statements of our goals, intentions and expectations;

	•	statements regarding our business plans, prospects, growth and operating strategies;

	•	statements regarding the quality of our loan and investment portfolios; and

	•	estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:


	•	general economic conditions, either nationally or in our market area, that are worse than expected;

	•	changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

	•	increased competitive pressures among financial services companies;

	•	changes in consumer spending, borrowing and savings habits;

	•	legislative or regulatory changes that adversely affect our business;

	•	adverse changes in the securities markets; and

	•	changes in accounting policies and practices, as may be adopted by the bank regulatory agencies or the Financial Accounting Standards Board.

Forward-looking statements that we make in this prospectus and in other public statements we make may turn out to be wrong because of inaccurate assumptions we might make, because of the factors illustrated above or because of other factors that we cannot foresee. Consequently, no forward-looking statement can be guaranteed.

The summary financial information presented below is derived in part from our financial statements. The following is only a summary and you should read it in conjunction with the financial statements and notes beginning on page F-1. The information at December 31, 2003 and 2002 and for the years ended December 31, 2003, 2002 and 2001 is derived in part from the audited consolidated financial statements that appear in this prospectus. The information at December 31, 2001, 2000 and 1999 for the years ended December 31, 2000 and 1999 is derived in part from audited consolidated financial statements that do not appear in this prospectus. The operating data for the three months ended March 31, 2004 and 2003 was not audited, but, in the opinion of our management, reflects all adjustments necessary for a fair presentation. No adjustments were made other than normal recurring entries. The results of operations for the three months ended March 31, 2004 are not necessarily indicative of the results of operations that may be expected for the entire year.


(1)	Performance ratios for the three months ended March 31, 2004 and 2003 are annualized.

(2)	Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3)	Represents net interest income as a percent of average interest-earning assets.

(4)	Represents noninterest expense divided by the sum of net interest income and noninterest income, excluding gains or losses on the sale of securities.

The following table shows how we intend to use the net proceeds of the offering. The actual net proceeds will depend on the number of shares of common stock sold in the offering and the actual expenses of the offering. Payments for shares made through withdrawals from deposit accounts will reduce our deposits and will not result in the receipt of new funds for investment. See “Pro Forma Data” for the assumptions used to arrive at these amounts.


	•	to invest in securities;

	•	to pay dividends to stockholders;

	•	to repurchase shares of our common stock, subject to regulatory restrictions;

	•	to finance the possible acquisition of financial institutions or other businesses that are related to banking; and

	•	for general corporate purposes.

Under current Office of Thrift Supervision regulations, we may not repurchase shares of our common stock during the first year following the reorganization, except to fund stock-based benefit plans or, with prior regulatory approval, when extraordinary circumstances exist.

Naugatuck Valley Savings and Loan may use the proceeds that it receives from the offering, which is shown in the table above as the amount contributed to Naugatuck Valley Savings and Loan:


	•	to fund new loans;

	•	to invest in securities;

	•	to finance the possible expansion of its business activities, including developing or acquiring new branch locations; and

	•	for general corporate purposes.

We may need regulatory approvals to engage in some of the activities listed above. We currently have no specific plans or agreements regarding any expansion activities or acquisitions other than the following branch office openings and relocations that are already underway and subject to regulatory approval:


	•	we expect to open a branch in Seymour, Connecticut in the fourth quarter of 2004;

	•	we have signed an agreement for the purchase of a parcel of land in Southbury, Connecticut where we expect to open a branch by the third quarter of 2005; and


	•	we recently leased property in Shelton, Connecticut where we expect to relocate our current Shelton branch by the fourth quarter of 2005.

We do not have any other specific plans for the investment of the proceeds of this offering. For a discussion of our business reasons for undertaking the reorganization, see “The Reorganization and Stock Offering — Reasons for the Reorganization.”

Following the reorganization, we intend to adopt a policy of paying regular cash dividends, but we have not decided on the amount or frequency of payments or when the payments may begin. In addition, we may declare and pay periodic special cash dividends in addition to, or in lieu of, regular cash dividends. In determining whether to declare or pay any dividends, whether regular or special, we will take into account our financial condition and results of operations, tax considerations, capital requirements, industry standards, and economic conditions. The regulatory restrictions that affect the payment of dividends by Naugatuck Valley Savings and Loan to Naugatuck Valley Financial discussed below will also be considered. We cannot guarantee that we will pay dividends or that, if paid, we will not reduce or eliminate dividends in the future. Based upon our estimate of offering expenses and other assumptions described in “Pro Forma Data,” we expect to have between $7.1 million and $9.8 million in net proceeds, at the minimum and the maximum of the offering, respectively, that, subject to annual earnings and expenses, we could potentially use to pay dividends.

If we pay dividends to our shareholders, we also will be required to pay dividends to Naugatuck Valley Mutual, unless Naugatuck Valley Mutual elects to waive the receipt of dividends. We anticipate that Naugatuck Valley Mutual will waive receipt of any dividends that we may pay. Any decision to waive dividends will be subject to regulatory approval. Under Office of Thrift Supervision regulations, public shareholders would not be diluted in a “second-step conversion” transaction by Naugatuck Valley Mutual as a result of any dividends waived by Naugatuck Valley Mutual. See “Regulation and Supervision — Holding Company Regulation.”

Naugatuck Valley Financial will not be subject to Office of Thrift Supervision regulatory restrictions on the payment of dividends. However, its ability to pay dividends may depend, in part, upon dividends it receives from Naugatuck Valley Savings and Loan because it initially will have no source of income other than dividends from Naugatuck Valley Savings and Loan and earnings from the investment of the net proceeds from the offering that it retains. Office of Thrift Supervision regulations limit dividends and other distributions by Naugatuck Valley Savings and Loan. In addition, Naugatuck Valley Savings and Loan may not make a distribution that would constitute a return of capital during the three-year term of the business plan submitted in connection with the offering. Naugatuck Valley Savings and Loan may not make a capital distribution if, after making the distribution, it would be undercapitalized. See “Regulation and Supervision — Regulation of Federal Savings Associations — Limitation on Capital Distributions.”

Any payment of dividends by Naugatuck Valley Savings and Loan that would be deemed to be drawn out of Naugatuck Valley Savings and Loan’s bad debt reserves would require Naugatuck Valley Savings and Loan to pay federal income taxes at the then current income tax rate on the amount deemed distributed. See “Federal and State Taxation — Federal Income Taxation” and note 9 of the notes to financial statements included in this prospectus. We do not contemplate any distribution by Naugatuck Valley Savings and Loan that would result in this type of tax liability.

We have not previously issued common stock. Upon completion of the reorganization, we expect that our shares of common stock will trade on the Nasdaq National Market under the symbol “NVSL.” Ryan Beck & Co. intends to become a market maker in our common stock following the reorganization. Ryan Beck & Co. also will assist us in obtaining other market makers after the reorganization. We cannot assure

The development of a public market having the desirable characteristics of depth, liquidity and orderliness depends on the existence of willing buyers and sellers, the presence of which is not within our control or that of any market maker. The number of active buyers and sellers of our common stock at any particular time may be limited, which may have an adverse effect on the price at which our common stock can be sold. There can be no assurance that persons purchasing the common stock will be able to sell their shares at or above the $10.00 price per share in the offering. Purchasers of our common stock should have a long-term investment intent and should recognize that there may be a limited trading market in the common stock.

The following table presents the historical capitalization of Naugatuck Valley Savings and Loan at March 31, 2004 and the capitalization of Naugatuck Valley Financial reflecting the reorganization (referred to as “pro forma” information). The pro forma capitalization gives effect to the assumptions listed under “Pro Forma Data,” based on the sale of the number of shares of common stock indicated in the table. This table does not reflect the issuance of additional shares under the proposed stock-based incentive plan. A change in the number of shares to be issued in the reorganization may materially affect pro forma capitalization. We are offering our common stock on a best efforts basis. We must sell a minimum of 1,827,500 shares to complete the offering.


(1)	Does not reflect withdrawals from deposit accounts for the purchase of common stock in the offering. Withdrawals to purchase common stock will reduce pro forma deposits by the amounts of the withdrawals.


(2)	Retained earnings are restricted by applicable regulatory capital requirements.

(3)	Represents the expense, net of tax, of the contribution of common stock to the Naugatuck Valley Savings and Loan Foundation based on an estimated tax rate of 34.0%. The realization of the tax benefit is limited annually to 10% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.

(4)	Assumes that 3.60% of the common stock issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation, will be acquired by the employee stock ownership plan in the reorganization with funds borrowed from Naugatuck Valley Financial. Under generally accepted accounting principles, the amount of common stock to be purchased by the employee stock ownership plan represents unearned compensation and is, accordingly, reflected as a reduction of capital. As shares are released to plan participants’ accounts, a corresponding reduction in the charge against capital will occur. Since the funds are borrowed from Naugatuck Valley Financial, the borrowing will be eliminated in consolidation and no liability or interest expense will be reflected in the consolidated financial statements of Naugatuck Valley Financial. See “Our Management — Benefit Plans — Employee Stock Ownership Plan.”

(5)	Assumes the purchase in the open market at $10.00 per share, under the proposed stock-based incentive plan, of a number of shares equal to 3.21% of the shares of common stock issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation. The shares are reflected as a reduction of stockholders’ equity. The stock-based incentive plan will be submitted to shareholders for approval at a meeting following the reorganization. See “Risk Factors — Issuance of shares for benefit programs may dilute your ownership interest,” “Pro Forma Data” and “Our Management — Benefit Plans — Future Stock-Based Incentive Plan.”

At March 31, 2004, Naugatuck Valley Savings and Loan was subject to, and exceeded, the regulatory capital requirements of the Federal Deposit Insurance Corporation. See note 10 to the notes to the financial statements. Following the reorganization, Naugatuck Valley Savings and Loan will be subject to the regulatory capital requirements of the Office of Thrift Supervision. The following table presents Naugatuck Valley Savings and Loan’s capital position relative to the regulatory capital requirements of the Office of Thrift Supervision at March 31, 2004, on a historical and a pro forma basis, assuming that Naugatuck Valley Savings and Loan was subject to the regulatory capital requirements at March 31, 2004. The table reflects receipt by Naugatuck Valley Savings and Loan of 50% of the net proceeds of the offering. For purposes of the table, the amount expected to be borrowed by the employee stock ownership plan and the cost of the shares expected to be awarded under the stock-based incentive plan as restricted stock are deducted from pro forma regulatory capital. For a discussion of the assumptions underlying the pro forma capital calculations presented below, see “Use of Proceeds,” “Capitalization” and “Pro Forma Data.” The definitions of the terms used in the table are those provided in the capital regulations issued by the Office of Thrift Supervision. For a discussion of the capital standards applicable to Naugatuck Valley Savings and Loan, see “Regulation and Supervision — Regulation of Federal Savings Associations — Capital Requirements.”


(1)	Tangible capital and core capital levels are shown as a percentage of adjusted total assets of $242.1 million. Risk-based capital levels are shown as a percentage of risk-weighted assets of $140.2 million.

(2)	A portion of the net unrealized gains on available-for-sale securities accounts for the difference between capital calculated under generally accepted accounting principles and each of tangible capital and core capital. See note 10 to the notes to financial statements for additional information.

(3)	Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk-weighting.

The following tables show information about our net income and stockholders’ equity (“book value”) reflecting the reorganization based on the sale of common stock at the minimum of the offering range, the midpoint of the offering range, the maximum of the offering range and 15% above the maximum of the offering range. The actual net proceeds from the sale of the common stock cannot be determined until the reorganization is completed. Net proceeds indicated in the following tables are based upon the following assumptions:


	•	All shares of stock will be sold in the subscription and community offerings;

	•	Our employee stock ownership plan will purchase a number of shares equal to 3.60% of the shares issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation, with a loan from Naugatuck Valley Financial that will be repaid in equal installments over 15 years;

	•	Total expenses of the offering, including fees and expenses paid to Ryan Beck & Co., will be $837,000 at the maximum of the offering; and

	•	We will make a charitable contribution of 2% of the shares of our common stock issued in the reorganization to the Naugatuck Valley Savings and Loan Foundation, with an assumed value of $10.00 per share.

Actual expenses may vary from this estimate, and the fees paid will depend upon whether a syndicate of broker-dealers or other means is necessary to sell the shares, and other factors.

Pro forma net income for the three months ended March 31, 2004 and the year ended December 31, 2003 has been calculated as if the reorganization was completed at the beginning of each period, and the net proceeds had been invested at 1.25% for the three months ended March 31, 2004 and for the year ended December 31, 2003, which represents the three-year treasury rate.

A pro forma after-tax return of 0.83% is used for both the three months ended March 31, 2004 and the year ended December 31, 2003, after giving effect to a combined federal and state income tax rate of 34.0%. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the number of shares of common stock indicated in the tables.


	•	The final column gives effect to a 15% increase in the offering range, which may occur without any further notice, if Keller & Company increases its appraisal to reflect the results of this offering, changes in our financial condition or results of operations or changes in market conditions after the offering begins. See “The Reorganization and Stock Offering — How We Determined the Offering Range and the $10.00 Purchase Price.”

	•	Since funds on deposit with us may be withdrawn to purchase shares of common stock, the amount of funds available to us for investment will be reduced by the amount of such withdrawals. The pro forma tables do not reflect withdrawals from deposit accounts.

	•	Historical per share amounts have been computed as if the shares of common stock expected to be issued in the reorganization had been outstanding at the beginning of the period covered by the table. However, neither historical nor pro forma stockholders’ equity has been adjusted to reflect the investment of the estimated net proceeds from the sale of the shares in the offering, the additional employee stock ownership plan expense or the proposed stock-based incentive plan.

	•	Pro forma stockholders’ equity (“pro forma book value”) represents the difference between the stated amounts of our assets and liabilities. Pro forma book value amounts do not represent fair market values or amounts available for distribution to shareholders in the unlikely event of liquidation. The amounts shown do not reflect the federal income tax consequences of the


		restoration to income of our special bad debt reserves for income tax purposes, which would be required in the unlikely event of liquidation. See “Federal and State Taxation.”

	•	The amounts shown as pro forma stockholders’ equity per share do not represent possible future price appreciation of our common stock.

	•	The amounts shown do not account for the shares to be reserved for issuance upon the exercise of stock options that may be granted under our proposed stock-based incentive plan, which requires shareholder approval at a meeting following the reorganization. Under the stock-based incentive plan, an amount equal to 3.21% of the common stock issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation, will be reserved for future issuance upon the exercise of options to be granted under the plan.

The following pro forma data, which are based on our historical capital at March 31, 2004 and December 31, 2003, and our historical net income for the three months ended March 31, 2004 and year ended December 31, 2003, may not represent the actual financial effects of the reorganization or our operating results after the reorganization. The pro forma data rely exclusively on the assumptions outlined above and in the notes to the pro forma tables. The pro forma data do not represent the fair market value of our common stock, the current fair market value of our assets or liabilities, or the amount of money that would be available for distribution to shareholders if we are liquidated after the reorganization.

We are offering our common stock on a best efforts basis. We must sell a minimum of 1,827,500 shares to complete the offering.


(1)	Assumes that the employee stock ownership plan will acquire an amount of stock equal to 3.60% of the shares of common stock issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation. The employee stock ownership plan will borrow the funds to acquire these shares from the net offering proceeds that Naugatuck Valley Financial will retain. The amount of this borrowing has been reflected as a reduction from gross proceeds to determine estimated net investable proceeds. This borrowing will have an interest rate equal to the prime rate as published in The Wall Street Journal, which is currently %. Naugatuck Valley Savings and Loan intends to make contributions to the employee stock ownership plan in amounts at least equal to the principal and interest requirement of the debt. As the debt is paid down, stockholders’ equity will be increased. The payment of the employee stock ownership plan debt is based upon equal installments of principal over a 15 year period, assuming a combined federal and state income tax rate of 34.0%. Interest income that Naugatuck Valley Financial will earn on the loan will offset the interest paid on the loan by Naugatuck Valley Savings and Loan. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. Applicable accounting principles require that compensation expense for the employee stock ownership plan be based upon shares committed to be released and that unallocated shares be excluded from earnings per share computations. The valuation of shares committed to be released would be based upon the average market value of the shares during the year, which, for purposes of this calculation, was assumed to be equal to the $10.00 per share purchase price. See “Our Management — Benefit Plans — Employee Stock Ownership Plan.”

(2)	Does not give effect to the non-recurring expense that will be recognized in fiscal 2004 as a result of the contribution of common stock to the Naugatuck Valley Savings and Loan Foundation. The following table shows the estimated after-tax expense associated with the contribution to the Naugatuck Valley Savings and Loan Foundation, as well as pro forma net income and pro forma net income per share assuming the contribution to the Naugatuck Valley Savings and Loan Foundation was expensed during the periods presented. The pro forma data assumes that we will realize 100% of the income tax benefit as a result of the contribution to the Naugatuck Valley Savings and Loan Foundation based on a 34.0% tax rate. The realization of the tax benefit is limited annually to 10% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.

(3)

In calculating the pro forma effect of the restricted stock awards, it is assumed that the required shareholder approval has been received, that we acquired the shares used to fund the awards (3.21% of the shares issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation) at the beginning of the respective period in open market purchases at the $10.00 per share purchase price, that 20% of the amount contributed was an amortized expense during

the period, and that the combined federal and state income tax rate is 34.0%. We may fund the stock-based incentive plan through the purchase of common stock in the open market by a trust established in connection with the plan or from authorized, but unissued, shares of common stock. The issuance of authorized but unissued shares of the common stock instead of open market purchases would dilute the ownership interests of existing shareholders, other than Naugatuck Valley Mutual, by approximately 6.66%.


	For purposes of the pro forma tables, shares of restricted stock issued under the stock-based incentive plan vest 20% per year and compensation expense is recognized on a straight-line basis over each vesting period. If the fair market value per share is greater than $10.00 per share on the date shares are awarded under the stock-based incentive plan, total stock-based incentive plan expense would be greater. The total estimated expense was multiplied by 20%, which is the total percent of shares for which expense is recognized in the first year.

	The following table shows the estimated pro forma net income and stockholders’ equity per share if restricted shares awarded under the stock-based incentive plan were authorized but unissued shares instead of repurchased shares. The table also shows the estimated pre-tax stock-based incentive plan expense. The number of shares used to calculate pro forma net income per share in the following table is the total number of shares issued at the indicated point in the offering range, minus the number of shares sold to the employee stock ownership plan assumed not to be committed to be released within one year following the reorganization and plus the number of shares that may be awarded as restricted stock under the planned stock-based incentive plan. The number of shares used to calculate pro forma stockholders’ equity per share in the following table is the total number of shares issued at the indicated point in the offering range, plus the number of shares that may be awarded as restricted stock under the planned stock-based incentive plan.


(4)	Assumes the value of our common stock is $10.00 per share for purposes of determining the total estimated value of the common stock acquired by the employee stock ownership plan and the restricted stock awards.

(5)	The following table shows how we derived the number of shares used to calculate pro forma net income per share.

(6)

In calculating the pro forma effect of the stock-based incentive plan, no effect has been given to any shares that may be reserved for issuance upon the exercise of stock options that may be granted under the stock-based incentive plan. The number of options available under the stock-based incentive plan will be equal to 8.03% of the number of shares issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation. The issuance of authorized but unissued shares of common stock instead of shares repurchased in the open market would dilute the ownership interests of existing stockholders, other than Naugatuck Valley Mutual, by approximately 15.15%.


	The following table shows the estimated pro forma net income and stockholders’ equity per share if shares for stock issued as a result of the exercise of stock options were authorized but unissued shares instead of repurchased shares.

As set forth in the following table, if we do not establish and fund the Naugatuck Valley Savings and Loan Foundation as part of the offering, Keller & Company estimates that our pro forma valuation would be greater, which would increase the amount of common stock offered for sale. If the Naugatuck Valley Savings and Loan Foundation were not established, there is no assurance that the updated appraisal that Keller & Company will prepare at the closing of the reorganization would conclude that our pro forma market value would be the same as the estimate set forth in the table below. The updated appraisal will be based on the facts and circumstances existing at closing time, including, among other things, market and economic conditions.

The information presented in the following table is for comparative purposes only. It assumes that the reorganization was completed at March 31, 2004, based on the assumptions set forth under “Pro Forma Data.”


(1)	Based on independent valuation prepared by Keller & Company as of May 21, 2004.

(2)	Does not give effect to the non-recurring expense that will be recognized in fiscal 2004 as a result of the contribution of common stock to the Naugatuck Valley Savings and Loan Foundation.

Naugatuck Valley Financial will be organized as a federal corporation at the direction of Naugatuck Valley Savings and Loan upon completion of the reorganization. As a result of the reorganization, Naugatuck Valley Savings and Loan will be a wholly owned subsidiary of Naugatuck Valley Financial. Upon completion of the reorganization, Naugatuck Valley Financial’s business activity will be the ownership of the outstanding capital stock of Naugatuck Valley Savings and Loan and management of the investment of offering proceeds retained from the reorganization. Initially, Naugatuck Valley Financial will neither own nor lease any property but will instead use the premises, equipment and other property of Naugatuck Valley Savings and Loan with the payment of appropriate rental fees, as required by applicable law and regulations. In the future, Naugatuck Valley Financial may acquire or organize other operating subsidiaries; however, there are no current plans, arrangements, agreements or understandings, written or oral, to do so.

Naugatuck Valley Savings and Loan was formed as a Connecticut state-chartered mutual savings and loan association in 1922 under the name Naugatuck Building and Loan. Naugatuck Valley Savings and Loan changed its name to Savings and Loan Association of Naugatuck, Inc. in 1951 and again changed its name to Naugatuck Valley Savings and Loan Association, Inc. in 1974. On January 24, 2003, Naugatuck Valley Savings and Loan converted its charter from a Connecticut state-chartered mutual savings and loan association to a Connecticut state-chartered mutual savings bank. As part of its charter conversion, Naugatuck Valley Savings and Loan changed its name to Naugatuck Valley Savings and Loan, S.B.

We operate as a community-oriented financial institution offering traditional financial services to consumers and businesses in our market area. We attract deposits from the general public and use those funds to originate one-to four-family, multi-family and commercial real estate, construction, commercial business and consumer loans, which we primarily hold for investment.

Our website address is www.nvsl.com. Information on our website should not be considered a part of this prospectus.

We are headquartered in Naugatuck, Connecticut, which is located in south-western Connecticut approximately six miles south of Waterbury and 26 miles north of Bridgeport. In addition to our main office, we operate four branch offices in the Greater Naugatuck Valley which we consider our market area. The Greater Naugatuck Valley encompasses the communities in the central and lower Naugatuck Valley regions. The population surrounding our main office in Naugatuck and our branch office in Derby is larger than the rest of our market area with average to above average growth. The other communities in our market area are generally smaller, however, have average to strong population growth. The residents of these communities display lower affluent to mid-scale demographics, with the exception of the Shelton market which is dominated by upper affluent. The economy in our market area is primarily oriented to the service, retail, construction, and manufacturing industries. The major employers in the area include Hershey Foods Corporation (Peter Paul Division), Wal-Mart, Coca-Cola Bottling Co. and Pitney Bowes.

We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the several financial institutions operating in our market area and, to a lesser extent, from other financial service companies, such as brokerage firms, credit unions and insurance companies. We also face competition for investors’ funds from money market funds and other corporate and government securities. In addition, banks owned by Bank of America Corporation, Wachovia Corporation and J.P. Morgan Chase & Co., all of which are large super-regional bank holding companies, also operate in our market area. These institutions are significantly larger than us and, therefore, have significantly greater resources.

Our competition for loans comes primarily from financial institutions in our market area and, to a lesser extent, from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from the increasing number of non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.

We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered the barriers to enter new market areas, allowed banks to expand their geographic reach by providing services over the Internet and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Changes in federal law permit affiliation among banks, securities firms and insurance companies, which promotes a competitive environment in the financial services industry. Competition for deposits and the origination of loans could limit our growth in the future.

General. Our loan portfolio consists primarily of one- to four-family residential mortgage loans. To a lesser extent, our loan portfolio includes multi-family and commercial real estate loans, construction loans commercial business loans and consumer loans. Substantially all of our loans are made within Connecticut.

One- to Four-Family Residential Loans. Our primary lending activity is the origination of mortgage loans to enable borrowers to purchase or refinance existing homes or to construct new residential dwellings in our market area. We offer fixed-rate and adjustable-rate mortgage loans with terms up to 30 years. Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the initial period interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment and the effect each has on our interest rate risk. The loan fees charged, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

We offer fixed rate loans with terms of either 15, 20 or 30 years. Our adjustable-rate mortgage loans are based on either a 15, 20 or 30 year amortization schedule and interest rates and payments on our adjustable-rate mortgage loans adjust annually after either a one, three, five or seven year initial fixed period. Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate typically equal to 2.75% above the one-year constant maturity Treasury index. The maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate cap is generally 6% over the initial interest rate of the loan.

Due to historically low interest rate levels, borrowers generally have preferred fixed-rate loans in recent years. While we anticipate that our adjustable-rate loans will better offset the adverse effects on our net interest income of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loans in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding

We generally do not make conventional loans with loan-to-value ratios exceeding 97% and generally make loans with a loan-to-value ratio in excess of 80% only when secured by first liens on owner-occupied one-to four-family residences. Loans with loan-to-value ratios in excess of 80% generally require private mortgage insurance or additional collateral. We require all properties securing mortgage loans to be appraised by a Board-approved independent appraiser. We require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, or flood insurance for loans on property located in a flood zone, before closing the loan.

In an effort to provide financing for first-time buyers, we offer a first-time home buyers program. We offer fixed-rate residential mortgage loans through this program to qualified individuals and originate the loans using modified underwriting guidelines.

Multi-Family and Commercial Real Estate Loans. We offer fixed rate and adjustable-rate mortgage loans secured by multi-family and commercial real estate. Our multi-family and commercial real estate loans are generally secured by condominiums, apartment buildings, single-family subdivisions and owner-occupied properties used for businesses. We intend to continue to grow this segment of our loan portfolio.

We originate multi-family and commercial real estate loans for terms generally up to 20 years. Interest rates and payments on adjustable-rate loans adjust every one, three or five years. Interest rates and payment on our adjustable rate loans generally are adjusted to a rate typically equal to 3% above the one-year, three-year or five-year constant maturity Treasury index. There are no adjustment period or lifetime interest rate caps. Loan amounts generally do not exceed 80% of the appraised value.

Loans secured by multi-family and commercial real estate generally have larger balances and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in multi-family and commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements on multi-family and commercial real estate loans. In reaching a decision on whether to make a multi-family or commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. We require either an environmental survey or impaired property insurance for all multi-family and commercial real estate loans.

Construction Loans. We originate loans to individuals to finance the construction of residential dwellings for personal use. Our construction loans generally provide for the payment of interest only during the construction phase, which is usually nine months. At the end of the construction phase, the loan converts to a permanent mortgage loan. Loans generally can be made with a maximum loan to value ratio of 80% of the appraised value with a maximum term of 30 years. The largest outstanding residential construction loan at March 31, 2004 was $350,000, $298,000 of which was outstanding. This loan was performing according to its terms at March 31, 2004. We also make commercial construction loans for commercial development projects, including condominiums, apartments buildings, single family subdivisions, as well as owner-occupied properties used for business. These loans provide for payment of interest only during the construction phase and may, in the case of an apartment or commercial building, convert to a permanent mortgage loan or, in the case of a single family subdivision or construction or builder loan, be paid in full with the sale of the property after construction is complete. In the case of a commercial construction loan, the construction period may be from nine months to two years. Loans are generally made to a maximum of 80% of the appraised value as determined by an appraisal of the property made by an independent licensed appraiser. We also require an inspection of the property before disbursement of funds during the term of the construction loan for both residential and commercial construction loans. The

We originate land loans to individuals on approved residential building lots for personal use for terms of up to 20 years and to a maximum loan-to-value ratio of 75% of the lower of the appraisal value or purchase price. Our land loans adjust annually after a five year initial fixed period. Interest rates are equal to 3.75% above the one-year constant maturity Treasury index.

We also originate loans to local contractors and developers for the purpose of making improvements to, and on, approved subdivisions and condominium projects within two years of the date of the original loan. Such loans generally are written with a maximum loan-to-value ratio of 80% of the lower of the appraised value or purchase price of the land. These loans adjust when and as the index changes at a rate that is generally equal to the prime rate as published in The Wall Street Journal plus 1%. We require title insurance and, if applicable, a hazardous waste survey reporting that the land is free of hazardous or toxic waste.

Construction financing is generally considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment. As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If we are forced to foreclose on a project before or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

Commercial Business Loans. We make commercial business loans to a variety of professionals, sole proprietorships and small businesses primarily in our market area. We offer a variety of commercial lending products. These loans are typically secured, primarily by business assets. These loans are originated with maximum loan-to-value ratios of 75% of the value of the personal property. We originate one- to seven-year term loans for the acquisition of equipment or business expansion, lines of credit for seasonal financing needs and demand loans for short term financing needs with specific repayment sources. Commercial business loans are usually written at variable rates which use the prime rate as published in The Wall Street Journal as an index and, depending on the qualifications of the borrower, a 0.5% to 3.0% margin is added. These rates will change when and as the index rate changes without caps. Fixed-rate loans are written at market rates determined at the time the loan is granted and are based on the length of the term and qualifications of the borrower. Our largest commercial business loan relationship was a $569,000 loan secured primarily by business assets, including drilling equipment, trucks and commercial real estate. This loan was performing according to its original terms at March 31, 2004.

When making commercial business loans, we consider the financial statements of the borrower, the borrower’s payment history of both corporate and personal debt, the debt service capabilities of the borrower, the projected cash flows of the business, and viability of the industry in which the customer operates and the value of the collateral.

Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Consumer Loans. We offer a variety of consumer loans, primarily second mortgage loans and home equity lines of credit, and, to a much lesser extent, loans secured by passbook or certificate accounts,

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loans. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Second mortgage loans have fixed rates of interest for terms of up to 15 years. These loans are originated with maximum loan-to-value ratios of 80% of the appraised value of the property. Home equity lines of credit have adjustable rates of interest that are indexed to the prime rate as published in The Wall Street Journal for terms of up to 10 years. These loans are originated with maximum loan-to-value ratios of 80% of the value of the appraised value of the property and we require that we have a second lien position on the property.

Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Loan Originations, Purchases and Sales. Loan originations come from a number of sources. The primary source of loan originations are our in-house loan originators, and to a lesser extent, local mortgage brokers, advertising and referrals from customers. We occasionally purchase loans or participation interests in loans.

Historically, we have originated loans for investment purposes only. However, as the low interest rate environment continued, we determined to consider loan sales as part of our interest rate risk management efforts. Beginning in 2002, we began selling some of the longer-term fixed-rate loans that we originate. We sell these loans in the secondary market based on prevailing market interest rate conditions, an analysis of the composition and risk of the loan portfolio, liquidity needs and interest rate risk management goals. Generally, loans are sold without recourse and with servicing retained. We sold $1.9 million, $8.9 million and $7.0 million of loans in the three months ended March 31, 2004 and the years ended December 31, 2003 and 2002, respectively. We did not sell any loans in 2001. We occasionally sell participation interests in loans.

Loan Approval Procedures and Authority. Our lending activities follow written, non-discriminatory, underwriting standards and loan origination procedures established by our Board of Directors and management.

For one- to four-family loans and owner occupied residential construction loans, two members of the mortgage loan committee, one of whom must be the President and Chief Executive Officer or a vice president, may approve loans up to $333,700 and a majority of the members of the Board loan committee must approve loans over $333,700. For unsecured commercial business loans, a majority of the members of the Board must approve loans over $500,000 and two members of the Board of Directors loan committee must approve loans over $200,000 and up to $500,000. For secured commercial loans and commercial construction loans, a majority of the members of the Board must approve loans over $1.0 million and two members of the Board of Directors loan committee must approve loans over $500,000 and up to $1.0 million. The Board of Directors must approve all consumer loans over $150,000. Various bank personnel have been delegated authority to approve smaller commercial loans and consumer loans.

Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is limited, by regulation, to generally 15% of our stated capital and reserves. At March 31, 2004, our regulatory limit on loans to one borrower was $3.5 million. At that date, our largest lending relationship was $3.3 million and included residential mortgage, home equity lines of credit and

Loan Commitments. We issue commitments for fixed-rate and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers and generally expire in 45 days or less.

Delinquencies. When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status. We make initial contact with the borrower when the loan becomes 15 days past due. If payment is not then received by the 30th day of delinquency, additional letters and phone calls generally are made. We send a letter notifying the borrower that we will commence foreclosure proceedings if the loan is not brought current within 91 days. When the loan becomes 91 days past due, we generally commence foreclosure proceedings against any real property that secures the loan or attempt to repossess any personal property that secures a consumer loan. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. We may consider loan workout arrangements with certain borrowers under certain circumstances.

Management informs the Board of Directors on a monthly basis of the amount of loans delinquent more than 90 days, all loans in foreclosure and all foreclosed and repossessed property that we own.

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various federal agencies and of state and municipal governments, mortgage-backed securities and certificates of deposit of federally insured institutions. Within certain regulatory limits, we also may invest a portion of our assets in corporate securities and mutual funds. We also are required to maintain an investment in Federal Home Loan Bank of Boston stock.

At March 31, 2004, our investment portfolio consisted primarily of U.S. government and agency securities with maturities of five years or less, mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae with stated final maturities of 30 years or less, collateralized mortgage obligations, and insured certificates of deposit at other financial institutions.

Our investment objectives are to provide and maintain liquidity, to maintain a balance of high quality, diversified investments to minimize risk, to provide collateral for pledging requirements, to establish an acceptable level of interest rate risk, to provide an alternate source of low-risk investments when demand for loans is weak, and to generate a favorable return. Our Board of Directors has the overall responsibility for our investment portfolio, including approval of our investment policy and appointment of our Asset/Liability Committee. The Asset/Liability Committee is responsible for approval of investment strategies and monitoring of investment performance. Our Executive Vice President is the designated investment officer and is responsible for the daily investment activities and is authorized to make investment decisions consistent with our investment policy. The Asset/Liability Committee meets regularly with the Executive Vice President and President and Chief Executive Officer in order to review and determine investment strategies and transactions.

General. Deposits and loan repayments are the major sources of our funds for lending and other investment purposes. Loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

Deposit Accounts. The vast majority of our depositors are residents of the State of Connecticut. Deposits are attracted from within our primary market area through the offering of a broad selection of deposit instruments, including NOW accounts, checking accounts, money market accounts, regular savings accounts, club savings accounts, certificate accounts and various retirement accounts. Generally, we do not

Borrowings. We borrow from the Federal Home Loan Bank of Boston to supplement our supply of lendable funds and to meet deposit withdrawal requirements. The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank of Boston and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. Under its current credit policies, the Federal Home Loan Bank generally limits advances to 25% of a member’s assets, and short-term borrowings of less than one year may not exceed 10% of the institution’s assets. The Federal Home Loan Bank determines specific lines of credit for each member institution.

In addition, we occasionally borrow short-term from correspondent banks to cover temporary cash needs.

We conduct our business through our main office and branch offices. The following table sets forth certain information relating to these facilities at March 31, 2004.


(1)	We have an option to renew this lease for one additional ten-year period.

(2)	We have an option to renew this lease for three additional five-year periods.


(3)	Former branch site. We have an option to renew this lease for two additional ten-year periods. This property has been leased to a subtenant under a lease that expires in 2006. The tenant has an option to renew this lease for one additional five-year period.

(4)	This property is a future branch site. Construction commenced in June 2004.

(5)	This property is designated for future parking, additional access and future expansions of our Beacon Falls branch.

At March 31, 2004, we had 68 full-time employees and 12 part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Naugatuck Valley Mortgage Servicing Corporation, established in 1999 under Connecticut law, is a subsidiary of Naugatuck Valley Savings and Loan and is a passive investment corporation organized in order to take advantage of certain tax benefits. Its primary business is to service mortgage loans which we have originated and subsequently transferred to Naugatuck Valley Mortgage Servicing. At March 31, 2004, Naugatuck Valley Mortgage Servicing had $152.2 million in assets.

The objective of this section is to help potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the financial statements and notes to the financial statements that appear at the end of this prospectus.

Income. We have two primary sources of pre-tax income. The first is net interest income, which is the difference between interest income, the income that we earn on our loans and investments, and interest expense, the interest that we pay on our deposits and borrowings.

To a much lesser extent, we also recognize pre-tax income from fee and service charges, which is the compensation we receive from providing products and services. Our primary non-interest income comes from service charges on deposit accounts. We also earn income from bank owned life insurance, sales of loans and investments and service charge income from investment advisory services, ATM charges and other services.

Expenses. The expenses we incur in operating our business consist of compensation, taxes and benefits, office occupancy, computer processing fees, federal insurance premiums, and other expenses.

Compensation, taxes and benefits consist primarily of the salaries and wages paid to our employees and directors, payroll taxes and expenses for retirement and other employee benefits.

Occupancy expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of lease payments, real estate taxes, depreciation charges, maintenance, and costs of utilities.

Computer processing fees includes fees paid to our third-party data processing servicer and our network security expenses.

Federal insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts.

Other expenses include expenses for attorneys, accountants and consultants, advertising, telephone, charitable contributions, insurance, office supplies, postage and other miscellaneous operating activities.

We consider 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. We consider 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 we believe that we use 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. We engage an independent review of our commercial loan portfolio annually and adjust our loan ratings based upon this review. In addition, our regulatory authorities as an integral part of their examination process, periodically review our allowance for loan losses. Such agencies may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. See notes 1 and 4 of the notes to the financial statements included in this prospectus.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed continually as regulatory and business factors change. See note 9 of the notes to the financial statements in this prospectus.

Our mission is to operate and grow a profitable community-oriented financial institution serving primarily retail customers and small businesses in our market area. After the reorganization, we plan to continue our strategy of:


	•	operating as an independent community-oriented financial institution;

	•	expanding our branch network and upgrading our existing branches;

	•	pursuing opportunities to increase and diversify lending in our market area;

	•	applying conservative underwriting practices to maintain the high quality of our loan portfolio;

	•	managing our net interest margin and interest rate risk;

	•	increasing core deposits; and

	•	increasing noninterest income

We have a long tradition of focusing on the needs of consumers and small sized businesses in our community and being an active corporate citizen. Unlike some large banks, our decisions are made locally, we have many long time branch employees, and customers have access to senior management. In recent years, we have upgraded our computer systems and expanded our customer service initiatives. In addition to standard conveniences such as ATMs, we offer extended hours, Internet banking, bill payment, and a “voice response” inquiry phone line. We deliver personalized service and respond with flexibility to customer needs. We believe our community orientation is attractive to our customers and distinguishes us from the large regional banks that operate in our market area and we intend to maintain this focus as we grow. We are pleased that the reorganization provides a good opportunity for us to establish the Naugatuck Valley Savings and Loan Foundation as a means of enhancing our long-standing commitment to our local communities. The foundation will be funded with our common stock and will make grants and donations to non-profit and community groups and projects.

In 2000, our branch network consisted of three locations. At that time, we recognized an opportunity to prudently expand to the south. As a result of bank mergers over time, a number of communities ceased to enjoy the services of community banking on both a personal and small business level. In an effort to bring community banking back to the Greater Naugatuck Valley, and in order to take advantage of the expansion of commuting patterns in southwest Connecticut, we expanded our branch network through de novo branching. In June 2001 and February 2003, we opened two new branches in Shelton and Derby, Connecticut, respectively. These profitable branches helped us to increase our low-cost core deposit base. Additionally, our lending programs have benefitted from our presence in Shelton. We intend to increase our presence in the Greater Naugatuck Valley by opening branches in Seymour and Southbury, Connecticut, which we expect to open

Our loan portfolio has increased $37.3 million, or 25.0%, since December 31, 2000. In particular, since December 31, 2000, our commercial real estate, commercial business and construction loan portfolio has increased $26.4 million, or 335.0%, and at March 31, 2004 was 18.4% of our total loan portfolio. During this period, we have increased our presence in our market area by expanding our branch network and have taken advantage of the significant growth in both residential and commercial real estate development in parts of our market area. With the additional capital raised in the offering, we expect to continue to expand all of our lending activities and, in particular, intend to continue to pursue the larger lending relationships associated with commercial real estate and construction lending opportunities. We plan to hire additional lending personnel to assist us with this expansion.

We believe that high asset quality is a key to long-term financial success. We have sought to grow and diversify the portfolio, while maintaining a high level of asset quality and moderate credit risk, using underwriting standards which we believe are conservative and diligent monitoring and collection efforts. At March 31, 2004, our nonperforming loans (loans which are 90 or more days delinquent) were 0.46% of our total loan portfolio and 0.35% of our total assets.

We intend to continue to maximize our net interest margin through the aggressive pursuit of high quality loans in our market area. We will focus especially on the growth of commercial loans because they typically have high yields which increases our net interest margin. Additionally, commercial loans also typically are written with variable rates which reduces our interest rate risk exposure in a rising interest rate environment. Our investment portfolio has been deployed primarily into variable rate instruments or instruments with relatively short maturities with the goal of managing interest rate risk.

Retail deposits are our primary source of funds for investing and lending. We have been successful in increasing our core deposits, which include checking accounts and all other deposit account types except certificates of deposit. Core deposits are generally lower cost to us than certificates of deposit, and they are generally less sensitive to withdrawal when interest rates fluctuate. At December 31, 2001, core deposits represented 42.7% of deposits and, at March 31, 2004, this percentage had increased to 53.9%. By offering a variety of deposit products and providing exceptional customer service, we seek to attract and maintain deposits. Additionally, we believe that our expanding branch network has and will contribute to increasing core deposits.

Our profits rely heavily on the spread between the interest earned on loans and investments and interest paid on deposits and borrowings. In order to decrease our reliance on interest rate spread income we have pursued initiatives to increase noninterest income. During the third quarter of 2003, we began offering investment advisory services through a third party registered broker-dealer and purchased key executive life insurance policies, from which we derive income. These new initiatives accounted for 23.7%

Loans. Our primary lending activity is the origination of loans secured by real estate primarily located in our market area. We originate real estate loans secured by one- to four-family residential homes and, to a much lesser extent, we originate multi-family and commercial real estate and construction loans. At March 31, 2004, real estate loans totaled $160.1 million, or 85.8% of total loans compared to $159.7 million, or 86.3% of total loans at December 31, 2003 and $149.3 million, or 88.0% of total loans at December 31, 2002. Real estate loans have increased since December 31, 2001 due to historically low interest rates, our expanding branch network and significant growth in both residential and commercial real estate development, which we believe is attributable to the availability of lower cost land and expansion of commuting patterns in southwest Connecticut.

The largest segment of our real estate loans is one- to four-family residential loans. At March 31, 2004, these loans totaled $130.1 million and represented 81.2% of real estate loans and 69.7% of total loans compared to $131.4 million, which represented 82.2% of real estate loans and 71.0% of total loans, at December 31, 2003. One- to four-family residential loans decreased $1.3 million, or 0.9%, from December 31, 2003 to March 31, 2004 and decreased $781,000, or 0.6%, from December 31, 2002 to December 31, 2003, reflecting a large volume of loan originations offset by loan repayments and sales of fixed-rate residential loans. In periods of low and falling interest rates, loan demand increased, but repayments of loans also increase as borrowers refinance in order to benefit from lower available interest rates. As the low interest rate environment continued during these periods, we determined to sell fixed-rate loans as part of our interest rate risk management efforts.

Multi-family and commercial real estate loans is the second largest segment of our real estate loan portfolio. This portfolio was $15.3 million and represented 9.5% of real estate loans and 8.2% of total loans at March 31, 2004 compared to $14.3 million, which represented 8.9% of real estate loans and 7.7% of total loans, at December 31, 2003. Multi-family and commercial real estate loans increased $1.0 million, or 7.1%, for the three months ended March 31, 2004 and $4.0 million, or 38.8%, in the year ended December 31, 2003 due to significant new development within parts of our market area and increased market share.

We also originate construction loans secured by residential and commercial real estate. This portfolio was $14.8 million and represented 9.2% of real estate loans and 7.9% of total loans at March 31, 2004 compared to $14.1 million, which represented 8.8% of real estate loans and 7.6% of total loans at December 31, 2003. Construction loans increased $696,000, or 4.9%, for the three months ended March 31, 2004 and $7.2 million, or 104.6%, in the year ended December 31, 2003 primarily due to significant new development within parts of our market area and increased market share.

We originate commercial business loans secured by business assets other than real estate, such as business equipment, inventory and accounts receivable and letters of credit. Commercial business loans totaled $4.2 million, and represented 2.3% of total loans at March 31, 2004 and December 31, 2003.

We also originate a variety of consumer loans, including second mortgage loans, home equity lines of credit, loans secured by savings accounts and automobiles. Consumer loans totaled $22.4 million and represented 12.0% of total loans at March 31, 2004 compared to $21.1 million, which represented 11.4% of total loans at December 31, 2003. The $1.3 million, or 6.2%, increase for the three months ended March 31, 2004 and the $2.4 million, or 12.6%, increase for the 2003 fiscal year was due to targeted increased marketing activities and competitive pricing on our home equity products.

The following table sets forth the composition of our loan portfolio at the dates indicated.

The following table sets forth certain information at March 31, 2004 regarding the dollar amount of loans repricing or maturing during the periods indicated. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated maturity are reported as due in one year or less.

The following table sets forth the dollar amount of all loans at March 31, 2004 that are due after March 31, 2005 and have either fixed interest rates or floating or adjustable interest rates. The amounts shown below exclude applicable loans in process, nonperforming loans and deferred loan fees, net.

The following table shows loan origination activity during the periods indicated.

Allowance for Loan Losses. 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. When additional reserves 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.

The allowance for loan losses is established to recognize the inherent losses associated with lending activities. Loss and risk factors are based on our historical loss experience and industry averages and may be adjusted for significant factors that in management’s judgment affect the collectibility of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary lending area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, specific

Our methodology for assessing the appropriateness of the allowance for loan losses consists of the following procedures. The loan portfolio is segregated first between passed and classified assets.

Passed Assets. Our assets designated as pass or bankable with care by our internal classification system are aggregated by loan category and an allowance percentage is assigned based on estimated inherent losses associated with each type of lending. Our passed and bankable with care assets are loans for which the borrower is established and represents a reasonable credit risk.

Classified Assets. Our assets classified as special mention, substandard or doubtful by our internal classification system are individually evaluated by management and an allowance percentage, increasing as the probability of loss increases, is assigned to each classified asset based on the collateral value and loan balance. The level of the allowance percentage is further dependent on whether the loan is secured by real estate, secured by assets other than real estate or unsecured. Loans classified as loss are charged off and the real estate is transferred to real estate owned.

The loss factors which are presently used to determine the reserve level were updated in 2003 based on various risk factors such as type of loan, collateral and loss history. These factors are subject to ongoing evaluation to ensure their relevance in the current economic environment.

When we determine that a loan is troubled and where, based on current information and events, it is probable that we will not be able to collect all amounts due, we classify as loss any excess of the recorded investment in the loan over its fair market value less the estimated cost to sell the asset, and we classify as substandard the remainder.

We identify loans which may require charge off as a loss by reviewing all delinquent loans, significant credits, loans classified as substandard, doubtful, loss, or special mention by our internal classification system, and other loans that management may have concerns about collectibility, such as loans to a specific industry. For individually reviewed loans, a borrower’s inability to service a credit according to the contractual terms based on the borrower’s cash flow and or a shortfall in collateral value would result in the recording of a charge off of the loan or the portion of the loan that was impaired.

Our banking regulators, as an integral part of their examination process, periodically review our allowance for loan losses. The examinations may require us to make additional provisions 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 classification of specific credits in the portfolio.

At March 31, 2004, our allowance for loan losses represented 0.98% of total gross loans and 213.31% of nonperforming loans. The allowance for loan losses remained at $1.8 million from December 31, 2003 to March 31, 2004 due to the decrease in delinquent loans and nonperforming loans.

At December 31, 2003, our allowance for loan losses represented 1.0% of total gross loans and 199.8% of nonperforming loans. The allowance for loan losses decreased from $2.0 million at December 31, 2002 to $1.8 million at December 31, 2003 due to charge-offs of $265,000 offset by a provision for loan losses of $45,000 that reflected decreased delinquencies and nonperforming loans. The increase in charge-offs was primarily due to a one time charge, required by the Federal Deposit Insurance Corporation, to write down to market value loans for which we had previously established specific reserves.

The allowance for loan losses increased from $1.9 million at December 31, 2001 to $2.0 million at December 31, 2002 due primarily to a provision for loan losses of $231,000. The increase in the provision for loan losses in 2002 was primarily due to the increase in net charge-offs and the expansion of the commercial loan 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.

Summary of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated. Where specific loan loss allowances have been established, any difference between the loss allowance and the amount of loss realized has been charged or credited to current income.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

Nonperforming and Classified Assets. When a loan becomes 90 days delinquent, the loan is placed on nonaccrual status at which time the accrual of interest ceases, the interest previously accrued to income is reversed and the loan is placed on a cash basis. Payments on a nonaccrual loan are applied to the outstanding principal and interest as determined at the time of collection of the loan.

We consider repossessed assets and loans that are 90 days or more past due to be nonperforming assets. Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned until it is sold. When property is acquired it is recorded at the lower of its cost, which is the unpaid balance of the loan, or fair market value at the date of foreclosure. Holding costs and declines in fair value after acquisition of the property are charged against income.

Nonperforming assets totaled $980,000, or 0.4% of total assets, at March 31, 2004, which was a decrease of $134,000, or 12.0%, from December 31, 2003. Nonaccrual loans accounted for 86.6% of the total nonperforming assets at March 31, 2004. At March 31, 2004, $107,000 of the allowance for loan losses was related to nonaccrual real estate loans.

Nonperforming assets totaled $1.1 million, or 0.5% of total assets, at December 31, 2003, which was a decrease of $218,000, or 7.9%, from $1.3 million, or 0.6% of total assets, at December 31, 2002. Nonaccrual loans accounted for 81.3% of the total nonperforming assets at December 31, 2003 and 91.8% of nonperforming assets at December 31, 2002. At December 31, 2003, $98,000 of the allowance for loan

Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that the creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. We consider one- to four-family mortgage loans and consumer loans to be homogeneous and only evaluate them for impairment separately when they are delinquent or classified. Other loans are evaluated for impairment on an individual basis. At March 31, 2004, three loans having an aggregate balance of $209,000 were considered impaired and $189,000 of these loans were on nonaccrual status.

The following table provides information with respect to our nonperforming assets at the dates indicated. We did not have any troubled debt restructurings or any accruing loans past due 90 days or more at the dates presented.

Other than discussed above, there are no other loans at March 31, 2004 that we have serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

Interest income that would have been recorded for the three months ended March 31, 2004 and for the year ended December 31, 2003 had nonaccruing loans been current according to their original terms amounted to $44,400 and $50,100, respectively. There was no interest related to nonaccrual loans included in interest income for the three months ended March 31, 2004 and for the year ended December 31, 2003.

Federal regulations require us to regularly review and classify our assets. In addition, our regulators have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. When we classify an asset as substandard or doubtful, we must establish a general allowance for loan losses. If we classify an asset as loss, we must charge off such amount.

The following table shows the aggregate amounts of our classified assets at the dates indicated.

Of the $2.6 million of substandard assets at March 31, 2004, $849,000 are nonaccrual loans. The substandard assets of $2.7 million at December 31, 2003, and $2.8 million at December 31, 2002 include $906,000 and $1.2 million, respectively, in nonaccrual loans. At March 31, 2004, all loans included in the $1.8 million special mention assets were current.

Delinquencies. The following table provides information about delinquencies in our loan portfolios at the dates indicated.

Securities. Our securities portfolio consists primarily of U.S. Government and agency obligations as well as mortgage-backed securities with maturities of 30 years or less. Securities decreased by $5.8 million in the three months ended March 31, 2004 due to the sale and maturity of securities to fund loan demand. Securities increased by $4.8 million during 2003 as a result of funds generated due to deposit inflows exceeding loan demand and due to the sale of fixed-rate mortgages. All of our mortgage-backed securities were issued either by Ginnie Mae, Fannie Mae or Freddie Mac. In addition, our securities portfolio includes interest bearing balances (certificates of deposits) at other institutions. The interest bearing balances are all held-to-maturity and all mature within five years.

The following table sets forth the carrying values and fair values of our securities portfolio at the dates indicated.

At March 31, 2004, we did not own any securities, other than U.S. Government and agency securities, that had an aggregate book value in excess of 10% of our equity at that date.

The following table sets forth the maturities and weighted average yields of securities at March 31, 2004. Certain mortgage-backed securities and collateralized mortgage obligations have adjustable interest rates and reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below. At March 31, 2004, mortgage-backed securities and collateralized mortgage obligations with adjustable rates totaled $12.0 million.

Bank Owned Life Insurance. During 2003, we purchased life insurance policies on certain key executives. We record bank owned life insurance as an asset at the lower of its cash surrender value or the amount that can be realized.

Deposits. Our primary source of funds are retail deposit accounts held primarily by individuals and businesses within our market area. The deposit base is comprised of certificate accounts, regular savings accounts, checking and NOW accounts and money market savings accounts. At March 31, 2004, brokered deposits totaled $99,000. Total deposits increased $4.0 million or 2.2% in the three months ended March 31, 2004. During that time period, certificate accounts increased 0.3%, regular savings accounts increased by 3.7%, checking and NOW accounts increased by 5.0% and money market deposit accounts increased by 2.7%. These increases in our deposit accounts, primarily core deposit accounts, are primarily due to our new Derby branch, which opened in February 2003, advertising and competitive interest rates.

The following table sets forth the balances of our deposit products at the date indicated.

The following table indicates the amount of jumbo certificate accounts by time remaining until maturity at March 31, 2004. Jumbo certificate accounts require minimum deposits of $100,000.

The following table sets forth the certificate accounts classified by rates at the dates indicated.

The following table sets forth the amount and maturities of certificate accounts at March 31, 2004.

Borrowings. We borrow funds from the Federal Home Loan Bank of Boston during periods of low liquidity to match fund increases in our fixed-rate mortgage portfolio and to provide long-term fixed-rate funding with the goal of decreasing our exposure to an increase in interest rates. In addition, we occasionally borrow short-term from correspondent banks to cover temporary cash needs. At March 31, 2004, we had the ability to borrow a total of $2.0 million from a correspondent bank, none of which was borrowed at such date.

The following table presents certain information regarding our Federal Home Loan Bank advances during the periods and at the dates indicated.

Capital. Total capital increased by $439,000, or 2.1%, to $21.7 million at March 31, 2004 from $21.2 million at December 31, 2003. Total capital increased $1.4 million, or 6.9%, to $21.2 million at December 31, 2002 from $19.9 million at December 31, 2002. Our average equity to average assets ratio

Comparison of Operating Results for the Three Months Ended March 31, 2004 and March 31, 2003

Net income decreased primarily due to an increase in noninterest expense, partially offset by an increase in noninterest income.

Net Interest Income. Net interest income for the three months ended March 31, 2004 increased $6,000, or 2.9%, compared to the same period in 2003. The primary reason for the increase in net interest income for the three month period was a decrease in the average cost of funds partially offset by a decrease in the average yield.

Interest and dividend income for the three months ended March 31, 2004 was $3.0 million, compared to $3.3 million for the three months ended March 31, 2003, a decrease of $230,000, or 7.1%. Substantially all of the decrease in interest income resulted from a decrease in the average yield on interest-earning assets of 66 basis points from 6.12% to 5.46% due primarily to a decline in market interest rates. The effect of the lower rate environment on interest and dividend income was partially offset by an increase in average interest earning assets of $9.1 million, or 4.3%, from $212.7 million at March 31, 2003 to $221.8 million at March 31, 2004. The increase in the average balance was primarily due to growth in the loan portfolio.

Interest expense for the three months ended March 31, 2004 was $936,000 compared to $1.2 million for the three months ended March 31, 2003, a decrease of $236,000, or 20.1%. This decrease resulted from a decrease of 57 basis points in the rate paid on interest bearing liabilities to 1.74% from 2.31% due to a decline in market interest rates. The decrease was partially offset by a 3.6% increase of $7.3 million in the average balance of interest bearing liabilities to $215.5 million for the three months ended March 31, 2004 from $203.0 million for the same period in March 31, 2003. The increase in the average interest bearing liabilities was due to increases in all regular savings and money market savings deposit accounts and in advances from Federal Home Loan Bank.

Rate/ Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). For purposes of this table, changes attributable to changes in

Provision for Loan Losses. We did not record a provision for loan losses for the three months ended March 31, 2004. We recorded a $45,000 provision for the three months ended March 31, 2003. The lack of a provision in 2004 reflected lower charge-offs, decreased nonperforming assets and improved asset quality ratios. An analysis of the changes in the allowance for loan losses is presented under “— Allowance for Loan Losses and Asset Quality.”

Noninterest Income. The following table summarizes noninterest income for the three months ended March 31, 2004 and 2003.

Noninterest income increased primarily as a result of an increase in income from bank owned life insurance, gains on the sale of investments and income from investment advisory services. In the third quarter of 2003, we began offering investment advisory services through a third party registered broker-dealer and purchased life insurance policies, from which we derive income, on certain key executives.

Noninterest Expense. The following table summarizes noninterest expense for the three months ended March 31, 2004 and 2003.

Compensation, taxes and benefits increased due to salary increases and additional compensation related to an increase in employees, the resulting payroll taxes and increased pension expense. The increase in employees is primarily the result of the opening of our Derby branch office in February 2003. As we continue to pursue branch expansion opportunities, we expect to hire additional employees resulting in an increase in compensation, taxes and benefits in future periods.

Costs of computer processing increased due to the additional services related to the new Derby branch, as well as increased costs of maintaining high levels of security.

Income Taxes. Income taxes decreased as a result of a decrease in earnings. The effective tax rate for the three months ended March 31, 2004 was 30.5% compared with 33.6% for the same period in 2003. The decrease in the effective tax rate is the result of an increase in tax exempt income for the three months ended March 31, 2004.

2003 v. 2002. Net income decreased primarily due to an increase in noninterest expense, partially offset by an increase in net interest income and noninterest income. Noninterest expense increased primarily as a result of higher compensation, taxes and benefits expense.

2002 v. 2001. Net income increased primarily due to increases in net interest income and noninterest income offset by an increase in noninterest expense. Net interest income increased primarily as a result a higher volume of interest earning assets and a decrease in the cost of funds.

2003 v. 2002. Net interest income increased $524,000, or 6.7%, to $8.4 million for 2003. The increase in net interest income for 2003 was primarily attributable to a higher volume of interest earning assets and a decrease in the cost of funds.

Total interest and dividend income for 2003 was $12.6 million, compared to $13.2 million for 2002, a decrease of $534,000, or 4.1%. Substantially all of the decrease in interest income resulted from a decrease

Interest expense for 2003 was $4.2 million compared to $5.3 million for 2002, a decrease of $1.1 million, or 20.0%. This decrease resulted from a 75 basis point decrease in the rate paid on interest bearing liabilities to 2.01% in 2003 from 2.76% in 2002 due to a decline in market interest rates, partially offset by a 9.8% increase in the average balance of interest bearing liabilities of $18.9 million to $210.8 million in 2003 from $191.9 million in 2002. The increase in the average interest bearing liabilities was due to increases in regular savings, checking and money market savings accounts and in advances from the Federal Home Loan Bank.

2002 v. 2001. Net interest income increased $1.4 million, or 22.1% to $7.9 million for 2002. The increase in net interest income in 2002 was primarily attributable to a higher volume of interest earning assets and a decrease in the cost of funds.

Total interest income for 2002 was $13.2 million, compared to $12.6 million for 2001, an increase of $547,000, or 4.3%. Substantially all of the increase in interest income resulted from an increase in average interest earning assets of $28.2 million, or 16.2%, from $173.8 million in 2001 to $202.0 million in 2002. The increase in the average balance primarily occurred in loans and investment securities. The effect of the increase in interest earning assets was partially offset by a decrease in the average yield of 74 basis points from 7.27% in 2001 to 6.53% in 2002 due primarily to a decline in market interest rates.

Interest expense for 2002 was $5.3 million compared to $6.2 million for 2001, a decrease of $879,000, or 14.2%. This decrease resulted from a 100 basis point decrease in the rate paid on interest bearing liabilities to 2.76% in 2002 from 3.76% in 2001, due to a decline in market interest rates, and was partially offset by a 16.9% increase in the average balance of interest bearing liabilities of $27.8 million to $191.9 million in 2002 from $164.1 million in 2001. The increase in the average interest bearing liabilities was primarily due to increases in money market savings accounts, certificates accounts and advances from the Federal Home Loan Bank.

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends, the total dollar amount of interest expense and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using the average of daily balances and nonaccrual loans are included in average balances only.

2003 v. 2002. The provision for loan losses in 2003 was $45,000 compared to $231,000 in 2002. During 2003, management determined to reduce the provision for loan losses based on the decrease in nonperforming loans and improved asset quality ratios. As a result of the decrease in nonperforming loans, and despite the decrease in the provision for loan losses, the percentage of the allowance for loan losses to nonperforming loans increased.

2002 v. 2001. The provision for loan losses in 2002 was $231,000 compared to $80,000 in 2001. The provision was increased during 2002 as a result of the increase in net charge-offs during 2002. In addition, we deemed it prudent to increase the provision for loan losses given the expansion of our commercial loan portfolio.

An analysis of the changes in the allowance for loan losses is presented under “— Allowance for Loan Losses and Asset Quality.”

Noninterest Income. The following table shows the components of noninterest income and the percentage changes from 2003 to 2002 and from 2002 to 2001.

During the third quarter of 2003, we began offering investment advisory services through a third party broker-dealer and purchased life insurance policies, from which we derive income, on certain key executives. In 2002, we sold long-term residential mortgage loans, servicing retained, in an effort to manage interest rate risk.

Noninterest Expense. The following table shows the components of noninterest expense and the percentage changes from 2003 to 2002 and from 2002 to 2001.

2003 v. 2002. Compensation taxes and benefits increased due to salary increases, benefits increases and additional compensation related to new employees and resulting payroll taxes. The increase in employees is primarily the result of the opening of the Derby branch office. As we continue to pursue branch expansion opportunities, we expect to hire additional employees resulting in an increase in compensation, taxes and benefits in future periods. Office occupancy and computer processing increased primarily as a result of the opening of the Derby branch office.

2002 v. 2001. Salary and employee benefits increased due to salary increases and compensation related to an increase in employees and resulting payroll taxes. Office occupancy increased as a result of the opening of the Shelton branch office.

2003 v. 2002. Income taxes decreased due to a lower level of taxable income. The effective tax rate for 2003 was 31.3% compared to 31.4% for 2002.

2002 v. 2001. Income taxes increased due to a higher level of taxable income. The effective tax rate for 2002 and 2001 was 31.4%.

Qualitative Aspects of Market Risk. Our most significant form of market risk is interest rate risk. We manage the interest rate sensitivity of our 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 our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have 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 our 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. Beginning in 2002, we began selling some of the fixed-rate loans that we originate. We sell our longer term fixed-rate one- to four-family mortgage loans in the secondary market based on prevailing market interest rate conditions, an analysis of the composition and risk of the loan portfolio, liquidity needs and interest rate risk management goals. Generally, loans are sold without recourse and with servicing retained. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of off-balance sheet derivative financial instruments.

Our 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. We have used gap analysis to quantify our exposure to interest rate risk. Gap analysis sets forth the cumulative maturity distribution of interest-earning assets and interest-bearing liabilities. Gap analysis quantifies the time periods in which interest-earning assets and interest-bearing liabilities will mature or may reprice (rate adjustment) in accordance with their contractual terms. However, it does not necessarily indicate the impact of general interest rate movements on our net interest yield because the repricing of various categories of assets and liabilities is discretionary and subject to competitive and other pressures. Additionally, certain assets, such as adjustable-rate loans, have features that restrict adjustments to interest rates both on a short-term basis and over the life of the asset. Further, in the event of changes in interest rates, prepayments and early withdrawal levels would likely deviate significantly from those assumed in the gap analysis. As a result, various assets and liabilities indicated as repricing within the same period may, in fact, reprice at different times and at different rate levels. It should also be noted that gap analysis reflects certain assumptions regarding the categorization of assets and liabilities and represents a one-day position; in fact, variations occur daily as we adjust our interest rate sensitivity throughout the year.

The following table sets forth the cumulative maturity distribution of interest-earning assets and interest-bearing liabilities at March 31, 2004, the interest rate sensitivity gap, the cumulative interest rate

A gap is considered positive when the amount of interest rate sensitive assets exceeds the amount of interest rate sensitive liabilities and a gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. During a period of rising interest rates, an institution with a negative gap position would tend to have its interest-bearing liabilities repricing upward at a rate faster than its interest-earning assets which may negatively affect the growth of its net interest income. During a period of falling interest rates, an institution with a negative gap would tend to have its interest-bearing liabilities repricing downward at a faster rate than its interest-earning assets which may positively affect the growth of its net interest income. Given our existing liquidity position and our ability to sell securities from our available-for-sale portfolio, we believe that our negative gap position will have no material adverse effect on our liquidity position. The ratios set forth in the table above are within the Board of Directors’ approved parameters.

Liquidity is the ability to meet current and future short-term financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments and maturities and sales of investment

Each quarter we project liquidity availability and demands on this liquidity for the next 90 days. We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits, Federal funds and short- and intermediate-term U.S. Government agency obligations.

Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At March 31, 2004, cash and cash equivalents totaled $11.9 million, including Federal funds of $5.7 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $30.4 million at March 31, 2004. At March 31, 2004, we had arranged overnight lines of credit of $2.5 million with the Federal Home Loan Bank of Boston. At March 31, 2004, we had no overnight advances outstanding. In addition, at March 31, 2004 we had ability to borrow $2.0 million from a correspondent bank. We had no advances outstanding on this line at March 31, 2004.

At March 31, 2004, we had $13.7 million in unused line availability on home equity lines of credit, $11.3 million in unadvanced commercial lines, $3.5 million in mortgage commitments, $3.0 million in commercial mortgage loan commitments, $2.2 million in unadvanced construction mortgage commitments, $1.6 million in letters of credit, and $72,000 in overdraft line of credit availability. Certificates of deposit due within one year of March 31, 2004 totaled $52.5 million, or 28% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and lines of credit. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before March 31, 2005. We believe, however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Historically, we have remained highly liquid, with our liquidity position increasing substantially over the past two fiscal years. We have no material commitments or demands that are likely to affect our liquidity other than as set forth below. Consequently, the Board intends to make additional investments in intermediate-term mortgage-backed securities, government agency securities, and certificates of deposit to increase interest income. In the event loan demand were to increase at a pace greater than expected, or any unforeseen demand or commitment were to occur, we would access our borrowing capacity with the Federal Home Loan Bank of Boston.

The following table presents certain of our contractual obligations at March 31, 2004.

Our primary investing activities are the origination of loans and the purchase of securities. For the three months ended March 31, 2004 we originated $13.7 million of loans and purchased $4.9 million of securities. In 2003, we originated $101.0 million of loans and purchased $20.5 million of securities. In 2002, we originated $64.3 million of loans and purchased $20.8 million of securities. In 2001, we originated $62.6 million of loans and purchased $20.5 million of securities.

Financing activities consist primarily of activity in deposit accounts and in Federal Home Loan Bank advances. We experienced a net increase in total deposits of $4.0 million, $10.2 million, $16.6 million and $20.2 million for the three months ended March 31, 2004 and the years ended December 31, 2003, 2002 and 2001, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. We experienced a decrease in Federal Home Loan Bank advances of $4.9 million for the three months ended March 31, 2004 and increases in Federal Home Loan Bank advances of $3.9 million and $7.7 million for the years ended December 31, 2003 and 2002.

At March 31, 2004, we were subject to the regulatory capital requirements of the Federal Deposit Insurance Corporation, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2004, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines. After the reorganization, we will be subject to the regulatory capital requirements of the Office of Thrift Supervision. See “Regulation and Supervision — Regulation of Federal Savings Association,” “Regulatory Capital Compliance” and note 10 of the notes to the financial statements.

The capital from the reorganization will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations will be enhanced by the capital from the reorganization, resulting in increased net interest-earning assets and net income. However, the large increase in equity resulting from the capital raised in the offering will, initially, have an adverse impact on our, return on equity.

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and letters of credit. See note 13 of the notes to the financial statements.

For the three months ended March 31, 2004 and the year ended December 31, 2003, we engaged in no off-balance-sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

In November 2002, the Financial Accounting Standards Board issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. Interpretation No. 45 requires a guarantor entity at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing the guarantee. In addition, Interpretation No. 45 elaborates on previously existing disclosure requirements for most guarantees, including loan guarantees such a standby letters of credit. We did not have financial letters of credit at December 31, 2003 and March 31, 2004.

In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123”. This statement provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements about the method of

In January 2003, the Financial Accounting Standards Board issued Interpretation No. 46, “Consolidation of Variable Interest Entities.” Interpretation No. 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or is entitled to receive a majority of the entity’s residual returns, or both. Interpretation No. 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of Interpretation No. 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain other disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. We have not established any variable interest entities. The adoption of Interpretation No. 46 did not have material effect on our financial statements.

In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” which clarifies certain implementation issues raised by constituents and amends Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to include the conclusions reached by the Financial Accounting Standards Board on certain Financial Accounting Standards Board Staff Implementation Issues that, while inconsistent with Statement 133’s discussion of financial guarantee contracts and the application of the shortcut method to an interest rate swap agreement that includes an embedded option and amends other pronouncements. The guidance in Statement 149 is effective for new contracts entered into or modified after June 30, 2003 and for hedging relationships designated after that date, except for the following: guidance incorporated from FASB Staff Implementation Issues that was effective for periods beginning before June 15, 2003 should continue to be applied according to the effective dates in those issues; and guidance relating to forward purchase and sale agreements involving “when-issued” securities should be applied to both existing contracts and new contracts entered into after June 30, 2003. The adoption of Statement of Financial Accounting Standards No. 149 did not have a material effect on our financial statements.

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity,” which changes the classification in the statement of financial position of certain common financial instruments from either equity or mezzanine presentation to liabilities and requires an issuer of those financial statements to recognize changes in fair value or redemption amount, as applicable, in earnings. Statement of Financial Accounting Standards No. 150 requires an issuer to classify certain financial instruments as liabilities, including mandatorily redeemable preferred and common stocks. Statement of Financial Accounting Standards No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and, with one exception, is effective at the beginning of the first interim period beginning after June 15, 2003 (July 1, 2003 as to Naugatuck Valley Savings and Loan). The adoption of Statement of Financial Accounting Standards No. 150 did not have a material effect on our financial statements.

We have prepared the financial statements and related financial data presented in this prospectus in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of our assets and liabilities are monetary in nature. As a result, interest rates generally have a more significant impact on our performance than do general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.

Initially, the Board of Directors of Naugatuck Valley Financial and Naugatuck Valley Mutual will consist of all current directors of Naugatuck Valley Savings and Loan. The Board of Directors of Naugatuck Valley Financial and Naugatuck Valley Mutual will be elected to terms of three years, approximately one-third of whom are elected annually.

Our Board of Directors is presently composed of eight members who are elected for terms of three years, approximately one-third of whom are elected annually. All of the directors are independent under the current listing standards of the Nasdaq Stock Market, except for John C. Roman and Jane H. Walsh who we employ as officers. Information regarding the directors is provided below. Unless otherwise stated, each person has held his or her current occupation for the last five years. Ages presented are as of March 31, 2004.


	Carlos S. Batista is a Vice President of Bristol Babcock, Inc., a manufacturer and world-wide supplier of products and services in the oil, gas, water, wastewater, process control and power industries. Age 54. Director since 1999.

	John C. Roman will serve as the President and Chief Executive Officer of Naugatuck Valley Financial and Naugatuck Valley Mutual. Mr. Roman has been President and Chief Executive Officer of Naugatuck Valley Savings and Loan since September 1999 and previously was the Vice President and Chief Lending Officer of Naugatuck Valley Savings and Loan. Age 50. Director since 1999.

	Camilo P. Vieira is a consultant with, and previously served as the President of CM Property Management, a property management firm. Mr. Vieira previously served with IBM Corp. as a project and financial manager for over 30 years. Age 60. Director since 2002.


	Richard M. Famiglietti has been the owner of CM Property Management, a property management firm since 2002. Previously, Mr. Famiglietti was a Vice President of sales for Naugatuck Glass Company, a glass fabricator. Age 56. Director since 2000.

	Ronald D. Lengyel will serve as the Chairman of the Board of Directors of Naugatuck Valley Financial and Naugatuck Valley Mutual and currently is the Chairman of the Board of Naugatuck Valley Savings and Loan. Mr. Lengyel previously served as President and Chief Executive Officer of Naugatuck Valley Savings and Loan before his retirement in September 1999. Mr. Lengyel is a director of Connecticut Water Service, Inc. Age 65. Director since 1971.


	James A. Mengacci has been the owner of James A. Mengacci Associates LLC, a consulting firm, since 1999 and a partner in Allied Capital Management, LLC, a marketing and investment firm, since 1999. Mr. Mengacci previously was the Secretary and Treasurer of Fitzgerald Funeral Home, Inc. Age 46. Director since 1988.

	Michael S. Plude is a certified public accountant and the managing partner of Kaskie Plude & Co., an accounting firm, located in Monroe, Connecticut. Mr. Plude previously was an accountant with Pricewaterhouse. Age 44. Director since 2003.

	Jane H. Walsh will serve as Senior Vice President of Naugatuck Valley Financial and Naugatuck Valley Mutual. Ms. Walsh has been Senior Vice President of Naugatuck Valley Savings and Loan since 2000. Ms. Walsh has served with Naugatuck Valley Savings and Loan for over 30 years. Age 60. Director since 2001.

Our executive officers are elected annually by the Board of Directors and serve at the Board’s discretion. The executive officers of Naugatuck Valley Financial and Naugatuck Valley Mutual will be, and the executive officers of Naugatuck Valley Savings and Loan, are:

Below is information regarding the executive officers who are not also directors. Unless otherwise stated, each executive officer has held his or her current position for at least the last five years. Ages presented are as of March 31, 2004.

Dominic J. Alegi, Jr. will serve as Executive Vice President of Naugatuck Valley Financial and Naugatuck Valley Mutual. Mr. Alegi has been Executive Vice President of Naugatuck Valley Savings and Loan since 1989. Mr. Alegi has served with Naugatuck Valley Savings and Loan for over 34 years. Age 58.

William C. Nimons will serve as Senior Vice President of Naugatuck Valley Financial and Naugatuck Valley Mutual. Mr. Nimons has been Senior Vice President of Naugatuck Valley Savings and Loan since 2001. Mr. Nimons previously was the Manager — Network Management of Prudential Real Estate and Relocation, a real estate and relocation firm and was an Executive Vice President at Shelton Savings Bank. Age 56.

Lee R. Schlesinger will serve as Vice President and Controller of Naugatuck Valley Financial and Naugatuck Valley Mutual. Mr. Schlesinger has been Vice President and Controller of Naugatuck Valley Savings and Loan since 2003. Mr. Schlesinger has served with Naugatuck Valley Savings and Loan for over 21 years. Age 43.

Meetings and Committees of the Board of Directors of Naugatuck Valley Savings and Loan

Naugatuck Valley Savings and Loan conducts business through meetings of its Board of Directors and its committees. During the year ended December 31, 2003, the Board of Directors of Naugatuck Valley Savings and Loan held 18 regular meetings and 78 special meetings.

Naugatuck Valley Savings and Loan’s Board of Directors has standing Audit, Human Resource and Gain Share, and Nominating Committees, among others.

The Audit Committee, consisting of Messrs. Famiglietti, Lengyel and Plude, is responsible for developing and monitoring internal audit and compliance programs. The committee also receives and reviews all the reports and findings and other information presented to them by Naugatuck Valley Savings

The Human Resource and Gain Share Committee, consisting of Messrs. Famiglietti, Roman, Lengyel and Vieira, determines annual grade and salary levels for employees and establishes personnel policies. Mr. Famiglietti is the Human Resource and Gain Share Committee Chairman. This committee met eight times during the year ended December 31, 2003.

The Nominating Committee, consisting of all directors, is responsible for the annual selection of management’s nominees for election as directors. Mr. Mengacci is the Nominating Committee Chairman. This committee met twice in 2003 to nominate the individuals for election at the 2004 annual meeting.

In addition, the Board of Directors has Budget, Marketing, Building/Alternate Site, Loan, Information Technology, Mortgage and Mortgage Review Committees.


	The Audit Committee will consist of Messrs. Famiglietti, Lengyel and Plude and be responsible for ensuring that we maintain reliable accounting policies and financial reporting processes and reviewing the work of our independent accountants and internal auditors to determine their effectiveness. Mr. Famiglietti will be the Audit Committee Chairman. Each member of the Audit Committee is independent in accordance with the listing standards of the Nasdaq Stock Market. The Board of Directors has determined that Mr. Plude is an audit committee financial expert under the rules of the Securities and Exchange Commission.

	The Compensation Committee will consist of Messrs. Famiglietti, Lengyel and Vieira and be responsible for determining annual grade and salary levels for our employees and establishing our personnel policies. Mr. Famiglietti will be the Compensation Committee Chairman. Each member of the Compensation Committee is independent in accordance with the listing standards of the Nasdaq Stock Market.

	The Nominating Committee will consist of all directors, except Mr. Roman and Ms. Walsh, and be responsible for the annual selection of management’s nominees for election as directors and developing and implementing policies and practices relating to corporate governance, including implementation of and monitoring adherence to our corporate governance policy. Mr. Mengacci will be the Nominating Committee Chairman. Each member of the Nominating Committee is independent in accordance with the listing standards of the Nasdaq Stock Market.

Each of the committees listed above will operate under a written charter, which will govern its composition, responsibilities and operations.

In addition to establishing committees of the Board of Directors, we will also adopt several policies to govern the activities of both us and Naugatuck Valley Savings and Loan, including a corporate governance policy and a code of business conduct and ethics. The corporate governance policy will set forth:


	•	the duties and responsibilities of each director;

	•	the composition, responsibilities and operation of the Board of Directors;

	•	the establishment and operation of Board committees;

	•	succession planning;

	•	appointing an independent lead director and convening executive sessions of independent directors;


	•	the Board of Directors’ interaction with management and third parties; and

	•	the evaluation of the performance of the Board of Directors and of the chief executive officer.

The code of business conduct and ethics, which will apply to all employees, officers and directors, will address conflicts of interest, the treatment of confidential information, general employee conduct and compliance with applicable laws, rules and regulations. In addition, the code of business conduct and ethics will be designed to deter wrongdoing and to promote honest and ethical conduct, the avoidance of conflicts of interest, full and accurate disclosure and compliance with all applicable laws, rules and regulations.

Fees. Each non-employee director of Naugatuck Valley Savings and Loan receives an annual retainer of $7,500. The Chairman of the Board of Directors receives an annual retainer of $11,500. In addition, each non-employee director receives $500 per Board meeting attended and $400 per committee meeting attended. The Chairman of the Board of Directors also receives $400 per month for his service as Asset/Liability Committee liaison. Each non-employee director of Naugatuck Valley Financial will receive a quarterly retainer of $500 and each member of the Naugatuck Valley Financial Audit Committee will receive $400 per meeting attended.

Director Retirement Policy. Naugatuck Valley Savings and Loan maintains a retirement benefits policy for certain non-employee directors. Under the policy, any person who served as a director on January 1, 2000, who has attained the age of 68 on or by that date and who has served on the Board for at least 10 years as of the time he or she attains age 70, becomes eligible for an annual retirement benefit. The annual retirement benefit for these directors equals the total amounts paid to all non-employee directors during the calendar year preceding the director’s retirement date and dividing that number by the number of non-employee directors for that year. For all other directors who have served on the Board for at least 10 years as of the time he or she attains age 70, the director’s annual retirement benefit equals the total amounts paid to all non-employee directors during the calendar year preceding the director’s retirement date and dividing that number by the number of non-employee directors for that year and then multiplying that result by 60%. These annual retirement benefits are payable to each director in semi-annual installments for five years. In the event the director dies before receiving each of the semi-annual installments, his or her beneficiary will receive the remaining installments that would have been to the director but for his or her death.

Summary Compensation Table. The following information is provided for John C. Roman, our President and Chief Executive Officer, and Dominic J. Alegi, Jr., our Executive Vice President. Messrs. Roman and Alegi are the only executive officers of Naugatuck Valley Savings and Loan who received salary and bonus totaling $100,000 or more during the year ended December 31, 2003.


(1)	Does not include the aggregate amount of perquisites or other personal benefits, which was less than $50,000 or 10% of the total annual salary and bonus reported.

(2)	Represents matching contributions under the 401(k) Plan.

Employment Agreements. Upon completion of the offering, Naugatuck Valley Savings and Loan will enter into an amended and restated employment agreement with John C. Roman. Naugatuck Valley Financial will also be a party to the employment agreement with Mr. Roman. Naugatuck Valley Savings and Loan and Naugatuck Valley Financial will enter into the agreement to help ensure that they maintain a stable and competent management base after the offering. The continued success of Naugatuck Valley Financial and Naugatuck Valley Savings and Loan depends to a significant degree on the skills and competence of Mr. Roman.

The employment agreement will provide for a three-year term. The term of the employment agreement may be renewed on an annual basis after review and extension by the respective Board of Directors. The employment agreement establishes a base salary of $ . The Boards of Directors will review Mr. Roman’s base salary each year in order to consider any appropriate changes. In addition to base salary, the employment agreement will provide for, among other things, participation in stock-based benefit plans and fringe benefits applicable to the executive.

The employment agreement will provide that Naugatuck Valley Savings and Loan and Naugatuck Valley Financial may terminate the executive’s employment for cause, as described in the employment agreements, at any time. If Naugatuck Valley Savings and Loan or Naugatuck Valley Financial terminates the executive’s employment for reasons other than for cause, or if the executive resigns from Naugatuck Valley Savings and Loan or Naugatuck Valley Financial after specified circumstances that would constitute constructive termination, the executive or, if he dies, his beneficiary, would be entitled to receive an amount equal to the remaining base salary payments due for the remaining term of the employment agreement and the contributions that would have been made on his behalf to any employee benefit plans of Naugatuck Valley Savings and Loan and Naugatuck Valley Financial during the remaining term of the employment agreement. Naugatuck Valley Savings and Loan would also continue and/or pay for the executive’s life, health and dental coverage for the remaining term of the employment agreement. The executive must agree not to compete with Naugatuck Valley Savings and Loan or Naugatuck Valley Financial for one year following their termination of employment other than in connection with a change in control.

Under the employment agreement, if the executive voluntarily (upon circumstances discussed in the agreement) or involuntarily terminates employment following a change in control of Naugatuck Valley Savings and Loan or Naugatuck Valley Financial, the executive or, if the executive dies, the executive’s beneficiary, would receive a severance payment equal to the greater of: (1) the payments due for the remaining term of the agreement; or (2) three times the average of the five preceding taxable years’ annual compensation. Naugatuck Valley Savings and Loan would also continue the executive’s life, health, and dental coverage for 36 months following termination of employment. Section 280G of the Internal Revenue Code provides that severance payments that equal or exceed three times the individual’s base amount are deemed to be “excess parachute payments” if they are contingent upon a change in control. Individuals receiving excess parachute payments are subject to a 20% excise tax on the amount of the payment in excess of the base amount, and the employer would not be entitled to deduct such amount. The agreements limit payments made to the executive in connection with a change in control to amounts that will not exceed the limits imposed by Section 280G.

Naugatuck Valley Savings and Loan or Naugatuck Valley Financial will pay or reimburse the executive for all reasonable costs and legal fees paid or incurred by the executive in any dispute or question of interpretation relating to the employment agreement if the executive is successful on the merits in a legal judgment, arbitration or settlement. The employment agreement also provides that Naugatuck Valley Savings and Loan and Naugatuck Valley Financial will indemnify Mr. Roman to the fullest extent legally allowable.

Change in Control Agreements. Upon completion of the offering, Naugatuck Valley Savings and Loan will enter into change in control agreements with certain individuals, including Mr. Alegi, Ms. Walsh, Mr. Nimons and Mr. Schlesinger. Each change in control agreement will have either a two- or three-year term, subject to renewal by the Board of Directors on an annual basis. Mr. Alegi, Ms. Walsh

and Mr. Nimons will have three-year agreements and Mr. Schlesinger will have a two-year agreement. If, following a change in control of Naugatuck Valley Savings and Loan or Naugatuck Valley Financial, Naugatuck Valley Savings and Loan or Naugatuck Valley Financial or their successors terminates the employment of an individual who has entered into a change in control agreement for reasons other than for cause, or if the individual voluntarily resigns upon the occurrence of circumstances specified in the agreements, the officer will receive a severance payment under the agreements equal to two or three times, based on the term of the agreement, the officer’s average annual compensation for the five most recent taxable years. Naugatuck Valley Savings and Loan will also continue health and welfare benefit coverage for 24 or 36 months, based on the term of the agreement, following termination of employment. If a change in control of Naugatuck Valley Financial or Naugatuck Valley Savings and Loan occurred, and Naugatuck Valley Savings and Loan terminated all officers covered by change in control agreements, the total payments due under the agreements, based solely on current cash compensation and excluding any benefits that would be payable under any employee benefit plans, would equal approximately $ . The agreements limit payments made to the executives in connection with a change in control to amounts that will not exceed the limits imposed by Section 280G.

Death Benefit Agreements. Naugatuck Valley Savings and Loan has entered into death benefit agreements with certain employees, including Mr. Roman, Mr. Alegi, and Mr. Schlesinger. Under these agreements, each employee’s beneficiaries become entitled to a single lump sum payment of $25,000 upon the employee’s death.

Employee Severance Compensation Plan. In connection with the offering, Naugatuck Valley Savings and Loan expects to adopt the Naugatuck Valley Savings and Loan Employee Severance Compensation Plan to provide severance benefits to eligible employees whose employment terminates in connection with a change in control of Naugatuck Valley Savings and Loan or Naugatuck Valley Financial. Employees become eligible for severance benefits under the plan if they have a minimum of [one year of service] with Naugatuck Valley Savings and Loan. Individuals who enter into employment or change in control agreements with Naugatuck Valley Savings and Loan or Naugatuck Valley Financial will not participate in the severance plan. Under the severance plan, if, within [24 months] of a change in control, Naugatuck Valley Savings and Loan or Naugatuck Valley Financial or their successors terminate an employee’s employment or if the individual voluntarily terminates employment upon the occurrence of events specified in the severance plan, then that individual will receive a severance payment equal to one month’s compensation for each year of service with Naugatuck Valley Savings and Loan, up to a maximum payment equal to 24 months of compensation. Based solely on 2003 cash compensation and assuming that a change in control had occurred at March 31, 2004, and all eligible employees became entitled to receive severance payments, the aggregate payments due under the severance plan would equal approximately $ .

401(k) Savings Plan. Naugatuck Valley Savings and Loan maintains the Naugatuck Valley Savings and Loan S.B. Employee Savings Plan, a tax-qualified defined contribution plan with a 401(k) feature, for employees of Naugatuck Valley Savings and Loan who are 21 years of age and have completed six months of service. Eligible employees may contribute a portion of their compensation to the plan on a pre-tax basis, subject to certain limitations imposed by the Internal Revenue Code of 1986, as amended. For 2004, the maximum dollar limit any individual may contribute to the plan is $13,000; provided, however, that participants over age 50 may contribute an additional $3,000 per year. Each year, Naugatuck Valley Savings and Loan may make a discretionary matching contributions on behalf of participant who have made deferrals under the plan. Naugatuck Valley Savings and Loan also has the authority to make discretionary profit sharing contributions under the plan for the benefit of eligible participants. Participants vest in their profit sharing contributions at a rate of 20% per year following two years of service. Participants are always 100% vested in their salary deferrals.

The plan has an individual account for each participant’s contributions and allows each participant to direct the investment of his or her account in a variety of investment funds. In connection with the

offering, the plan will add an additional investment alternative, the Naugatuck Valley Financial Stock Fund. The Naugatuck Valley Financial Stock Fund will permit participants to invest up to 100% of their deferrals in Naugatuck Valley Financial common stock. A participant who elects to purchase common stock in the offering through the plan will receive the same subscription priority and be subject to the same individual purchase limitations as if the participant had elected to make such purchase using other funds. See “The Reorganization and Stock Offering — Subscription Offering and Subscription Rights” and “— Limitations on Purchases of Shares.” The plan will purchase common stock for participants in the offering, to the extent that shares are available. [After the offering, the plan will purchase shares in open market transactions. Participants may direct the stock fund trustee on the voting of shares purchased for their plan accounts. The trustee will use dividends paid on shares held in the stock fund to purchase additional shares.]

Retirement Plan. Naugatuck Valley Savings and Loan participates in the Financial Institutions Retirement Fund (the “Retirement Plan”) to provide retirement benefits for eligible employees. Employees are eligible to participate in the Retirement Plan after the completion of six months of employment and the attainment of age 21. The formula for normal retirement benefits payable annually under the Retirement Plan is 1.5% of the average of the participant’s highest five years of compensation multiplied by the participant’s years of benefit service.

Participants generally have no vested interest in Retirement Plan benefits prior to the completion of five years of service. Following the completion of five years of vesting service, or in the event of a participant’s attainment of age 65, death or termination of employment due to disability, a participant will become 100% vested in the accrued benefit under the Retirement Plan. The table below reflects the annual pension benefit payable to a participant assuming various levels of earnings and years of service. The amounts of benefits paid under the Retirement Plan are not reduced for any social security benefit payable to participants. As of March 31, 2004, [executives] had credited years of service of [number] years, respectively.

Employee Stock Ownership Plan. In connection with the offering, the Board of Directors of Naugatuck Valley Savings and Loan has adopted an employee stock ownership plan for eligible employees of Naugatuck Valley Savings and Loan. [Eligible employees who are 21 years old and employed by Naugatuck Valley Savings and Loan as of the closing date of the offering begin participating in the plan as of that date.] Thereafter, new employees of Naugatuck Valley Savings and Loan who are 21 years old and have been credited with at least [six months] of service with Naugatuck Valley Savings and Loan will be eligible to participate in the employee stock ownership plan as of the first entry date following their completion of the plan’s eligibility requirements.

It is anticipated that Naugatuck Valley Savings and Loan will engage an independent third party trustee to purchase 3.60% of the shares issued in the reorganization including shares issued to Naugatuck Valley Mutual and our charitable foundation on behalf of the employee stock ownership plan. This would range between 153,000 shares, assuming 1,827,500 shares are sold in the offering, and 207,000 shares, assuming 2,472,500 shares are sold in the offering. If 2,843,375 shares are sold in the offering, the employee stock ownership plan will purchase 238,050 shares. It is anticipated that the employee stock ownership plan will fund its purchase in the offering through a loan from Naugatuck Valley Financial. The loan will equal 100% of the aggregate purchase price of the common stock. The loan to the employee stock ownership plan will be repaid principally from Naugatuck Valley Savings and Loan’s contributions to

In any plan year, Naugatuck Valley Savings and Loan may make additional discretionary contributions (beyond those necessary to satisfy the loan obligation) to the employee stock ownership plan for the benefit of plan participants in either cash or shares of common stock, which may be acquired through the purchase of outstanding shares in the market or from individual stockholders or which constitute authorized but unissued shares or shares held in treasury by Naugatuck Valley Financial. The timing, amount, and manner of discretionary contributions will be affected by several factors, including applicable regulatory policies, the requirements of applicable laws and regulations, and market conditions. Naugatuck Valley Savings and Loan’s contributions to the employee stock ownership plan are not fixed, so benefits payable under the employee stock ownership plan cannot be estimated.

Shares purchased by the employee stock ownership plan with the proceeds of the employee stock ownership plan loan will be held in a suspense account and released on a pro rata basis as the loan is repaid. Discretionary contributions to the employee stock ownership plan and shares released from the suspense account will be allocated among participants on the basis of each participant’s proportional share of compensation.

After two years of service, participants will vest in the benefits allocated under the employee stock ownership plan at a rate of [20%] per year for each year of continuous service with Naugatuck Valley Savings and Loan over a -year period. A participant will become fully vested at retirement, upon death or disability, upon a change in control or upon termination of the employee stock ownership plan. Benefits are generally distributable upon a participant’s separation from service. Any unvested shares that are forfeited upon a participant’s termination of employment will be reallocated among the remaining plan participants.

Plan participants will be entitled to direct the plan trustee on how to vote common stock credited to their accounts. The trustee will vote all allocated shares held in the employee stock ownership plan as instructed by the plan participants and unallocated shares and allocated shares for which no instructions are received will be voted in the same ratio on any matter as those shares for which instructions are given, subject to the fiduciary responsibilities of the trustee.

Under applicable accounting requirements, compensation expense for a leveraged employee stock ownership plan is recorded at the fair market value of the employee stock ownership plan shares when committed to be released to participants’ accounts. See “Pro Forma Data.”

The employee stock ownership plan must meet certain requirements of the Internal Revenue Code and the Employee Retirement Income Security Act. Naugatuck Valley Savings and Loan intends to request a favorable determination letter from the Internal Revenue Service regarding the tax-qualified status of the employee stock ownership plan. Naugatuck Valley Savings and Loan expects to receive a favorable determination letter, but cannot guarantee that it will.

Future Stock-Based Incentive Plan. Following the offering, Naugatuck Valley Financial plans to adopt a stock-based incentive plan that will provide for grants of stock options and restricted stock. Shares of restricted stock, in an amount up to 3.21% of the shares issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation, will be awarded at no cost to the recipient. Stock options, in an amount up to 8.03% of the shares issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation, will be granted at an exercise price equal to 100% of the fair market value of our common stock on the option grant date.

Naugatuck Valley Financial may fund the stock-based incentive plan through the purchase of common stock in the open market by a trust established in connection with the plan or from authorized, but unissued, shares of Naugatuck Valley Financial common stock. The acquisition of additional

Naugatuck Valley Financial will grant stock options at an exercise price equal to 100% of the fair market value of the stock on the date of grant. Naugatuck Valley Financial will grant restricted stock awards at no cost to recipients. Restricted stock awards and stock options generally vest ratably over a five-year period, but Naugatuck Valley Financial may also make vesting contingent upon the satisfaction of certain conditions, such as performance goals, established by the Board of Directors or the committee charged with administering the plan provided, however, that no such award will vest more rapidly than 20% in any given year. All outstanding awards will accelerate and become fully vested upon a change in control of Naugatuck Valley Financial.

No earlier than six months after the reorganization, Naugatuck Valley Financial will submit the stock-based incentive plan to shareholders for their approval, at which time Naugatuck Valley Financial will provide shareholders with detailed information about the plan.

Loans and Extensions of Credit. The Sarbanes-Oxley Act of 2002 generally prohibits us from making loans to our executive officers and directors, but it contains a specific exemption from such prohibition for loans made by Naugatuck Valley Savings and Loan to our executive officers and directors in compliance with federal banking regulations. Federal regulations require that all loans or extensions of credit to executive officers and directors of insured institutions must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and must not involve more than the normal risk of repayment or present other unfavorable features. Naugatuck Valley Savings and Loan is therefore prohibited from making any new loans or extensions of credit to executive officers and directors at different rates or terms than those offered to the general public, except for loans made under a benefit program generally available to all other employees and that does not give preference to any executive officer or director over any other employee.

In addition, loans made to a director or executive officer in an amount that, when aggregated with the amount of all other loans to the person and his or her related interests, are in excess of the greater of $25,000 or 5% of Naugatuck Valley Savings and Loan’s capital and surplus, up to a maximum of $500,000, must be approved in advance by a majority of the disinterested members of the Board of Directors. See “Regulation and Supervision — Regulation of Federal Savings Associations — Transactions with Related Parties.”

The aggregate amount of loans to our executive officers and directors was $1.1 million at March 31, 2004, or approximately 2.65% of pro forma stockholders’ equity assuming that 2,472,500 shares are sold in the offering. These loans were performing according to their original terms at March 31, 2004.

Our bylaws provide that we will indemnify all of our officers, directors and employees to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by them in connection with or arising out of any action, suit or proceeding in which they may be involved by reason of their having been a director or officer. Such indemnification may include the advancement of funds to pay for or reimburse reasonable expenses incurred by an indemnified party to the fullest extent permitted under federal law. Indemnification shall be made only if: (i) final judgment on the merits is in his or her favor; or (ii) in case of settlement, final judgment against him or her, or final judgment in his or her favor, other than on the merits, if a majority of our disinterested directors determine that he or she was acting in good faith within the scope of his or her employment or authority as he or she could reasonably have perceived it under the circumstances and for a purpose he or she could reasonably have believed under the circumstances was in our best interest. However, no indemnification shall be made unless we give the Office of Thrift Supervision at least 60 days notice of our intention to make such indemnification. No such

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to our directors, officers and controlling persons by our bylaws or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable.

The following table presents certain information as to the approximate purchases of common stock by our directors and executive officers, including their associates, if any, as defined by applicable regulations. No individual has entered into a binding agreement to purchase these shares and, therefore, actual purchases could be more or less than indicated. Directors and executive officers and their associates may not purchase more than 31% in the aggregate of the shares sold in the offering and issued to our charitable foundation. For purposes of the following table, sufficient shares are assumed to be available to satisfy subscriptions in all categories.


(1)	Includes shares of common stock to be issued to the Naugatuck Valley Savings and Loan Foundation.

The Board of Directors of Naugatuck Valley Savings and Loan has approved the plan of reorganization. The plan of reorganization also must be approved by the depositors of Naugatuck Valley Savings and Loan. A special meeting of depositors has been called for this purpose. The Office of Thrift Supervision has conditionally approved the plan of reorganization; however, such approval does not constitute a recommendation or endorsement of the plan of reorganization by the agency.

On May 17, 2004, the Board of Directors of Naugatuck Valley Savings and Loan unanimously adopted the plan of reorganization and minority stock issuance, pursuant to which Naugatuck Valley Savings and Loan will reorganize into a two-tiered mutual holding company. This structure is called a two-tier structure because it will have two levels of holding companies. After the reorganization, Naugatuck Valley Financial will be the mid-tier stock holding company and Naugatuck Valley Mutual will be the top-tier mutual holding company. Under the terms of the plan of reorganization, Naugatuck Valley Financial will own all of the stock of Naugatuck Valley Savings and Loan and Naugatuck Valley Mutual will own at least a majority of Naugatuck Valley Financial’s stock. Naugatuck Valley Mutual will have no stockholders and depositors of Naugatuck Valley Savings and Loan will become members of Naugatuck Valley Mutual.

The reorganization also includes the offering by Naugatuck Valley Financial of up to 43% of its common stock to qualifying depositors of Naugatuck Valley Savings and Loan in a subscription offering and, if necessary, to members of the general public through a community offering and/or a syndicate community offering. The completion of the offering depends on market conditions and other factors beyond our control. We can give no assurance as to the length of time that will be required to complete the sale of the common stock. If we experience delays, significant changes may occur in the independent appraisal, which would require a change in the offering range. A change in the offering range would result in a change in the net proceeds realized from the sale of the common stock. If the reorganization is terminated, Naugatuck Valley Savings and Loan would be required to charge all reorganization expenses against current income. The Office of Thrift Supervision approved the plan of reorganization, subject to, among other things, approval of the plan of reorganization by Naugatuck Valley Savings and Loan’s depositors. The plan of reorganization also provides for the establishment of the Naugatuck Valley Savings and Loan Foundation and our funding of the foundation with 2% of the shares of common stock issued in the reorganization. The establishment of the Naugatuck Valley Savings and Loan Foundation is subject to a separate vote of Naugatuck Valley Savings and Loan’s depositors. The special meeting of Naugatuck Valley Savings and Loan’s depositors has been called for these purposes on , 2004.

The following is a brief summary of the pertinent aspects of the reorganization. A copy of the plan of reorganization is available from Naugatuck Valley Savings and Loan upon request and is available for inspection at the offices of Naugatuck Valley Savings and Loan and at the Office of Thrift Supervision. The plan of reorganization is also filed as an exhibit to the registration statement that we have filed with the Securities and Exchange Commission. See “Where You Can Find More Information.”

After considering the advantages and disadvantages of the reorganization, the Board of Directors of Naugatuck Valley Savings and Loan unanimously approved the reorganization as being in the best interest of Naugatuck Valley Savings and Loan and its depositors. The Board of Directors concluded that the reorganization offers a number of advantages that will be important to our future growth and performance and that outweigh the disadvantages of the reorganization.

The reorganization will result in the raising of additional capital, which will support our future lending and operational growth and may also support possible future branching activities or the acquisition of other financial institutions or financial service companies or their assets. As a mutual holding company with a mid-tier stock holding company, we will have greater flexibility in structuring mergers and acquisitions, including giving us the ability to use stock as a form of merger consideration. Our current mutual structure, by its nature, limits any ability to offer any common stock as consideration in a merger or acquisition. Our new mutual holding company structure will enhance our ability to compete with other bidders when acquisition opportunities arise by better enabling us to offer stock or cash consideration, or a combination of the two. Since we will not be offering all of our common stock for sale in the offering, the reorganization will result in less capital raised in comparison to a standard mutual-to-stock conversion. Therefore, the reorganization permits us to control the amount of capital being raised and enables us to prudently deploy the proceeds of the offering. The reorganization, however, also will allow us to raise additional capital in the future because a majority of our common stock will be available for sale in the event of a conversion of Naugatuck Valley Mutual to stock form.

The reorganization will afford our directors, officers and employees the opportunity to become stockholders, which we believe to be an effective performance incentive and an effective means of attracting and retaining qualified personnel. The reorganization also will provide our customers and local community members with an opportunity to acquire our stock.

The disadvantages of the reorganization considered by Naugatuck Valley Savings and Loan’s Board of Directors are the additional expense and effort of operating as a public company listed on the Nasdaq Stock Market, the inability of stockholders other than Naugatuck Valley Mutual to obtain majority ownership of Naugatuck Valley Financial and Naugatuck Valley Savings and Loan, which may result in the perpetuation of our management and Board of Directors, and the corporate ownership and regulatory policies relating to the mutual holding company structure that may be adopted periodically which may have an adverse impact on stockholders other than Naugatuck Valley Mutual. A majority of our voting stock will be owned by Naugatuck Valley Mutual, which will be controlled by its Board of Directors. While this structure will permit management to focus on our long-term business strategy for growth and capital redeployment without undue pressure from stockholders, it will also serve to perpetuate our existing management and directors. Naugatuck Valley Mutual will be able to elect all the members of our Board of Directors, and will be able to control the outcome of most matters presented to our stockholders for resolution by vote. The matters as to which stockholders other than Naugatuck Valley Mutual will be able to exercise voting control are limited and include any proposal to implement a stock-based incentive plan. No assurance can be given that Naugatuck Valley Mutual will not take action adverse to the interests of other stockholders. For example, Naugatuck Valley Mutual could prevent the sale of control of Naugatuck Valley Financial, or defeat a candidate for our Board of Directors or other proposals put forth by stockholders. This reorganization does not preclude the conversion of Naugatuck Valley Mutual from the mutual to stock form of organization in the future. No assurance can be given when, if ever, Naugatuck Valley Mutual will convert to stock form or what conditions the Office of Thrift Supervision or other regulatory agencies may impose on such a transaction. See “Risk Factors” and “Summary — Possible Conversion of Naugatuck Valley Mutual to Stock Form.”

Following receipt of all required regulatory approvals and approval of the plan of reorganization by Naugatuck Valley Savings and Loan’s depositors, the reorganization will be effected as follows or in any


	•	Naugatuck Valley Savings and Loan will organize an interim federal savings bank (“Interim One”) as a wholly owned subsidiary;

	•	Interim One will organize Naugatuck Valley Financial as a wholly owned subsidiary;

	•	Interim One will then organize an interim federal savings bank (“Interim Two”) as a wholly owned subsidiary;

	•	Naugatuck Valley Savings and Loan will convert its charter to a federal stock savings bank charter and Interim One will exchange its charter for a federal mutual holding company charter to become Naugatuck Valley Mutual;

	•	sequentially with step 4, Interim Two will merge with and into Naugatuck Valley Savings and Loan with Naugatuck Valley Savings and Loan in stock form surviving as a subsidiary of Naugatuck Valley Mutual;

	•	former members of Naugatuck Valley Savings and Loan will become members of Naugatuck Valley Mutual; and

	•	Naugatuck Valley Mutual will contribute 100% of the issued common stock of Naugatuck Valley Savings and Loan to Naugatuck Valley Financial.

Contemporaneously with the reorganization, we will offer for sale up to 43% of our common stock representing up to 43% of the pro forma market value of Naugatuck Valley Savings and Loan on a fully converted basis. Naugatuck Valley Savings and Loan intends to capitalize Naugatuck Valley Mutual with $100,000.

As a result of the reorganization, Naugatuck Valley Savings and Loan will be organized in stock form and will be wholly owned by Naugatuck Valley Financial. The legal existence of Naugatuck Valley Savings and Loan will not terminate as a result of the reorganization. Instead, Naugatuck Valley Savings and Loan in stock form will be a continuation of Naugatuck Valley Savings and Loan in mutual form. All property of Naugatuck Valley Savings and Loan, including its right, title and interest in all property of any kind and nature, interest and asset of every conceivable value or benefit then existing or pertaining to Naugatuck Valley Savings and Loan, or which would inure to Naugatuck Valley Savings and Loan immediately by operation of law and without the necessity of any conveyance or transfer and without any further act or deed, will vest in Naugatuck Valley Savings and Loan in stock form. Naugatuck Valley Savings and Loan in stock form will have, hold and enjoy the same in its right and fully and to the same extent as the same was possessed, held and enjoyed by Naugatuck Valley Savings and Loan in the mutual form. Naugatuck Valley Savings and Loan in stock form will continue to have, succeed to and be responsible for all the rights, liabilities and obligations of Naugatuck Valley Savings and Loan in the mutual form and will maintain its headquarters and operations at Naugatuck Valley Savings and Loan’s present locations.

The plan of reorganization also provides that we will establish and fund the Naugatuck Valley Savings and Loan Foundation. See “The Naugatuck Valley Savings and Loan Foundation.”

Continuity. While the reorganization is being accomplished, the normal business of Naugatuck Valley Savings and Loan will continue without interruption, including being regulated by the Office of Thrift Supervision, its primary regulator, and the Federal Deposit Insurance Corporation. After reorganization, Naugatuck Valley Savings and Loan will continue to provide services for depositors and borrowers under current policies by its present management and staff.

The directors of Naugatuck Valley Savings and Loan at the time of reorganization will serve as directors of Naugatuck Valley Savings and Loan after the reorganization. The Board of Directors of

Deposit Accounts and Loans. The reorganization will not affect any deposit accounts or borrower relationships with Naugatuck Valley Savings and Loan. All deposit accounts in Naugatuck Valley Savings and Loan after the reorganization will continue to be insured up to the legal maximum by the Federal Deposit Insurance Corporation in the same manner as such deposit accounts were insured immediately before the reorganization. The reorganization will not change the interest rate or the maturity of deposits at Naugatuck Valley Savings and Loan.

After the reorganization, each depositor of Naugatuck Valley Savings and Loan will have both a deposit account in Naugatuck Valley Savings and Loan and a pro rata ownership interest in the equity of Naugatuck Valley Mutual based upon the balance in the depositor’s account. This ownership interest is tied to the depositor’s account, has no tangible market value separate from the deposit account and may only be realized in the event of a liquidation of Naugatuck Valley Mutual. Any depositor who opens a deposit account obtains a pro rata ownership interest in the equity of Naugatuck Valley Mutual without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives the balance in the account but receives nothing for his or her ownership interest in the equity of Naugatuck Valley Mutual, which is lost to the extent that the balance in the account is reduced. Consequently, depositors of Naugatuck Valley Mutual have no way to realize the value of their ownership interest in Naugatuck Valley Mutual, except in the unlikely event that Naugatuck Valley Mutual is liquidated.

After the reorganization, all loans of Naugatuck Valley Savings and Loan will retain the same status that they had before the reorganization. The amount, interest rate, maturity and security for each loan will remain as they were contractually fixed before the reorganization.

Effect on Voting Rights of Members. After the reorganization, direction of Naugatuck Valley Savings and Loan will continue to be under the control of its Board of Directors. As the holder of all of the outstanding common stock of Naugatuck Valley Savings and Loan, we will have exclusive voting rights with respect to any matters concerning Naugatuck Valley Savings and Loan requiring stockholder approval, including the election of directors.

After the reorganization, Naugatuck Valley Financial stockholders will have exclusive voting rights with respect to any matters concerning Naugatuck Valley Financial that requires stockholder approval. By virtue of its ownership of a majority of the outstanding shares of common stock of Naugatuck Valley Financial, Naugatuck Valley Mutual will be able to control the outcome of most matters presented to the stockholders for resolution by vote.

As a federally chartered mutual holding company, Naugatuck Valley Mutual will have no authorized capital stock and, therefore, no stockholders. Holders of deposit accounts of Naugatuck Valley Savings and Loan will become members of Naugatuck Valley Mutual. Such persons will be entitled to vote on all questions requiring action by the members of Naugatuck Valley Mutual, including the election of directors of Naugatuck Valley Mutual. In addition, all persons who become depositors of Naugatuck Valley Savings and Loan following the reorganization will have membership rights with respect to Naugatuck Valley Mutual. Borrowers do not currently have membership rights in connection with any borrowings and will not receive any membership rights after the reorganization.

Effect on Liquidation Rights. In the unlikely event of a complete liquidation of Naugatuck Valley Savings and Loan before the completion of the reorganization, each depositor would receive a pro rata share of any assets of Naugatuck Valley Savings and Loan remaining after payment of expenses and satisfaction of claims of all creditors. Each depositor’s pro rata share of such liquidating distribution would be in the same proportion as the value of such depositor’s deposit account was to the total value of all deposit accounts in Naugatuck Valley Savings and Loan at the time of liquidation.

Upon a complete liquidation of Naugatuck Valley Savings and Loan after the reorganization, each depositor would have a claim as a creditor of the same general priority as the claims of all other general creditors of Naugatuck Valley Savings and Loan. However, except as described below, a depositor’s claim would be solely for the amount of the balance in such depositor’s deposit account plus accrued interest. Such depositor would not have an interest in the value or assets of Naugatuck Valley Savings and Loan above that amount. Instead, the holder of Naugatuck Valley Savings and Loan’s common stock (i.e., Naugatuck Valley Financial) would be entitled to any assets remaining upon a liquidation of Naugatuck Valley Savings and Loan.

Upon a complete liquidation of Naugatuck Valley Financial, our stockholders, including Naugatuck Valley Mutual, would be entitled to receive our remaining assets, following payment of all debts, liabilities and all claims of greater priority.

If liquidation of Naugatuck Valley Mutual occurs following completion of the reorganization, all depositors of Naugatuck Valley Savings and Loan at that time will be entitled, pro rata, to the value of their deposit accounts, to a distribution of any assets of Naugatuck Valley Mutual remaining after payment of all debts and claims of creditors.

There are no plans to liquidate Naugatuck Valley Savings and Loan, Naugatuck Valley Financial or Naugatuck Valley Mutual in the future.

Under the plan of reorganization, we have granted rights to subscribe for our common stock to the following persons in the following order of priority:


	•	Persons with deposits in Naugatuck Valley Savings and Loan with balances aggregating $50 or more (“qualifying deposits”) as of April 30, 2003 (“eligible account holders”). For this purpose, deposit accounts include all savings, time and demand accounts.

	•	Our tax-qualified benefit plans, including our employee stock ownership plan.

	•	Persons with qualifying deposits in Naugatuck Valley Savings and Loan as of [Supplemental ERD] (“supplemental eligible account holders”).

	•	Persons with deposits in Naugatuck Valley Savings and Loan as of [Voting RD] (“other members”).

The amount of common stock that any person may purchase will depend on the availability of the common stock after satisfaction of all subscriptions having prior rights in the subscription offering and to the maximum and minimum purchase limitations set forth in the plan of reorganization. See “ — Limitations on Purchases of Shares.” All persons sharing a qualifying joint account will be counted as a single depositor for purposes of determining the maximum amount that may be subscribed for by individuals and persons exercising subscription rights through qualifying accounts registered to the same address will be subject to the overall purchase limitation.

Category 1: Eligible Account Holders. Subject to the $200,000 overall purchase limitation as described below under “ — Limitations on Purchases of Shares,” each eligible account holder has the right to subscribe for up to the greater of:


	•	$150,000 of common stock (which equals 15,000 shares);

	•	one-tenth of 1% of the total offering of common stock to persons other than Naugatuck Valley Mutual; or

	•	15 times the product, rounded down to the next whole number, obtained by multiplying the total number of shares of common stock to be sold by a fraction of which the numerator is the amount of qualifying deposits of the eligible account holder and the denominator is the total amount of qualifying deposits of all eligible account holders.

If there are insufficient shares to satisfy all subscriptions by eligible account holders, shares first will be allocated so as to permit each subscribing eligible account holder, if possible, to purchase a number of shares sufficient to make the person’s total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. After that, unallocated shares will be allocated to each remaining subscribing eligible account holder whose subscription remains unfilled in the proportion that the amounts of his or her respective qualifying deposits bear to the total qualifying deposits of all remaining eligible account holders whose subscriptions remain unfilled. Subscription rights of eligible account holders who are also executive officers or directors of Naugatuck Valley Savings and Loan or their associates will be subordinated to the subscription rights of other eligible account holders to the extent attributable to increased deposits in Naugatuck Valley Savings and Loan in the one-year period preceding April 30, 2003.

To ensure a proper allocation of stock, each eligible account holder must list on his or her stock order form all deposit accounts in which such eligible account holder had an ownership interest at April 30, 2003. Failure to list an account, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation.

Category 2: Tax-Qualified Employee Benefit Plans. Our tax-qualified employee benefit plans have the right to purchase up to 10% of the shares of common stock sold in the offering and issued to our charitable foundation, which totals 4.5% of the common stock issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation. As a tax-qualified employee benefit plan, our employee stock ownership plan intends to purchase 3.60% of the shares of common stock issued in the reorganization, including shares issued to Naugatuck Valley Mutual and our charitable foundation. Subscriptions by the employee stock ownership plan will not be aggregated with shares of common stock purchased by any other participants in the offering, including subscriptions by our officers and directors, for the purpose of applying the purchase limitations in the plan of reorganization. If we increase the number of shares offered in the reorganization above the maximum of the offering range, the employee stock ownership plan will have a first priority right to purchase any shares exceeding that amount up to 10% of the common stock sold in the offering and issued to our charitable foundation. If the plan’s subscription is not filled in its entirety, the employee stock ownership plan may purchase shares in the open market or may purchase shares directly from us with the approval of the Office of Thrift Supervision.

Category 3: Supplemental Eligible Account Holders. Subject to the $200,000 overall purchase limitation as described below under “— Limitations on Purchases of Shares,” each supplemental eligible account holder has the right to subscribe for up to the greater of:


	•	$150,000 of common stock (which equals 15,000 shares);

	•	one-tenth of 1% of the total offering of common stock to persons other than Naugatuck Valley Mutual; or

	•	15 times the product, rounded down to the next whole number, obtained by multiplying the total number of shares of common stock to be sold by a fraction of which the numerator is the amount of qualifying deposits of the supplemental eligible account holder and the denominator is the total amount of qualifying deposits of all supplemental eligible account holders.

If eligible account holders and the employee stock ownership plan subscribe for all of the shares, no shares will be available for supplemental eligible account holders. If shares are available for supplemental eligible account holders but there are insufficient shares to satisfy all subscriptions by supplemental eligible account holders, shares first will be allocated so as to permit each subscribing supplemental eligible account holder, if possible, to purchase a number of shares sufficient to make the person’s total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. After that, unallocated shares will be allocated among each remaining subscribing supplemental eligible account holder whose subscription remains unfilled in the proportion that the amounts of his or her respective qualifying deposits bear to the total qualifying deposits of all remaining supplemental eligible account holders whose subscriptions remain unfilled.

To ensure a proper allocation of stock, each supplemental eligible account holder must list on his or her stock order form all deposit accounts in which such supplemental eligible account holder had an ownership interest at [Supplemental ERD]. Failure to list an account, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation.

Category 4: Other Members. Subject to the $200,000 overall purchase limitation, each other member has the right to purchase up to the greater of $150,000 of common stock (which equals 15,000 shares) or one-tenth of 1% of the total offering of common stock to persons other than Naugatuck Valley Mutual. If eligible account holders, the employee stock ownership plan and supplemental eligible account holders subscribe for all of the shares, no shares will be available for other members. If shares are available for other members but there are not sufficient shares to satisfy all subscriptions by other members, shares first will be allocated so as to permit each subscribing other member, if possible, to purchase a number of shares sufficient to make the person’s total allocation equal 100 shares or the number of shares actually subscribed for, whichever is less. After that, unallocated shares will be allocated among the remaining subscribing other members in the proportion that each other member’s subscription bears to the total subscriptions of all such subscribing other members whose subscriptions remain unfilled.

To ensure a proper allocation of stock, each other member must list on his or her stock order form all deposit accounts in which such other member had an ownership interest at April 30, 2003. Failure to list an account or loan, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock allocation.

Expiration Date for the Subscription Offering. The subscription offering, and all subscription rights under the plan of reorganization, is expected to terminate at 10:00 a.m., Eastern Time, on [Expiration Date]. We will not accept orders for common stock in the subscription offering received after that time. We will make reasonable attempts to provide a prospectus and related offering materials to holders of subscription rights; however, all subscription rights will expire on the expiration date, as extended, whether or not we have been able to locate each person entitled to subscription rights. We may extend the expiration date without notice to you until [Extension Date #1], unless the Office of Thrift Supervision approves a later date, which will not be beyond [Extension Date #2].

Office of Thrift Supervision regulations require that we complete the sale of common stock within 45 days after the close of the subscription offering. If the sale of the common stock is not completed within that period, all funds received will be returned promptly with interest at our passbook rate and all deposit account withdrawal authorizations will be canceled unless we receive approval of the Office of Thrift Supervision to extend the time for completing the offering. If regulatory approval of an extension of the time period has been granted, we will notify all subscribers of the extension and of the duration of any extension that has been granted, and subscribers will have the right to modify or rescind their purchase orders. If we do not receive an affirmative response from a subscriber to any resolicitation, the subscriber’s order will be rescinded and all funds received will be returned promptly with interest, or withdrawal authorizations will be canceled. No single extension can exceed 90 days, and all extensions in the aggregate may not last beyond [Extension Date #2].

Persons in Non-Qualified States. We will make reasonable efforts to comply with the securities laws of all states in the United States in which persons entitled to subscribe for stock under the plan of reorganization reside. However, we are not required to offer stock in the subscription offering to any person who resides in a foreign country or who resides in a state of the United States in which (1) only a small number of persons otherwise eligible to subscribe for shares of common stock reside; (2) the granting of subscription rights or the offer or sale of shares to such person would require that we or our officers or directors register as a broker, dealer, salesman or selling agent under the securities laws of the state, or register or otherwise qualify the subscription rights or common stock for sale or qualify as a foreign corporation or file a consent to service of process; or (3) we determine that compliance with that state’s securities laws would be impracticable for reasons of cost or otherwise.

Restrictions on Transfer of Subscription Rights and Shares. Subscription rights are nontransferable. You may not transfer, or enter into any agreement or understanding to transfer, the legal or beneficial

If you sell or otherwise transfer your rights to subscribe for common stock in the subscription offering or subscribe for common stock on behalf of another person, you may forfeit those rights and face possible further sanctions and penalties imposed by the Office of Thrift Supervision or another agency of the U.S. Government. We will pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights and will not honor orders known by us to involve the transfer of such rights.

To the extent that shares remain available for purchase after satisfaction of all subscriptions received in the subscription offering, we may offer shares in a community offering to the following persons in the following order of priority:


	•	Natural persons and trusts of natural persons who are residents of Fairfield and New Haven Counties, Connecticut; and

	•	Members of the general public to whom we deliver a prospectus.

We will consider persons residing in one of the specified counties if they occupy a dwelling in the county and establish an ongoing physical presence in the county that is not merely transitory in nature. We may utilize depositor or loan records or other evidence provided to us to make a determination as to whether a person is a resident. In all cases, the determination of residence status will be made by us in our sole discretion.

Purchasers in the community offering are eligible to purchase up to $150,000 of common stock (which equals 15,000 shares). If not enough shares are available to fill orders of natural persons and trusts of natural persons, the available shares will be allocated first to each such subscriber whose order we accept in an amount equal to the lesser of 100 shares or the number of shares subscribed for by each such subscriber, if possible. After that, unallocated shares will be allocated among subscribers whose orders remain unsatisfied in the same proportion that the unfilled order of each such subscriber bears to the total unfilled orders of all such subscribers. If oversubscription occurs among members of the general public, the allocation procedures described above will apply.

The community offering, if held, may commence concurrently with or subsequent to the subscription offering, is expected to terminate with the subscription offering and must terminate no later than 45 days after the close of the subscription offering unless extended by us, with approval of the Office of Thrift Supervision. If we receive regulatory approval for an extension of the offering beyond [Extension Date #2], all subscribers will be notified of the extension and of the duration of any extension that has been granted, and will have the right to confirm, increase, decrease or rescind their orders. If we do not receive an affirmative response from a subscriber to any resolicitation, the subscriber’s order will be rescinded and all funds received will be promptly returned with interest.

The opportunity to subscribe for shares of common stock in the community offering is subject to our right to reject orders, in whole or part, either at the time of receipt of an order or as soon as practicable following the expiration date of the offering. If your order is rejected in part, you will not have the right to cancel the remainder of your order.

The plan of reorganization provides that, if necessary, all shares of common stock not purchased in the subscription offering and community offering may be offered for sale to the general public in a syndicated community offering through a syndicate of registered broker-dealers to be formed and managed by Ryan Beck & Co. acting as our agent. Neither Ryan Beck & Co. nor any registered broker-dealer will have any obligation to take or purchase any shares of the common stock in the syndicated community offering; however, Ryan Beck & Co. has agreed to use its best efforts in the sale of shares in any syndicated community offering. We have not selected any particular broker-dealers to participate in a syndicated community offering. The syndicated community offering must terminate no later than 45 days after the expiration of the subscription offering, unless extended by us, with approval of the Office of Thrift Supervision. See “— Community Offering” above for a discussion of rights of subscribers in the event an extension is granted.

The opportunity to subscribe for shares of common stock in the syndicated community offering is subject to our right to reject orders, in whole or part, either at the time of receipt of an order or as soon as practicable following the expiration date of the offering. If your order is rejected in part, you will not have the right to cancel the remainder of your order.

Purchasers in the syndicated community offering are eligible to purchase up to $150,000 of common stock (which equals 15,000 shares).

The syndicated community offering will be conducted in accordance with certain Securities and Exchange Commission rules applicable to best efforts offerings. Generally under those rules, Ryan Beck & Co., a broker-dealer, will deposit funds it receives prior to closing from interested investors into a separate non-interest bearing bank account. If and when all the conditions for the closing are met, funds for common stock sold by Ryan Beck & Co. in the syndicated community offering will be promptly delivered to us. If the offering is consummated, but some or all of an interested investor’s funds are not accepted by us, those funds will be returned to the interested investor promptly, without interest. If the offering is not consummated, funds in the account will be promptly returned, without interest, to the potential investor. Normal customer ticketing will be used for order placement. In the syndicated community offering, subscription agreements will not be used.

If we are unable to find purchasers from the general public for all unsubscribed shares, we will make other purchase arrangements, if feasible. Other purchase arrangements must be approved by the Office of Thrift Supervision and may provide for purchases for investment purposes by directors, officers, their associates and other persons in excess of the limitations provided in the plan of reorganization and in excess of the proposed director purchases discussed earlier, although no purchases are currently intended. If other purchase arrangements cannot be made, the plan of reorganization will terminate.

We have retained Ryan Beck as our financial and marketing advisor to consult with and to advise Naugatuck Valley Financial, and to assist Naugatuck Valley Financial, on a best efforts basis, in the distribution of the shares of common stock in the offering. The services that Ryan Beck will provide include, but are not limited to:


	•	managing the Stock Information Center and training the employees of Naugatuck Valley Financial who will perform ministerial functions in the subscription offering and community offering;

	•	soliciting orders for common stock and assisting interested stock subscribers; and

	•	assisting in soliciting proxy votes of depositors.

For its services, Ryan Beck will receive an advisory and marketing fee of 1% (the aggregate amount of this fee shall not exceed $230,000) of the aggregate dollar amount of the common stock sold in the subscription and community offerings to persons other than the employee stock ownership plan and directors, officers and employees of Naugatuck Valley Savings and Loan or their immediate families. If

Ryan Beck sells common stock through a group of broker-dealers in a syndicated community offering, it will be paid a fee equal to 1.0% of the dollar amount of total shares sold in the syndicated community offering, which fee along with the fee payable to selected dealers (which may include Ryan Beck) shall not exceed 6.0% of aggregate syndicated community offering sales. Ryan Beck will also be reimbursed for its allocable expenses not to exceed $15,000 without our consent and its legal fees in an amount not to exceed $40,000. Naugatuck Valley Financial and Naugatuck Valley Savings and Loan have agreed to indemnify Ryan Beck against certain claims or liabilities, including liabilities under the Securities Act of 1933, as amended, and will contribute to payments Ryan Beck may be required to make in connection with any such claims or liabilities.

A Stock Information Center will be established at our office located at our main office at 333 Church Street, Naugatuck, Connecticut 06770. We will rely on Rule 3a4-1 of the Securities Exchange Act of 1934 and sales of common stock will be conducted within the requirements of this rule, so as to permit officers, directors and employees to participate in the sale of common stock in those states where the law permits. Our officers, directors and employees will not be compensated directly or indirectly by the payment of commissions or other remuneration in connection with his or her participation in the sale of common stock. Ryan Beck has not prepared a report or opinion constituting recommendations or advice to us in connection with the stock offering. In addition, Ryan Beck has expressed no opinion as to the prices at which the common stock to be offered in the stock offering may trade.

We will offer the common stock in the subscription offering and community offering principally by the distribution of this prospectus and through activities conducted at our Stock Information Center. At all times, registered representatives of Ryan Beck & Co. will manage the Stock Information Center. The Stock Information Center is open Monday through Friday, except for bank holidays, from 9:30 a.m. to 4:00 p.m., Eastern Time. The phone number is .

Our officers and employees may participate in the offering in clerical capacities, providing administrative support in effecting sales transactions or, when permitted by state securities laws, answering questions of a mechanical nature relating to the proper execution of the order form. Our officers may answer questions regarding our business when permitted by state securities laws. Other questions of our depositors and other prospective purchasers, including questions as to the advisability or nature of the investment, will be directed to employees of Ryan Beck & Co. Our officers and employees have been instructed not to solicit offers to purchase common stock or provide advice regarding the purchase of common stock. None of our officers, directors or employees will be compensated, directly or indirectly, for any activities in connection with the offer or sale of securities issued in the reorganization.

None of our personnel participating in the offering is registered or licensed as a broker or dealer or an agent of a broker or dealer. Our personnel will assist in the above-described sales activities under an exemption from registration as a broker or dealer provided by Rule 3a4-1 promulgated under the Securities Exchange Act of 1934. Rule 3a4-1 generally provides that an “associated person of an issuer” of securities will not be deemed a broker solely by reason of participation in the sale of securities of the issuer if the associated person meets certain conditions. These conditions include, but are not limited to, that the associated person participating in the sale of an issuer’s securities not be compensated in connection with the offering at the time of participation, that the person not be associated with a broker or dealer and that the person observe certain limitations on his or her participation in the sale of securities. For purposes of this exemption, “associated person of an issuer” is defined to include any person who is a director, officer or employee of the issuer or a company that controls, is controlled by or is under common control with the issuer.

Use of Order Forms. To purchase shares in the offering, you must submit a properly completed and executed order form to be received by us by 10:00 a.m., Eastern Time, on [Expiration Date]. Your

In order to ensure that your stock purchase eligibility and priority are properly identified, you must list all accounts on the order form, giving all names in each account, the account number and the approximate account balance as of the appropriate eligibility date. We will strive to identify your ownership in all accounts, but cannot guarantee we will identity all accounts in which you have an ownership interest.

We need not accept order forms that are received after the expiration of the subscription offering or community offering, as the case may be, or that are executed defectively or that are received without full payment or without appropriate withdrawal instructions. In addition, we are not obligated to accept orders submitted on photocopied or facsimilied stock order forms. We have the right to waive or permit the correction of incomplete or improperly executed order forms, but do not represent that we will do so. Under the plan of reorganization, our interpretation of the terms and conditions of the plan of reorganization and of the order form will be final. Once received, an executed order form may not be modified, amended or rescinded without our consent unless the reorganization has not been completed within 45 days after the end of the subscription offering or the offering range has been amended to below the minimum or above the maximum, as adjusted, of the offering range.

The reverse side of the order form contains a regulatorily mandated certification form. We will not accept order forms where the certification form is not executed. By executing and returning the certification form, you will be certifying that you received this prospectus and acknowledging that the common stock is not a deposit account and is not insured or guaranteed by the federal government. You also will be acknowledging that you received disclosure concerning the risks involved in this offering. The certification form could be used as support to show that you understand the nature of this investment.

To ensure that each purchaser receives a prospectus at least 48 hours before the end of the offering, as required by Rule 15c2-8 under the Securities Exchange Act of 1934, no prospectus will be mailed any later than five days before that date or hand delivered any later than two days before that date. Execution of the order form will confirm receipt or delivery under Rule 15c2-8. Order forms will be distributed only when preceded or accompanied by a prospectus.

Payment for Shares and Delivery of Order Forms. Payment for subscriptions may be made by personal check, bank check or money order, or by authorization of withdrawal from a Naugatuck Valley Savings and Loan deposit accounts without checkwriting privileges. Appropriate means by which withdrawals may be authorized are provided on the order form. No wire transfers, Naugatuck Valley Savings and Loan lines of credit checks or third party checks will be accepted. Payments made by cash or check must be available in the account and will be immediately cashed and placed in our escrow account. Interest will be paid on payments at our passbook rate from the date payment is received at the Stock Information Center until the completion or termination of the reorganization. If payment is made by authorization of withdrawal from deposit accounts, the funds authorized to be withdrawn from a deposit account will remain in the accounts and will continue to accrue interest at the contractual rates until completion or termination of the reorganization, but a hold will be placed on the funds, making them unavailable to the depositor during the offering period. When the reorganization is completed, the funds received in the offering will be used to purchase the shares of common stock ordered and account withdrawals will be made for the purchase of shares. The shares of common stock issued in the reorganization cannot and will not be insured by the Federal Deposit Insurance Corporation or any other government agency. If the reorganization is not consummated for any reason, all funds submitted will be promptly refunded with interest as described above.

If a subscriber authorizes us to withdraw the amount of the aggregate purchase price of the stock from his or her deposit account, we will do so as of the effective date of reorganization, though the account must contain the full amount necessary for payment at the time the subscription order is received.

You may submit your order form and payment by mail using the return envelope provided, by bringing your order form to our Stock Information Center, or by overnight delivery to the indicated address on the order form. Order forms may not be delivered to Naugatuck Valley Savings and Loan branches. Once tendered, an order form cannot be modified or revoked without our consent.

You may not designate on the order form that you wish funds to be withdrawn from a Naugatuck Valley Savings and Loan individual retirement account (IRA). By regulation, our IRAs do not permit investment in our common stock. A depositor interested in using his or her IRA funds to purchase common stock must do so through a self-directed IRA. Since we do not offer those accounts, we will allow a depositor to make a trustee-to-trustee transfer of Naugatuck Valley Savings and Loan IRA funds to a trustee offering a self-directed IRA program such as a brokerage firm of your choice or the Stock Information Center can assist you to locate a trustee. There will be no early withdrawal or Internal Revenue Service interest penalties for transfers. The new trustee would hold the common stock in a self-directed account in the same manner as we now hold the depositor’s IRA funds. An annual administrative fee may be payable to the new trustee. Depositors interested in using funds in an IRA with us to purchase common stock should contact the Stock Information Center promptly. Whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds. If you can, the necessary forms may be forwarded for execution and returned before the offering ends. Federal laws and regulations require that officers, directors and 10% shareholders who use self-directed IRA funds to purchase shares of common stock in the subscription offering, make purchases for the exclusive benefit of IRAs.

The employee stock ownership plan will not be required to pay for the shares subscribed for at the time it subscribes, but rather may pay for shares of common stock subscribed for upon the completion of the reorganization; provided that there is in force from the time of its subscription until the completion of the reorganization, a loan commitment from an unrelated financial institution or from us to lend to the employee stock ownership plan, at that time, the aggregate purchase price of the shares for which it subscribed.

Federal regulations require that the aggregate purchase price of the securities sold in connection with the reorganization be based upon our estimated pro forma value on a fully converted basis (i.e., taking into account the expected receipt of proceeds from the sale of securities in the offering), as determined by an independent appraisal. We have retained Keller & Company, Inc., which is experienced in the evaluation and appraisal of financial institutions, to prepare the independent appraisal. Keller & Company will receive fees totaling $20,000 for its appraisal services, plus reasonable out-of-pocket expenses incurred in connection with the appraisal. We have agreed to indemnify Keller & Company under certain circumstances against liabilities and expenses, including legal fees, arising out of, related to, or based upon the reorganization.

Keller & Company prepared the appraisal taking into account the pro forma impact of the offering. For its analysis, Keller & Company undertook substantial investigations to learn about our business and operations. We supplied financial information, including annual financial statements, information on the composition of assets and liabilities, and other financial schedules. In addition to this information, Keller & Company reviewed our reorganization and stock issuance applications as filed with the Office of Thrift Supervision and our registration statement as filed with the Securities and Exchange Commission. Furthermore, Keller & Company visited our facilities and had discussions with our management. Keller & Company did not perform a detailed individual analysis of the separate components of our assets and liabilities. We did not impose any limitations on Keller & Company in connection with its appraisal.

In connection with its appraisal, Keller & Company reviewed the following factors, among others:


	•	the economic make-up of our primary market area;

	•	our financial performance and condition in relation to publicly traded companies that Keller & Company deemed comparable to us;

	•	the specific terms of the offering of our common stock;

	•	the pro forma impact of the additional capital raised in the offering;

	•	our proposed dividend policy;

	•	conditions of securities markets in general; and

	•	the market for thrift institution common stock in particular.

Consistent with Office of Thrift Supervision appraisal guidelines, Keller & Company’s analysis utilized three selected valuation procedures, the price/book method, the price/core earnings method, and price/assets method, all of which are described in its report. Keller & Company’s appraisal report is filed as an exhibit to the registration statement that we have filed with the Securities and Exchange Commission. See “Where You Can Find More Information.” Keller & Company placed the greatest emphasis on the price/core earnings and price/book methods in estimating pro forma market value. Keller & Company compared the pro forma price/book and price/core earnings ratios for Naugatuck Valley Financial to the same ratios for a peer group of comparable companies. The peer group consisted of ten publicly traded companies based in the New England, Mid-Atlantic and Midwestern United States. The peer group included companies with:


	•	average assets of $462.9 million;

	•	average nonperforming assets of 0.38% of total assets;

	•	average loans of 72.56% of total assets;

	•	average equity of 11.52% of total assets; and

	•	average income of 0.83% of average assets.

On the basis of the analysis in its report, Keller & Company has advised us that, in its opinion, as of May 21, 2004, our estimated pro forma market value on a fully converted basis was within the valuation range of $42,500,000 and $57,500,000 with a midpoint of $50,000,000 and that, based on our intention to offer for sale 43% of our shares outstanding, the estimated pro forma market value of our shares of common stock, was within the valuation range of $18,275,000 to $24,725,000 with a midpoint of $21,500,000. As a result, we established the offering range of $18,275,000 to $24,725,000, with a midpoint of $21,500,000. Our Board of Directors reviewed Keller & Company’s appraisal report, including the methodology and the assumptions used by Keller & Company, and determined that the offering range was reasonable and adequate. Based on the $10.00 per share offering price, the estimated number of shares issued in the reorganization will be between 4,250,000 and 5,750,000, with a midpoint of 5,000,000 and the estimated number of shares sold in the offering will be between 1,827,500 and 2,472,500 with a midpoint of 2,150,000. We determined the purchase price of $10.00 per share taking into account, among other factors, the requirement under Office of Thrift Supervision regulations that the common stock be offered in a manner that will achieve the widest distribution of the stock and desired liquidity in the common stock after the reorganization.

Since the outcome of the offering relates in large measure to market conditions at the time of sale, it is not possible for us to determine the exact number of shares that we will issued at this time. The offering range may be amended, with the approval of the Office of Thrift Supervision, if necessitated by developments following the date of the appraisal in, among other things, market conditions, our financial condition or operating results, regulatory guidelines or national or local economic conditions.

If, upon completion of the subscription offering, at least the minimum number of shares are subscribed for, Keller & Company, after taking into account factors similar to those involved in its prior appraisal, will determine its estimate of our pro forma market value as of the close of the subscription offering.

No shares will be sold unless Keller & Company confirms that, to the best of its knowledge and judgment, nothing of a material nature has occurred that would cause it to conclude that the actual total purchase price of the shares on and the offering range is decreased below $18,275,000 or above $28,433,750, an aggregate basis was materially incompatible with its appraisal. If, however, the facts do not justify that statement, the offering may be canceled or it may be extended with a new offering range or new subscription, community and syndicated community offerings may be held. Under those circumstances, subscribers would have the right to confirm, modify or cancel their subscriptions within a specified period of time or else their subscription would be cancelled. If a subscriber does not respond during the resolicitation period, his or her subscriptions will be cancelled and subscription funds will be returned promptly with interest, and holds on funds authorized for withdrawal from deposit accounts will be released or reduced.

In formulating its appraisal, Keller & Company relied upon the truthfulness, accuracy and completeness of all documents we furnished to it. Keller & Company also considered financial and other information from regulatory agencies, other financial institutions, and other public sources, as appropriate. While Keller & Company believes this information to be reliable, Keller & Company does not guarantee the accuracy or completeness of the information and did not independently verify the financial statements and other data provided by us or independently value our assets or liabilities. The appraisal is not intended to be, and must not be interpreted as, a recommendation of any kind as to the advisability of voting to approve the plan of reorganization or of purchasing shares of common stock. Moreover, because the appraisal must be based on many factors that change periodically, there is no assurance that purchasers of shares in the offering will be able to sell shares after the reorganization at prices at or above the $10.00 offering price per share.

Copies of the appraisal report of Keller & Company, including any amendments to the report, and the detailed memorandum of the appraiser setting forth the method and assumptions for such appraisal are available for inspection at our main office and the other locations specified under “Where You Can Find More Information.”

In addition to the purchase limitations described above under “ — Subscription Offering and Subscription Rights,” “ — Community Offering” and “ —Syndicated Community Offering,” the plan of reorganization provides for the following purchase limitations:


	•	The minimum purchase is 25 shares.

	•	The aggregate amount of our outstanding common stock owned or controlled by persons other than Naugatuck Valley Mutual at the close of the offering shall be less than 50% of our total outstanding common stock.

	•	Except for our tax-qualified employee benefit plans which may purchase up to 10% of the common stock sold in the offering and issued to our charitable foundation, no person, either alone or together with associates of or persons acting in concert with such person, may purchase in the aggregate more than $200,000 of common stock (which equals 20,000 shares). This overall purchase limitation is subject to increase as described below.

	•	The aggregate amount of common stock acquired in the offering, plus in all prior issuances, by any non-tax-qualified employee plan or any management person and his or her associates, exclusive of any shares of common stock acquired by such plan or management person and his or her associates in the secondary market, shall not exceed 4.9% of the outstanding shares of common stock at the conclusion of the offering.


	•	The aggregate amount of common stock or preferred stock acquired in the offering, plus in all prior issuances, by any non-tax-qualified employee plan or any management person and his or her associates, exclusive of any common stock acquired by such plan or management person and his or her associates in the secondary market, shall not exceed 4.9% of our stockholders’ equity at the conclusion of the offering.

	•	The aggregate amount of common stock acquired in the offering, plus in all prior issuances, by any one or more tax-qualified employee plans, exclusive of any shares of common stock acquired by such plans in the secondary market, shall not exceed 4.9% of the outstanding shares of common stock at the conclusion of the offering.

	•	The aggregate amount of common stock or preferred stock acquired in the offering, plus in all prior issuances, by one or more tax-qualified employee plans, exclusive of any shares of common stock acquired by such plans in the secondary market, shall not exceed 4.9% of our stockholders’ equity at the conclusion of the offering.

	•	The aggregate amount of common stock acquired in the offering, plus in all prior issuances, by all of our stock benefit plans, other than employee stock ownership plans, shall not exceed 25% of the outstanding common stock held by persons other than Naugatuck Valley Mutual.

	•	The aggregate amount of common stock acquired in the offering, plus in all prior issuances, by all non-tax-qualified employee plans or management persons and their associates, exclusive of any common stock acquired by such plans or management persons and their associates in the secondary market, shall not exceed 31% of the outstanding shares of common stock held by persons other than Naugatuck Valley Mutual at the conclusion of the offering.

	•	The aggregate amount of common stock acquired in the offering, plus in all prior issuances, by all non-tax-qualified employee plans or management persons and their associates, exclusive of any common stock acquired by such plans or management persons and their associates in the secondary market, shall not exceed 31% of our stockholders’ equity held by persons other than Naugatuck Valley Mutual at the conclusion of the offering.

We may, in our sole discretion, increase the individual or aggregate purchase limitation to up to 5% of the shares of common stock sold in the offering. We do not intend to increase the maximum purchase limitation unless market conditions warrant an increase in the maximum purchase limitation and the sale of a number of shares in excess of the minimum of the offering range. If we decide to increase the purchase limitations, persons who subscribed for the maximum number of shares of common stock will be given the opportunity to increase their subscriptions accordingly, subject to the rights and preferences of any person who has priority subscription rights. We, in our discretion, also may give other large subscribers the right to increase their subscriptions.

The plan of reorganization defines “acting in concert” to mean knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement or understanding; or a combination or pooling of voting or other interests in the securities of an issuer for a common purpose under any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. In general, a person who acts in concert with another party will also be deemed to be acting in concert with any person who is also acting in concert with that other party. We may presume that certain persons are acting in concert based upon, among other things, joint account relationships and the fact that persons may have filed joint Schedules 13D or 13G with the Securities and Exchange Commission with respect to other companies. For purposes of the plan of reorganization, our directors are not deemed to be acting in concert solely by reason of their Board membership.

The plan of reorganization defines “associate,” with respect to a particular person, to mean:


	•	any corporation or organization other than Naugatuck Valley Mutual, Naugatuck Valley Financial or Naugatuck Valley Savings and Loan or a majority-owned subsidiary of Naugatuck Valley


		Mutual, Naugatuck Valley Financial or Naugatuck Valley Savings and Loan of which a person is an officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities;

	•	any trust or other estate in which a person has a substantial beneficial interest or as to which a person serves as trustee or in a similar fiduciary capacity; and

	•	any relative or spouse of a person, or any relative of a spouse, who either has the same home as a person or who is a director or officer of Naugatuck Valley Mutual, Naugatuck Valley Financial or Naugatuck Valley Savings and Loan or any of their subsidiaries.

For example, a corporation of which a person serves as an officer would be an associate of that person and, therefore, all shares purchased by the corporation would be included with the number of shares that the person could purchase individually under the purchase limitations described above. We have the right in our sole discretion to reject any order submitted by a person whose representations we believe to be false or who we otherwise believe, either alone or acting in concert with others, is violating or circumventing, or intends to violate or circumvent, the terms and conditions of the plan of reorganization. Directors and officers are not treated as associates of each other solely by virtue of holding such positions. We have the sole discretion to determine whether prospective purchasers are “associates” or “acting in concert.”

Certificates representing the common stock sold in the offering and checks representing only refund and/or interest paid on subscriptions made by check or money order will be mailed to investors at the certificate registration address noted on the stock order form as soon as practicable following completion of the reorganization. We will hold any certificates returned as undeliverable until claimed by the persons legally entitled to the certificates or otherwise disposed of in accordance with applicable law. Until certificates for common stock are available and delivered to subscribers, subscribers may not be able to sell their shares, even though trading of the common stock will have commenced.

Under Office of Thrift Supervision regulations, we may not for a period of one year from the date of the completion of the reorganization repurchase any of our common stock from any person, except (1) in an offer made to all shareholders to repurchase the common stock on a pro rata basis, approved by the Office of Thrift Supervision, (2) the repurchase of qualifying shares of a director, or (3) repurchases to fund restricted stock plans or tax-qualified employee stock benefit plans. Where extraordinary circumstances exist, the Office of Thrift Supervision may approve the open market repurchase of up to 5% of our common stock during the first year following the reorganization. To receive such approval, we must establish compelling and valid business purposes for the repurchase to the satisfaction of the Office of Thrift Supervision. Furthermore, repurchases of any common stock are prohibited if they would cause Naugatuck Valley Savings and Loan’s regulatory capital to be reduced below the amount required for reorganization the regulatory capital requirements imposed by the Office of Thrift Supervision.

Restrictions on Transfer of Shares After the Reorganization Applicable to Officers and Directors

Common stock purchased in the offering will be freely transferable, except for shares purchased by our directors and executive officers.

Shares of common stock purchased by our directors and executive officers may not be sold for a period of one year following the reorganization, except upon the death of the shareholder or unless approved by the Office of Thrift Supervision. Shares purchased by these persons in the open market after the reorganization will be free of this restriction. Shares of common stock issued to directors and executive officers will bear a legend giving appropriate notice of the restriction and, in addition, we will give appropriate instructions to our transfer agent with respect to the restriction on transfers. Any shares issued

Persons affiliated with us, including our directors and executive officers, received subscription rights based only on their deposits with Naugatuck Valley Savings and Loan as account holders. While this aspect of the reorganization makes it difficult, if not impossible, for insiders to purchase stock for the explicit purpose of meeting the minimum of the offering, any purchases made by persons affiliated with us for the explicit purpose of meeting the minimum of the offering must be made for investment purposes only, and not with a view towards redistribution. Furthermore, as set forth above, Office of Thrift Supervision regulations restrict sales of common stock purchased in the offering by directors and executive officers for a period of one year following the reorganization.

Purchases of outstanding shares of our common stock by directors, officers, or any person who becomes an executive officer or director after adoption of the plan of reorganization, and their associates, during the three-year period following the reorganization may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Office of Thrift Supervision. This restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock or to the purchase of stock under stock benefit plans.

We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the registration of the common stock to be sold in the offering and issued to our charitable foundation. This registration does not cover the resale of the shares. Shares of common stock purchased by persons who are not affiliates of us may be resold without registration. Shares purchased by an affiliate of us will have resale restrictions under Rule 144 of the Securities Act. If we meet the current public information requirements of Rule 144, each affiliate of us who complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of certain other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares or the average weekly volume of trading in the shares during the preceding four calendar weeks. We may make future provision to permit affiliates to have their shares registered for sale under the Securities Act of 1933 under certain circumstances.

Although the reorganization may be effected in any manner approved by the Office of Thrift Supervision that is consistent with the purposes of the plan of reorganization and applicable law, regulations and policies, it is intended that the reorganization will be effected through a merger. Completion of the reorganization is conditioned upon prior receipt of either a ruling or an opinion of counsel with respect to federal tax laws, and either a ruling or an opinion with respect to Connecticut tax laws, that no gain or loss will be recognized by Naugatuck Valley Savings and Loan, Naugatuck Valley Financial or Naugatuck Valley Mutual as a result of the reorganization or by account holders receiving subscription rights, except to the extent, if any, that subscription rights are deemed to have fair market value on the date such rights are issued. We believe that the tax opinions summarized below address all material federal income tax consequences that are generally applicable to Naugatuck Valley Savings and Loan, Naugatuck Valley Financial and Naugatuck Valley Mutual and persons receiving subscription rights.

Muldoon Murphy Faucette & Aguggia LLP has issued an opinion to Naugatuck Valley Savings and Loan that, for federal income tax purposes:


	•	the reorganization will constitute a reorganization under Internal Revenue Code section 368(a)(1)(F), and Naugatuck Valley Savings and Loan (in either its mutual form (the “Mutual Bank”) or its stock form (the “Stock Bank”) will recognize no gain or loss as a result of the reorganization;

	•	the basis of each asset of the Mutual Bank received by the Stock Bank in the reorganization will be the same as the Mutual Bank’s basis for such asset immediately before the reorganization;


	•	the holding period of each asset of the Mutual Bank received by the Stock Bank in the reorganization will include the period during which such asset was held by the Mutual Bank before the reorganization;

	•	for purposes of Internal Revenue Code section 381(b), the Stock Bank will be treated as if there had been no reorganization and, accordingly, the taxable year of the Mutual Bank will not end on the effective date of the reorganization and the tax attributes of the Mutual Bank (subject to application of Internal Revenue Code sections 381, 382, and 384) will be taken into account by the Stock Bank as if the reorganization had not occurred;

	•	the Mutual Bank’s members will recognize no gain or loss upon their constructive receipt of shares of the Stock Bank common stock solely in exchange for their mutual ownership interest in the Mutual Bank;

	•	no gain or loss will be recognized by members of the Mutual Bank upon the issuance to them of deposits in the Stock Bank in the same dollar amount as their deposits in the Mutual Bank;

	•	with respect to the members of the Mutual Bank’s exchange of the stock of the Stock Bank constructively received for the mutual ownership interests in Naugatuck Valley Mutual, the exchange will qualify as an exchange of property for stock under Internal Revenue Code section 351, the initial stockholders of the Stock Bank will recognize no gain or loss upon the constructive transfer to Naugatuck Valley Mutual of the shares of the Stock Bank they constructively received and Naugatuck Valley Mutual will recognize no gain or loss upon its receipt of the common stock of the Stock Bank in exchange for mutual ownership interests in the Mutual Bank;

	•	with respect to Naugatuck Valley Mutual’s transfer of 100% of the common stock of the Stock Bank to Naugatuck Valley Financial, Naugatuck Valley Financial will recognize no gain or loss upon its transfer of 100% of the common stock of the Stock Bank from Naugatuck Valley Mutual and Naugatuck Valley Mutual will recognize no gain or loss upon its transfer of 100% of the common stock of the Stock Bank from Naugatuck Valley Mutual to Naugatuck Valley Financial;

	•	it is more likely than not that the fair market value of the non-transferable subscription rights to purchase shares of common stock of Naugatuck Valley Financial to be issued to eligible account holders, supplemental eligible account holders and other members is zero and, accordingly, that no income will be realized by eligible account holders, supplemental eligible account holders and other members upon the issuance to them of the subscription rights or upon the exercise of the subscription rights;

	•	it is more likely than not that the tax basis to the holders of shares of common stock purchased in the reorganization pursuant to the exercise of the subscription rights will be the amount paid therefor, and that the holding period for such shares of common stock will begin on the date of completion of the reorganization; and

	•	the holding period for shares of common stock purchased in the community offering or syndicated community offering will begin on the day after the date of the purchase.

The opinions set forth in the 9th and 10th bullet points above are based on the position that the subscription rights do not have any market value when they are distributed or exercised. Whether subscription rights have a market value for federal income tax purposes is a question of fact, depending upon all relevant facts and circumstances. According to our counsel, the Internal Revenue Service will not issue rulings on whether subscription rights have a market value. Counsel has also advised us that they are unaware of any instance in which the Internal Revenue Service has taken the position that nontransferable subscription rights issued by a converting financial institution have a market value. Counsel also noted that the subscription rights will be granted at no cost to the recipients, will be nontransferable and of short duration, and will afford the recipients the right only to purchase our common stock at a price equal to its

Unlike a private letter ruling issued by the Internal Revenue Service, an opinion of counsel is not binding on the Internal Revenue Service and the Internal Revenue Service could disagree with the conclusions reached in the opinion. If there is a disagreement, no assurance can be given that the conclusions reached in an opinion of counsel would be sustained by a court if contested by the Internal Revenue Service.

Naugatuck Valley Savings and Loan has also received an opinion from Snyder & Haller, P.C., Hartford, Connecticut, that, assuming the reorganization does not result in any federal income tax liability to Naugatuck Valley Savings and Loan, its account holders, or Naugatuck Valley Financial, implementation of the plan of reorganization will not result in any Connecticut income tax liability to those entities or persons.

The opinions of Muldoon Murphy Faucette & Aguggia LLP and Snyder & Haller, P.C., are filed as exhibits to the registration statement that we have filed with the Securities and Exchange Commission. See “Where You Can Find More Information.”

To the extent permitted by law, all interpretations by us of the plan of reorganization will be final; however, such interpretations have no binding effect on the Office of Thrift Supervision. The plan of reorganization provides that, if deemed necessary or desirable, we may substantively amend the plan of reorganization as a result of comments from regulatory authorities or otherwise, without the further approval of our members.

Completion of the reorganization requires the sale of all shares of the common stock within 24 months following approval of the plan of reorganization by our members. If this condition is not satisfied, the plan of reorganization will be terminated and we will continue our business in the mutual form of organization. We may terminate the plan of reorganization at any time.

General. In furtherance of our commitment to our local community, the plan of reorganization provides that we will establish the Naugatuck Valley Savings and Loan Foundation as a non-stock Delaware corporation in connection with the reorganization. The foundation will be funded with our common stock, as described below. By further enhancing our visibility and reputation in our local community, we believe that the foundation will enhance the long-term value of our community banking franchise. The reorganization presents us with a unique opportunity to provide a substantial and continuing benefit to our community and to receive the associated tax benefits, without any significant cash outlay by us.

Purpose of the Charitable Foundation. Although we intend to continue to emphasize community lending and community activities following the stock offering, such activities are not our sole corporate purpose. The Naugatuck Valley Savings and Loan Foundation will be dedicated completely to community activities and the promotion of charitable causes, and may be able to support such activities in manners that are not presently available to us. We believe that the Naugatuck Valley Savings and Loan Foundation will enable us to assist the communities within our market area in areas beyond community development and lending and will enhance our current activities under the Community Reinvestment Act.

We further believe that the funding of the Naugatuck Valley Savings and Loan Foundation with our common stock will allow our community to share in our potential growth and success long after the stock offering. The Naugatuck Valley Savings and Loan Foundation will accomplish that goal by providing for continued ties between it and us, thereby forming a partnership within the communities in which we operate.

We do not expect the contribution to the Naugatuck Valley Savings and Loan Foundation to take the place of our traditional community lending and charitable activities. For the three months ended March 31, 2004 and the year ended December 31, 2003, we contributed $23,000 and $50,000, respectively, to community organizations. We expect to continue making charitable contributions within our community. In connection with the closing of the reorganization, we intend to contribute to the Naugatuck Valley Savings and Loan Foundation 100,000 shares of our common stock, at the midpoint of the offering, valued at $1.0 million based on the offering price of $10.00 per share.

Structure of the Charitable Foundation. The Naugatuck Valley Savings and Loan Foundation will be incorporated under Delaware law as a non-stock corporation. The Naugatuck Valley Savings and Loan Foundation’s Certificate of Incorporation will provide that the Naugatuck Valley Savings and Loan Foundation is organized exclusively for charitable purposes as set forth in Section 501(c)(3) of the Internal Revenue Code. The Certificate of Incorporation will further provide that no part of the net earnings of the foundation will inure to the benefit of, or be distributable to, its directors, officers or members.

We have selected three of our current directors, Messrs. Lengyel, Mengacci and Roman, to serve on the initial Board of Directors of the foundation. As required by OTS regulations, we also will select one additional person to serve on the initial Board of Directors who will not be one of our officers or directors and who will have experience with local charitable organizations and grant making. While there are no plans to change the size of the initial Board of Directors during the year following the completion of the reorganization, following the first anniversary of the reorganization, the foundation may alter the size and composition of its Board of Directors. For five years after the reorganization, one seat on the foundation’s Board of Directors will be reserved for a person from our local community who has experience with local community charitable organizations and grant making and who is not one of our officers, directors or employees, and one seat on the foundation’s Board of Directors will be reserved for one of our directors.

The Board of Directors of the Naugatuck Valley Savings and Loan Foundation will be responsible for establishing its grant and donation policies, consistent with the purposes for which it was established. As directors of a nonprofit corporation, directors of the Naugatuck Valley Savings and Loan Foundation will

The Naugatuck Valley Savings and Loan Foundation’s place of business will be located at our administrative offices. The Board of Directors of the Naugatuck Valley Savings and Loan Foundation will appoint such officers and employees as may be necessary to manage its operations. To the extent applicable, we will comply with the affiliates restrictions set forth in Sections 23A and 23B of the Federal Reserve Act and the OTS regulations governing transactions between us and the foundation.

The Naugatuck Valley Savings and Loan Foundation will receive working capital from: (1) any dividends that may be paid on our common stock in the future; (2) within the limits of applicable federal and state laws, loans collateralized by the common stock; or (3) the proceeds of the sale of any of the common stock in the open market from time to time. As a private foundation under Section 501(c)(3) of the Internal Revenue Code, the Naugatuck Valley Savings and Loan Foundation will be required to distribute annually in grants or donations a minimum of 5% of the average fair market value of its net investment assets. One of the conditions imposed on the gift of common stock by us is that the amount of common stock that may be sold by the Naugatuck Valley Savings and Loan Foundation in any one year shall not exceed 5% of the average market value of the assets held by the Naugatuck Valley Savings and Loan Foundation, except where the Board of Directors of the foundation determines that the failure to sell an amount of common stock greater than such amount would result in a long-term reduction of the value of its assets and/or would otherwise jeopardize its capacity to carry out its charitable purposes.

Tax Considerations. Our independent tax advisor has advised us that an organization created for the above purposes should qualify as a Section 501(c)(3) exempt organization under the Internal Revenue Code and should be classified as a private foundation. The Naugatuck Valley Savings and Loan Foundation will submit a timely request to the Internal Revenue Service to be recognized as an exempt organization. As long as the Naugatuck Valley Savings and Loan Foundation files its application for tax-exempt status within 15 months from the date of its organization, and provided the Internal Revenue Service approves the application, its effective date as a Section 501(c)(3) organization will be the date of its organization. Our independent tax advisor, however, has not rendered any advice on whether the Naugatuck Valley Savings and Loan Foundation’s tax exempt status will be affected by the regulatory requirement that all shares of our common stock held by the Naugatuck Valley Savings and Loan Foundation must be voted in the same ratio as all other outstanding shares of common stock on all proposals considered by our shareholders.

We are authorized under federal law to make charitable contributions. We believe that the stock offering presents a unique opportunity to establish and fund a charitable foundation given the substantial amount of additional capital being raised. In making such a determination, we considered the dilutive impact of the contribution of common stock to the Naugatuck Valley Savings and Loan Foundation on the amount of common stock to be sold in the offering. See “Capitalization,” “Regulatory Capital Compliance,” and “Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation.” The amount of the contribution will not adversely impact our financial condition. We therefore believe that the amount of the charitable contribution is reasonable given our pro forma capital position and does not raise safety and soundness concerns.

We have received an opinion from our independent tax advisor that our contribution of our stock to the Naugatuck Valley Savings and Loan Foundation should not constitute an act of self-dealing and that we should be entitled to a deduction in the amount of the fair market value of the stock at the time of the contribution less the nominal amount that the Naugatuck Valley Savings and Loan Foundation is required to pay us for such stock. We are permitted to deduct only an amount equal to 10% of our annual taxable

income in any one year. We are permitted under the Internal Revenue Code to carry the excess contribution over the five-year period following the contribution to the Naugatuck Valley Savings and Loan Foundation. We estimate that substantially all of the contribution should be deductible over the six-year period. However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to the foundation. Furthermore, even if the contribution is deductible, we may not have sufficient earnings to be able to use the deduction in full. We do not expect to make any further contributions to the Naugatuck Valley Savings and Loan Foundation within the first five years following the initial contribution, unless such contributions would be deductible under the Internal Revenue Code. Any such decisions would be based on an assessment of, among other factors, our financial condition at that time, the interests of our shareholders and depositors, and the financial condition and operations of the foundation.

Although we have received an opinion from our independent tax advisor that we should be entitled to a deduction for the charitable contribution, there can be no assurances that the Internal Revenue Service will recognize the Naugatuck Valley Savings and Loan Foundation as a Section 501(c)(3) exempt organization or that the deduction will be permitted. In such event, our contribution to the Naugatuck Valley Savings and Loan Foundation would be expensed without tax benefit, resulting in a reduction in earnings in the year in which the Internal Revenue Service makes such a determination.

As a private foundation, earnings and gains, if any, from the sale of common stock or other assets are exempt from federal and state income taxation. However, investment income, such as interest, dividends and capital gains, is generally taxed at a rate of 2.0%. Within four and one-half months after the close of its fiscal year, the Naugatuck Valley Savings and Loan Foundation will be required to make its annual return available for public inspection. The annual return for a private foundation includes, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the foundation’s managers and a concise statement of the purpose of each grant.

Regulatory Conditions Imposed on the Charitable Foundation. Office of Thrift Supervision regulations will impose the following conditions on the establishment of the Naugatuck Valley Savings and Loan Foundation:


	•	the Office of Thrift Supervision can examine the foundation;

	•	the foundation must comply with all supervisory directives imposed by the Office of Thrift Supervision;

	•	the foundation must provide annually to the Office of Thrift Supervision a copy of the annual report that the foundation submits to the IRS;

	•	the foundation must operate according to written policies adopted by its Board of Directors, including a conflict of interest policy;

	•	the foundation may not engage in self-dealing and must comply with all laws necessary to maintain its tax-exempt status under the Internal Revenue Code; and

	•	the foundation must vote its shares in the same ratio as all of the other shares voted on each proposal considered by our shareholders.

In addition, within six months of completing the reorganization, the Naugatuck Valley Savings and Loan Foundation must submit to the Office of Thrift Supervision a three-year operating plan.

Additionally, the establishment and funding of the Naugatuck Valley Savings and Loan Foundation must be separately approved by at least a majority of the total number of votes eligible to be cast by depositors of Naugatuck Valley Savings and Loan at the special meeting of members.

Consummation of the reorganization and related offering of common stock is not conditioned upon depositors’ approval of the charitable foundation. Failure to approve the charitable foundation may, however, materially increase our pro forma market value. See “Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation.”

Naugatuck Valley Savings and Loan is subject to extensive regulation, examination and supervision by the Office of Thrift Supervision, as its primary federal regulator, and the Federal Deposit Insurance Corporation, as its deposits insurer. Naugatuck Valley Savings and Loan is a member of the Federal Home Loan Bank System and its deposit accounts are insured up to applicable limits by the Savings Association Insurance Fund managed by the Federal Deposit Insurance Corporation. Naugatuck Valley Savings and Loan must file reports with the Office of Thrift Supervision and the Federal Deposit Insurance Corporation concerning its activities and financial condition in addition to obtaining regulatory approvals before entering into certain transactions such as mergers with, or acquisitions of, other financial institutions. There are periodic examinations by the Office of Thrift Supervision and, under certain circumstances, the Federal Deposit Insurance Corporation to evaluate Naugatuck Valley Savings and Loan’s safety and soundness and compliance with various regulatory requirements. This regulatory structure is intended primarily for the protection of the insurance fund and depositors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such policies, whether by the Office of Thrift Supervision, the Federal Deposit Insurance Corporation or Congress, could have a material adverse impact on our operations. Naugatuck Valley Financial and Naugatuck Valley Mutual, as savings and loan holding companies, will be required to file certain reports with, will be subject to examination by, and otherwise will have to comply with the rules and regulations of the Office of Thrift Supervision. Naugatuck Valley Financial will also be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.

Certain of the regulatory requirements that are or will be applicable to Naugatuck Valley Savings and Loan, Naugatuck Valley Financial and Naugatuck Valley Mutual are described below. This description of statutes and regulations is not intended to be a complete explanation of such statutes and regulations and their effects on Naugatuck Valley Savings and Loan, Naugatuck Valley Financial and Naugatuck Valley Mutual and is qualified in its entirety by reference to the actual statutes and regulations.

Business Activities. Federal law and regulations, primarily the Home Owners’ Loan Act and the regulations of the Office of Thrift Supervision, govern the activities of federal savings banks, such as Naugatuck Valley Savings and Loan. These laws and regulations delineate the nature and extent of the activities in which federal savings banks may engage. In particular, certain lending authority for federal savings banks, e.g., commercial, non-residential real property loans and consumer loans, is limited to a specified percentage of the institution’s capital or assets.

Branching. Federal savings banks are authorized to establish branch offices in any state or states of the United States and its territories, subject to the approval of the Office of Thrift Supervision.

Capital Requirements. The Office of Thrift Supervision’s capital regulations require federal savings institutions to meet three minimum capital standards: a 1.5% tangible capital to total assets ratio, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS examination rating system) and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage ratio (3% for institutions receiving the highest rating on the CAMELS system) and, together with the risk-based capital standard itself, a 4% Tier 1 risk-based capital standard. The Office of Thrift Supervision regulations also require that, in meeting the tangible, leverage and risk-based capital standards, institutions must generally deduct investments in and loans to subsidiaries engaged in activities as principal that are not permissible for a national bank.

The risk-based capital standard requires federal savings institutions to maintain Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, recourse obligations, residual interests and direct credit substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision capital regulation based on the risks believed inherent in the type of asset. Core (Tier 1) capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital.

The Office of Thrift Supervision also has authority to establish individual minimum capital requirements in appropriate cases upon a determination that an institution’s capital level is or may become inadequate in light of the particular circumstances. At March 31, 2004, Naugatuck Valley Savings and Loan met each of these capital requirements.

Prompt Corrective Regulatory Action. The Office of Thrift Supervision is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. Generally, a savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be “undercapitalized.” A savings institution that has a total risk-based capital ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be “significantly undercapitalized” and a savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.” Subject to a narrow exception, the Office of Thrift Supervision is required to appoint a receiver or conservator within specified time frames for an institution that is “critically undercapitalized.” An institution must file a capital restoration plan with the Office of Thrift Supervision within 45 days of the date it receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. “Significantly undercapitalized” and “critically undercapitalized” institutions are subject to more extensive mandatory regulatory actions. The Office of Thrift Supervision could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

Loans to One Borrower. Federal law provides that savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. A savings institution may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if secured by specified readily-marketable collateral.

Standards for Safety and Soundness. As required by statute, the federal banking agencies have adopted Interagency Guidelines prescribing Standards for Safety and Soundness. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the Office of Thrift Supervision determines that a savings institution fails to meet any standard prescribed by the guidelines, the Office of Thrift Supervision may require the institution to submit an acceptable plan to achieve compliance with the standard.

Limitation on Capital Distributions. Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required before any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination and Community Reinvestment Act ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like Naugatuck Valley Savings and Loan, it is a subsidiary of a holding company. If Naugatuck Valley Savings and Loan’s capital were ever to fall below its regulatory requirements or the Office of Thrift Supervision notified it that it was in need of increased supervision, its ability to make capital distributions could be restricted. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution that would otherwise be permitted by the regulation, if the agency determines that such distribution would constitute an unsafe or unsound practice.

Qualified Thrift Lender Test. Federal law requires savings institutions to meet a qualified thrift lender test. Under the test, a savings association is required to either qualify as a “domestic building and loan association” under the Internal Revenue Code or maintain at least 65% of its “portfolio assets” (total assets less: (i) specified liquid assets up to 20% of total assets; (ii) intangibles, including goodwill; and (iii) the value of property used to conduct business) in certain “qualified thrift investments” (primarily residential mortgages and related investments, including certain mortgage-backed securities) in at least 9 months out of each 12 month period.

A savings institution that fails the qualified thrift lender test is subject to certain operating restrictions and may be required to convert to a bank charter. Recent legislation has expanded the extent to which education loans, credit card loans and small business loans may be considered “qualified thrift investments.” At March 31, 2004, Naugatuck Valley Savings and Loan met the qualified thrift lender test.

Transactions with Related Parties. Federal law limits Naugatuck Valley Savings and Loan’s authority to lend to, and engage in certain other transactions with (collectively, “covered transactions”), “affiliates” (e.g., any company that controls or is under common control with an institution, including Naugatuck Valley Financial, Naugatuck Valley Mutual and their non-savings institution subsidiaries). The aggregate amount of covered transactions with any individual affiliate is limited to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited to 20% of the savings institution’s capital and surplus. Loans and other specified transactions with affiliates are required to be secured by collateral in an amount and of a type described in federal law. The purchase of low quality assets from affiliates from making loans is generally prohibited. Transactions with affiliates must be on terms and under circumstances that are at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary.

The Sarbanes-Oxley Act of 2002 generally prohibits a company from making loans to its executive officers and directors. However, that act contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws. Under such laws, Naugatuck Valley Savings and Loan’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is limited. The law restricts both the individual and aggregate amount of loans Naugatuck Valley Savings and Loan may make to insiders based, in part, on Naugatuck Valley Savings and Loan’s capital position and requires certain Board approval procedures to be followed. Such loans must be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an

Enforcement. The Office of Thrift Supervision has primary enforcement responsibility over federal savings institutions and has the authority to bring actions against the institution and all institution-affiliated parties, including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors to appointment of a receiver or conservator or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. The Federal Deposit Insurance Corporation has authority to recommend to the Director of the Office of Thrift Supervision that enforcement action to be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take such action under certain circumstances. Federal law also establishes criminal penalties for certain violations.

Assessments. Federal savings banks are required to pay assessments to the Office of Thrift Supervision to fund its operations. The general assessments, paid on a semi-annual basis, are based upon the savings institution’s total assets, including consolidated subsidiaries, as reported in the institution’s latest quarterly thrift financial report.

Insurance of Deposit Accounts. Naugatuck Valley Savings and Loan is a member of the Savings Association Insurance Fund. The Federal Deposit Insurance Corporation maintains a risk-based assessment system by which institutions are assigned to one of three categories based on their capitalization and one of three subcategories based on examination ratings and other supervisory information. An institution’s assessment rate depends upon the categories to which it is assigned. Assessment rates for Savings Association Insurance Fund member institutions are determined semi-annually by the Federal Deposit Insurance Corporation and currently range from zero basis points of assessable deposits for the healthiest institutions to 27 basis points of assessable deposits for the riskiest.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A material increase in Savings Association Insurance Fund insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Naugatuck Valley Savings and Loan. Management cannot predict what insurance assessment rates will be in the future.

In addition to the assessment for deposit insurance, institutions are required to make payments on bonds issued in the late 1980s by the Financing Corporation to recapitalize the predecessor to the Savings Association Insurance Fund. During the year ended March 31, 2004, Financing Corporation payments for Savings Association Insurance Fund members averaged 1.56 basis points of assessable deposits.

The Federal Deposit Insurance Corporation may terminate an institution’s insurance of deposits upon a finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the Federal Deposit Insurance Corporation or the Office of Thrift Supervision. The management of Naugatuck Valley Savings and Loan does not know of any practice, condition or violation that might lead to termination of deposit insurance.

Federal Home Loan Bank System. Naugatuck Valley Savings and Loan is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank provides a central credit facility primarily for member institutions. Naugatuck Valley Savings and Loan, as a member of the Federal Home Loan Bank, is required to acquire and hold shares of capital stock in that Federal Home Loan Bank in an amount at least equal to 1.0% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the Federal Home Loan Bank, whichever is greater. Naugatuck

The Federal Home Loan Banks are required to provide funds for the resolution of insolvent thrifts in the late 1980s and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and could also result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members. If dividends were reduced, or interest on future Federal Home Loan Bank advances increased, our net interest income would likely also be reduced.

Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by Office of Thrift Supervision regulations, a savings association has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The Community Reinvestment Act does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the Community Reinvestment Act. The Community Reinvestment Act requires the Office of Thrift Supervision, in connection with its examination of a savings association, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution.

The Community Reinvestment Act requires public disclosure of an institution’s rating and requires the Office of Thrift Supervision to provide a written evaluation of an association’s Community Reinvestment Act performance utilizing a four-tiered descriptive rating system.

Naugatuck Valley Savings and Loan received a “Satisfactory” rating as a result of its most recent Community Reinvestment Act assessment.

General. Naugatuck Valley Financial and Naugatuck Valley Mutual will be savings and loan holding companies within the meaning of federal law. As such, they will be registered with the Office of Thrift Supervision and will be subject to Office of Thrift Supervision regulations, examinations, supervision, reporting requirements and regulations concerning corporate governance and activities. In addition, the Office of Thrift Supervision will have enforcement authority over Naugatuck Valley Financial and Naugatuck Valley Mutual and their non-savings institution subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to Naugatuck Valley Savings and Loan.

Restrictions Applicable to Mutual Holding Companies. According to federal law and Office of Thrift Supervision regulations, a mutual holding company, such as Naugatuck Valley Mutual, may generally engage in the following activities: (1) investing in the stock of insured depository institutions and acquiring them by means of a merger or acquisition; (2) investing in a corporation the capital stock of which may be lawfully purchased by a savings association under federal law; (3) furnishing or performing management services for a savings association subsidiary of a savings and loan holding company; (4) conducting an insurance agency or escrow business; (5) holding, managing or liquidating assets owned or acquired from a savings association subsidiary of the savings and loan holding company; (6) holding or managing properties used or occupied by a savings association subsidiary of the savings and loan holding company; (7) acting as trustee under deed or trust; (8) any activity permitted for multiple savings and loan holding companies by Office of Thrift Supervision regulations; (9) any activity permitted by the Board of Governors of the Federal Reserve System for bank holding companies and financial holding companies; and (10) any activity permissive for service corporations. Recent legislation, which authorized mutual holding companies to engage in activities permitted for financial holding companies, expanded the authorized activities. Financial holding companies may engage in a broad array of financial services activities, including insurance and securities.

Federal law prohibits a savings and loan holding company, including a federal mutual holding company, from directly or indirectly, or through one or more subsidiaries, acquiring more than 5% of the voting stock of another savings institution, or its holding company, without prior written approval of the Office of Thrift Supervision. Federal law also prohibits a savings and loan holding company from acquiring or retaining control of a depository institution that is not insured by the Federal Deposit Insurance Corporation. In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources and future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance funds, the convenience and needs of the community and competitive factors.

The Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, except: (1) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (2) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.

If the savings institution subsidiary of a savings and loan holding company fails to meet the qualified thrift lender test set, the holding company must register with the Federal Reserve Board as a bank holding company within one year of the savings institution’s failure to so qualify.

Stock Holding Company Subsidiary Regulation. The Office of Thrift Supervision has adopted regulations governing the two-tier mutual holding company form of organization and subsidiary stock holding companies that are controlled by mutual holding companies. We have adopted this form of organization and it will be in place after the proposed offering. Naugatuck Valley Financial is the stock holding company subsidiary of Naugatuck Valley Mutual. Naugatuck Valley Financial is only permitted to engage in activities that are permitted for Naugatuck Valley Mutual subject to the same restrictions and conditions.

Waivers of Dividends by Naugatuck Valley Mutual. Office of Thrift Supervision regulations require Naugatuck Valley Mutual to notify the Office of Thrift Supervision if it proposes to waive receipt of our dividends from Naugatuck Valley Financial. The Office of Thrift Supervision reviews dividend waiver notices on a case-by-case basis, and, in general, does not object to any such waiver if: (i) the waiver would not be detrimental to the safe and sound operation of the savings association; (ii) the mutual holding company’s Board of Directors determines that such waiver is consistent with such directors’ fiduciary duties to the mutual holding company’s members; (iii) for as long as the savings association subsidiary is controlled by the mutual holding company, the dollar amount of dividends waived by the mutual holding company is considered as a restriction on the retained earnings of the savings association, which restriction, if material, is disclosed in the public financial statements of the savings association as a note to the financial statements; (iv) the amount of any dividend waived by the mutual holding company is available for declaration as a dividend solely to the mutual holding company, and, in accordance with SFAS 5, where the savings association determines that the payment of such dividend to the mutual holding company is probable, an appropriate dollar amount is recorded as a liability; and (v) the amount of any waived dividend is considered as having been paid by the savings association in evaluating any proposed subsequent dividend under Office of Thrift Supervision capital distribution regulations. We anticipate that Naugatuck Valley Mutual will waive dividends that Naugatuck Valley Financial may pay, if any.

Conversion of Naugatuck Valley Mutual to Stock Form. Office of Thrift Supervision regulations permit Naugatuck Valley Mutual to convert from the mutual form of organization to the capital stock form of organization. There can be no assurance when, if ever, a conversion transaction will occur, and the Board of Directors has no current intention or plan to undertake a conversion transaction. In a conversion transaction a new holding company would be formed as our successor, Naugatuck Valley Mutual’s corporate existence would end, and certain depositors of Naugatuck Valley Savings and Loan would receive the right to subscribe for additional shares of the new holding company. In a conversion transaction, each share of common stock held by stockholders other than Naugatuck Valley Mutual would

be automatically converted into a number of shares of common stock of the new holding company based on an exchange ratio determined at the time of conversion that ensures that stockholders other than Naugatuck Valley Mutual own the same percentage of common stock in the new holding company as they owned in us immediately before conversion. Under Office of Thrift Supervision regulations, stockholders other than Naugatuck Valley Mutual would not be diluted because of any dividends waived by Naugatuck Valley Mutual (and waived dividends would not be considered in determining an appropriate exchange ratio), in the event Naugatuck Valley Mutual converts to stock form. The total number of shares held by stockholders other than Naugatuck Valley Mutual after a conversion transaction also would be increased by any purchases by stockholders other than Naugatuck Valley Mutual in the stock offering conducted as part of the conversion transaction.

Acquisition of Control. Under the federal Change in Bank Control Act, a notice must be submitted to the Office of Thrift Supervision if any person (including a company), or group acting in concert, seeks to acquire “control” of a savings and loan holding company or savings association. An acquisition of “control” can occur upon the acquisition of 10% or more of the voting stock of a savings and loan holding company or savings institution or as otherwise defined by the Office of Thrift Supervision. Under the Change in Bank Control Act, the Office of Thrift Supervision has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the anti-trust effects of the acquisition. Any company that so acquires control would then be subject to regulation as a savings and loan holding company.

Remutualization Transactions. Current Office of Thrift Supervision regulations permit a mutual holding company to be acquired by a mutual institution in a remutualization transaction. However, the Office of Thrift Supervision has issued a policy statement indicating that it views remutualization transactions as raising significant issues concerning disparate treatment of minority stockholders and mutual members of the target entity and as raising issues concerning the effect on the mutual members of the acquiring entity. Under certain circumstances, the Office of Thrift Supervision intends to give these issues special scrutiny and reject applications for the remutualization of a mutual holding company unless the applicant can clearly demonstrate that the Office of Thrift Supervision’s concerns are not warranted in the particular case.

We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the registration of the common stock to be issued pursuant to the offering. Upon completion of the offering, our common stock will continue to be registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We will be subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

The registration, under the Securities Act of 1933, of the shares of common stock to be sold in the offering and issued to our charitable foundation does not cover the resale of those shares. Shares of common stock purchased by persons who are not affiliates of us may be resold without registration. Shares purchased by an affiliate of us will be subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If we meet the current public information requirements of Rule 144, each affiliate of us that complies with the other conditions of Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, we may permit affiliates to have their shares registered for sale under the Securities Act of 1933.

On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002, which implemented legislative reforms intended to address corporate and accounting fraud. The Sarbanes-Oxley Act restricts

Under the Sarbanes-Oxley Act, bonuses issued to top executives before restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan “blackout” periods, and loans to company executives (other than loans by financial institutions permitted by federal rules and regulations) are restricted. The legislation accelerates the time frame for disclosures by public companies and changes in ownership in a company’s securities by directors and executive officers.

The Sarbanes-Oxley Act also increases the oversight of, and codifies certain requirements relating to audit committees of public companies and how they interact with the company’s “registered public accounting firm.” Among other requirements, companies must disclose whether at least one member of the committee is a “financial expert” (as such term is defined by the Securities and Exchange Commission) and if not, why not.

Although we anticipate that we will incur additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, management does not expect that such compliance will have a material impact on our results of operations or financial condition.

The Gramm-Leach-Bliley Act of 1999 provided for sweeping financial modernization for commercial banks, savings banks, securities firms, insurance companies, and other financial institutions operating in the United States. Among other provisions, the Gramm-Leach-Bliley Act places limitations on the sharing of consumer financial information with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of personal financial information with unaffiliated third parties.

On October 26, 2001, in response to the events of September 11, 2001, the President of the United States signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”). The USA PATRIOT Act significantly expands the responsibilities of financial institutions, including savings and loan associations, in preventing the use of the U.S. financial system to fund terrorist activities. Title III of the USA PATRIOT Act provides for a significant overhaul of the U.S. anti-money laundering regime. Among other provisions, it requires financial institutions operating in the United States to develop new anti-money laundering compliance programs, due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control Regulations. We have established policies and procedures to ensure compliance with the USA PATRIOT Act’s provisions, and the impact of the USA PATRIOT Act on our operations has not been material.

Interest and other charges collected or contracted for by Naugatuck Valley Savings and Loan are subject to state usury laws and federal laws concerning interest rates. Naugatuck Valley Savings and Loan’s loan operations are also subject to federal laws applicable to credit transactions, such as the:


	•	Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

	•	Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

	•	Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;

	•	Fair Credit Reporting Act of 1978, governing the use and provision of information to credit reporting agencies;

	•	Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; and

	•	rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.

The deposit operations of Naugatuck Valley Savings and Loan also are subject to the:


	•	Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

	•	Electronic Funds Transfer Act and Regulation E promulgated thereunder, which governs automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

	•	Check Clearing for the 21st Century Act (also known as “Check 21”), which, effective October 28, 2004, gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check.

General. We report our income on a fiscal year basis using the accrual method of accounting. The federal income tax laws apply to us in the same manner as to other corporations with some exceptions, including particularly our reserve for bad debts discussed below. The following discussion of tax matters is intended only as a summary and does not purport to be a comprehensive description of the tax rules applicable to us. Our federal income tax returns have been either audited or closed under the statute of limitations through tax year 2000. For its 2003 year, Naugatuck Valley Savings and Loan’s maximum federal income tax rate was 34%.

Bad Debt Reserves. For fiscal years beginning before June 30, 1996, thrift institutions that qualified under certain definitional tests and other conditions of the Internal Revenue Code were permitted to use certain favorable provisions to calculate their deductions from taxable income for annual additions to their bad debt reserve. A reserve could be established for bad debts on qualifying real property loans, generally secured by interests in real property improved or to be improved, under the percentage of taxable income method or the experience method. The reserve for nonqualifying loans was computed using the experience method. Federal legislation enacted in 1996 repealed the reserve method of accounting for bad debts and the percentage of taxable income method for tax years beginning after 1995 and require savings institutions to recapture or take into income certain portions of their accumulated bad debt reserves. Approximately

Distributions. If Naugatuck Valley Savings and Loan makes “non-dividend distributions” to us, the distributions will be considered to have been made from Naugatuck Valley Savings and Loan’s unrecaptured tax bad debt reserves, including the balance of its reserves as of December 31, 1987, to the extent of the “non-dividend distributions,” and then from Naugatuck Valley Savings and Loan’s supplemental reserve for losses on loans, to the extent of those reserves, and an amount based on the amount distributed, but not more than the amount of those reserves, will be included in Naugatuck Valley Savings and Loan’s taxable income. Non-dividend distributions include distributions in excess of Naugatuck Valley Savings and Loan’s current and accumulated earnings and profits, as calculated for federal income tax purposes, distributions in redemption of stock, and distributions in partial or complete liquidation. Dividends paid out of Naugatuck Valley Savings and Loan’s current or accumulated earnings and profits will not be so included in Naugatuck Valley Savings and Loan’s taxable income.

The amount of additional taxable income triggered by a non-dividend is an amount that, when reduced by the tax attributable to the income, is equal to the amount of the distribution. Therefore, if Naugatuck Valley Savings and Loan makes a non-dividend distribution to us, approximately one and one-half times the amount of the distribution not in excess of the amount of the reserves would be includable in income for federal income tax purposes, assuming a 34% federal corporate income tax rate. Naugatuck Valley Savings and Loan does not intend to pay dividends that would result in a recapture of any portion of its bad debt reserves.

Naugatuck Valley Mutual, Naugatuck Valley Financial and its subsidiaries are subject to the Connecticut corporation business tax. Naugatuck Valley Mutual, Naugatuck Valley Financial and its subsidiaries will be eligible to file a combined Connecticut income tax return and will pay the larger of the regular corporation business tax (income tax) or a capital stock tax, but no less than a nominal minimum tax.

The Connecticut corporation business tax is based on the federal taxable income before net operating loss and special deductions of Naugatuck Valley Mutual, Naugatuck Valley Financial and its subsidiaries and makes certain modifications to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable income is multiplied by the state tax rate (7.5% for 2003) to arrive at Connecticut income tax.

Connecticut capital stock tax is computed as the average value of our issued and outstanding capital stock, including treasury stock at par or face value, fractional shares, scrip certificates convertible into stock and amounts received on capital stock subscriptions plus the average value of its surplus and undivided profit and the average value of its surplus reserves less the average value of any deficit carried on its balance sheets and the average value of any stock it owns in private corporations, including treasury shares. The average capital calculated so computed is then multiplied by the Connecticut capital tax rate of 0.31% per dollar not to exceed $1 million.

In May 1998 the State of Connecticut enacted legislation permitting the formation of passive investment company subsidiaries by financial institutions. This legislation exempts qualifying passive investment companies from the Connecticut corporation business tax and excludes dividends paid from a passive investment company from the taxable income of the parent financial institution. Naugatuck Valley Savings and Loan’s formation of a passive investment company in September 1999 is expected to substantially eliminate the state income tax expense of Naugatuck Valley Mutual, Naugatuck Valley Financial and its subsidiaries. See “Our Business — Subsidiaries” for a discussion of Naugatuck Valley Savings and Loan’s passive investment company. However, we will remain liable for the capital stock tax. The State of Connecticut continues to be under pressure to find new sources of revenue, and therefore

Naugatuck Valley Savings and Loan’s plan of reorganization provides that Naugatuck Valley Savings and Loan will be reorganized from a Connecticut state-chartered mutual savings bank into a federal mutual holding company structure and includes the adoption of a federal stock charter and bylaws for Naugatuck Valley Financial. Certain provisions in our charter and bylaws may have antitakeover effects. In addition, provisions in Naugatuck Valley Savings and Loan’s charter and bylaws may also have anti-takeover effects. Finally, regulatory restrictions may make it more difficult for persons or companies to acquire control of us.

Following the reorganization, we will own all of the issued and outstanding common stock of Naugatuck Valley Savings and Loan. Naugatuck Valley Mutual will own a majority of the issued and outstanding common stock of Naugatuck Valley Financial. As a result, management of Naugatuck Valley Mutual is able to exert voting control over Naugatuck Valley Financial and Naugatuck Valley Savings and Loan and will restrict the ability of our minority stockholders to effect a change of control of management. Naugatuck Valley Mutual, as long as it remains in the mutual form of organization, will control a majority of our voting stock.

Although our Board of Directors is not aware of any effort that might be made to obtain control of us after the offering, the Board of Directors believed it appropriate to adopt certain provisions permitted by federal regulations that may have the effect of deterring a future takeover attempt that is not approved by our Board of Directors. The following description of these provisions is only a summary and does not provide all of the information contained in our charter and bylaws. See “Additional Information” as to where to obtain a copy of these documents.

Limitation on Voting Rights. Our charter provides that, for a period of five years from the date of the reorganization, no person, except Naugatuck Valley Mutual or a tax-qualified employee stock benefit plan of ours, may directly or indirectly acquire the beneficial ownership of more than 10% of any class of an equity security of ours. If shares are acquired in excess of 10%, those shares will be considered “excess shares” and will not be counted as shares entitled to vote.

Classified Board. Our Board of Directors is divided into three classes, each of which contains approximately one-third of the number of directors. The stockholders elect one class of directors each year for a term of three years. The classified Board makes it more difficult and time consuming for a stockholder group to fully use its voting power to gain control of the Board of Directors without the consent of the incumbent Board of Directors.

Filling of Vacancies; Removal. The bylaws provide that any vacancy occurring in the Board of Directors, including a vacancy created by an increase in the number of directors, may be filled by a vote of a majority of the directors then in office. A person elected to fill a vacancy on the Board of Directors will serve until the next election of directors. Our bylaws provide that a director may be removed from the Board of Directors before the expiration of his or her term only for cause and only upon the vote of a

Qualification. The bylaws provide that no person will be eligible to serve on the Board of Directors who has in the past 10 years been subject to a supervisory action by a financial regulatory agency that involved dishonesty or breach of trust or other bad actions, has been convicted of a crime involving dishonesty or breach of trust that is punishable by a year or more in prison, or is currently charged with such a crime, or has been found by a regulatory agent or a court to have breached a fiduciary duty involving personal profit or committed a wilful violation of any law governing banking securities or insurance. These provisions may prevent stockholders from nominating themselves or persons of their choosing for election to the Board of Directors.

Stockholder Action by Written Consent; Special Meetings of Stockholders. Our stockholders must act only through an annual or special meeting or by unanimous written consent. Our charter provides that for a period of five years following the reorganization, special meetings of stockholders relating to a change in control of us or amendments to our charter may be called only upon direction of the Board of Directors. Subject to this restriction, the bylaws provide that holders of not less than 10% of our outstanding shares may request the calling of a special meeting. At a special meeting, stockholders may consider only the business specified in the notice of meeting given by us. The provisions of our charter and bylaws limiting stockholder action by written consent and calling of special meetings of stockholders may have the effect of delaying consideration of a stockholder proposal until the next annual meeting, unless a special meeting is called at the request of a majority of the Board of Directors or holders of not less than 10% of our outstanding shares. These provisions also would prevent the holders of a majority of common stock from unilaterally using the written consent procedure to take stockholder action.

Advance Notice Provisions for Stockholder Nominations and Proposals. Our bylaws establish an advance notice procedure for stockholders to nominate directors or bring other business before an annual meeting of stockholders. A person may not be nominated for election as a director unless that person is nominated by or at the direction of our Board of Directors or by a stockholder who has given appropriate notice to us before the meeting. Similarly, a stockholder may not bring business before an annual meeting unless the stockholder has given us appropriate notice of the stockholder’s intention to bring that business before the meeting. Our Secretary must receive notice of the nomination or proposal not less than 30 days before the annual meeting. A stockholder who desires to raise new business must provide us with certain information concerning the nature of the new business, the stockholder and the stockholder’s interest in the business matter. Similarly, a stockholder wishing to nominate any person for election as a director must provide us with certain information concerning the nominee and the proposing stockholder.

Advance notice of nominations or proposed business by stockholders gives our Board of Directors time to consider the qualifications of the proposed nominees, the merits of the proposals and, to the extent deemed necessary or desirable by our Board of Directors, to inform stockholders and make recommendations about those matters.

Authorized but Unissued Shares of Capital Stock. Following the reorganization, we will have authorized but unissued shares of common and preferred stock. Our charter authorizes the Board of Directors to establish one or more series of preferred stock and, for any series of preferred stock, to determine the terms and rights of the series, including voting rights, conversion rates, and liquidation preferences. Although such shares of common and preferred stock could be issued by the Board of Directors to render more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy contest or otherwise, it is anticipated that such uses will be unlikely given that Naugatuck Valley Mutual must always own a majority of our common stock.

Although the Board of Directors of Naugatuck Valley Savings and Loan is not aware of any effort that might be made to obtain control of Naugatuck Valley Savings and Loan after the offering, the Board of Directors believed it appropriate to adopt provisions permitted by federal law to protect the interests of

Naugatuck Valley Savings and Loan’s stockholders will not be permitted to cumulate their votes in the election of directors. Furthermore, Naugatuck Valley Savings and Loan’s bylaws provide for the election of three classes of directors to staggered terms. In addition, Naugatuck Valley Savings and Loan’s charter provides that, for a period of five years from the date of the reorganization, no person except Naugatuck Valley Financial and Naugatuck Valley Mutual or a tax-qualified employee stock benefit plan of Naugatuck Valley Financial or Naugatuck Valley Savings and Loan, may directly or indirectly acquire the beneficial ownership of more than 10% of any class of Naugatuck Valley Savings and Loan’s equity securities. Additionally, special meetings of stockholders related to changes in control of Naugatuck Valley Savings and Loan or amendments to its charter may only be called upon direction of the Board of Directors for a period of five years from the date of the reorganization. Naugatuck Valley Savings and Loan’s charter and bylaws also contain other provisions to protect the interests of the institution including a requirement that vacancies on the Board of Directors be filled by a majority vote of the Board of Directors, eligibility requirements for directors, and establishes advance notice procedures for stockholders to nominate directors or bring other business before the stockholders.

In addition, the charter provides for the issuance of shares of preferred stock on terms, including conversion and voting rights, as may be determined by Naugatuck Valley Savings and Loan’s Board of Directors without stockholder approval. Although Naugatuck Valley Savings and Loan has no arrangements, understandings or plans at the present time for the issuance or use of the shares of undesignated preferred stock authorized, the Board of Directors believes that the availability of such shares will provide Naugatuck Valley Savings and Loan with increased flexibility in structuring possible future financings and acquisitions and in meeting other corporate needs that may arise. If a proposed merger, tender offer or other attempt to gain control of Naugatuck Valley Savings and Loan occurs of which management does not approve, the Board of Directors can authorize the issuance of one or more series of preferred stock with rights and preferences which could impede the completion of such a transaction. An effect of the possible issuance of such preferred stock, therefore, may be to deter a future takeover attempt. The Board of Directors does not intend to issue any preferred stock except on terms which the Board of Directors deems to be in the best interest of Naugatuck Valley Savings and Loan and its then existing stockholders.

Office of Thrift Supervision Regulations. Office of Thrift Supervision regulations provide that for a period of three years following the date of the completion of the reorganization, no person, acting singly or together with associates in a group of persons acting in concert, will directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10% of our class of our equity securities without the prior written approval of the Office of Thrift Supervision. Where any person, directly or indirectly, acquires beneficial ownership of more than 10% of our class of any equity securities without the prior written approval of the Office of Thrift Supervision, the securities beneficially owned by such person in excess of 10% will not be voted by any person or counted as voting shares in connection with any matter submitted to the stockholders for a vote, and will not be counted as outstanding for purposes of determining the affirmative vote necessary to approve any matter submitted to the stockholders for a vote.

Change in Bank Control Act. The acquisition of 10% or more of our outstanding common stock may trigger the provisions of the Change in Bank Control Act. The Office of Thrift Supervision has also adopted a regulation under the Change in Bank Control Act which generally requires persons who at any time intend to acquire control of a federally chartered savings association or its holding company, to provide 60 days prior written notice and certain financial and other information to the Office of Thrift Supervision.

The 60-day notice period does not commence until the information is deemed to be substantially complete. Control for these purposes exists in situations in which the acquiring party has voting control of at least 25% of any class of our voting stock or the power to direct our management or policies. However, under Office of Thrift Supervision regulations, control is presumed to exist where the acquiring party has voting control of at least 10% of any class of our voting securities if specified “control factors” are present. The statute and underlying regulations authorize the Office of Thrift Supervision to disapprove a proposed acquisition on certain specified grounds.

We are authorized to issue 25,000,000 shares of our common stock having a par value of $.01 per share and 1,000,000 shares of preferred stock having a par value of $.01 per share. Each share of our common stock will have the same relative rights as, and will be identical in all respects with, each other share of common stock. Upon payment of the purchase price for the common stock, as required by the plan of reorganization, all stock will be duly authorized, fully paid and nonassessable. We will not issue any shares of preferred stock in the reorganization.

Dividends. We can pay dividends if, as and when declared by our Board of Directors. The payment of dividends is limited by law and applicable regulation. See “Our Dividend Policy.” The holders of our common stock will be entitled to receive and share equally in dividends as may be declared by the Board of Directors out of funds legally available for dividends. If we issue preferred stock, the holders of the preferred stock may have a priority over the holders of the common stock with respect to dividends.

Voting Rights. After the reorganization, the holders of our common stock will possess exclusive voting rights in us. They will elect our Board of Directors and act on other matters as are required to be presented to them under federal law or as are otherwise presented to them by the Board of Directors. Except as discussed in “Restrictions on Acquisition of Naugatuck Valley Financial and Naugatuck Valley Savings and Loan,” each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. If we issue preferred stock, holders of our preferred stock may also possess voting rights.

Liquidation. If there is any liquidation, dissolution or winding up of Naugatuck Valley Savings and Loan, as the holder of Naugatuck Valley Savings and Loan’s capital stock, we would be entitled to receive all of Naugatuck Valley Savings and Loan’s assets available for distribution after payment or provision for payment of all debts and liabilities of Naugatuck Valley Savings and Loan, including all deposit accounts and accrued interest. Upon our liquidation, dissolution or winding up, the holders of our common stock would be entitled to receive all of our assets available for distribution after payment or provision for payment of all its debts and liabilities. If we issue preferred stock, the preferred stockholders may have a priority over the holders of the common stock upon liquidation or dissolution.

Preemptive Rights; Redemption. Holders of our common stock will not be entitled to preemptive rights with respect to any shares that may be issued. The common stock cannot be redeemed.

We will not issue any preferred stock in the reorganization and we have no current plans to issue any preferred stock after the reorganization. Preferred stock may be issued with designations, powers, preferences and rights as the Board of Directors may from time to time determine. The Board of Directors can, without stockholder approval, issue preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control.

We have registered our common stock with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934, as amended, and will not deregister our common stock for a period of at least three years following the offering. As a result of registration, the proxy and tender offer rules, insider trading reporting and restrictions, annual and periodic reporting and other requirements of that statute will apply.

The legality of our common stock has been passed upon for us by Muldoon Murphy Faucette & Aguggia LLP, Washington, D.C. Muldoon Murphy Faucette & Aguggia LLP has consented to the references to their opinion in this prospectus. Certain legal matters will be passed upon for Ryan Beck & Co. by Thacher Proffitt & Wood LLP, Washington, D.C.

Our consolidated financial statements at December 31, 2003 and 2002 and for the three years ended December 31, 2003 are included in this prospectus and in the registration statement in reliance upon the report of Snyder & Haller, P.C., Hartford, Connecticut, independent certified public accountants, included elsewhere in this prospectus, and upon the authority of said firm as experts in accounting and auditing.

Keller & Company, Inc. has consented to the summary in this prospectus of its report to us setting forth its opinion as to our estimated pro forma market value, as converted, and to the use of its name and statements with respect to it appearing in this prospectus.

We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933, as amended, that registers the common stock offered in the stock offering, including the shares to be contributed to the Naugatuck Valley Savings and Loan Foundation. The registration statement, including the exhibits, contains additional relevant information about us and our common stock. The rules and regulations of the Securities and Exchange Commission allow us to omit certain information included in the registration statement from this prospectus. You may read and copy the registration statement at the Securities and Exchange Commission’s public reference room at 450 Fifth Street, N.W., Washington, D.C. Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further information on the Securities and Exchange Commission’s public reference rooms. The registration statement also is available to the public from commercial document retrieval services and at

Naugatuck Valley Savings and Loan has filed an application for approval of the plan of reorganization and minority stock issuance with the Office of Thrift Supervision. This prospectus omits certain information contained in the application. The applications may be inspected, without charge, at the offices of the Office of Thrift Supervision, 1700 G Street, NW, Washington, D.C. 20552 and at the offices of the Regional Director of the Office of Thrift Supervision at the Northeast Regional Office of the Office of Thrift Supervision, Harborside Financial Center, Plaza 5, Suite 1600, Jersey City, New Jersey 07311.

A copy of the plan of reorganization and minority stock issuance and our charter and bylaws are available without charge from us.

All schedules are omitted as the required information either is not applicable or is included in the financial statements or related notes.

Separate financial statements for Naugatuck Valley Financial have not been included in this prospectus because Naugatuck Valley Financial, which has engaged only in organizational activities to date, has no significant assets, contingent or other liabilities, revenues or expenses.

[LETTERHEAD OF SNYDER & HALLER, P.C.]

Report of Independent Registered Public Accounting Firm

To The Board of Directors
Naugatuck Valley Savings and Loan, S.B.

We have audited the accompanying consolidated statements of financial condition of Naugatuck Valley Savings and Loan, S.B. and subsidiary as of December 31, 2003, and 2002, and the related consolidated statements of income, changes in capital accounts and cash flows for each of the years in the three year period ended December 31, 2003. These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Companies Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Naugatuck Valley Savings and Loan, S.B. and subsidiary at December 31, 2003 and 2002, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America.

-s- Snyder & Haller P.C.

Hartford, Connecticut
January 9, 2004 (except as to Note 14,
which is as of May 17, 2004)

F-1

(NAUGATUCK VALLEY LOGO)

Consolidated Statements of Financial Condition

(In Thousands)


	March 31,		December 31,
	2004		2003		2002
	(Unaudited)		(Audited)
ASSETS
Cash and due from depository institutions	$	6,207	$	4,752	$	5,038
Investment in federal funds		5,711		5,023		13,120
Investment securities		32,914		38,727		33,876
Loans receivable, net		182,311		180,378		166,046
Accrued income receivable		1,029		1,071		1,045
Foreclosed real estate, net		131		208		108
Premises and equipment, net		6,209		6,119		6,126
Deferred income taxes		395		427		371
Bank owned life insurance asset		4,782		4,734		—
Other assets		2,459		2,517		2,268

Total assets	$	242,148	$	243,956	$	227,998

LIABILITIES AND CAPITAL ACCOUNTS
Liabilities
Deposits	$	187,474	$	183,455	$	173,231
Advances from Federal Home Loan Bank of Boston		30,138		34,990		31,119
Mortgagors’ escrow accounts		1,530		2,634		2,362
Other liabilities		1,350		1,660		1,436

Total liabilities		220,492		222,739		208,148

Capital accounts
Retained earnings		21,325		20,947		19,141
Accumulated other comprehensive income		331		270		709

Total capital		21,656		21,217		19,850

Total liabilities and capital accounts	$	242,148	$	243,956	$	227,998

See notes to consolidated financial statements.

F-2

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Consolidated Statements of Income
(In Thousands)


	Three Months Ended					Year Ended
	March 31,					December 31,
	2004			2003		2003		2002		2001
	(Unaudited)					(Audited)
Interest and dividend income
Interest on loans	$	2,695		$	2,877	$	11,052	$	11,841	$	11,630
Interest and dividends on investments and deposits		331			379		1,592		1,337		1,001

Total interest income		3,026			3,256		12,644		13,178		12,631

Interest expense
Interest on deposits		570			819		2,848		3,914		5,105
Interest on borrowed funds		366			353		1,393		1,385		1,073

Total interest expense		936			1,172		4,241		5,299		6,178

Net interest income		2,090			2,084		8,403		7,879		6,453
Provision for loan losses		—			45		45		231		80

Net interest income after provision for loan losses		2,090			2,039		8,358		7,648		6,373

Noninterest income
Loan fees and service charges		211			221		851		793		673
Income from bank owned life insurance		48			—		133		—		—
Gain on sale of mortgages		5			17		14		100		—
Gain on sale of investments		24			—		1		3		—
Income from investment advisory services, net		31			—		45		—		—
Other income		14			19		71		76		70

Total noninterest income		333			257		1,115		972		743

Noninterest expense
Compensation, taxes and benefits		1,122			885		4,024		3,304		3,181
Office occupancy		283			270		1,041		877		737
Computer processing		146			115		507		446		395
Federal insurance premiums		7			7		28		28		26
(Gain) loss on foreclosed real estate, net		(32	)		4		2		51		9
Other expenses		353			369		1,243		1,114		1,044

Total noninterest expense		1,879			1,650		6,845		5,820		5,392

Income before provision for income taxes		544			646		2,628		2,800		1,724
Provision for income taxes		166			217		822		880		542

Net Income	$	378		$	429	$	1,806	$	1,920	$	1,182

See notes to consolidated financial statements.

F-3

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Consolidated Statements of Changes in Capital Accounts
For the Three Months Ended March 31, 2004 and 2003 (unaudited)
and the Years Ended December 31, 2003, 2002 and 2001

(In Thousands)


			Accumulated Other
	Retained		Comprehensive
	Earnings		Income (Loss)			Total
Balance at December 31, 2000	$	16,039	$	(54	)	$	15,985
Comprehensive income
Net income		1,182		—			1,182
Other comprehensive income		—		330			330

Total comprehensive income							1,512

Balance at December 31, 2001		17,221		276			17,497
Comprehensive income
Net income		1,920		—			1,920
Other comprehensive income		—		433			433

Total comprehensive income							2,353

Balance at December 31, 2002		19,141		709			19,850
Comprehensive income
Net income		1,806		—			1,806
Other comprehensive loss		—		(439	)		(439	)

Total comprehensive income							1,367

Balance at December 31, 2003		20,947		270			21,217
Comprehensive income
Net income		378		—			378
Other comprehensive income		—		61			61

Total comprehensive income							439

Balance at March 31, 2004	$	21,325	$	331		$	21,656

Balance at December 31, 2002	$	19,141	$	709		$	19,850
Comprehensive income
Net income		429		—			429
Other comprehensive loss		—		(78	)		(78	)

Total comprehensive income							351

Balance at March 31, 2003	$	19,570	$	631		$	20,201

See notes to consolidated financial statements.

F-4

(NAUGATUCK VALLEY LOGO)

Consolidated Statements of Cash Flows
(In Thousands)


	Three Months Ended						Year Ended
	March 31,						December 31,
	2004			2003			2003			2002			2001
	(Unaudited)						(Audited)
Cash flows from operating activities
Net income	$	378		$	429		$	1,806		$	1,920		$	1,182
Adjustments to reconcile net income to cash provided by operating activities:
Provision for loan losses		—			45			45			231			80
Depreciation and amortization expense		165			154			662			588			463
Provision for deferred taxes		1			6			171			(98	)		(179	)
Net gain on sale of real estate owned		(37	)		—			(53	)		(6	)		(18	)
Gain on sale of mortgages		(5	)		(17	)		(14	)		(100	)		—
Gain on sale of investments		(24	)		—			(1	)		(3	)		—
Decrease (increase) in accrued income receivable		42			(74	)		(27	)		(14	)		(38	)
Increase (decrease) in deferred loan fees		87			20			(178	)		(114	)		21
Increase in bank owned life insurance asset		(48	)		—			(133	)		—			—
Decrease (increase) in other assets		50			83			(283	)		(438	)		(86	)
(Decrease) increase in other liabilities		(311	)		(67	)		224			(86	)		461

Net cash provided by operating activities		298			579			2,219			1,880			1,886

Cash flows from investing activities
Proceeds from maturities of available-for-sale securities		10,878			4,668			14,395			8,363			12,215
Proceeds from maturities of held-to-maturity securities		—			100			450			144			578
Purchase of available-for-sale securities		(4,029	)		(7,565	)		(19,838	)		(20,091	)		(20,061	)
Purchase of held-to-maturity securities		(950	)		(291	)		(647	)		(749	)		(452	)
Loan originations net of principal payments		(3,947	)		(5,316	)		(23,355	)		(14,733	)		(12,871	)
Proceeds from the sale of loans		1,932			1,581			8,865			7,071			—
Proceeds from the sale of foreclosed real estate		114			—			258			113			139
Purchase of property and equipment		(216	)		(395	)		(497	)		(1,110	)		(1,715	)
Purchase of bank owned life insurance asset		—			(1,200	)		(4,600	)		—			—

Net cash provided (used) by investing activities		3,782			(8,418	)		(24,969	)		(20,992	)		(22,167	)

Cash flows from financing activities
Net change in time deposits		239			1,766			(3,091	)		(416	)		10,824
Net change in other deposit accounts		3,780			4,601			13,316			16,985			9,386
Advances from Federal Home Loan Bank		650			3,403			13,903			12,750			12,000
Repayment of Advances from Federal Home Loan Bank		(5,502	)		(5,828	)		(10,032	)		(5,003	)		(10,664	)
Net change in mortgagors’ escrow accounts		(1,104	)		(1,003	)		271			311			136

Net cash provided (used) by financing activities		(1,937	)		2,939			14,367			24,627			21,682

Increase (Decrease) in cash and cash equivalents		2,143			(4,900	)		(8,383	)		5,515			1,401
Cash and cash equivalents at beginning of year		9,775			18,158			18,158			12,643			11,242

Cash and cash equivalents at end of year	$	11,918		$	13,258		$	9,775		$	18,158		$	12,643

See notes to consolidated financial statements.

F-5

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

1. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements include the accounts of Naugatuck Valley Savings & Loan, S.B. (“the Bank”) and its wholly-owned subsidiary, Naugatuck Valley Mortgage Servicing Corporation. Significant intercompany accounts and transactions have been eliminated in consolidation.

Business

The Bank provides a full range of personal banking services to individual and small business customers located primarily in Naugatuck, Connecticut 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 certain state and 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.

Charter Conversion

In January, 2003, the Bank converted from a state-chartered savings and loan to a state-chartered savings bank. As a result, the Bank is subject to direct oversight by the Federal Deposit Insurance Corporation instead of the Office of Thrift Supervision. The Bank remains a mutual institution.

Basis of Presentation

The accounting and reporting policies of the Bank and its subsidiary conform to generally accepted accounting principles in the United States of America and to general practices within the thrift industry. Such policies have been followed on a consistent basis.

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 reserve 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.

Investment securities

Investments are accounted for in accordance with the intent of management at the time of purchase. If management has the intent and the Bank has the ability at the time of purchase to hold debt securities until maturity, they are classified as held-to-maturity. These securities are carried at historical cost adjusted for the amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income.

Securities to be held for indefinite periods of time are classified as available-for-sale and are carried at fair value with unrealized gains and losses reported as a separate component of capital net of estimated income taxes.

F-6

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

The Bank has no securities held for trading.

Gains or losses on the sales of securities are recognized at trade date utilizing the specific identification method.

Loans receivable and allowance for loan losses

Loans receivable are stated at unpaid principal balance less loans in process, deferred loan fees, and allowances for loan losses.

Uncollected interest on loans receivable is accrued as earned based on rates applied to principal amounts outstanding. Recognition of income on the accrual basis is discontinued when there is sufficient question as to the collectibility of the interest. In these cases, the interest previously accrued to income is reversed, and the loans are placed on the cash basis.

Loan origination fees and certain direct loan origination costs are being deferred and the net amount amortized on a level-yield basis as an adjustment to the related loan yield over its contractual life. Unamortized net fees are recognized upon early repayment of the loans.

The allowance for loan losses is established by a provision charged to earnings and is maintained at a level considered adequate to provide for potential loan losses based on management’s evaluation of known and inherent risks in the loan portfolio. When a loan or portion of a loan is considered uncollectible, it is charged against the allowance for loan losses. Recoveries of loans previously charged-off are credited to the allowance when collected.

Management makes regular evaluations of the loan portfolio to determine the adequacy of the level of the allowance for loan losses. Numerous factors are considered in the evaluation, including a review of certain borrowers’ current financial status and credit standing, available collateral, loss experience in relation to outstanding loans, the overall loan portfolio quality, management’s judgment regarding prevailing and anticipated economic conditions, and other relevant factors. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

Foreclosed real estate

Real estate properties acquired through loan foreclosure and other partial or total satisfaction of problem loans are carried at the lower of fair value or the related loan balance at the date of foreclosure.

Valuations are periodically performed by management and an allowance for losses is established if the carrying value of a property subsequently exceeds its fair value less estimated disposal costs. Losses arising at the time of acquisition of such properties are charged against the allowance for loan losses. Subsequent write-downs in the carrying value and expenses incurred to maintain the properties are charged to expense.

Premises and equipment

Premises and equipment are stated at cost less accumulated depreciation computed on the straight-line method at rates based on estimated useful lives.

F-7

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

1. Summary of Significant Accounting Policies- (Continued)

Expenditures for replacements or major improvements are capitalized. Expenditures for normal maintenance and repairs are charged to expense as incurred. Upon the sale or retirement of premises and equipment, the cost and accumulated depreciation are removed from their respective accounts and any gain or loss is included in income.

Computation of fair values

The calculation of fair value estimates of financial instruments is dependent upon certain subjective assumptions and involves significant uncertainties. Changes in assumptions could significantly affect the estimates. These estimates do not reflect any possible tax ramifications, estimated transaction costs or any premium or discount that could result from offering the Bank’s entire holdings of a particular financial instrument.

The following methods and assumptions were utilized by the Bank in estimating the fair values of its on-balance sheet financial instruments:

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

Investment securities - Fair values for investment securities are based on quoted market prices where available. If quoted market prices are not available, fair values are based on market prices for comparable instruments.

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.

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.

Advances from Federal Home Loan Bank of Boston - 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 financial condition approximate the fair value of the mortgagors’ escrow accounts.

Income taxes

The Bank 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.

Reclassification

The financial statements for the prior year have been reclassified to conform with changes in the current financial statement presentation.

F-8

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

2. Statement of Cash Flows

For purposes of reporting cash flows, cash and cash equivalents include cash and amounts due from depository institutions and investments in federal funds.

Supplemental Disclosures


	Three Months Ended				Year Ended
	March 31,				December 31,
(In thousands)	2004		2003		2003		2002		2001

	(Unaudited)				(Audited)
Non-cash investing activities:
Transfer of loans to foreclosed real estate	$	—	$	—	$	305	$	55	$	166
Cash paid during the year for:
Interest	$	928	$	1,164	$	4,244	$	5,298	$	6,181
Income taxes		—		—		701		931		740

3. Investment Securities

A summary of investment securities at March 31, 2004 and December 31, 2003 and 2002 follows:


	March 31,				December 31,
	2004				2003				2002
	(Unaudited)				(Audited)
			Estimated				Estimated				Estimated
	Carrying		Market		Carrying		Market		Carrying		Market
(In thousands)	Amount		Value		Amount		Value		Amount		Value
Available-for-sale securities	$	30,403	$	30,403	$	37,166	$	37,166	$	32,512	$	32,512
Held-to-maturity securities		2,511		2,536		1,561		1,577		1,364		1,395

Total investment securities	$	32,914	$	32,939	$	38,727	$	38,743	$	33,876	$	33,907

For the three months ended March 31, 2004, the Bank realized gross gains of $37,477 and gross losses of $13,689. For the year ended December 31, 2003 the Bank realized gross gains of $6,213 and gross losses of $5,377 on sales of investment securities. The Bank realized gross gains of $2,812 on sales of investment securities during the year ended December 31, 2002.

At March 31, 2004, December 31, 2003 and 2002 securities with a carrying value of $700,000, and market values of $731,304, $730,271 and $729,691, respectively, were pledged as collateral to secure municipal deposits.

F-9

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

3. Investment Securities - (Continued)

At March 31, 2004 the composition of the investment portfolio with remaining maturities was:


	Amortized		Gross Unrealized					Estimated
(In thousands)	Cost Basis		Gain		Loss			Value
	(Unaudited)
Available-for-sale securities:
US government and agency obligations
From one through five years	$	11,965	$	549	$	—		$	12,514
From five through ten years		3,000		—		(9	)		2,991
Mortgage-backed securities		14,938		30		(70	)		14,898

Total available-for-sale securities	$	29,903	$	579	$	(79	)	$	30,403

Held-to-maturity securities:
US government and agency obligations
From one through five years	$	706	$	25	$	—		$	731
Corporate debt
From one through five years		1,805		—		—			1,805

Total held-to-maturity securities	$	2,511	$	25	$	—		$	2,536

The Bank 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. At March 31, 2004, these securities had an aggregate market value of $12,483,000 which resulted in unrealized losses of $78,975.

The following is a summary of the market value and related unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at March 31, 2004.


	Securities in Continuous Unrealized
	Loss Position Less Than 12 Months
	Number of		Market		Unrealized
(Dollars in thousands)	Securities		Value		Loss
US government and agency obligations		2	$	2,991	$	(9	)
Mortgage-backed securities		7		9,492		(70	)

Total securities in unrealized loss position		9	$	12,483	$	(79	)

F-10

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

At December 31, 2003, the composition of the investment portfolio was:


	Amortized		Gross Unrealized					Estimated
(In thousands)	Cost Basis		Gain		Loss			Value
	(Audited)
Available-for-sale securities:
US government and agency obligations	$	22,861	$	583	$	(88	)	$	23,356
Mortgage-backed securities		13,896		38		(124	)		13,810

Total available-for-sale securities	$	36,757	$	621	$	(212	)	$	37,166

Held-to-maturity securities:
US government and agency obligations	$	706	$	17	$	(1	)	$	722
Corporate debt		855		—		—			855

Total held-to-maturity securities	$	1,561	$	17	$	(1	)	$	1,577

At December 31, 2002, the composition of the investment portfolio was:


	Amortized		Gross Unrealized					Estimated
(In thousands)	Cost Basis		Gain		Loss			Value
	(Audited)
Available-for-sale securities:
US government and agency obligations	$	19,912	$	964	$	—		$	20,876
Mortgage-backed securities		11,526		116		(6	)		11,636

Total available-for-sale securities	$	31,438	$	1,080	$	(6	)	$	32,512

Held-to-maturity securities:
US government and agency obligations	$	699	$	31	$	—		$	730
Corporate debt		665		—		—			665

Total held-to-maturity securities	$	1,364	$	31	$	—		$	1,395

F-11

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

4. Loans Receivable

A summary of loans receivable at March 31, 2004, December 31, 2003 and 2002 is as follows:


	March 31,			December 31,
(In thousands)	2004			2003			2002
	(Unaudited)			(Audited)
Loans secured by first mortgages on real estate:
Conventional:
Fixed rate mortgage loans	$	105,933		$	107,858		$	107,968
Adjustable rate mortgage loans		22,361			21,913			23,623
Construction loans		6,025			6,621			4,540
Commercial loans		30,024			27,568			14,869
Loans on savings accounts		585			592			519
Personal, auto and property improvement loans		21,812			20,494			18,207

		186,740			185,046			169,726
Less: Allowance for loan losses		1,811			1,810			1,994
Undisbursed construction loans		2,191			2,519			1,168
Deferred loan origination fees		427			339			518

Loans receivable, net	$	182,311		$	180,378		$	166,046

Weighted average yield		5.74	%		5.81	%		6.58	%

The Bank’s lending activities are conducted principally in the Naugatuck Valley area of Connecticut. The Bank’s investment in loans includes both adjustable and fixed rate loans. At March 31, 2004, and December 31, 2003 and 2002 the composition of the Bank’s investment in fixed rate loans was as follows:


Fixed Rate
	March 31,		December 31,
Term to Maturity	2004		2003		2002
(In thousands)	(Unaudited)		(Audited)
Less than 1 year	$	5,853	$	6,563	$	4,567
1 - 3 years		1,320		674		843
3 - 5 years		2,010		2,159		2,078
5 - 10 years		13,607		12,543		10,327
10 - 20 years		50,268		51,341		36,470
Over 20 years		48,856		49,768		64,378

Total loans at fixed rates	$	121,914	$	123,048	$	118,663

F-12

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

Adjustable rate loans have interest rate adjustment limitations and are generally indexed to one year, three year or five year treasury notes, or prime rate. At March 31, 2004, and December 31, 2003 and 2002 the Bank had the following adjustable rate loans:


Adjustable Rate
	March 31,		December 31,
Rate Adjustment	2004		2003		2002
(In thousands)	(Unaudited)		(Audited)
Less than 1 year	$	41,228	$	37,956	$	34,486
1 - 3 years		6,736		8,159		7,113
3 - 5 years		7,780		7,989		5,378
5 - 7 years		8,682		7,574		4,085
Over 7 years		400		320		—

Total loans at adjustable rates	$	64,826	$	61,998	$	51,062

Nonperforming loans totaled approximately $849,000, $906,000 and $1,224,000 at March 31, 2004, December 31, 2003 and 2002, respectively. 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 approximately $44,400, $50,100 and $128,000 in 2004, 2003 and 2002, respectively.

The recorded investment in loans that are considered to be impaired by the Bank was $208,949, $118,234 and $763,255 at March 31, 2004, and December 31, 2003 and 2002 respectively. $189,057, $96,542 and $619,804 of these loans were accounted for on a nonaccrual basis as of March 31, 2004, and December 31, 2003 and 2002, respectively. The allowance for loan losses related to these impaired investments was $31,555 at March 31, 2004 compared with $16,462 at December 31, 2003 and $269,225 at December 31, 2002.

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


	Three Months Ended					Year Ended
	March 31,					December 31,
(In thousands)	2004		2003			2003			2002			2001
	(Unaudited)					(Audited)
Balance at beginning of year	$	1,810	$	1,994		$	1,994		$	1,856		$	1,749
Provision for loan losses		—		45			45			231			80
Loans written off, net of recoveries		1		(33	)		(229	)		(93	)		27

Balance at end of year	$	1,811	$	2,006		$	1,810		$	1,994		$	1,856

F-13

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

4. Loans Receivable - (Continued)

In the ordinary course of business, the Bank makes loans to directors, officers and employees on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who are not directors, officers or employees. The amounts of these loans were approximately $1,370,000 at March 31, 2004, compared with $1,411,000 and $946,000 and December 31, 2003 and 2002, respectively.

The Bank services loans for other financial institutions and agencies. These loans are originated by the Bank and then sold. The Bank continues to service these loans and remits the payments received to the purchasing institution. At March 31, 2004 and 2003, the amounts of these loans were approximately $13,517,000 and $9,252,000 respectively, compared with $12,056,000, $8,158,000 and $1,617,000 at December 31, 2003, 2002 and 2001, respectively.

5. Premises and Equipment

Premises and equipment are summarized as follows:


	March 31,			December 31,
(In thousands)	2004			2003			2002
	(Unaudited)			(Audited)
Banking offices and branch buildings	$	4,687		$	4,516		$	4,504
Furniture and equipment		1,917			1,872			1,837
Land		1,012			1,012			1,012
Leasehold improvements		699			699			399

		8,315			8,099			7,752
Accumulated depreciation and amortization		(2,106	)		(1,980	)		(1,626	)

Premises and equipment, net	$	6,209		$	6,119		$	6,126

Depreciation and amortization expense is computed using the straight-line method over the estimated useful life of an asset. Estimated useful lives range from three to ten years for furniture and equipment, 39 years for the banking offices, and the initial lease term for leasehold improvements. Land is not depreciated.

Depreciation and amortization expenses were $126,351 and $117,886 for the three months ended March 31, 2004 and 2003 compared with $503,425, $436,091, and $355,812 for the years ended December 31, 2003, 2002 and 2001, respectively.

F-14

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

At December 31, 2003, future minimum rental income and lease payment expense were expected to be:


(In thousands)	Income		Expense
	(Audited)
2004	$	31	$	110
2005		31		112
2006		26		78
2007		—		55
2008		—		56
Thereafter		—		255

Total future minimum rents	$	88	$	666

6. Other Assets

In October, 2002, the Financial Accounting Standards Board (“FASB) issued Statement of Financial Accounting Standard (“SFAS”) No. 147, “Acquisitions of Certain Financial Institutions”. This standard removes the accounting for certain branch acquisitions from the scope of SFAS No. 72, “Accounting for Certain Acquisitions of Banking or Thrift Institutions".

For branch acquisitions completed before October, 2002, SFAS No. 147 requires that the carrying amount of any intangible asset which meets certain recognition criteria be accounted for separately and not be reclassified as goodwill. The standard indicates these assets are to be accounted for in accordance with SFAS No. 141, “Business Combinations”, and continue to be amortized.

The Bank adopted SFAS No. 147 as of its October 1, 2002 (its effective date), and determined its intangible asset met the recognition criteria of the Standards. Accordingly, the Bank is continuing to amortize the intangible asset.

At March 31, 2004 the remaining intangible asset is $281,000 compared with $289,430 and $323,150, at December 31, 2003 and 2002, respectively. The intangible is being amortized on the straight-line basis over a 15 year period. Amortization expense was $8,430 for each of the three months ended March 31, 2004 and 2003, and $33,720 for each of the years ended December 31, 2003, 2002 and 2001.

F-15

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

7. Deposits

Deposits and weighted average rates at March 31, 2004 and December 31, 2003 and 2002 are summarized as follows:


	March 31,					December 31,
	2004					2003					2002
	(Unaudited)					(Audited)
			Weighted					Weighted					Weighted
			Average					Average					Average
(In thousands)	Amount		Cost			Amount		Cost			Amount		Cost
Certificate accounts	$	86,431		2.15	%	$	86,192		2.19	%	$	89,283		3.16	%
Regular savings accounts		41,672		0.35	%		40,185		0.40	%		36,835		0.75	%
Checking and NOW accounts		34,368		0.25	%		32,723		0.25	%		28,346		0.50	%
Money market savings accounts		25,003		0.91	%		24,355		0.85	%		18,767		1.40	%

Total deposits	$	187,474		1.24	%	$	183,455		1.27	%	$	173,231		2.02	%

The aggregate amount of individual certificate accounts of $100,000 or more at March 31, 2004, and December 31, 2003 and 2002 was approximately $17,661,000, $16,983,000 and $16,345,000 respectively.

At the end of the period, the remaining maturities for certificate accounts were:


	March 31,		December 31,
(In thousands)	2004		2003		2002
	(Unaudited)		(Audited)
Certificate accounts maturing in:
Under 12 months	$	52,538	$	52,466	$	67,722
12 to 36 months		18,820		20,049		9,966
Over 36 months		15,073		13,677		11,595

Total certificate accounts	$	86,431	$	86,192	$	89,283

8. Advances from Federal Home Loan Bank of Boston

The Bank has an agreement with Federal Home Loan Bank of Boston (“FHLBB”) providing for future credit availability of up to twenty times the amount of FHLBB stock held by the Bank, not to exceed 30% of its total assets. The Bank held $1,757,000 in Federal Home Loan Bank stock at March 31, 2004 and December 31, 2003. In additional to the outstanding advances, the Bank has a $2,540,000 line of credit available from FHLBB and a $2,000,000 line of credit available from another correspondent bank.

F-16

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

FHLBB advances are secured by a blanket lien on the Bank’s assets. Outstanding advances with calendar-year maturity dates and weighted average cost of funds were as follows:


	March 31,					December 31,
(In thousands)	2004					2003					2002
	(Unaudited)					(Audited)
			Weighted					Weighted					Weighted
	Amount		Average			Amount		Average			Amount		Average
Year of Maturity	Due		Cost			Due		Cost			Due		Cost
2003	$	—		—		$	—		—		$	9,112		3.31	%
2004		5,012		4.92	%		9,864		3.41	%		4,270		5.63	%
2005		5,123		5.59	%		5,123		5.59	%		4,336		5.92	%
2006		5,223		5.07	%		5,223		5.07	%		4,406		5.31	%
2007		6,828		4.47	%		6,828		4.47	%		5,978		4.57	%
2008		2,939		4.36	%		2,939		4.36	%		1,555		5.00	%
2009		2,380		4.16	%		2,380		4.16	%		1,462		4.38	%
2010		703		4.01	%		703		4.01	%		—		—
2011		657		4.09	%		657		4.09	%		—		—
2012		684		4.09	%		684		4.09	%		—		—
2013		579		4.13	%		579		4.13	%		—		—
2014		10		3.94	%		10		3.94	%		—		—

Total advances	$	30,138		4.77	%	$	34,990		4.37	%	$	31,119		4.65	%

9. Income Taxes

Retained earnings at March 31, 2004 and December 31, 2003 includes approximately $755,000 for which no provision for Federal income tax has been made. This amount represents aggregate allocations of income to bad debt deductions for tax purposes only. Reduction of amounts so allocated for purposes other than tax bad debt losses will create income for tax purposes only, which will be subjected to the then current corporate income tax rate.

The Bank’s fully-owned subsidiary, the Naugatuck Valley Mortgage Servicing Corporation, qualifies and operates as a Connecticut passive investment company pursuant to legislation. Because the subsidiary earns income from passive investments which is exempt from Connecticut Corporation Business Tax and its dividends to the Bank are exempt from state tax, the Bank no longer expects to incur state income tax expense.

F-17

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

9. Income Taxes - (Continued)

Federal income taxes receivable and payable included in the balance sheet were:


	March 31,			December 31,
(In thousands)	2004			2003			2002
	(Unaudited)			(Audited)
Current tax receivable (payable)	$	(140	)	$	26		$	(24	)

Deferred tax receivable
Reserve for loan losses	$	327		$	340		$	314
Post-retirement benefits		229			246			254
Deferred income		147			117			177
Depreciation		—			—			21

Total deferred tax receivable		703			703			766

Deferred tax payable
Available-for-sale securities	$	(170	)	$	(139	)	$	(365	)
Depreciation		(117	)		(110	)		—
Other items		(21	)		(27	)		(30	)

Total deferred tax payable		(308	)		(276	)		(395	)

Net deferred tax receivable	$	395		$	427		$	371

Deferred income taxes reflect the impact of “temporary differences” between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. Principle items making up the deferred income tax provision include the provision for loan losses, accelerated tax depreciation and deferred mortgage fee income. The Bank records a valuation allowance against deferred tax assets if, based on the weight of available evidence, it is more likely than not, that some or all of the deferred tax assets will not be realized. The Bank believes that all deferred tax assets will be realized in the future and that no valuation allowance is necessary.

F-18

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

The provision for income tax expense for the three months ended March 31, 2004 and 2003, and the years ended December 31, 2003, 2002, and 2001 consists of:


	Three Months
	Ended						Year Ended
	March 31,						December 31,
(In thousands)	2004			2003			2003			2002			2001
	(Unaudited)						(Audited)
Current income tax expense	$	165		$	211		$	651		$	978		$	721
Deferred income tax expense (benefit), due to:
Post retirement benefits		17			16			8			36			(84	)
Reserve for loan losses		13			(13	)		(26	)		(151	)		(67	)
Depreciation		7			(14	)		131			(21	)		(12	)
Deferred income		(30	)		9			60			39			(8	)
Other items		(6	)		8			(2	)		(1	)		(8	)

Total deferred income tax expense (benefit)		1			6			171			(98	)		(179	)

Provision for income taxes	$	166		$	217		$	822		$	880		$	542

A reconcilement of the statutory federal income tax rate applied to income before income taxes with the income tax provision is as follows:


	Three Months
	Ended						Year Ended
(In thousands)	2004			2003			2003			2002			2001
	(Unaudited)						(Audited)
Income tax expense at statutory rate of 34%	$	185		$	220		$	894		$	952		$	586
Increase (decrease) in income tax expense due to:
Changes in tax bad debt base year reserves		—			—			(28	)		(74	)		(46	)
Income exempt from income tax		(16	)		—			(46	)		—			—
Other items, net		(3	)		(3	)		2			2			2

Provision for income taxes	$	166		$	217		$	822		$	880		$	542

F-19

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

10. Regulatory Capital

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum ratios of 4.00% for Tier 1 capital to average assets, 4.00% for Tier 1 capital to risk-weighted assets, and 8.00% for total risk-based capital to risk-weighted assets. As of March 31, 2004 the Bank meets all capital requirements to which it is subject.

At March 31, 2004 the Bank’s capital ratios were considered well capitalized for regulatory purposes. To be categorized as well capitalized, the Bank must maintain a Tier 1 capital to average assets ratio of 5.00%, a Tier 1 capital to risk-based ratio of at least 6.00%; and a total risk-based capital to risk-weighted assets ratio of at least 10.00%. There have been no subsequent conditions or events which management believes have changed the Bank’s status.

Prior to its charter-conversion (see note 1), the Bank was subject to capital requirements established by The Office of Thrift Supervision (OTS). Under the regulations in effect at December 31, 2002, the Bank was required to maintain a minimum ratio of tangible capital to total adjusted assets of 1.50%; a minimum ratio of Tier 1 (core) capital to total adjusted assets of 4.00%; a minimum ratio of Tier I capital to risk-weighted assets of 4.00% and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.00%. At December 31, 2002, the Bank’s capital ratios were considered well capitalized for regulatory purposes.

The following is a summary of the Bank’s actual capital as computed under the standards established by the FDIC and the OTS at March 31, 2004, and December 31, 2003 and 2002, respectively.


	March 31,					December 31,
	2004					2003					2002
(In thousands)	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Unaudited)					(Audited)
Tier I Capital (to Average Assets in 2004 and 2003, and to Adjusted Total Assets in 2002)	$	21,044		8.83	%	$	20,658		8.64	%	$	18,818		8.30	%
Tier I Risk-Based Capital (to Risk-Weighted Assets)		21,044		15.01	%		20,658		14.96	%		18,818		14.12	%
Total Risk-Based Capital (to Risk-Weighted Assets)		22,797		16.26	%		22,372		16.21	%		20,487		15.37	%
Tangible Equity Capital (to Tangible Assets)	NA		NA			NA		NA				18,818		8.30	%

F-20

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

11. Retirement Benefits

Pension Plan

The Bank participates in a multi-employer defined benefit pension plan covering all of its full time (as defined) employees who have been employed by the Bank for more than six months and are at least twenty-one years of age. Benefits under this plan become fully vested after five years of service. The Bank’s net pension cost for the period is the amount of contributions due. Total pension expense was $94,604 and $73,353 for the three months ended March 31, 2004 and 2003 compared with $335,300, $225,899 and $205,135 for the years ended December 31, 2003, 2002 and 2001. Current valuations of the Bank’s allocation of the plan’s pooled assets are not available.

Defined Contribution Plan

The Bank has a defined contribution 401(k) plan for eligible employees. During 2003, the plan was amended and restated to comply with various legislative acts, collectively referred to as “GUST”. As amended, the 401(k) plan permits participants to contribute the maximum percentage allowable subject to limits provided by the new law. The Bank provides 50% matching of employee contributions, with a maximum contribution on up to 6% of the employee’s salary. The Bank’s contribution vests over a 6 year graded vesting schedule. The Bank’s contribution to the plan was $17,836 and $15,657 for the three months ended March 31, 2004 and 2003 compared with $58,675, $23,000, and $23,434 for the years ended December 31, 2003, 2002 and 2001, respectively.

Directors Retirement Plan

The Bank sponsors a retirement and benefits plan for non-employee directors who attain age 70 and meet certain other qualifying criteria. Annual retirement benefits for qualifying individuals are payable in ten semi-annual installments. The plan is unfunded. Accrued expenses for the three months ended March 31, 2004 and 2003 were $3,035 and $4,560 respectively. Accrued expense for the years ended December 31, 2003, 2002 and 2001 were $29,665, $106,882, and $264,563 respectively.

Healthcare Benefits

In addition to providing pension benefits, the Bank provides certain health care benefits to retired employees. Substantially all of the Bank’s employees may become eligible for those benefits.

The Bank’s policy is to accrue the expected cost of providing those benefits during the years that the employee renders the necessary service. Accrued expense (benefit) for the years ended December 31, 2003, 2002 and 2001 were $53,991, $(105,015), and $30,789.

F-21

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

12. Comprehensive Income

For the three months ended March 31, 2004 and 2003, and the years ended December 31, 2003, 2002 and 2001, the Bank’s comprehensive income was:


	Three Months Ended						Year Ended
	March 31,						December 31,
(In thousands)	2004			2003			2003			2002			2001
	(Unaudited)						(Audited)
Net income	$	378		$	429		$	1,806		$	1,920		$	1,182

Other comprehensive income (loss):
Unrealized gain (loss) on securities available for sale		117			(118	)		(664	)		659			500
Reclassification adjustment for gains realized in net income		(24	)		—			(1	)		(3	)		—

Other comprehensive income (loss) before tax expense		93			(118	)		(665	)		656			500
Income tax expense (benefit) related to items of other comprehensive income (loss)		32			(40	)		(226	)		223			170

Other comprehensive income (loss) net of tax		61			(78	)		(439	)		433			330

Total Comprehensive Income	$	439		$	351		$	1,367		$	2,353		$	1,512

13. Financial Instruments

The Bank is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to reduce its own exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the balance sheet. The following table summarizes these financial instruments and other commitments and contingent liabilities as of March 31, 2004 and December 31, 2003 and 2002:


	March 31,		December 31,
(In thousands)	2004		2003		2002
	(Unaudited)		(Audited)
Commitments to extend credit:
Loan commitments	$	6,467	$	7,754	$	10,986
Unused lines of credit		13,760		13,478		14,650
Amounts due mortgagors on construction loans		2,191		2,519		1,168
Amounts due on commercial loans		11,349		7,569		4,017
Commercial letters of credit		1,563		545		599
Commitments to sell loans		—		—		491

F-22

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual notional amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments are principally collateralized by mortgages on real estate, generally have fixed expiration dates or other termination clauses and may require payment of fees. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The estimated fair value of the Bank’s financial instruments follows:


	March 31,				December 31,
	2004				2003				2002
	(Unaudited)				(Audited)
	Carrying		Estimated		Carrying		Estimated		Carrying		Estimated
(In thousands)	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value
Financial assets
Cash and cash equivalents	$	11,918	$	11,918	$	9,775	$	9,775	$	18,158	$	18,158
Investment securities		32,914		32,939		38,727		38,743		33,876		33,907
Loans receivable, net		182,311		184,399		180,378		184,572		166,046		174,464
Accrued income receivable		1,029		1,029		1,071		1,071		1,045		1,045
Financial Liabilities
Deposits	$	187,474	$	188,517	$	183,455	$	184,636	$	173,231	$	174,276
Federal Home Loan Bank advances		30,138		31,027		34,990		35,944		31,119		32,556
Mortgagors’ escrow accounts		1,530		1,530		2,634		2,634		2,362		2,362

14. Mutual Holding Company Reorganization and Minority Stock Issuance (unaudited)

On May 17, 2004, the Board of Directors of the Bank unanimously adopted both a Plan of Reorganization and Minority Stock Issuance (the “Plan of Reorganization”) and a Plan of Charter Conversion. Pursuant to the Plan of Charter Conversion, the Bank will convert from a Connecticut-chartered mutual savings bank to a federal mutual savings bank. As soon as practicable after the completion of the charter conversion and pursuant to the Plan of Reorganization, the Bank will: (i) convert to a stock savings bank as the successor to the Bank in its current mutual form; (ii) organize a Stock Holding Company as a federally chartered corporation that will own 100% of the common stock of the Stock Bank; and (iii) organize a Mutual Holding Company as a federally chartered mutual holding company that will own at least 51% of the common stock of the Stock Holding Company so long as the Mutual Holding Company remains in existence. The Stock Bank will succeed to the business and operations of the Bank in its mutual form and the Stock Holding Company will sell a minority interest in its common stock in a public stock offering.

F-23

(NAUGATUCK VALLEY LOGO)

Notes to Consolidated Financial Statements
Three Months Ended March 31, 2004 and 2003 (unaudited)
and Years Ended December 31, 2003, 2002 and 2001

14. Mutual Holding Company Reorganization and Minority Stock Issuance (unaudited) - (Continued)

The Plan of Reorganization must be approved by the Office of Thrift Supervision and by the Bank’s depositors. The Plan of Charter Conversion must be approved by the Office of Thrift Supervision, the Banking Commissioner of the State of Connecticut and the Bank’s Board of Corporators.

Following the completion of the reorganization, all depositors who had membership or liquidation rights with respect to the Bank as of the effective date of the reorganization will continue to have such rights solely with respect to the Mutual Holding Company so long as they continue to hold deposit accounts with the Bank. In addition, all persons who become depositors of the Bank subsequent to the reorganization will have such membership and liquidation rights with respect to the Mutual Holding Company.

The Stock Holding Company plans to offer to the public shares of common stock representing a minority ownership of the estimated pro forma market value of the Bank as determined by an independent appraisal. The Mutual Holding Company will maintain the majority ownership of the Stock Holding Company. Cost incurred in connection with the offering will be recorded as a reduction of the proceeds from the offering. If the transaction is not consummated, all costs incurred in connection with the transaction will be expensed. At March 31, 2004, no reorganization costs had been included in other assets.

F-24

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered by this prospectus to any person or in any jurisdiction in which an offer or solicitation is not authorized or in which the person making an offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make an offer or solicitation in those jurisdictions. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of the common stock.

These securities are not deposits or accounts and are not federally insured or guaranteed.

Until or 25 days after commencement of the syndicated community offering, if any, whichever is later, all dealers effecting transactions in the registered securities, whether or not participating in this distribution, may be required to deliver a prospectus when acting as underwriters and with respect to their unsold allotments of subscriptions.


(1)	Estimated expenses based on the registration of 2,975,625 shares at $10.00 per share.

In accordance with federal law, Article XII of the Registrant’s Bylaws provide as follows:

The Subsidiary Holding Company shall indemnify all officers, directors and employees of the Subsidiary Holding Company, and their heirs, executors and administrators, to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by them in connection with or arising out of any action, suit or proceeding in which they may be involved by reason of their having been a director or officer of the Subsidiary Holding Company, whether or not they continue to be a director or officer at the time of incurring such expenses or liabilities, such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys’ fees and the cost of reasonable settlements.

The exhibits and financial statement schedules filed as a part of this registration statement are as follows:

All schedules have been omitted as not applicable or not required under the rules of Regulation S-X.


	(1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:


	(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;

	(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement;

	(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement;


	(2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

	(3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.


	(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective.

	(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Borough of Naugatuck, State of Connecticut, on June 15, 2004.

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.

4 EX-1.1 2 g89544exv1w1.txt EX-1.1 ENGAGEMENT LETTER EXHIBIT 1.1 CONFIDENTIAL April 27, 2004 Mr. John C. Roman President & Chief Executive Officer Naugatuck Valley Savings and Loan, S.B. 333 Church Street Naugatuck, CT 06770 Re: Proposed Mutual Holding Company Formation - Subscription Enhancement & Administrative Services Dear Mr. Roman: Ryan Beck & Co., Inc. ("RBCO") is pleased to submit this engagement letter setting forth the terms of the proposed engagement between RBCO and Naugatuck Valley Savings and Loan, S.B., (the "Institution" or the "Company") in connection with the potential corporate reorganization of the Institution and sale of common stock by the Institution. 1. BACKGROUND ON RYAN BECK Ryan Beck & Co., Inc. was organized in 1946 and is one of the nation's leading investment bankers for financial institutions. The firm is a registered broker-dealer with the Securities and Exchange Commission, a member of the National Association of Securities Dealers, Inc., Securities Industry Association and a member of the Securities Investor Protection Corporation. RBCO's Financial Institutions Group represents one of the largest such groups devoted solely to financial institution matters in the country. 2. MUTUAL HOLDING COMPANY FORMATION AND STOCK OFFERING The Institution is considering the reorganization into a two-tier mutual holding company structure by forming a mutual holding company and middle-tier holding company ("Holding Company") pursuant to applicable regulations. The common stock (the "Common Stock") would be offered in a subscription offering with any remaining shares sold in a community offering (collectively the "Offering"). In connection therewith, the Institution's Board of Directors would adopt a stock issuance plan (the "Plan") whereby shares of Common Stock would be offered for sale in the Offering. In connection with the Offering, RBCO would propose to act as financial advisor to the Institution with respect to the Plan and selling agent/manager with respect to the Offering of the shares of Common Stock in the Offering. Specific terms of services shall be set forth in a definitive agency Mr. John C. Roman Naugatuck Valley Savings and Loan, S.B. Page 2 agreement (the "Definitive Agreement") between RBCO and the Institution to be executed on the date the offering document is declared effective by the appropriate regulatory authorities. 3. SERVICES TO BE PROVIDED BY RYAN BECK a. Advisory Services - Thorough planning is essential to a successful offering. RBCO serves as lead coordinator of the financial advisory, marketing and logistic efforts necessary to prepare for an offering. Our actions are intended to clearly define responsibilities and timetables, while avoiding costly surprises. We assume responsibility for the initial preparation of marketing materials--saving you time and legal expense. Moreover, as your investment banker, RBCO, will evaluate the financial, marketing and regulatory issues involved in the Offering. Our specific responsibilities include: - Advise with respect to business planning issues in preparation for a public offering; - Advise with respect to the choice of charter and form of organization; - Review and advise with respect to the Plan; - Review and provide input with respect to the Business Plan to be prepared in connection with the Offering; - Participate in drafting the Prospectus and assist in obtaining all requisite regulatory approvals; - Review and provide to the Board of Directors on the adequacy of the appraisal process; - Develop a marketing plan for the Offering including direct mail, advertising, community meetings and telephone solicitation; - Provide specifications and assistance in selecting data processing assistance, printer and other professionals; - Develop an operating plan for the Stock Sale Center (the "Center"); - Provide a list of equipment and supplies needed for the Center; - Draft marketing materials including letters, brochures, slide show script and advertisements; and - Assist in arranging market-makers for post-reorganization trading. b. Administrative Services and Stock Sale Center Management - RBCO will manage all aspects of the Offering. A successful Offering requires an enormous amount of attention to detail. Working knowledge and familiarity with the law and "lore" of bank regulators, Securities and Exchange Commission and NASD is essential. RBCO's experience in managing many thrift reorganizations and mutual holding company minority stock offerings will minimize the burden on your management and disruption to normal banking business. At the same time, our legal, accounting and regulatory background ensures that details are attended to in a professional fashion. An Offering requires accurate and timely record keeping and reporting. Furthermore, customer inquiries must be handled professionally and accurately. The Center centralizes all data and work effort relating to the Offering. Mr. John C. Roman Naugatuck Valley Savings and Loan, S.B. Page 3 RBCO will supervise and administer the Center. We will train Center staff to help record stock orders, answer customer inquiries and handle special situations as they arise. Center activities include the following: - Provide experienced on-site registered representatives to minimize disruption of day-to-day business; - Identify and organize space for the Center, the focal point of sales and proxy solicitation activity; - Administer the Center. All substantive stock and proxy related matters will be handled by employees of RBCO; - Organize and implement all proxy solicitation efforts (if applicable); - Prepare procedures for processing proxies, stock orders and cash, and for handling requests for information; - RBCO will outsource all Offering agent/data processing/transfer agent functions. The cost of such services will be borne by the Institution and are subject to separate agreement. RBCO will provide the Institution with the proposed agreements for such services prior to the execution of such agreements by RBCO or the Institutions; - Provide scripts, training and guidance for the telephone team in soliciting proxies and in the stock sales telemarketing effort; - Educate the Institution's directors, officers and employees about the Reorganization and Offering, their roles and relevant securities laws; - Train branch managers and customer - contact employees on the proper response to stock purchase inquiries; - Train and supervise Center staff assisting with proxy and order processing; - Prepare daily sales reports for management and ensure funds received balance to such reports; - Coordinate functions with the data processing agent, printer, transfer agent, stock certificate printer and other professionals; - Design and implement procedures for handling IRA and Keogh orders; and - Provide post-offering subscriber assistance and management of the pro-ration process. c. Securities Marketing Services - RBCO uses various sales techniques including direct mail, advertising, community investor meetings, telephone solicitation, and if necessary, selling group formation. The sales approach is tailored to fit your specific situation. Our techniques are designed to attract a stockholder base comprised largely of community oriented individuals loyal to the Institution. Our specific actions include: - Assign licensed registered representatives from our staff to work at the Center to solicit orders on behalf of the Institution from eligible prospects who have been targeted as likely and desirable stockholders by RBCO with the concurrence of the Institution; - Assist management in developing a list of potential investors who are viewed as priority prospects; Mr. John C. Roman Naugatuck Valley Savings and Loan, S.B. Page 4 - Respond to inquiries concerning the Offering and investment opportunities; - Organize, coordinate and participate in community informational meetings. These meetings are intended to both relieve customer anxiety and attract potential investors. The meetings generate widespread publicity for the Offering while providing local exposure of the Institution and promoting favorable stockholder relations; - Supervise and conduct a telemarketing campaign to identify prospects from among the Institution's customer base; - Continually advise management on market conditions and the community's responsiveness to the Offering; and - If appropriate assemble a selling group of selected local broker-dealers to assist in selling stock during the offering. In so doing, prepare broker "fact sheets" and arrange "road shows" for the purpose of stimulating local interest in the stock and informing the brokerage community of the particulars of the Offering. 4. COMPENSATION a. For its services hereunder, the Institution will pay to RBCO a total inclusive Advisory and Marketing fee of 1%. (However, the aggregate amount of this fee shall not exceed $230,000) For stock sold by a group of NASD member firms (which will include RBCO) pursuant to a syndicated community offering solely managed by RBCO (the "Selling Group"), a fee equal to one percent (1.00%), which fee along with the fee payable directly by the Company to selected dealers shall not exceed six percent (6.00%) in the aggregate. In consultation with RBCO, the Institution shall be authorized to determine which NASD member firms participate in the syndicated community offering and the extent of their participation. RBCO will not commence sales of the stock through members of the Selling Group without the specific prior approval of the Company. Such fees (less the amount of any advance payments) are to be paid to RBCO at the closing of the Offering. The Institution will pay RBCO $25,000 upon execution of this letter which will be applied to any fees due hereunder, including fees payable pursuant to subparagraph (b) below. If, pursuant to a resolicitation undertaken by the Institution, RBCO is required to provide significant additional services, the parties shall mutually agree to the dollar amount of the additional compensation due (if any). No fees shall be paid to RBCO on stock sold to board, management and employees of the Institution and to any employee stock ownership plan or any other benefit plan of the Institution. b. If, after adoption of the Plan, (i) the Plan is abandoned or terminated by the Institution; (ii) the Offering is not consummated by March 31, 2006; (iii) RBCO terminates this relationship because there has been a material adverse change in the financial condition or operations of the Institution since December 31, 2003; or (iv) immediately prior to commencement of the Offering, RBCO terminates this relationship because in its opinion, which shall have been formed in good faith after reasonable determination and consideration of all relevant factors, there has been a failure to satisfactorily disclose all relevant information in the disclosure documents or the existence of market conditions which might render the sale of the shares by the Institution hereby Mr. John C. Roman Naugatuck Valley Savings and Loan, S.B. Page 5 contemplated inadvisable; RBCO shall not be entitled to the fees set forth above under subparagraph (a) but in addition to reimbursement of its reasonable out-of-pocket expenses as set forth in paragraph 7 below, shall be entitled to receive for its advisory and administrative services a fee of $25,000. 5. MARKET MAKING If applicable, RBCO agrees to use its best efforts to maintain a market and to solicit other broker-dealers to make a market in the Common Stock after the Offering so that there are at least three market makers for the Common Stock after the Offering. 6. DOCUMENTS The Institution and its counsel will complete, file with the appropriate regulatory authorities and, as appropriate, amend from time to time, the information to be contained in the Institution's applications to banking and securities regulators and any related exhibits thereto. In this regard, the Institution and its counsel will prepare a prospectus and any other necessary disclosure documents relating to the offering of the Common Stock in conformance with applicable rules and regulations. As the Institution's financial advisor, RBCO will in conjunction with counsel, conduct an examination of the relevant documents and records of the Institution and will make such other reasonable investigation as deemed necessary and appropriate under the circumstances. The Institution agrees to make all such documents, records and other information deemed necessary by RBCO, or its counsel, available to them upon reasonable request. RBCO's counsel will prepare, subject to the approval of the Institution's counsel, the Definitive Agreement. RBCO's counsel shall be selected by RBCO, subject to the approval of the Institution. 7. EXPENSES AND REIMBURSEMENT The Institution will bear all of its expenses in connection with the Reorganization and the Offering of its Common Stock including, but not limited to, the Institution's attorney fees, NASD filing fees, "blue sky" legal fees, expenses for appraisal, auditing and accounting services, advertising expenses, printing expenses, "road show" expenses, syndicate related expenses, temporary personnel expenses and the preparation of stock certificates. In the event RBCO incurs such expenses on behalf of the Institution, the Institution shall pay or reimburse RBCO for such reasonable fees and expenses regardless of whether the Reorganization is successfully completed. RBCO will not incur any single expense of more than $1,000, pursuant to this paragraph without the prior approval of the Institution. The Institution also agrees to reimburse RBCO for reasonable out-of-pocket expenses, including legal fees and expenses, incurred by RBCO in connection with the services contemplated hereunder. RBCO will not incur legal fees (excluding the out-of-pocket expenses of counsel) in excess of $40,000 without the approval of the Institution. RBCO will not incur reimbursable direct out-of-pocket expenses in excess of $15,000 without the consent of the Institution. The parties acknowledge, however, that such cap may be increased by the mutual consent of the Institution and RBCO in the Mr. John C. Roman Naugatuck Valley Savings and Loan, S.B. Page 6 event of any material delay in the Offering which would require an update of the financial information in tabular form contained in the Prospectus for a period later than that set forth in the original Prospectus filing. Not later than three days before closing, we will provide you with a detailed accounting of all reimbursable expenses to be paid at closing. 8. BLUE SKY To the extent required by applicable state law, RBCO and the Institution will need to obtain or confirm exemptions, qualifications or registration of the Common Stock under applicable state securities laws and NASD policies. The cost of such legal work and related filing fees will be paid by the Institution to the law firm furnishing such legal work. The Institution will cause the counsel performing such services to prepare a Blue Sky memorandum related to the Offering including RBCO's participation therein and shall furnish RBCO a copy thereof addressed to RBCO or upon which such counsel shall state RBCO may rely. 9. AVAILABILITY OF "STARS" PROGRAM As an additional service to the Institution, RBCO will make available for a period of 1 year following the completion of the Offering, advisory services through the RBCO Strategic Advisory Services ("STARS") program. The undersigned will serve as the senior relationship manager for this program. If the Institution elects to avail itself of the STARS program, RBCO will meet with the Institution at its request. RBCO also will provide opinions and recommendations, upon request, for the areas covered below: Valuation Analysis Merger and Acquisition Planning and Analysis Merger and Acquisition Trends Planning, Forecasting & Competitive Strategy Capital, Asset & Liability Structure & Management Stock Repurchase Programs Dividend Policy Dividend Reinvestment Programs Market Development and Sponsorship of Bank Securities Financial Disclosure Financial Relations Financial Reports Branch Sales and Purchases Stock Benefit Plan Analysis and Advisory Stockholder & Investor Relations Presentations & Programs Fairness Opinions Scanning of Potential Acquisition Candidates Based on Published Statement Information (This screening does not extend to any in-depth merger and acquisition analyses or studies which are available under RBCO's normal fee schedule, and does not include retention of RBCO by the Institution for any specific merger/acquisition situation.) Mr. John C. Roman Naugatuck Valley Savings and Loan, S.B. Page 7 If the Institution elects to utilize the STARS program RBCO will waive the regular retainer fee and hourly charges for this program for the first year. The Institution also will reimburse RBCO's reasonable out-of-pocket expenses incurred in conjunction with the performance of these services. Such out-of-pocket expenses shall include travel, legal and other miscellaneous expenses. RBCO will not incur any single expense in excess of $1,000 pursuant to this paragraph without the prior approval of the Institution. 10. INDEMNIFICATION The Definitive Agreement will provide for indemnification of the type usually found in underwriting agreements as to certain liabilities, including liabilities under the Securities Act of 1933. The Institution also agrees to defend, indemnify and hold harmless RBCO and its officers, directors, employees and agents against all claims, losses, actions, judgments, damages or expenses, including but not limited to reasonable attorneys' fees, arising solely out of the engagement described herein, except that such indemnification shall not apply to RBCO's own bad faith, willful misconduct or gross negligence. 11. CONFIDENTIALITY To the extent consistent with legal requirements and except as otherwise set forth in the Prospectus, all information given to RBCO by the Institution, unless publicly available or otherwise available to RBCO without restriction to breach of any confidentiality agreement ("Confidential Information"), will be held by RBCO in confidence and will not be disclosed to anyone other than RBCO's agents without the Institution's prior approval or used for any purpose other than those referred to in this engagement letter. Upon any termination of its engagement, RBCO shall promptly deliver to the Institution all materials specifically produced for it and will return to the Institution all Confidential Information provided to RBCO during the course of its engagement hereunder. 12. NASD MATTERS RBCO has an obligation to file certain documents and to make certain representations to the National Association of Security Dealers ("NASD") in connection with the Offering. The Institution agrees to cooperate with RBCO and provide such information as may be necessary for RBCO to comply with all NASD requirements applicable to it in connection with its participation as contemplated herein in the Offering. RBCO is and will remain through completion of the Offering a member in a good standing of the NASD and will comply with all applicable NASD requirements. 13. OBLIGATIONS (a) Except as set forth below, this engagement letter is merely a statement of intent. While RBCO and the Institution agree in principle to the contents hereof and propose to proceed promptly and in good faith to work out the arrangements with respect to the Offering, any legal obligations Mr. John C. Roman Naugatuck Valley Savings and Loan, S.B. Page 8 between RBCO and the Institution shall be only: (i) those set forth herein in paragraphs 2, 3 and 4 regarding services and payments; (ii) those set forth in paragraph 7 regarding reimbursement for certain expenses; (iii) those set forth in paragraph 10 regarding indemnification; (iv) those set forth in paragraph 11 regarding confidentiality; and (v) as set forth in a duly negotiated and executed Definitive Agreement. (b) The obligation of RBCO to enter into the Definitive Agreement shall be subject to there being, in RBCO's opinion, which shall have been formed in good faith after reasonable determination and consideration of all relevant factors: (i) no material adverse change in the condition or operation of the Institution; (ii) satisfactory disclosure of all relevant information in the disclosure documents and a determination that the sale of stock is reasonable given such disclosures; (iii) no market conditions which might render the sale of the shares by the Institution hereby contemplated inadvisable; and (iv) agreement that the price established by the independent appraiser is reasonable in the then prevailing market conditions. 14. INDEPENDENT CONTRACTOR; NO FIDUCIARY DUTY The Company acknowledges and agrees that it is a sophisticated business enterprise and that RBCO has been retained pursuant to this Agreement to act as financial advisor to the Company solely with respect to the matters set forth herein. In such capacity, RBCO shall act as an independent contractor, and any duties of RBCO arising out of this engagement pursuant to this Agreement shall be contractual in nature and shall be owed solely to the Company. Each party disclaims any intention to impose any fiduciary duty on the other. 15. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of New Jersey applicable to contracts executed and to be wholly performed therein without giving effects to its conflicts of laws principles or rules. Any dispute here under shall be brought in a court in the State of New Jersey. 16. WAIVER OF TRAIL BY JURY EACH OF RBCO AND THE COMPANY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTERCLAIM (WHETHER BASED ON CONTRACT, TORT OR OTHERWISE) RELATED TO OR ARISING OUT OF THIS AGREEMENT. Mr. John C. Roman Naugatuck Valley Savings and Loan, S.B. Page 9 Please acknowledge your agreement to the foregoing by signing in the place provided below and returning one copy of this letter to our office together with the retainer payment in the amount of $25,000. We look forward to working with you. RYAN BECK & CO., INC. BY: /s/ Mark B. Cohen --------------------------------- Mark B. Cohen Managing Director Accepted and Agreed to This 28 Day of April, 2004 -- ----- NAUGATUCK VALLEY SAVINGS AND LOAN, S.B. BY: /s/ John C. Roman --------------------------------- John C. Roman President & Chief Executive Officer Cc: Douglas P. Faucette Victor Cangelosi EX-2.1 3 g89544exv2w1.txt EX-2.1 PLAN OF REORGANIZATION EXHIBIT 2.1 PLAN OF REORGANIZATION AND MINORITY STOCK ISSUANCE NAUGATUCK VALLEY SAVINGS AND LOAN, S.B. NAUGATUCK, CONNECTICUT Adopted as of May 17, 2004 and Amended and Restated as of June 15, 2004 TABLE OF CONTENTS

i 18. Requirements for Stock Purchases by Directors and Officers Following the Reorganization............................................... 24 19. Restrictions on Transfer of Stock............................................. 24 20. Restrictions on Voting Holding Company Stock.................................. 25 21. Adoption of Federal Stock Charter and Bylaws.................................. 25 22. Tax Rulings or Opinions....................................................... 25 23. Stock Compensation Plans...................................................... 26 24. Dividend and Repurchase Restrictions on Stock................................. 26 25. Payment of Fees to Brokers.................................................... 26 26. Effective Date................................................................ 27 27. Amendment or Termination of the Plan.......................................... 27 28. Interpretation of the Plan.................................................... 27

ii 1. INTRODUCTION. For purposes of this section, all capitalized terms have the meanings ascribed to them in Section 2. The Board of Directors of the Bank has unanimously adopted this Plan of Reorganization and Minority Stock Issuance pursuant to which the Bank will reorganize into a mutual holding company structure under the laws of the United States. This Plan is being adopted in connection with the Bank's adoption of a separate Plan of Charter Conversion pursuant to which the Bank will convert from a Connecticut-chartered mutual savings bank to a federal mutual savings bank. It is intended that the Charter Conversion will occur immediately or as soon as practicable prior to the Reorganization. As a result, this Plan has been drafted and should be interpreted assuming the Bank is in the federal mutual savings bank form of organization and the Charter Conversion has been consummated. As part of the Reorganization and in accordance with this Plan, a mutual holding company to be known as Naugatuck Valley Mutual Holding Company (the "MHC") will be established, as well as Naugatuck Valley Financial Corporation (the "Holding Company"), which will be a federal corporation. In addition, a federally-chartered stock savings bank, which will be named Naugatuck Valley Savings and Loan, will also be established. The Holding Company will be a majority-owned subsidiary of the MHC at all times so long as the MHC remains in existence, and the Bank will be a wholly-owned subsidiary of the Holding Company. The Plan also provides that non-transferable subscription rights to purchase up to 49.9% of the common stock of the Holding Company ("Conversion Stock") shall be granted to certain deposit account holders of the Bank pursuant to the Plan and in accordance with the regulations of the OTS. This Reorganization and the Offerings will permit the Bank to control the amount of capital being raised to enable the Bank to more prudently deploy the proceeds, while at the same time enabling the Bank to: (1) support future lending and operational growth, including branching activities and acquisitions of other financial institutions or financial services companies; (2) increase its ability to render services to the communities it serves; (3) compete more effectively with commercial banks and other financial institutions for new business opportunities; and (4) increase its equity capital base and access the capital markets when needed. In furtherance of the Bank's commitment to its community, the Plan provides for the establishment of a charitable foundation as part of the Reorganization and Offerings. The charitable foundation is intended to complement the Bank's existing community reinvestment activities in a manner that will allow the Bank's local communities to share in the growth and profitability of the Holding Company and the Bank over the long term. Consistent with the Bank's goal, the Holding Company intends to donate to the charitable foundation immediately following the Offerings a number of shares of its authorized but unissued Holding Company Common Stock in an amount up to 2% of the Holding Company Common Stock issued in the Offerings and to the MHC in the Reorganization. 1 This Plan is subject to the approval of the OTS and must be adopted by at least a majority of the total number of outstanding votes eligible to be cast by Voting Members at the Special Meeting. 2. DEFINITIONS. As used in this Plan, the terms set forth below have the following meaning: ACTING IN CONCERT means (i) knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement or understanding; or (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. A person or company which acts in concert with another Person or company ("other party") shall also be deemed to be acting in concert with any Person who is also acting in concert with that other party, except that any Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether stock held by the trustee and stock held by the plan will be aggregated and participants or beneficiaries of any such Tax-Qualified Employee Stock Benefit Plan will not be deemed to be acting in concert solely as a result of their common interests as participants or beneficiaries. When Persons act together for such purpose, their group is deemed to have acquired their stock. The determination of whether a group is Acting in Concert shall be made solely by the Board of Directors of the Bank or by Officers designated by such Board and may be based on any evidence upon which the Board or such designees chooses to rely, including, without limitation, joint account relationships or the fact that such Persons have filed joint Schedules 13D or Schedules 13G with the SEC with respect to other companies. Directors of the Holding Company, the Bank and the MHC shall not be deemed to be Acting in Concert solely as a result of their membership on any such board or boards. ACTUAL PURCHASE PRICE means the price per share at which the Conversion Stock is ultimately sold by the Holding Company in the Offerings in accordance with the terms hereof. AFFILIATE means a Person who, directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with the Person specified. ASSOCIATE, when used to indicate a relationship with any Person, means (i) savings association, a corporation or organization (other than the MHC, the Holding Company, the Bank or a majority-owned subsidiary of the MHC, the Holding Company or the Bank) of which such Person is a senior officer or partner or is, directly or indirectly, the beneficial owner of 10% or more of any class of equity securities, (ii) any trust or other estate in which such Person has a substantial beneficial interest or as to which such Person 2 serves as trustee or in a similar fiduciary capacity, provided, however, that such term shall not include any Tax-Qualified Employee Stock Benefit Plan in which such Person has a substantial beneficial interest or serves as a trustee or in a similar fiduciary capacity, and (iii) any relative or spouse of such Person, or any relative of such spouse, who has the same home as such Person or who is a director or officer of the MHC, the Holding Company or the Bank or any of their subsidiaries. BANK means Naugatuck Valley Savings and Loan, S.B., a Connecticut-chartered mutual savings bank, or Naugatuck Valley Savings and Loan, a federally-chartered mutual savings bank, as the context of this Plan requires. BANK BENEFIT PLANS includes, but is not limited to, Tax Qualified Employee Stock Benefit Plans and Non-Tax Qualified Employee Stock Benefit Plans. BANK COMMON STOCK means the common stock of the Bank, par value $1.00 per share, which stock will not be insured by the FDIC or any other governmental authority, all of which will be held by the Holding Company. CHARTER CONVERSION means the conversion of the Bank's charter from a Connecticut state-chartered mutual savings bank charter to a federally chartered mutual savings bank charter. CODE means the Internal Revenue Code of 1986, as amended. COMMUNITY OFFERING means the offering for sale by the Holding Company of any shares of Conversion Stock not subscribed for in the Subscription Offering to such Persons within or without counties of Fairfield and New Haven Counties, Connecticut as may be selected by the Holding Company and the Bank in their sole discretion and to whom a copy of the Prospectus is delivered by or on behalf of the Holding Company. CONTROL (including the terms "controlling," "controlled by," and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. CONVERSION STOCK means the Holding Company Common Stock to be issued to the MHC, to be contributed by the Holding Company to the Foundation and to be sold by the Holding Company in the Offerings pursuant to the Plan. The Conversion Stock will not be insured by the FDIC or any other governmental authority. DEPOSIT ACCOUNT means any withdrawable account as defined in Section 561.42 of the Rules and Regulations of the OTS, including a demand account as defined in Section 561.16 of the Rules and Regulations of the OTS. ELIGIBLE ACCOUNT HOLDER means any Person holding a Qualifying Deposit on the Eligibility Record Date for purposes of determining Subscription Rights. 3 ELIGIBILITY RECORD DATE means the date for determining Eligible Account Holders and is the close of business on April 30, 2003. ESOP means a Tax Qualified Employee Stock Benefit Plan adopted by the MHC, Holding Company or the Bank in connection with the Reorganization, the purpose of which shall be to acquire capital stock of the Holding Company, including Conversion Stock. ESTIMATED PRICE RANGE means the range of the estimated aggregate pro forma market value of the total number of shares of Conversion Stock to be issued in the Offerings, as determined by the Independent Appraiser in accordance with Section 4 hereof. FOUNDATION means a charitable foundation that will qualify as an exempt organization under Section 501(c)(3) of the Code the establishment and funding of which is contemplated by Section 3A herein. FDIC means the Federal Deposit Insurance Corporation or any successor thereto. HOLDING COMPANY means Naugatuck Valley Financial Corporation, a stock corporation to be organized under the laws of the United States. Upon completion of the Reorganization, the Holding Company shall hold all of the outstanding capital stock of the Bank. HOLDING COMPANY COMMON STOCK means the common stock of the Holding Company, par value $.01 per share, which stock cannot and will not be insured by the FDIC or any other governmental authority. INDEPENDENT APPRAISER means the independent investment banking or financial consulting firm retained by the Holding Company and the Bank to prepare an appraisal of the estimated pro forma market value of the Conversion Stock. INITIAL PURCHASE PRICE means the price per share to be paid initially by Participants for shares of Conversion Stock subscribed for in the Subscription Offering and by Persons for shares of Conversion Stock ordered in the Community Offering and/or Syndicated Community Offering. MANAGEMENT PERSON means any Officer or director of the Bank or any Affiliate of the Bank and any person Acting in Concert with such Officer or director. MEMBER means any Person qualifying as a member of the Bank in accordance with its federal mutual charter and bylaws adopted in connection with the Plan of Charter Conversion, or any Person who would qualify as a member of the Bank in accordance with such federal mutual charter and bylaws but for the fact that such federal mutual charter and bylaws are not yet effective with the OTS, as the context of this Plan requires, and the 4 laws of the United States, and any Person qualifying as a member of the MHC in accordance with the mutual charter and bylaws and the laws of the United States. MHC means Naugatuck Valley MHC, a company organized under the laws of the United States. Upon completion of the Reorganization, the MHC shall hold at least 50.1% of the outstanding Holding Company Common Stock. MINORITY STOCKHOLDER means any owner of the Holding Company's Common Stock other than the MHC and the Foundation. OFFERINGS mean the offering of Conversion Stock to Persons other than the MHC and the Foundation in the Subscription Offering, the Community Offering and the Syndicated Community or Public Offering. OFFICER means the president, chief executive officer, vice-president, secretary, treasurer or principal financial officer, comptroller or principal accounting officer and any other person performing similar functions with respect to any organization whether incorporated or unincorporated. ORDER FORM means the form or forms to be provided by the Holding Company, containing all such terms and provisions as set forth in Section 11 hereof, to a Participant or other Person by which Conversion Stock may be ordered in the Offerings. OTHER MEMBER means a Voting Member who is not an Eligible Account Holder or a Supplemental Eligible Account Holder. OTS means the Office of Thrift Supervision or any successor thereto. PARTICIPANT means any Eligible Account Holder, Tax-Qualified Employee Stock Benefit Plan, Supplemental Eligible Account Holder or Other Member, but does not include the MHC or the Foundation. PERSON means an individual, a corporation, a partnership, an association, a joint stock company, a limited liability company, a limited liability partnership, a trust, an unincorporated organization or a government or any political subdivision thereof. PLAN and PLAN OF REORGANIZATION mean this Plan of Reorganization and Minority Stock Issuance as adopted by the Board of Directors of the Bank and any amendment hereto approved as provided herein. PROSPECTUS means the one or more documents to be used in offering the Conversion Stock in the Offerings. PROXY STATEMENT means the document used to solicit approval of the Plan and the funding of the Foundation by Voting Members. 5 PUBLIC OFFERING means an underwritten firm commitment offering to the public through one or more underwriters. QUALIFYING DEPOSIT means the aggregate balance of all Deposit Accounts in the Bank of (i) an Eligible Account Holder at the close of business on the Eligibility Record Date, provided such aggregate balance is not less than $50, and (ii) a Supplemental Eligible Account Holder at the close of business on the Supplemental Eligibility Record Date, provided such aggregate balance is not less than $50. REORGANIZATION means the reorganization of the Bank into the MHC and the organization of the Holding Company as a subsidiary of the MHC and the Stock Bank as a subsidiary of the Holding Company pursuant to this Plan. STOCK BANK means the federally chartered stock savings bank resulting from the conversion of the Bank to stock form pursuant to this Plan. SEC means the Securities and Exchange Commission. SPECIAL MEETING means the Special Meeting of Members of the Bank called for the purpose of soliciting the Members' approval of this Plan and the funding of the Foundation, including any adjournments or postponents of such meeting. SUBSCRIPTION OFFERING means the offering of the Conversion Stock to Participants. SUBSCRIPTION RIGHTS mean nontransferable rights to subscribe for Conversion Stock granted to Participants pursuant to the terms of this Plan. SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDER means any Person, except directors and Officers of the Bank and their Associates, holding a Qualifying Deposit at the close of business on the Supplemental Eligibility Record Date. SUPPLEMENTAL ELIGIBILITY RECORD DATE, if applicable, means the date for determining Supplemental Eligible Account Holders and shall be required if the Eligibility Record Date is more than 15 months prior to the date of the approval of the Plan by the OTS. If applicable, the Supplemental Eligibility Record Date shall be the last day of the calendar quarter preceding OTS approval of the Plan. SYNDICATED COMMUNITY OFFERING means the offering for sale by a syndicate of broker-dealers to the general public of shares of Conversion Stock not purchased in the Subscription Offering and the Community Offering. TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLAN means any defined benefit plan or defined contribution plan, such as an employee stock ownership plan, stock bonus plan, profit-sharing plan or other plan, which is established for the benefit of the 6 employees of the MHC, the Holding Company and/or the Bank and any Affiliate thereof and which, with its related trust, meets the requirements to be "qualified" under Section 401 of the Code as from time to time in effect. A "Non-Tax-Qualified Employee Stock Benefit Plan" is any defined benefit plan or defined contribution stock benefit plan that is not so qualified. VOTING MEMBER means a Person who at the close of business on the Voting Record Date is entitled to vote as a Member of the Bank in accordance with its federal mutual charter and bylaws adopted in connection with the Plan of Charter Conversion. VOTING RECORD DATE means the date or dates for determining the eligibility of Members to vote at the Special Meeting. 3. GENERAL PROCEDURE FOR REORGANIZATION. (1) Organization of the Holding Companies and the Bank The Reorganization will occur immediately or as soon as practicable after the Charter Conversion. The Reorganization will be effected as follows: (i) the Bank will organize an interim stock savings bank as a wholly owned subsidiary ("Interim One"); (ii) Interim One will organize a stock corporation as a wholly owned subsidiary ("Holding Company"); (iii) Interim One will organize an interim federal savings bank as a wholly owned subsidiary ("Interim Two"); (iv) the Bank will convert its charter to a federal stock savings bank charter and Interim One will exchange its charter for a federal mutual holding company charter to become the MHC; (v) sequentially with step (iv), Interim Two will merge with and into the Stock Bank with the Stock Bank as the resulting institution; (vi) former members of the Bank will become members of the MHC; (vii) MHC will contribute 100% of the issued common stock of the Stock Bank to the Holding Company; and (viii) the Holding Company will issue a majority of its common stock to the MHC. Contemporaneously with the Reorganization, the Holding Company will offer for sale in the Offerings shares of Holding Company Common Stock representing up to 49.9% the pro forma market value of the Holding Company and the Bank. Upon the consummation of the Reorganization, the legal existence of the Bank will not terminate, but the MHC will be a continuation of the Bank. All assets, rights, obligations and liabilities of whatever nature of the Bank that are not expressly retained by the MHC shall be transferred to the Stock Bank as part of the Reorganization. All property of the Bank (not expressly retained by the MHC), including its right, title and interest in all property of whatsoever kind and nature, interest and asset of every conceivable value or benefit then existing or pertaining to the Bank, or which would inure to the Bank immediately by operation of law and without the necessity of any conveyance or transfer and without any further act or deed, will vest in the MHC and will then be transferred to the Stock Bank. The Stock Bank will have, hold and enjoy the same in its right and fully and to the same extent as the same was possessed, held and enjoyed by the Bank. The Stock Bank will continue to have, succeed to and be responsible for all the rights, liabilities and obligations the 7 Bank had when it was in mutual form and will maintain its headquarters and operations at the Bank's present locations. Upon consummation of the Reorganization, substantially all of the assets and liabilities (including the savings accounts, demand accounts, tax and loan accounts, United States Treasury general accounts, or United States Treasury Time Deposit Accounts, as defined in the OTS regulations) of the Bank that are not expressly retained by the MHC shall become the assets and liabilities of the Stock Bank, which will thereupon become an operating savings association subsidiary of the Holding Company and of the MHC. The Bank will apply to the OTS to have the Holding Company receive or retain (as the case may be) up to 50% of the net proceeds of the Stock Offering, or such other amount as may be determined by the Board of Directors. The Stock Bank may distribute additional capital to the Holding Company following the Reorganization, subject to the OTS regulations governing capital distributions. The Board of Director of the Bank also intend to take all necessary steps to establish the Foundation and to fund the Foundation in the manner set forth in Section 3A hereof. (b) Effect on Deposit Accounts and Borrowings Each deposit account in the Bank on the effective date of the Reorganization will remain a deposit account in the Stock Bank in the same amount and upon the same terms and conditions, and will continue to be federally insured up to the legal maximum by the FDIC in the same manner as each deposit account existed in the Bank immediately prior to the Reorganization. Upon consummation of the Reorganization, all loans and other borrowings from the Bank shall retain the same status with the Stock Bank after the Reorganization as they had with the Bank immediately prior to the Reorganization. (3) The Bank Upon completion of the Reorganization, the Stock Bank will be authorized to exercise any and all powers, rights and privileges of, and will be subject to all limitations applicable to, capital stock savings associations under federal law and regulations. A copy of the proposed charter and bylaws of the Stock Bank is attached hereto as EXHIBIT A and made a part of this Plan. The Reorganization will not result in any reduction of the amount of retained earnings and general loss reserves will be accounted for by the MHC, the Holding Company and the Stock Bank on a consolidated basis in accordance with generally accepted accounting principles. The initial members of the Board of Directors of the Stock Bank will be the members of the existing Board of Directors of the Bank. The Stock Bank will be wholly-owned by the Holding Company. The Holding Company will be wholly-owned by its stockholders who will consist of the MHC and, initially, the persons who purchase Conversion Stock. Upon the effective date of the Reorganization, the voting and membership rights of Members will be transferred to the MHC, subject to the conditions specified below. 8 (4) The Holding Company The Holding Company will be authorized to exercise any and all powers, rights and privileges, and will be subject to all limitations applicable to savings and loan holding companies and mutual holding companies under federal law and regulations. The initial members of the Board of Directors of the Holding Company will be appointed by the Bank. Thereafter, the voting stockholders of the Holding Company will elect approximately one-third of the Holding Company's directors annually. A copy of the proposed charter and bylaws of the Holding Company is attached hereto as EXHIBIT B and made a part of this Plan. The Holding Company will have the power to issue shares of Holding Company Common Stock to persons other than the MHC. However, so long as the MHC is in existence, the MHC will be required to own at least a majority of the Holding Company Common Stock. The Holding Company may issue any amount of non-voting stock to persons other than the MHC. The Holding Company will be authorized to undertake one or more minority stock offerings of less than 50% in the aggregate of the total outstanding Holding Company Common Stock, and the Holding Company intends to offer for sale up to 49.9% of Holding Company Common Stock in the Offerings. (5) The Mutual Holding Company As a mutual corporation, the MHC will have no stockholders. The members of the MHC will have exclusive voting authority as to all matters requiring a vote of members under the charter of the MHC. Persons who have membership rights with respect to the Bank under its existing charter immediately prior to the Reorganization shall continue to have such rights solely with respect to the MHC after Reorganization so long as such persons remain depositors of the Stock Bank after the Reorganization. In addition, all persons who become depositors of the Stock Bank following the Reorganization will have membership rights with respect to the MHC. The rights and powers of the MHC will be defined by the MHC's charter and bylaws as attached hereto as EXHIBIT C and by the statutory and regulatory provisions applicable to savings and loan holding companies and mutual holding companies. In particular, the MHC shall be subject to the limitations and restrictions imposed on savings and loan holding companies by Section 10(o)(5) of the Home Owners' Loan Act of 1933, as amended. The initial members of the Board of Directors of the MHC will be the existing Board of Directors of the Bank. Thereafter, approximately one-third of the directors of the MHC will be elected annually by the members of the MHC who will consist of the former Members of the Bank and all persons who become depositors of the Stock Bank after the Reorganization. (6) Charters and Bylaws Copies of the proposed charter and bylaws of the Stock Bank, the Holding Company and the MHC are attached hereto as EXHIBIT A, EXHIBIT B AND EXHIBIT C, respectively, and made a part of this Plan. By their approval of this Plan, the Voting Members 9 shall have approved and adopted the charter and bylaws of the Stock Bank, the Holding Company and the MHC. The total shares of Holding Company Common Stock authorized under the Holding Company charter will exceed the shares of Holding Company Common Stock to be issued to the MHC and the Minority Stockholders in the Reorganization. (g) Rights of Owners of the MHC Following the Reorganization, all persons who had membership or liquidation rights with respect to the Bank as of the effective date of the Reorganization will continue to have such rights solely with respect to the MHC. All existing proxies granted by members of the Bank to the Board of Directors of the Bank shall automatically become proxies granted to the Board of Directors of the MHC; provided, however, such proxies may not be voted by the Board of Directors of the Bank at the Special Meeting. In addition, all persons who become depositors of the Stock Bank subsequent to the Reorganization also will have membership and liquidation rights with respect to the MHC. In each case, no person who ceases to be the holder of a Deposit Account with the Stock Bank shall have any membership or liquidation rights with respect to the MHC. (h) Conversion of MHC to Stock Form Following the completion of the Reorganization, the MHC may elect to convert to stock form in accordance with applicable law and regulation (a "Conversion Transaction"). There can be no assurance when, if ever, a Conversion Transaction will occur, and the Board of Directors has no present intent or plan to undertake a Conversion Transaction. If the Conversion Transaction does not occur, the MHC will continue to own a majority of the Holding Company Common Stock of the Holding Company. In a Conversion Transaction, the MHC would merge with and into the Stock Bank or the Holding Company (at the discretion of the MHC), and certain depositors of the Stock Bank would receive the right to subscribe for a number of shares of common stock of the new stock holding company formed in connection with the Conversion Transaction, as determined by the formula set forth in the following paragraphs. The additional shares of Holding Company Common Stock of the new Holding Company issued in the Conversion Transaction would be sold at their aggregate pro forma market value determined by an independent appraisal. Any Conversion Transaction shall be fair and equitable to Minority Stockholders. In any Conversion Transaction, Minority Stockholders, if any, will be entitled to maintain the same percentage ownership interest in the new Holding Company after the Conversion Transaction as their ownership interest in the Holding Company immediately prior to the Conversion Transaction (i.e., the Minority Ownership Interest), subject only to the adjustments (if required by federal or state law, regulation, or regulatory policy) to reflect the market value of assets of the MHC (other than common stock of the Holding Company). At the sole discretion of the Board of Directors of the MHC and the Holding Company, a Conversion Transaction may be effected in any other manner necessary to qualify 10 the Conversion Transaction as a tax-free reorganization under applicable federal and state tax laws, provided such Conversion Transaction does not diminish the rights and ownership interest of Minority Stockholders as set forth in the preceding paragraphs. A Conversion Transaction would require the approval of applicable federal regulators, and would be presented to a vote of the members of the MHC. Under current OTS policy, if a Conversion Transaction were to occur, the transaction would require the approval of a majority of the holders of the Holding Company Common Stock, other than the MHC. In addition, federal regulatory policy requires that in any Conversion Transaction the members of the MHC will be accorded the same stock purchase priorities as if the MHC were a mutual savings association converting to stock form. (i) Applications and Regulatory and Member Approval The Bank will take the necessary steps to prepare and file the Notice of Reorganization and Application for Approval of a Minority Stock Issuance, including the Plan, together with all requisite material, with the OTS for approval. The Bank also will cause copies of the Plan to be made available at each office of the Bank for inspection by Members. Once the Notice of Reorganization and Application for Approval of a Minority Stock Issuance are filed, the Bank will cause to be published, in accordance with the requirements of applicable regulations of the OTS, notice of the filing with the OTS of the Notice of Reorganization and Application for Approval of a Minority Stock Issuance, and will post notice of the filing of the Notice of Reorganization and Application for Approval of a Minority Stock Issuance in each office of the Bank. Promptly following receipt of requisite approval of the OTS, this Plan and the funding of the Foundation will be submitted to the Voting Members for their consideration and approval at the Special Meeting. The Bank shall mail to all Voting Members as of the Voting Record Date, at their last known address appearing on the records of the Bank, a proxy statement describing the Plan and the funding of the Foundation which will be submitted to a vote of the Voting Members at the Special Meeting. If the Plan and the funding of the Foundation are approved by the affirmative vote of a majority of the total number of votes eligible to be cast by Voting Members at the Special Meeting, the Bank shall take all other necessary organizational steps pursuant to applicable laws and regulations to amend its charter and bylaws to authorize the issuance of its capital stock to the Holding Company and to fund the Foundation at the time the Reorganization is consummated. As soon as practicable after the adoption of the Plan by the Board of Directors of the Bank, the proposed Board of Directors of the Holding Company shall adopt the Plan by at least a two-thirds vote. The proposed Board of Directors of the Holding Company shall cause to be submitted to the OTS such applications as may be required for approval of the Holding Company's acquisition of the Bank and a Registration Statement to the SEC to register the Conversion Stock under the Securities Act of 1933, as amended. The proposed Board of Directors of the Holding Company shall also register the Conversion Stock under any applicable state securities laws, subject to Section 13 hereof. Upon registration and after the receipt of all 11 required regulatory approvals, the Conversion Stock shall be first offered for sale in a Subscription Offering to Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans, Supplemental Eligible Account Holders, if applicable, and Other Members. It is anticipated that any shares of Conversion Stock remaining unsold after the Subscription Offering will be sold through a Community Offering, a Syndicated Community Offering and/or a Public Offering. The purchase price per share for the Conversion Stock shall be a uniform price determined in accordance with Section 4 hereof. The Holding Company shall purchase all of the capital stock of the Bank with an amount of the net proceeds received by the Holding Company from the sale of Conversion Stock as shall be determined by the Boards of Directors of the Holding Company and the Bank and as shall be approved by the OTS. (j) Expenses The Holding Company and the Bank may retain and pay for the services of financial and other advisors and investment bankers to assist in connection with any or all aspects of the Reorganization, including in connection with the Subscription Offering, Community Offering and/or any Syndicated Community Offering or Public Offering, the payment of fees to brokers and investment bankers for assisting Persons in completing and/or submitting Order Forms. All fees, expenses, retainers and similar items shall be reasonable. 3A. ESTABLISHMENT AND FUNDING OF CHARITABLE FOUNDATION. As part of the Reorganization, the Bank intends to establish a charitable foundation that will qualify as an exempt organization under Section 501(c)(3) of the Code and to donate to the Foundation from authorized but unissued shares of Holding Company Common Stock, an amount up to 2% of the number of shares of Holding Company Common Stock issued in the Offerings and to the MHC in the Reorganization. The Foundation is being formed in connection with the Reorganization to complement the Bank's existing community reinvestment activities and to share with the Bank's local community a part of the Bank's financial success as a locally headquartered, community minded, financial services institution. The funding of the Foundation with Holding Company Common Stock accomplishes this goal as it enables the community to share in the growth and profitability of the Holding Company and the Bank over the long-term. The Foundation will be dedicated to the promotion of charitable purposes including community development, grants or donations to support housing assistance, not-for-profit community groups and other types of organizations or civic minded projects. The Foundation will annually distribute total grants to assist charitable organizations or to fund projects within its local community of not less than 5% of the average fair value of Foundation assets each year, less certain expenses. To serve the purposes for which it was formed and maintain its Section 501(c)(3) qualification, the Foundation may sell, on an annual basis, a limited portion of the Holding Company Common Stock contributed to it by the Holding Company. The Board of Directors of the Foundation will be comprised of individuals who are Officers and/or Directors of the Holding Company or the Bank. Additionally, for at least five years after the Foundation's organization, one member of the Foundation's Board of Directors must be a member of the local community that is not an officer, director or employee of the 12 MHC, the Holding Company, the Bank or any of its Affiliates and who has experience with local charitable organizations and grant making. The Board of Directors of the Foundation will be responsible for establishing the policies of the Foundation with respect to grants or donations, consistent with the stated purposes of the Foundation. 4. TOTAL NUMBER OF SHARES AND PURCHASE PRICE OF CONVERSION STOCK. (a) The aggregate price at which shares of Conversion Stock shall be sold in the Offerings shall be based on a pro forma valuation of the aggregate market value of the Conversion Stock prepared by the Independent Appraiser. The valuation shall be based on financial information relating to the Holding Company and the Bank, market, financial and economic conditions, a comparison of the Holding Company and the Bank with selected publicly-held financial institutions and holding companies and with comparable financial institutions and holding companies and such other factors as the Independent Appraiser may deem to be important, including, but not limited to, the projected operating results and financial condition of the Holding Company and Bank. The valuation shall be stated in terms of an Estimated Price Range, the maximum of which shall generally be no more than 15% above the average of the minimum and maximum of such price range and the minimum of which shall generally be no more than 15% below such average. The valuation shall be updated during the pendency of the Reorganization as market and financial conditions warrant and as may be required by the OTS. (b) Based upon the independent valuation, the Boards of Directors of the Holding Company and the Bank shall fix the Initial Purchase Price and the number of shares of Conversion Stock to be offered in the Subscription Offering, Community Offering and/or Syndicated Community Offering. The purchase price per share for the Holding Company Common Stock shall be a uniform price determined in accordance with applicable OTS rules and regulations. The Actual Purchase Price and the total number of shares of Conversion Stock to be issued in the Offerings shall be determined by the Boards of Directors of the Holding Company and the Bank upon conclusion of the Offerings in consultation with the Independent Appraiser and any financial advisor or investment banker retained by the Holding Company and the Bank in connection with such Offerings. (c) Subject to the approval of the OTS, the Estimated Price Range may be increased or decreased to reflect market, financial and economic conditions prior to completion of the Reorganization or to fill the Order of the Tax-Qualified Employee Stock Benefit Plans, and under such circumstances the Holding Company and the Bank may increase or decrease the total number of shares of Conversion Stock to be issued in the Reorganization to reflect any such change. Notwithstanding anything to the contrary contained in this Plan, no resolicitation of subscribers shall be required and subscribers shall not be permitted to modify or cancel their subscriptions unless the gross proceeds from the sale of the Conversion Stock in the Offerings are less than the minimum or more than 15% above the maximum of the Estimated Price Range set forth in the Prospectus. In the event of an increase in the total number of shares offered in the 13 Offerings due to an increase in the Estimated Price Range, the priority of share allocation shall be as set forth in this Plan. 5. SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY). (a) Each Eligible Account Holder shall receive, as first priority and without payment, Subscription Rights to purchase up to the greater of (i) $150,000 of Conversion Stock (or such maximum purchase limitation as may be established for the Community Offering and/or Syndicated Community Offering), (ii) one-tenth of 1% of the total offering of shares in the Subscription Offering, or (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock offered in the Subscription Offering by a fraction, of which the numerator is the amount of the Qualifying Deposits of the Eligible Account Holder and the denominator is the total amount of all Qualifying Deposits of all Eligible Account Holders, in each case subject to Sections 10 and 13 hereof. (b) In the event of an oversubscription for shares of Conversion Stock pursuant to Section 5(a), available shares shall be allocated among subscribing Eligible Account Holders so as to permit each such Eligible Account Holder, to the extent possible, to purchase a number of shares which will make his or her total allocation equal to the lesser of the number of shares subscribed for or 100 shares. Any available shares remaining after each subscribing Eligible Account Holder has been allocated the lesser of the number of shares subscribed for or 100 shares shall be allocated among the subscribing Eligible Account Holders whose subscriptions remain unsatisfied in the proportion that the Qualifying Deposit of each such subscribing Eligible Account Holder bears to the total Qualifying Deposits of all such subscribing Eligible Account Holders whose orders are unfilled, provided that no fractional shares shall be issued. Subscription Rights of Eligible Account Holders who are also directors or Officers of the Holding Company or the Bank and their Associates shall be subordinated to those of other Eligible Account Holders to the extent that they are attributable to increased deposits during the one-year period preceding the Eligibility Record Date. 14 6. SUBSCRIPTION RIGHTS OF TAX-QUALIFIED EMPLOYEE STOCK BENEFIT PLANS (SECOND PRIORITY). Tax-Qualified Employee Stock Benefit Plans shall receive, without payment, Subscription Rights to purchase in the aggregate up to 10% of the Holding Company Common Stock issued in the Offerings and contributed to the Foundation, including any shares of Holding Company Common Stock to be issued as a result of an increase in the Estimated Price Range after commencement of the Subscription Offering and prior to completion of the Reorganization. The subscription rights granted to Tax-Qualified Employee Stock Benefit Plans shall be subject to the availability of shares of Conversion Stock after taking into account the shares of Conversion Stock purchased by Eligible Account Holders; provided, however, that in the event that the total number of shares of Conversion Stock is increased to any amount greater than the number of shares representing the maximum of the Estimated Price Range as set forth in the Prospectus ("Maximum Shares"), the ESOP shall have a priority right to purchase any such shares exceeding the Maximum Shares up to an aggregate of 10% of Holding Company Common Stock issued in the Offerings and contributed to the Foundation. Shares of Conversion Stock purchased by any individual participant ("Plan Participant") in a Tax-Qualified Employee Stock Benefit Plan using funds therein pursuant to the exercise of subscription rights granted to such Participant in his individual capacity as an Eligible Account Holder and/or supplemental Eligible Account Holder and/or purchases by such Plan Participant in the Community Offering shall not be deemed to be purchases by a Tax-Qualified Employee Stock Benefit Plan for purposes of calculating the maximum amount of Conversion Stock that Tax-Qualified Employee Stock Benefit Plans may purchase pursuant to the first sentence of this Section 6 if the individual Plan Participant controls or directs the investment authority with respect to such account or subaccount. Consistent with applicable laws and regulations and policies and practices of the OTS, the Tax-Qualified Employee Stock Benefit Plans may use funds contributed by the Holding Company or the Bank and/or borrowed from an independent financial institution to exercise such Subscription Rights, and the Holding Company and the Bank may make scheduled discretionary contributions thereto, provided that such contributions do not cause the Holding Company or the Bank to fail to meet any applicable regulatory capital requirement. The Tax-Qualified Employee Stock Benefit Plans shall not be deemed to be an Associate or Affiliate of or Person Acting in Concert with any Management Person. 7. SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD PRIORITY). (a) In the event that the Eligibility Record Date is more than 15 months prior to the date of the OTS approval, then, and only in that event, a Supplemental Eligibility Record Date shall be set and each Supplemental Eligible Account Holder shall receive, without payment, Subscription Rights to purchase up to the greater of (i) $150,000 of Conversion Stock in the Subscription Offering (or such maximum purchase limitation as may be established for the Community Offering and/or Syndicated Community Offering), (ii) one-tenth of 1% of the total offering of shares in the Subscription Offering and (iii) 15 times the product (rounded down to the next whole number) obtained by multiplying the total number of shares of Conversion Stock 15 offered in the Subscription Offering by a fraction, of which the numerator is the amount of the Qualifying Deposits of the Supplemental Eligible Account Holder and the denominator is the total amount of all Qualifying Deposits of all Supplemental Eligible Account Holders, in each case subject to Sections 10 and 13 hereof and the availability of shares of Conversion Stock for purchase after taking into account the shares of Conversion Stock purchased by Eligible Account Holders and Tax-Qualified Employee Stock Benefit Plans through the exercise of Subscription Rights under Sections 5 and 6 hereof. (b) In the event of an oversubscription for shares of Conversion Stock pursuant to Section 7(a), available shares shall be allocated among subscribing Supplemental Eligible Account Holders so as to permit each such Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation (including the number of shares, if any, allocated in accordance with Section 5(a)) equal to the lesser of the number of shares subscribed for or 100 shares. Any remaining available shares shall be allocated among subscribing Supplemental Eligible Account Holders whose subscriptions remain unsatisfied in the proportion that the amount of their respective Qualifying Deposits bears to the total amount of the Qualifying Deposits of all such subscribing Supplemental Eligible Account Holders whose orders are unfilled, provided that no fractional shares shall be issued. 8. SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY). (a) Each Other Member shall receive, without payment, Subscription Rights to purchase up to the greater of (i) $150,000 of Conversion Stock in the Subscription Offering (or such maximum purchase limitation as may be established for the Community Offering and/or Syndicated Community Offering) and (ii) one-tenth of 1% of the total offering of shares in the Subscription Offering, subject to Sections 10 and 13 hereof and the availability of shares of Conversion Stock for purchase after taking into account the shares of Conversion Stock purchased by Eligible Account Holders, Tax-Qualified Employee Stock Benefit Plans and Supplemental Eligible Account Holders, if any, through the exercise of Subscription Rights under Sections 5, 6 and 7 hereof. (b) If, pursuant to this Section 8, Other Members subscribe for a number of shares of Conversion Stock in excess of the total number of shares of Conversion Stock remaining, available shares shall be allocated among subscribing Other Members so as to permit each such Other Member, to the extent possible, to purchase a number of shares which will make his or her total allocation equal to the lesser of the number of shares subscribed for or 100 shares. Any remaining available shares shall be allocated among subscribing Other Members whose subscriptions remain unsatisfied on a pro rata basis in the same proportion as each such Other Member's subscription bears to the total subscriptions of all such subscribing Other Members, provided that no fractional shares shall be issued. 9. COMMUNITY OFFERING, SYNDICATED COMMUNITY OFFERING, PUBLIC OFFERING AND OTHER OFFERINGS. 16 (a) If less than the total number of shares of Conversion Stock are sold in the Subscription Offering, it is anticipated that all remaining shares of Conversion Stock shall, if practicable, be sold in a Community Offering. Subject to the requirements set forth herein, the manner in which the Conversion Stock is sold in the Community Offering shall have as the objective the achievement of the widest possible distribution of such stock. (b) In the event of a Community Offering, all shares of Conversion Stock which are not subscribed for in the Subscription Offering shall be offered for sale by means of a direct community marketing program, which may provide for the use of brokers, dealers or investment banking firms experienced in the sale of financial institution securities. Any available shares in excess of those not subscribed for in the Subscription Offering will be available for purchase by members of the general public to whom a Prospectus is delivered by the Holding Company or on its behalf, with preference given first to natural persons and trusts of natural persons residing in Fairfield and New Haven counties, Connecticut ("Preferred Subscribers"). (c) A Prospectus and Order Form shall be furnished to such Persons as the Holding Company and the Bank may select in connection with the Community Offering, and each order for Conversion Stock in the Community Offering shall be subject to the absolute right of the Holding Company and the Bank to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable following completion of the Community Offering. Available shares will be allocated first to each Preferred Subscriber whose order is accepted in an amount equal to the lesser of 100 shares or the number of shares subscribed for by each such Preferred Subscriber, if possible. Thereafter, unallocated shares shall be allocated among the Preferred Subscribers whose accepted orders remain unsatisfied in the same proportion that the unfilled order bears to the total unfilled orders of all Preferred Subscribers whose accepted orders remain unsatisfied, provided that no fractional shares shall be issued. If there are any shares remaining after all accepted orders by Preferred Subscribers have been satisfied, such remaining shares shall be allocated to other members of the general public who purchase in the Community Offering, applying the same allocation described above for Preferred Subscribers. (d) The amount of Conversion Stock that any Person may purchase in the Community Offering shall not exceed $150,000 of Conversion Stock, provided, however, that this amount may be increased to up to 5% of the total offering of shares of Conversion Stock or decreased to less than $150,000, subject to any required regulatory approval but without the further approval of Members or the resolicitation of subscribers; and provided further that to the extent applicable, and subject to the preferences set forth in Section 9(b) and (c) of this Plan and the limitations on purchases of Conversion Stock set forth in this Section 9(d) and Section 10 of this Plan, orders for Conversion Stock in the Community Offering shall first be filled to a maximum of 2% of the total number of shares of Conversion Stock sold in the Offerings and thereafter any remaining shares shall be allocated on an equal number of shares basis per order until all orders have been filled, provided no fractional shares shall be issued. The Holding Company and the Bank may commence the Community Offering concurrently with, at any time during, or as soon as practicable after the end of, the Subscription Offering, and the Community Offering must be 17 completed within 45 days after the completion of the Subscription Offering, unless extended by the Holding Company and the Bank with any required regulatory approval. (e) Subject to such terms, conditions and procedures as may be determined by the Holding Company and the Bank, all shares of Conversion Stock not subscribed for in the Subscription Offering or ordered in the Community Offering may be sold by a syndicate of broker-dealers to the general public in a Syndicated Community Offering. Each order for Conversion Stock in the Syndicated Community Offering shall be subject to the absolute right of the Holding Company and the Bank to accept or reject any such order in whole or in part either at the time of receipt of an order or as soon as practicable after completion of the Syndicated Community Offering. The amount of Conversion Stock that any Person may purchase in the Syndicated Community Offering shall not exceed $150,000 of Conversion Stock, provided, however, that this amount may be increased to up to 5% of the total offering of shares of Conversion Stock or decreased to less than $150,000, subject to any required regulatory approval but without the further approval of Members or the resolicitation of subscribers; and provided further that, to the extent applicable, and subject to the limitations on purchases of Conversion Stock set forth in this Section 9(e) and Section 10 of this Plan, orders for Conversion Stock in the Syndicated Community Offering shall first be filled to a maximum of 2% of the total number of shares of Conversion Stock sold in the Offerings and thereafter any remaining shares shall be allocated on an equal number of shares basis per order until all orders have been filled, provided no fractional shares shall be issued. The Holding Company and the Bank may commence the Syndicated Community Offering concurrently with, at any time during, or as soon as practicable after the end of, the Subscription Offering and/or Community Offering, and the Syndicated Community Offering must be completed within 45 days after the completion of the Subscription Offering, unless extended by the Holding Company and the Bank with any required regulatory approval. (f) The Holding Company and the Bank may sell any shares of Conversion Stock remaining following the Subscription Offering, Community Offering and/or the Syndicated Community Offering in a Public Offering. The provisions of Section 10 hereof shall not be applicable to the sales to underwriters for purposes of the Public Offering but shall be applicable to sales by the underwriters to the public. The price to be paid by the underwriters in such an offering shall be equal to the Actual Purchase Price less an underwriting discount to be negotiated among such underwriters and the Bank and the Holding Company, subject to any required regulatory approval or consent. (g) If for any reason a Syndicated Community Offering or Public Offering of shares of Conversion Stock not sold in the Subscription Offering and the Community Offering cannot be effected, or in the event that any insignificant residue of shares of Conversion Stock is not sold in the Subscription Offering, Community Offering or Syndicated Community Offering, the Holding Company and the Bank shall use their best efforts to obtain other purchasers for such shares in such manner and upon such conditions as may be satisfactory to the OTS. 18 10. LIMITATIONS ON SUBSCRIPTIONS AND PURCHASES OF CONVERSION STOCK. The following limitations shall apply to all purchases of Holding Company Common Stock in the Offerings: (1) The aggregate amount of outstanding Holding Company Common Stock owned or controlled by persons other than the MHC at the close of the Offerings shall be less than 50% of all outstanding Holding Company Common Stock. (b) Except in the case of Tax-Qualified Employee Stock Benefit Plans in the aggregate, as set forth in Section 10(h) hereof, and certain Eligible Account Holders and Supplemental Eligible Account Holders, as set forth in Sections 5(a)(ii) and (iii) and 7(a)(ii) and (iii) hereof, and in addition to the other restrictions and limitations set forth herein, the maximum amount of Holding Company Common Stock that any Person, any Person together with any Associates, or Persons otherwise Acting in Concert may, directly or indirectly, subscribe for or purchase in the Offerings, shall not exceed $200,000 of Conversion Stock in the Subscription Offering. (c) No Person may purchase fewer than 25 shares of Holding Company Common Stock in the Offerings, to the extent such shares are available; provided, however, that if the Actual Purchase Price is greater than $20.00 per share, such minimum number of shares shall be adjusted so that the aggregate Actual Purchase Price for such minimum shares will not exceed $500.00. (d) The aggregate amount of Holding Company Common Stock acquired in the Offerings, plus all prior issuances by the Holding Company, by any Non-Tax-Qualified Employee Stock Benefit Plan or any Management Person and his or her Associates, exclusive of any shares of Holding Company Common Stock acquired by such plan or Management Person and his or her Associates in the secondary market, shall not exceed 4.9% of the outstanding shares of Holding Company Common Stock at the conclusion of the Offerings. In calculating the number of shares held by any Management Person and his or her Associates under this paragraph, shares held by any Tax-Qualified Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan of the Holding Company or the Bank that are attributable to such Person shall not be counted. (e) The aggregate amount of Holding Company Common Stock or preferred stock acquired in the Offerings, plus all prior issuances by the Holding Company, by any Non-Tax-Qualified Employee Stock Benefit Plan or any Management Person and his or her Associates, exclusive of any Holding Company Common Stock acquired by such plan or Management Person and his or her Associates in the secondary market, shall not exceed 4.9% of the stockholders' equity of the Holding Company at the conclusion of the Offerings. In calculating the number of shares held by any Management Person and his or her Associates under this paragraph, shares held by any Tax-Qualified Employee Stock 19 Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan of the Holding Company or the Bank that are attributable to such Person shall not be counted. (f) The aggregate amount of Holding Company Common Stock acquired in the Offerings, plus all prior issuances by the Holding Company, by any one or more Tax-Qualified Employee Stock Benefit Plans, exclusive of any shares of Holding Company Common Stock acquired by such plans in the secondary market, shall not exceed 4.9% of the outstanding shares of Holding Company Common Stock at the conclusion of the Offerings. (g) The aggregate amount of Holding Company Common Stock or preferred stock acquired in the Offerings, plus all prior issuances by the Holding Company, by one or more Tax-Qualified Employee Stock Benefit Plans, exclusive of any shares of Holding Company Common Stock acquired by such plans in the secondary market, shall not exceed 4.9% of the stockholders' equity of the Holding Company at the conclusion of the Offerings. (h) The aggregate amount of Holding Company Common Stock acquired in the Offerings, plus all prior issuances by the Holding Company, by all stock benefit plans of the Holding Company or the Bank, other than employee stock ownership plans, shall not exceed 25% of the outstanding Holding Company Common Stock held by persons other than the MHC. (i) The aggregate amount of Holding Company Common Stock acquired in the Offerings, plus all prior issuances by the Holding Company, by all Non-Tax-Qualified Employee Stock Benefit Plans or Management Persons and their Associates, exclusive of any Holding Company Common Stock acquired by such plans or Management Persons and their Associates in the secondary market, shall not exceed 31% of the outstanding shares of Holding Company Common Stock, held by persons other than that MHC, at the conclusion of the Offerings. In calculating the number of shares held by Management Persons and their Associates under this paragraph or paragraph j. below, shares held by any Tax-Qualified Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan that are attributable to such persons shall not be counted. (j) The aggregate amount of Holding Company Common Stock or preferred stock acquired in the Offerings, plus all prior issuances by the Holding Company, by all Non-Tax-Qualified Employee Stock Benefit Plans or Management Persons and their Associates, exclusive of any Holding Company Common Stock acquired by such plans or Management Persons and their Associates in the secondary market, shall not exceed 31% of the stockholders' equity of the Holding Company, held by persons other than MHC, at the conclusion of the Offerings. 20 (k) For purposes of the foregoing limitations and the determination of Subscription Rights, (i) directors, Officers and employees of the Holding Company, the Bank or their subsidiaries shall not be deemed to be Associates or a group Acting in Concert solely as a result of their capacities as such, (ii) shares purchased by Tax-Qualified Employee Stock Benefit Plans shall not be attributable to the individual trustees or beneficiaries of any such plan for purposes of determining compliance with the limitations set forth in Section 10(b) hereof, and (iii) shares purchased by a Tax-Qualified Employee Stock Benefit Plan pursuant to instructions of an individual in an account in such plan in which the individual has the right to direct the investment, including any plan of the Bank qualified under Section 401(k) of the Code, shall be aggregated and included in that individual's purchases and not attributed to the Tax-Qualified Employee Stock Benefit Plan. (l) Subject to any required regulatory approval and the requirements of applicable laws and regulations, but without further approval of the Members or resolicitation of subscribers, the Holding Company and the Bank may increase or decrease any of the individual or aggregate purchase limitations set forth herein to a percentage which does not exceed 5% of the total offering of shares of Holding Company Common Stock in the Offerings whether prior to, during or after the Subscription Offering, Community Offering and/or Syndicated Community Offering. In the event that an individual purchase limitation is increased after commencement of the Subscription Offering or any other offering, the Holding Company and the Bank shall permit any Person who subscribed for the maximum number of shares of Conversion Stock to purchase an additional number of shares, so that such Person shall be permitted to subscribe for the then maximum number of shares permitted to be subscribed for by such Person, subject to the rights and preferences of any Person who has priority Subscription Rights. In the event that any of the individual or aggregate purchase limitations are decreased after commencement of the Subscription Offering or any other offering, the orders of any Person who subscribed for more than the new purchase limitation shall be decreased by the minimum amount necessary so that such Person shall be in compliance with the then maximum number of shares permitted to be subscribed for by such Person. (m) The Holding Company and the Bank shall have the right to take all such action as they may, in their sole discretion, deem necessary, appropriate or advisable in order to monitor and enforce the terms, conditions, limitations and restrictions contained in this Section 10 and elsewhere in this Plan and the terms, conditions and representations contained in the Order Form, including, but not limited to, the absolute right (subject only to any necessary regulatory approvals or concurrences) to reject, limit or revoke acceptance of any subscription or order and to delay, terminate or refuse to consummate any sale of Conversion Stock that they believe might violate, or is designed to, or is any part of a plan to, evade or circumvent such terms, conditions, limitations, restrictions and representations. Any such action shall be final, conclusive and binding on all persons, and the Holding Company and the Bank and their respective Boards shall be free from any liability to any Person on account of any such action. 21 11. TIMING OF SUBSCRIPTION OFFERING; MANNER OF EXERCISING SUBSCRIPTION RIGHTS AND ORDER FORMS. (a) The Offerings shall be conducted in compliance with 12 C.F.R. Part 563g and, to the extent applicable, Form OC. The Subscription Offering may be commenced concurrently with or at any time after the mailing of the Proxy Statement. The Subscription Offering may be closed before the Special Meeting, provided that the offer and sale of the Conversion Stock shall be conditioned upon the approval of the Plan by the Voting Members at the Special Meeting. (b) The exact timing of the commencement of the Subscription Offering shall be determined by the Holding Company and the Bank in consultation with the Independent Appraiser and any financial or advisory or investment banking firm retained by them in connection with the Reorganization. The Holding Company and the Bank may consider a number of factors, including, but not limited to, their current and projected future earnings, local and national economic conditions, and the prevailing market for stocks in general and stocks of financial institutions in particular. The Holding Company and the Bank shall have the right to withdraw, terminate, suspend, delay, revoke or modify any such Subscription Offering, at any time and from time to time, as they in their sole discretion may determine, without liability to any Person, subject to compliance with applicable securities laws and any necessary regulatory approval or concurrence. (c) The Holding Company and the Bank shall, promptly after the SEC has declared the Registration Statement, which includes the Prospectus, effective and all required regulatory approvals have been obtained, distribute or make available the Prospectus, together with Order Forms for the purchase of Conversion Stock, to all Participants for the purpose of enabling them to exercise their respective Subscription Rights, subject to Section 13 hereof. To the extent permitted by applicable law and regulation, the Holding Company and the Bank may elect to mail a Prospectus and Order Form only to those Participants who request such materials by returning a postage-paid card to the Holding Company and the Bank by a date specified in the letter informing them of their Subscription Rights. Under such circumstances, the Subscription Offering shall not be closed prior to the expiration of 30 days after the mailing by the Holding Company and the Bank of the postage-paid card to Participants. (d) A single Order Form for all Deposit Accounts maintained with the Bank by an Eligible Account Holder and any Supplemental Eligible Account Holder may be furnished, irrespective of the number of Deposit Accounts maintained with the Bank on the Eligibility Record Date and Supplemental Eligibility Record Date, respectively. No person holding a Subscription Right may exceed any otherwise applicable purchase limitation by submitting multiple orders for Conversion Stock. Multiple orders are subject to adjustment, as appropriate, on a pro rata basis and deposit balances will be divided equally among such orders in allocating shares in the event of an oversubscription. (e) The recipient of an Order Form shall have no less than 20 days and no more than 45 days from the date of mailing of the Order Form (with the exact termination date to be set forth on the Order Form) to properly complete and execute the Order Form and deliver it to the 22 Holding Company and the Bank. The Holding Company and the Bank may extend such period by such amount of time as they determine is appropriate. Failure of any Participant to deliver a properly executed Order Form to the Holding Company and the Bank, along with full payment (or authorization for full payment by withdrawal) for the shares of Conversion Stock subscribed for, within the time limits prescribed, shall be deemed a waiver and release by such person of any rights to subscribe for shares of Conversion Stock. Each Participant shall be required to confirm to the Holding Company and the Bank by executing an Order Form that such Person has fully complied with all of the terms, conditions, limitations and restrictions in the Plan. (f) The Holding Company and the Bank shall have the absolute right, in their sole discretion and without liability to any Participant or other Person, to reject any Order Form, including, but not limited to, any Order Form that is (i) improperly completed or executed; (ii) not timely received; (iii) not accompanied by the proper and full payment (or authorization of withdrawal for full payment) or, in the case of institutional investors in the Community Offering, not accompanied by an irrevocable order together with a legally binding commitment to pay the full amount of the purchase price prior to 48 hours before the completion of the Offerings; or (iv) submitted by a Person whose representations the Holding Company and the Bank believe to be false or who they otherwise believe, either alone, or Acting in Concert with others, is violating, evading or circumventing, or intends to violate, evade or circumvent, the terms and conditions of the Plan. Furthermore, in the event Order Forms (i) are not delivered and are returned to the Bank by the United States Postal Service or the Bank is unable to locate the addressee, or (ii) are not mailed pursuant to a "no mail" order placed in effect by the account holder, the Subscription Rights of the person to which such rights have been granted will lapse as though such person failed to return the contemplated Order Form within the time period specified thereon. The Holding Company and the Bank may, but will not be required to, waive any irregularity on any Order Form or may require the submission of corrected Order Forms or the remittance of full payment for shares of Conversion Stock by such date as they may specify. The interpretation of the Holding Company and the Bank of the terms and conditions of the Order Forms shall be final and conclusive. 23 12. PAYMENT FOR CONVERSION STOCK. (a) Payment for shares of Conversion Stock subscribed for by Participants in the Subscription Offering and payment for shares of Conversion Stock ordered by Persons in the Community Offering shall be equal to the Initial Purchase Price multiplied by the number of shares that are being subscribed for or ordered, respectively. Such payment may be made in cash, if delivered in person, or by check or money order at the time the Order Form is delivered to the Bank. The Bank, in its sole and absolute discretion, may also elect to receive payment for shares of Conversion Stock by wire transfer. In addition, the Holding Company and the Bank may elect to provide Participants and/or other Persons who have a Deposit Account with the Bank the opportunity to pay for shares of Conversion Stock by authorizing the Bank to withdraw from such Deposit Account an amount equal to the aggregate Initial Purchase Price of such shares. Payment may also be made by a Participant using funds held for such Participant's benefit by a Bank Benefit Plan to the extent that such plan allows participants or any related trust established for the benefit of such participants to direct that some or all of their individual accounts or sub-accounts be invested in Conversion Stock. If the Actual Purchase Price is less than the Initial Purchase Price, the Bank shall refund the difference to all Participants and other Persons, unless the Holding Company and the Bank choose to provide Participants and other Persons the opportunity on the Order Form to elect to have such difference applied to the purchase of additional whole shares of Conversion Stock. If the Actual Purchase Price is more than the Initial Purchase Price, the Bank shall reduce the number of shares of Conversion Stock ordered by Participants and other Persons and refund any remaining amount which is attributable to a fractional share interest, unless the Bank chooses to provide Participants and other Persons the opportunity to increase the Actual Purchase Price submitted by them. (b) Notwithstanding the above, if the Tax-Qualified Employee Stock Benefit Plans subscribe for shares during the Subscription Offering, such plans will not be required to pay for the shares at the time they subscribe but rather may pay for such shares of Holding Company Common Stock subscribed for by such plans at the Actual Purchase Price upon consummation of the Offerings, provided that, in the case of the ESOP, there is in force from the time of its subscription until the consummation of the Offerings, a loan commitment to lend to the ESOP, at such time, the aggregated price of the shares for which it subscribed. (c) If a Participant or other Person authorizes the Bank to withdraw the amount of the Initial Purchase Price from his or her Deposit Account, the Bank shall have the right to make such withdrawal or to freeze funds equal to the aggregate Initial Purchase Price upon receipt of the Order Form. Notwithstanding any regulatory provisions regarding penalties for early withdrawals from certificate accounts, the Bank may allow payment by means of withdrawal from certificate accounts without the assessment of such penalties. In the case of an early withdrawal of only a portion of such account, the certificate evidencing such account shall be canceled if any applicable minimum balance requirement ceases to be met. In such case, the remaining balance will earn interest at the regular passbook rate. However, where any applicable minimum balance is maintained in such certificate account, the rate of return on the balance of the certificate account shall remain the same as prior to such early withdrawal. This waiver of 24 the early withdrawal penalty applies only to withdrawals made in connection with the purchase of Conversion Stock and is entirely within the discretion of the Holding Company and the Bank. (d) The Bank shall pay interest, at not less than the passbook rate, for all amounts paid in cash, by check or money order to purchase shares of Conversion Stock in the Subscription Offering and the Community Offering from the date payment is received until the date the Reorganization is completed or terminated. (e) The Holding Company will not offer or sell any of the Holding Company Common Stock proposed to be issued to any Person whose purchase would be financed by funds loaned, directly or indirectly, to the Person by the Bank. (f) Each share of Conversion Stock shall be non-assessable upon payment in full of the Actual Purchase Price. 13. ACCOUNT HOLDERS IN NONQUALIFIED STATES OR FOREIGN COUNTRIES. The Holding Company and the Bank shall make reasonable efforts to comply with the securities laws of all jurisdictions in the United States in which Participants reside. However, no Participant will be offered or receive any Conversion Stock under the Plan if such Participant resides in a foreign country or resides in a jurisdiction of the United States with respect to which all of the following apply: (a) there are few Participants otherwise eligible to subscribe for shares under this Plan who reside in such jurisdiction; (b) the granting of Subscription Rights or the offer or sale of shares of Conversion Stock to such Participants would require any of the Holding Company or the Bank or their respective directors and Officers, under the laws of such jurisdiction, to register as a broker-dealer, salesman or selling agent or to register or otherwise qualify the Conversion Stock for sale in such jurisdiction, or any of the Holding Company or the Bank would be required to qualify as a foreign corporation or file a consent to service of process in such jurisdiction; and (c) such registration, qualification or filing in the judgment of the Holding Company and the Bank would be impracticable or unduly burdensome for reasons of cost or otherwise. 14. VOTING RIGHTS OF SHAREHOLDERS. Following consummation of the Reorganization, voting rights with respect to the Bank shall be held and exercised exclusively by the Holding Company as holder of all of the Bank's outstanding voting capital stock, voting rights with respect to the Holding Company shall be held and exercised exclusively by the holders of the Holding Company's voting capital stock, and voting rights with respect to the MHC shall be held and exercised exclusively by its eligible members. 15. TRANSFER OF DEPOSIT ACCOUNTS. 25 Each Deposit Account in the Bank at the time of the consummation of the Reorganization shall become, without further action by the holder, a Deposit Account in the Bank equivalent in withdrawable amount to the withdrawal value (as adjusted to give effect to any withdrawal made for the purchase of Conversion Stock), and subject to the same terms and conditions (except as to voting and liquidation rights) as such Deposit Account in the Bank immediately preceding consummation of the Reorganization. Holders of Deposit Accounts in the Bank shall not, as such holders, have any voting rights. 16. REQUIREMENTS FOLLOWING REORGANIZATION FOR REGISTRATION, MARKET MAKING AND STOCK EXCHANGE LISTING. In connection with the Reorganization, the Holding Company shall register the Holding Company Common Stock pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, and shall undertake not to deregister such stock for a period of three years thereafter. The Holding Company also shall use its best efforts to (i) encourage and assist a market maker to establish and maintain a market for the Holding Company Common Stock, and (ii) list the Holding Company Common Stock on a national or regional securities exchange or to have quotations for such stock disseminated on the Nasdaq Stock Market. 17. DIRECTORS AND OFFICERS OF THE BANK. Each person serving as a director or Officer of the Bank at the effective time of the Reorganization shall continue to serve as a director or Officer of the Bank for the balance of the term for which the person was elected prior to the Reorganization, and until a successor is elected and qualified. 18. REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS FOLLOWING THE REORGANIZATION. For a period of three years following the Reorganization, the directors and Officers of the Holding Company and the Bank and their Associates may not purchase, without the prior written approval of the OTS, Holding Company Common Stock except from a broker-dealer registered with the SEC. This prohibition shall not apply, however, to (i) a negotiated transaction and involving more than 1% of the outstanding Holding Company Common Stock, and (ii) purchases of stock made by and held by any Tax-Qualified Employee Stock Benefit Plan (and purchases of stock made by and held by any Non-Tax-Qualified Employee Stock Benefit Plan following the receipt of shareholder approval of such plan) even if such Holding Company Common Stock may be attributable to individual Officers or directors and their Associates. The foregoing restriction on purchases of Holding Company Common Stock shall be in addition to any restrictions that may be imposed by federal and state securities laws. 26 19. RESTRICTIONS ON TRANSFER OF STOCK. All shares of Conversion Stock which are purchased by Persons other than directors and Officers of the Holding Company or the Bank shall be transferable without restriction. Shares of Conversion Stock purchased by directors and Officers of the Holding Company or the Bank and their Associates on original issue from the Holding Company (by subscription or otherwise) shall be subject to the restriction that such shares shall not be sold or otherwise disposed of for value for a period of one year following the date of purchase, except for any disposition of such shares following the death of the original purchaser. The shares of Conversion Stock issued by the Holding Company to such directors and Officers shall bear the following legend giving appropriate notice of such one-year restriction: "The shares of stock evidenced by this Certificate are restricted as to transfer for a period of one year from the date of this Certificate pursuant to Part 575 of the Rules and Regulations of the Office of Thrift Supervision. These shares may not be transferred during such one-year period without a legal opinion of counsel for the Company that said transfer is permissible under the provisions of applicable law and regulation. This restrictive legend shall be deemed null and void after one year from the date of this Certificate." In addition, the Holding Company shall give appropriate instructions to the transfer agent for the Holding Company Common Stock with respect to the applicable restrictions relating to the transfer of restricted stock. Any shares issued at a later date as a stock dividend, stock split or otherwise with respect to any such restricted stock shall be subject to the same holding period restrictions as may then be applicable to such restricted stock. The foregoing restriction on transfer shall be in addition to any restrictions on transfer that may be imposed by federal and state securities laws. 20. RESTRICTIONS ON VOTING HOLDING COMPANY COMMON STOCK. The Charter of the Holding Company shall provide that in no event shall any record owner of any outstanding shares of Holding Company Common Stock who beneficially owns in excess of 10% of such outstanding shares, except the MHC, shall be entitled or permitted to any vote in respect to any shares held in excess of 10%. In addition, the Charter and Bylaws of the Holding Company will include provisions that eliminate cumulative voting for the election of directors and prohibit persons other than the Board of Directors of the Holding Company from calling special meetings of the stockholders of the Holding Company. 21. ADOPTION OF FEDERAL STOCK CHARTER AND BYLAWS. 27 As part of the Reorganization, the Bank shall take all appropriate steps to adopt a federal stock charter and bylaws to authorize the issuance of capital stock and otherwise to read in a form consistent with a federally chartered stock form savings bank. 22. TAX RULINGS OR OPINIONS. Consummation of the Reorganization is conditioned upon prior receipt by the Holding Company and the Bank of either a ruling or an opinion of counsel with respect to federal tax laws, and either a ruling or an opinion with respect to Connecticut tax laws, to the effect that consummation of the transactions contemplated hereby will not result in a taxable reorganization under the provisions of the applicable codes or otherwise result in any adverse tax consequences to the Holding Company and the Bank or to account holders receiving Subscription Rights before or after the Reorganization, except in each case to the extent, if any, that Subscription Rights are deemed to have fair market value on the date such rights are issued. 23. STOCK COMPENSATION PLANS. (a) The Holding Company and the Bank are authorized to adopt Tax-Qualified Employee Stock Benefit Plans in connection with the Reorganization, including without limitation an employee stock ownership plan. (b) Subsequent to the Reorganization, the Holding Company and the Bank are authorized to adopt Non-Tax Qualified Employee Stock Benefit Plans, including without limitation, stock option plans and restricted stock plans, provided however that, with respect to any such plan, the total number of shares of common stock for which options may be granted and the total amount of common stock granted as restricted stock must not exceed limitations set forth in Section 10 hereof. In addition, any such plan implemented during the one-year period subsequent to the date of consummation of the Reorganization: (i) shall be disclosed in the proxy solicitation materials for the Special Meeting of Members and in the Prospectus; (ii) in the case of stock option plans and employee recognition or grant plans, shall be submitted for approval by the holders of the Holding Company Common Stock no earlier than six months following consummation of the Reorganization; and (iii) shall comply with all other applicable requirements of the OTS. (c) Existing, as well as any newly-created, Tax-Qualified Employee Stock Benefit Plans may purchase shares of Conversion Stock in the Offerings, to the extent permitted by the terms of such benefit plans and this Plan. (d) The Holding Company and the Bank are authorized to enter into employment or severance agreements with their executive officers. 24. DIVIDEND AND REPURCHASE RESTRICTIONS ON STOCK. The Holding Company may not declare or pay a cash dividend on its Holding Company Common Stock if the effect thereof would cause the regulatory capital of the Bank to be reduced 28 below the amount required under Section 567.2 of the Regulations. Otherwise, the Holding Company may declare dividends or make other capital distributions in accordance with Section 563b.520 of the Regulations. Following completion of the Offerings, the Holding Company may repurchase its Holding Company Common Stock consistent with Section 563b.510 and Section 563b.515 of the Regulations relating to stock repurchases, as long as such repurchases do not cause the regulatory capital of the Bank to be reduced below the amount required under Section 567.2 of the Regulations. The MHC may from time to time purchase Holding Company Common Stock. Subject to any notice or approval requirements of the OTS under the Regulations, the MHC may waive its right to receive dividends declared by the Holding Company. 25. PAYMENT OF FEES TO BROKERS. The Bank may elect to offer to pay fees on a per share basis to securities brokers who assist purchasers of Conversion Stock in the Offerings. 26. EFFECTIVE DATE. The effective date of the Reorganization shall be the date of the closing of the sale of all shares of Conversion Stock. The closing of the sale of all shares of Conversion Stock sold in the Offerings shall occur simultaneously and shall be conditioned upon the prior receipt of all requisite regulatory and other approvals. 27. AMENDMENT OR TERMINATION OF THE PLAN. If deemed necessary or desirable by the Board of Directors of the Bank, this Plan may be substantively amended, as a result of comments from regulatory authorities or otherwise, at any time prior to the solicitation of proxies from Members to vote on the Plan and at any time thereafter with the concurrence of the OTS. Any amendment to this Plan made after approval by the Members with the concurrence of the OTS shall not necessitate further approval by the Members unless otherwise required by the OTS. This Plan shall terminate if the sale of all shares of Conversion Stock is not completed within 24 months from the date of the Special Meeting. Prior to the earlier of the Special Meeting, this Plan may be terminated by the Board of Directors of the Bank without approval of the OTS; after the Special Meeting, the Board of Directors may terminate this Plan only with the approval of the OTS. 28. INTERPRETATION OF THE PLAN. All interpretations of this Plan and application of its provisions to particular circumstances by a majority of each of the Boards of Directors of the Holding Company and Bank shall be final, subject to the authority of the OTS. 29 NAUGATUCK VALLEY SAVINGS AND LOAN CHARTER SECTION 1. CORPORATE TITLE. The full corporate title of the savings bank is Naugatuck Valley Savings and Loan (the "Bank"). SECTION 2. OFFICE. The home office shall be located in the Borough of Naugatuck, Connecticut. SECTION 3. DURATION. The duration of the Bank is perpetual. SECTION 4. PURPOSE AND POWERS. The purpose of the Bank is to pursue any or all of the lawful objectives of a Federal savings bank chartered under section 5 of the Home Owners' Loan Act and to exercise all of the express, implied, and incidental powers conferred thereby and by all acts amendatory thereof and supplemental thereto, subject to the Constitution and laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Office of Thrift Supervision (the "OTS"). SECTION 5. CAPITAL STOCK. The total number of shares of all classes of the capital stock that the Bank has the authority to issue is five thousand (5,000), of which four (4,000) shares shall be common stock, par value $1.00 per share, and of which one thousand (1,000) shares shall be serial preferred stock, par value $1.00 per share. The shares may be issued from time to time as authorized by the Board of Directors without the approval of the shareholders, except as otherwise provided in this Section 5 or to the extent that such approval is required by governing law, rule, or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par value. Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of the Bank. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted to the Bank), labor, or services actually performed for the Bank, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor, or services, as determined by the Board of Directors of the Bank, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the retained earnings of the Bank that is transferred to common stock or paid-in capital accounts upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance. Except for the shares issued in the initial organization of the Bank or in connection with the conversion of the Bank from the mutual to stock form of capitalization, no shares of capital stock (including shares issuable upon conversion, exchange or exercise of other securities) shall be issued, directly or indirectly, to officers, directors, or controlling persons of the Bank other than as part of a general public offering or as qualifying shares to a director, unless their issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting. Nothing contained in this Section 5 (or in any supplementary sections hereto) shall entitle the holders of any class or series of capital stock to vote as a separate class or series or to more than one vote per share provided, that this restriction on voting separately by class or series shall not apply: (i) to any provision that would authorize the holders of preferred stock, voting as a class or series, to elect some members of the Board of Directors, less than a majority thereof, in the event of default in the payment of dividends on any class or series of preferred stock; (ii) to any provision that would require the holders of preferred stock, voting as a class or series, to approve the merger or consolidation of the Bank with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) of properties or business in exchange for securities of a corporation other than the Bank if the preferred stock is exchanged for securities of such other corporation; provided, that no provision may require such approval for transactions undertaken with the assistance or pursuant to the direction of the OTS, or the Federal Deposit Insurance Corporation; (iii) to any amendment that would adversely change the specific terms of any class or series of capital stock as set forth in this Section 5 (or in any supplementary sections hereto), including any amendment which would create or enlarge any class or series ranking prior thereto in rights and preferences. An amendment that increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving bank in a merger or consolidation for the Bank, shall not be considered to be such an adverse change. A description of the different classes and series (if any) of the Bank's capital stock and a statement of the designations, and the relative rights, preferences, and limitations of the shares of each class of and series (if any) of capital stock are as follows: A. COMMON STOCK. Except as provided in this Section 5 (or in any supplementary sections hereto) the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holder and there shall be no right to cumulate votes in an election of directors. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to payment of dividends, the full amount of dividends and of sinking fund, retirement fund, or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends out of any assets legally available for the payment of dividends. In the event of any liquidation, dissolution, or winding up of the Bank, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Bank available for distribution remaining after: (i) payment or provision for 2 payment of the Bank's debts and liabilities; (ii) distributions or provision for distributions in settlement of its liquidation account; and (iii) distributions or provision for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution, or winding up of the Bank. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock. B. PREFERRED STOCK. The Bank may provide in supplementary sections to its charter for one or more classes of preferred stock, which shall be separately identified. The shares of any class may be divided into and issued in series, with each series separately designated so as to distinguish the shares thereof from the shares of all other series and classes. The terms of each series shall be set forth in a supplementary section to the charter. All shares of the same class shall be identical except as to the following relative rights and preferences, as to which there may be variations between different series: (i) the distinctive serial designation and the number of shares constituting such series; (ii) the dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s), the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends; (iii) the voting powers, full or limited, if any, of shares of such series; (iv) whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed; (v) the amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Bank; (vi) whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund; (vii) whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock of the Bank and, if so, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (viii) the price or other consideration for which the shares of such series shall be issued; and (ix) whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock. 3 Each share of each series of serial preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series. The Board of Directors shall have authority to divide, by the adoption of supplementary charter sections, any authorized class of preferred stock into series and, within the limitations set forth in this section and the remainder of this charter, fix and determine the relative rights and preferences of the shares of any series so established. Prior to the issuance of any preferred shares of a series established by a supplementary charter section adopted by the Board of Directors, the Bank shall file with the Secretary of the OTS a dated copy of that supplementary section of this charter establishing and designating the series and fixing and determining the relative rights and preferences thereof. SECTION 6. PREEMPTIVE RIGHTS. Holders of the capital stock of the Bank shall not be entitled to preemptive rights with respect to any shares of the Bank that may be issued. SECTION 7. DIRECTORS. The Bank shall be under the direction of a Board of Directors. The authorized number of directors, as stated in the Bank's bylaws, shall not be fewer than five (5) nor more than fifteen (15), except when a greater or lesser number is approved by the Director of the OTS, or his or her delegate. SECTION 8. CERTAIN PROVISIONS APPLICABLE FOR FIVE YEARS. Notwithstanding anything contained in the Bank's charter and or bylaws to the contrary, for a period of five (5) years from the date of completion of an initial minority stock offering of shares of common stock of Naugatuck Valley Financial Corporation, the following provisions shall apply: A. BENEFICIAL OWNERSHIP LIMITATION. No person shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than ten percent (10%) of any class of an equity security of the Bank. This limitation shall not apply to Naugatuck Valley Mutual Holding Company or Naugatuck Valley Financial Corporation, a transaction in which the Bank forms a holding company without change in the respective beneficial ownership interests of its stockholders other than pursuant to the exercise of any dissenter and appraisal rights, the purchase of shares by underwriters in connection with a public offering, or the purchase of shares by a tax-qualified employee stock benefit plan that is exempt from the approval requirements under 574.3(c)(1)(vii) of the OTS's regulations. In the event shares are acquired in violation of this Section 8, all shares beneficially owned by any person in excess of ten percent (10%) shall be considered "excess shares" and shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matters submitted to the stockholders for a vote. For the purposes of this Section 8, the following definitions apply. 4 (A) The term "person" includes an individual, a group acting in concert, a corporation, a partnership, an association, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of the equity securities of the Bank. (B) The term "offer" includes every offer to buy or otherwise acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tenders of, a security or interest in a security for value. (C) The term "acquire" includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise. (D) The term "security" includes non_transferable subscription rights issued pursuant to a plan of stock issuance as well as a "security" as defined in 15 U.S.C. ss. 78c(a)(10). (E) The term "acting in concert" means (i) knowing participation in a joint activity or conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangements, whether written or otherwise. B. CALL FOR SPECIAL MEETINGS. Special meetings of stockholders relating to changes in control of the Bank or amendments to its charter shall be called only upon direction of the Board of Directors. SECTION 9. DEPOSIT ACCOUNTS. In any situation in which the priority of the accounts of the Bank is in controversy, all such accounts shall, to the extent of their withdrawable value, be debts of the Bank having at least as high a priority as the claims of general creditors of the Bank not having priority (other than any priority arising or resulting from consensual subordination) over other general creditors of the Bank. SECTION 10. AMENDMENT OF CHARTER. Except as provided in Section 5 hereof, no amendment, addition, alteration, change, or repeal of this charter shall be made, unless such is first proposed by the Board of Directors of the Bank, approved by the stockholders by a majority of the total votes eligible to be cast at a legal meeting, unless a higher vote is otherwise required, and approved or preapproved by the OTS. 5 NAUGATUCK VALLEY SAVINGS AND LOAN Attest: By: ----------------------------- ------------------------------------ Bernadette A. Mole John C. Roman Secretary of the Bank President and Chief Executive Officer OFFICE OF THRIFT SUPERVISION Attest: By: ----------------------------- ------------------------------------ Secretary of the Office of Director of the Office of Thrift Thrift Supervision Supervision Effective Date: --------------------- 6 NAUGATUCK VALLEY SAVINGS AND LOAN BYLAWS ARTICLE I - HOME OFFICE The home office of Naugatuck Valley Savings and Loan (the "Bank") shall be located at 333 Church Street, Naugatuck, Connecticut, in the County of New Haven, in the State of Connecticut. ARTICLE II - SHAREHOLDERS SECTION 1. PLACE OF MEETINGS. All annual and special meetings of shareholders shall be held at the home office of the Bank or at such other convenient place as the Board of Directors may determine. SECTION 2. ANNUAL MEETING. A meeting of the shareholders of the Bank for the election of directors and for the transaction of any other business of the Bank shall be held annually within 150 days after the end of the Bank's fiscal year on such date as the Board of Directors may determine. SECTION 3. SPECIAL MEETINGS. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by the regulations of the Office of Thrift Supervision (the "OTS") or the Federal Stock Charter of the Bank, may be called at any time by the chairman of the board, the president, or a majority of the Board of Directors, and shall be called by the chairman of the board, the president, or the secretary upon the written request of the holders of ten percent or more of all the outstanding capital stock of the Bank entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered at the home office of the Bank addressed to the chairman of the board, the president, or the secretary. SECTION 4. CONDUCT OF MEETINGS. Annual and special meetings shall be conducted by the chairman of the annual or special meeting in accordance with the written procedures agreed to by the Board of Directors. The Board of Directors shall designate, when present, either the chairman of the board or one of its members to preside at such meetings. SECTION 5. NOTICE OF MEETINGS. Written notice stating the place, day and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, or the secretary, or the directors calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the Bank as of the record date prescribed in Section 6 of this Article II with postage prepaid. When any shareholders' meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken. SECTION 6. FIXING OF RECORD DATE. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment. SECTION 7. VOTING LISTS. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the Bank shall make a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the Bank and shall be subject to inspection by any shareholder of record or the shareholder's agent at any time during usual business hours for a period of 20 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. In lieu of making the shareholder list available for inspection by shareholders as provided in the preceding paragraph, the Board of Directors may elect to follow the procedures prescribed in Section 552.6(d) of the OTS's regulations as now or hereafter in effect. SECTION 8. QUORUM. A majority of the outstanding shares of the Bank entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to constitute less than a quorum. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number of shareholders voting together or voting by classes is required by law or the charter. Directors, however, are elected by a plurality of the votes cast at an election of directors. SECTION 9. PROXIES. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his or her duly authorized attorney in fact. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the shareholder. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the Board of 2 Directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest. SECTION 10. VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When ownership stands in the name of two or more persons, in the absence of written directions to the Bank to the contrary, at any meeting of the shareholders of the Bank, any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such stock and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. SECTION 11. VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name of another corporation may be voted by any officer, agent, or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine. Shares held by an administrator, executor, guardian, or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares held in trust in an IRA or Keogh Account, however, may be voted by the Bank if no other instructions are received. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. Neither treasury shares of its own stock held by the Bank nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Bank, shall be voted at any meeting, or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. SECTION 12. INSPECTORS OF ELECTION. In advance of any meeting of shareholders, the Board of Directors may appoint any person other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the Board or the president may, or on the request of not fewer than 10 percent of the votes represented at the meeting shall, make such appointment at the meeting. If appointed at the meeting, the majority of the votes present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the Board of Directors in advance of the meeting or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by regulations of the OTS, the duties of such inspectors shall include: determining the number of shares of stock and the voting power of each share, the shares 3 represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. SECTION 13. NOMINATING COMMITTEE. The Board of Directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Bank. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the Bank at least five days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Bank. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon. SECTION 14. NEW BUSINESS. Any new business to be taken up at the annual meeting of shareholders shall be stated in writing and filed with the secretary of the Bank at least five days before the date of the annual meeting, and all business so stated, proposed and filed shall be considered at the annual meeting; but no other proposal shall be acted upon the annual meeting. Any shareholder may make any other proposal at the annual meeting and the same may be discussed and considered but unless stated in writing and filed with the secretary at least five days before the meeting, such proposal shall be laid over for action at an adjourned, special, or annual meeting of the shareholders taking place 30 days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees; but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. SECTION 15. INFORMAL ACTION BY SHAREHOLDERS. Any action required to be taken at a meeting of the shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter thereof. 4 ARTICLE III - BOARD OF DIRECTORS SECTION 1. GENERAL POWERS. The business and affairs of the Bank shall be under the direction of its Board of Directors. The Board of Directors shall annually elect a chairman of the board from among its members and, when present, the chairman of the board shall preside at its meetings. If the chairman of the board is not present, the directors present shall select one of its members to preside at its meetings. SECTION 2. NUMBER AND TERM. The Board of Directors shall consist of eight (8) members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually. SECTION 3. REGULAR MEETINGS. A regular meeting of the Board of Directors shall be held without other notice than this bylaw following the annual meeting of shareholders. The Board of Directors may provide by resolution, the time and place, for holding of additional regular meetings without other notice than such resolution. Directors may participate in a meeting by means of conference telephone or similar communications device by which all persons participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes. SECTION 4. QUALIFICATION. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the Bank unless the Bank is a wholly owned subsidiary of a holding company. SECTION 5. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by or at the request of the chairman of the board or one-third of the directors. The persons authorized to call special meetings of the Board of Directors may fix any place, within the Bank's normal lending territory, as the place for holding any special meeting of the Board of Directors called by such persons. Members of the Board of Directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person for all purposes. SECTION 6. NOTICE. Written notice of any special meeting shall be given to each director at least 24 hours prior thereto when delivered personally or by telegram or at least five days prior thereto when delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid if mailed, when delivered to the telegraph company if sent by telegram, or when the Bank receives notice of delivery if electronically transmitted. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. 5 SECTION 7. QUORUM. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the Board of Directors; but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III. SECTION 8. MANNER OF ACTING. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless a greater number is prescribed by regulation of the OTS or by these bylaws. SECTION 9. ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the Board of Directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. SECTION 10. RESIGNATION. Any director may resign at any time by sending a written notice of such resignation to the home office of the Bank addressed to the chairman of the board. Unless otherwise specified, such resignation shall take effect upon receipt thereof by the chairman of the board. More than three consecutive absences from regular meetings of the Board of Directors, unless excused by resolution of the Board of Directors, shall automatically constitute a resignation, effective when such resignation is accepted by the Board of Directors. SECTION 11. VACANCIES. Any vacancy occurring on the Board of Directors may be filled by the affirmative vote of a majority of the remaining directors although less than a quorum of the Board of Directors. A director elected to fill a vacancy shall be elected to serve only until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the Board of Directors for a term of office continuing only until the next election of directors by the shareholders. SECTION 12. COMPENSATION. Directors, as such, may receive a stated fee for their services. By resolution of the Board of Directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the Board of Directors. Members of either standing or special committees may be allowed such compensation for attendance at committee meetings as the Board of Directors may determine. SECTION 13. PRESUMPTION OF ASSENT. A director of the Bank who is present at a meeting of the Board of Directors at which action on any bank matter is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention shall be entered in the minutes of the meeting or unless he or she shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Bank within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 14. REMOVAL OF DIRECTORS. At a meeting of shareholders called expressly for that purpose, any director may be removed for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the charter or supplemental sections 6 thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole. For purposes of this section, removal for cause includes, as defined in 12 C.F.R. Section 563.39, or any successor regulation enacted by the OTS, "personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, [or a] willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order." SECTION 15. INTEGRITY OF DIRECTORS. A person is not qualified to serve as director if he or she: (1) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, or (2) is a person against who a banking agency has, within the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) has been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency. SECTION 16. AGE LIMITATION. No person 70 years of age shall be eligible for election, reelection, appointment, or reappointment to the board of the Bank. No director shall serve as such beyond the annual meeting of the Bank following the director becoming 70. This age limitation does not apply to an advisory director. ARTICLE IV - EXECUTIVE AND OTHER COMMITTEES SECTION 1. APPOINTMENT. The Board of Directors, by resolution adopted by a majority of the full board, may designate the chief executive officer and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the Board of Directors, or any director, of any responsibility imposed by law or regulation. SECTION 2. AUTHORITY. The executive committee, when the Board of Directors is not in session, shall have and may exercise all of the authority of the Board of Directors, except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the Board of Directors with reference to: the declaration of dividends; the amendment of the charter or bylaws of the Bank, or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease, or other disposition of all or substantially all of the property and assets of the Bank otherwise than in the usual and regular course of its business; a voluntary dissolution of the Bank; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest. SECTION 3. TENURE. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the 7 Board of Directors following his or her designation and until a successor is designated as a member of the executive committee. SECTION 4. MEETINGS. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day's notice stating the place, date, and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting. SECTION 5. QUORUM. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present. SECTION 6. ACTION WITHOUT A MEETING. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee. SECTION 7. VACANCIES. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full Board of Directors. SECTION 8. RESIGNATIONS AND REMOVAL. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full Board of Directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the Bank. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. SECTION 9. PROCEDURE. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure, which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the Board of Directors for its information at the meeting held next after the proceedings shall have occurred. SECTION 10. OTHER COMMITTEES. The Board of Directors may by resolution establish an audit, loan, or other committee composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Bank and may prescribe the duties, constitution, and procedures thereof. ARTICLE V - OFFICERS SECTION 1. POSITIONS. The officers of the Bank shall be a president, one or more vice presidents, a secretary, and a treasurer or comptroller, each of whom shall be elected by the Board of Directors. The Board of Directors may also designate the Chairman of the Board as an officer. The offices of the secretary and treasurer or comptroller may be held by the same person and a vice president may also be either the secretary or the treasurer or comptroller. The Board of Directors 8 may designate one or more vice presidents as executive vice president or senior vice president. The Board of Directors may also elect or authorize the appointment of such other officers as the business of the Bank may require. The officers shall have such authority and perform such duties as the Board of Directors may from time to time authorize or determine. In the absence of action by the Board of Directors, the officers shall have such powers and duties as generally pertain to their respective offices. SECTION 2. ELECTION AND TERM OF OFFICE. The officers of the Bank shall be elected annually at the first meeting of the Board of Directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer's death, resignation, or removal in the manner hereinafter provided. Election or appointment of an officer, employee, or agent shall not of itself create contractual rights. The Board of Directors may authorize the Bank to enter into an employment contract with any officer in accordance with regulations of the Office; but no such contract shall impair the right of the Board of Directors to remove any officer at any time in accordance with Section 3 of this Article V. SECTION 3. REMOVAL. Any officer may be removed by the Board of Directors whenever, in its judgment, the best interests of the Bank will be served thereby, but such removal, other than for cause, shall be without prejudice to any contractual rights, if any, of the person so removed. For purposes of this section, removal for cause includes, as defined in 12 C.F.R. Section 563.39 or any successor regulation enacted by the Office, removal because of the officer's "personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, [or, a] willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease-and-desist order." SECTION 4. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification, or otherwise, may be filled by the Board of Directors for the unexpired portion of the term. SECTION 5. REMUNERATION. The remuneration of the officers shall be fixed from time to time by the Board of Directors. 9 ARTICLE VI - CONTRACTS, LOANS, CHECKS AND DEPOSITS SECTION 1. CONTRACTS. To the extent permitted by regulations of the Office, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the Board of Directors may authorize any officer, employee or agent of the Bank to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Bank. Such authority may be general or confined to specific instances. SECTION 2. LOANS. No loans shall be contracted on behalf of the Bank and no evidence of indebtedness shall be issued in its name unless authorized by the Board of Directors. Such authority may be general or confined to specific instances. SECTION 3. CHECKS, DRAFTS, ETC. All checks, drafts, or other orders for the payment of money, notes, or other evidences of indebtedness issued in the name of the Bank shall be signed by one or more officers, employees, or agents of the Bank in such manner as shall from time to time be determined by the Board of Directors. SECTION 4. DEPOSITS. All funds of the Bank not otherwise employed shall be deposited from time to time to the credit of the Bank in any duly authorized depositories as the Board of Directors may select. ARTICLE VII - CERTIFICATES FOR SHARES AND THEIR TRANSFER SECTION 1. CERTIFICATES FOR SHARES. Certificates representing shares of capital stock of the Bank shall be in such form as shall be determined by the Board of Directors and approved by the Office. Such certificates shall be signed by the chief executive officer or by any other officer of the Bank authorized by the Board of Directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the Bank itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Bank. All certificates surrendered to the Bank for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and cancelled, except that in the case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Bank as the Board of Directors may prescribe. SECTION 2. TRANSFER OF SHARES. Transfer of shares of capital stock of the Bank shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his or her legal representative, who shall furnish proper evidence of such authority, or by his or her attorney authorized by a duly executed power of attorney and filed with the Bank. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name the shares of capital stock stand on the books of the Bank shall be deemed by the Bank to be the owner for all purposes. 10 ARTICLE VIII - FISCAL YEAR The fiscal year of the Bank shall end on the 31st day of December of each year. The appointment of accountants shall be subject to annual ratification by the shareholders. ARTICLE IX - DIVIDENDS Subject only to the terms of the Bank's charter and the regulations and orders of the Office, the Board of Directors may, from time to time, declare, and the Bank may pay, dividends on its outstanding shares of capital stock. ARTICLE X - CORPORATE SEAL The Board of Directors shall provide a Bank seal, which shall be two concentric circles between which shall be the name of the Bank. The year of incorporation or an emblem may appear in the center. ARTICLE XI - AMENDMENTS These bylaws may be amended in a manner consistent with regulations of the OTS and shall be effective after: (i) approval of the amendment by a majority vote of the authorized Board of Directors, or by a majority vote of the votes cast by the shareholders of the Bank at any legal meeting; and (ii) receipt of any applicable regulatory approval. If the Bank fails to meet its quorum requirements solely due to vacancies on the board, then the affirmative vote of a majority of the sitting board will be required to amend the bylaws. ARTICLE XII - INDEMNIFICATION The Bank shall indemnify all officers, directors and employees of the Bank, and their heirs, executors and administrators, to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by them in connection with or arising out of any action, suit or proceeding in which they may be involved by reason of their having been a director or officer of the Bank, whether or not they continue to be a director or officer at the time of incurring such expenses or liabilities, such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 11 FEDERAL MHC SUBSIDIARY HOLDING COMPANY CHARTER FOR NAUGATUCK VALLEY FINANCIAL CORPORATION SECTION 1. CORPORATE TITLE. The full corporate title of the MHC subsidiary holding company is Naugatuck Valley Financial Corporation (the "Holding Company"). SECTION 2. DOMICILE The domicile of the Holding Company is in the Borough of Naugatuck, in the State of Connecticut. SECTION 3. DURATION. The duration of the Holding Company is perpetual. SECTION 4. PURPOSE AND POWERS. The purpose of the Holding Company is to pursue any or all of the lawful objectives of a federal mutual holding company chartered under Section 10(o) of the Home Owners' Loan Act, 12 U.S.C. 1467a(o), and to exercise all the express, implied, and incidental powers conferred thereby and by all acts amendatory thereof and supplemental thereto, subject to the Constitution and laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Office of Thrift Supervision ("OTS"). SECTION 5. CAPITAL STOCK. The total number of shares of all classes of the capital stock which the Holding Company has authority to issue is twenty-six million shares (26,000,000), of which twenty-five million shares (25,000,000) shall be common stock, par value $.01 per share, and of which one million shares (1,000,000) shall be preferred stock, par value $.01 per share. The shares may be issued from time to time as authorized by the Board of Directors without further approval of shareholders except as otherwise provided in this Section 5 or to the extent that such approval is required by governing law, rule, or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par value. Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of the Holding Company. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted), labor, or services actually performed for the Holding Company, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such 1 property, labor, or services, as determined by the Board of Directors of the Holding Company, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the retained earnings of the Holding Company that is transferred to common stock or paid-in capital accounts upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance. Except for the initial offering of shares of the Holding Company, no shares of capital stock (including shares issuable upon conversion, exchange, or exercise of other securities) shall be issued, directly or indirectly, to officers, directors, or controlling persons of the Holding Company other than as part of a general public offering or as qualifying shares to a director, unless their issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting. Nothing contained in this Section 5 (or in any supplementary sections hereto) shall entitle the holders of any class or series of capital stock to vote as a separate class or series or to more than one vote per share: provided, that this restriction on voting separately by class or series shall not apply: (i) To any provision which would authorize the holders of preferred stock, voting as a class or series, to elect some members of the Board of Directors, less than a majority thereof, in the event of default in the payment of dividends on any class or series of preferred stock; (ii) To any provision which would require the holders of preferred stock, voting as a class or series, to approve the merger or consolidation of the Holding Company with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) of properties or business in exchange for securities of a corporation other than the Holding Company if the preferred stock is exchanged for securities of such other corporation; provided, that no provision may require such approval for transactions undertaken with the assistance or pursuant to the direction of the OTS or the Federal Deposit Insurance Corporation; (iii) To any amendment which would adversely change the specific terms of any class or series of capital stock as set forth in this Section 5 (or in any supplementary sections hereto), including any amendment which would create or enlarge any class or series ranking prior thereto in rights and preferences. An amendment which increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving Holding Company in a merger or consolidation for the Holding Company, shall not be considered to be such an adverse change. 2 A description of the different classes and series (if any) of the Holding Company's capital stock and a statement of the designations, and the relative rights, preferences, and limitations of the shares of each class of and series (if any) of capital stock are as follows: A. Common Stock. Except as provided in this Section 5 (or in any supplementary sections thereto) the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holder and there shall be no right to cumulate votes in an election of directors. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of sinking fund, or retirement fund, or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends out of any assets legally available for the payment of dividends. In the event of any liquidation, dissolution, or winding up of the Holding Company, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Holding Company available for distribution remaining after: (i) payment or provision for payment of the Holding Company's debts and liabilities; (ii) distributions or provision for distributions in settlement of a liquidation account; and (iii) distributions or provision for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution, or winding up of the Holding Company. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock. B. Preferred Stock. The Holding Company may provide in supplementary sections to its charter for one or more classes of preferred stock, which shall be separately identified. The shares of any class may be divided into and issued in series, with each series separately designated so as to distinguish the shares thereof from the shares of all other series and classes. The terms of each series shall be set forth in a supplementary section to the charter. All shares of the same class shall be identical except as to the following relative rights and preferences, as to which there may be variations between different series: 3 (a) The distinctive serial designation and the number of shares constituting such series; (b) The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s) the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends; (c) The voting powers, full or limited, if any, of the shares of such series; (d) Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed; (e) The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Holding Company; (f) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund; (g) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock of the Holding Company and, if so, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (h) The price or other consideration for which the shares of such series shall be issued; and (i) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock. Each share of each series of serial preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series. The Board of Directors shall have authority to divide, by the adoption of supplementary charter sections, any authorized class of preferred stock into series, and, within the limitations set forth in this 4 section and the remainder of this charter, fix and determine the relative rights and preferences of the shares of any series so established. Prior to the issuance of any preferred shares of a series established by a supplementary charter section adopted by the Board of Directors, the Holding Company shall file with the Secretary to the OTS a dated copy of that supplementary section of this charter establishing and designating the series and fixing and determining the relative rights and preferences thereof. SECTION 6. CERTAIN PROVISIONS APPLICABLE FOR FIVE YEARS. Notwithstanding anything contained in the Holding Company's charter or bylaws to the contrary, for a period of five years from the date of an initial minority stock offering of shares of common stock of the Holding Company, the following provisions shall apply: A. Beneficial Ownership Limitation. No person other than Naugatuck Valley Mutual Holding Company shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10 percent of any class of any equity security of the Holding Company. This limitation shall not apply to a transaction in which the Holding Company forms a holding company in conjunction with conversion, or thereafter, if such formation is without change in the respective beneficial ownership interests of the Holding Company's shareholders other than pursuant to the exercise of any dissenter and appraisal rights, the purchase of shares by underwriters in connection with a public offering, or the purchase of shares by a tax-qualified employee stock benefit plan which is exempt from the approval requirements under Section 574.3(c)(1)(vi) of the OTS's Regulations. In the event shares are acquired in violation of this Section 6, all shares beneficially owned by any person in excess of 10 percent shall be considered "excess shares" and shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matters submitted to the shareholders for a vote. For the purposes of this Section 6, the following definitions apply: (i) The term "person" includes an individual, a group acting in concert, a corporation, a partnership, an association, a joint stock company, a trust, any unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of the equity securities of the Holding Company. 5 (ii) The term "offer" includes every offer to buy or otherwise acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tenders of, a security or interest in a security for value. (iii) The term "acquire" includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise. (iv) The term "acting in concert" means (a) knowing participation in a joint activity or conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (b) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. B. Call for Special Meetings. Special meetings of shareholders relating to changes in control of the Holding Company or amendments to its charter shall be called only at the direction of the Board of Directors. SECTION 7. PREEMPTIVE RIGHTS. Holders of the capital stock of the Holding Company are not entitled to preemptive rights with respect to any shares of the Holding Company that may be issued. SECTION 8. DIRECTORS. The Holding Company shall be under the direction of a Board of Directors. The authorized number of directors, as stated in the Holding Company's bylaws, shall be not be fewer than five nor more than 15 except when a greater or lesser number is approved by the Director of the OTS, or his or her delegate. SECTION 9. AMENDMENT OF CHARTER. Except as provided in Section 5, no amendment, addition, alteration, change, or repeal of this charter shall be made, unless such is proposed by the Board of Directors of the Holding Company, approved by the shareholders by a majority of the votes eligible to be cast at a legal meeting, unless a higher vote is otherwise is required, and approved or preapproved by the OTS. 6 NAUGATUCK VALLEY FINANCIAL CORPORATION Attest: __________________________ _______________________________________ Bernadette A. Mole John C. Roman Corporate Secretary President and Chief Executive Officer Attest: Office of Thrift Supervision __________________________ By: _____________________________ Secretary Office of Thrift Supervision EFFECTIVE DATE: _______________________ 7 BYLAWS OF NAUGATUCK VALLEY FINANCIAL CORPORATION ARTICLE I. HOME OFFICE The home office of Naugatuck Valley Financial Corporation (the "Subsidiary Holding Company") is 333 Church Street, Naugatuck, in the County of New Haven, in the State of Connecticut. ARTICLE II. SHAREHOLDERS Section 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the home office of the Subsidiary Holding Company or at such other convenient place as the board of directors may determine. Section 2. Annual Meeting. A meeting of the shareholders of the Subsidiary Holding Company for the election of directors and for the transaction of any other business of the Subsidiary Holding Company shall be held annually within 150 days after the end of the Subsidiary Holding Company's fiscal year on such date as the board of directors may determine. Section 3. Special Meetings. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by the regulations of the Office of Thrift Supervision ("OTS") or the Federal Stock Charter of the Subsidiary Holding Company, may be called at any time by the chairman of the board, the president or a majority of the board of directors, and shall be called by the chairman of the board, the president or the secretary upon the written request of the holders of not less than one-tenth of all of the outstanding capital stock of the Subsidiary Holding Company entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the home office of the Subsidiary Holding Company addressed to the chairman of the board, the president or the secretary. Section 4. Conduct of Meetings. Annual and special meetings shall be conducted by the person designated by the board of directors to preside at such meetings in accordance with the written procedures agreed to by the board of directors. The board of directors shall designate, when present, either the chairman of the board or such other person as designated by the board of directors to preside at such meetings. Section 5. Notice of Meetings. Written notice stating the place, day and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, the secretary or the directors calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be 1 delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the Subsidiary Holding Company as of the record date prescribed in Section 6 of this Article II, with postage prepaid. When any shareholders' meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken. Section 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment. Section 7. Voting Lists. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the Subsidiary Holding Company shall make a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the Subsidiary Holding Company and shall be subject to inspection by any shareholder of record or the shareholder's agent at any time during usual business hours, for a period of 20 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder of record or any shareholder's agent during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. In lieu of making the shareholder list available for inspection by shareholders as provided in the preceding paragraph, the board of directors may elect to follow the procedures prescribed in Section 552.6(d) of the OTS's Regulations as now or hereafter in effect. Section 8. Quorum. A majority of the outstanding shares of the Subsidiary Holding Company entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the 2 withdrawal of enough shareholders to constitute less than a quorum. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number of shareholders voting together or voting by classes is required by law or the charter. Directors, however, are elected by a plurality of the votes cast at an election of directors. Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the shareholder. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest. Section 10. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the Subsidiary Holding Company to the contrary, at any meeting of the shareholders of the Subsidiary Holding Company any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. Section 11. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares held in trust in an IRA or Keogh Account, however, may be voted by the Subsidiary Holding Company if no other instructions are received. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. 3 Neither treasury shares of its own stock held by the Subsidiary Holding Company, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Subsidiary Holding Company, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. Section 12. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may, or on the request of not fewer than 10 percent of the votes represented at the meeting shall, make such appointment at the meeting. If appointed at the meeting, the majority of the votes present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting, or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by regulations of the OTS, the duties of such inspectors shall include: determining the number of shares of stock and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. Section 13. Nominating Committee. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Subsidiary Holding Company. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the Subsidiary Holding Company at least 30 days prior to the date of the annual meeting; provided, however, that in the event that less than 40 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder must be received not later than the close of business on the 10th day following the day on which notice of the date of the annual meeting was mailed or such public disclosure was made. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Subsidiary Holding Company. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon. 4 Section 14. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary at least 30 days before the date of the annual meeting; provided, however, that in the event that less than 40 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder must be received not later than the close of business on the 10th day following the day on which notice of the date of the annual meeting was mailed or such public disclosure was made, and all business so stated, proposed and filed shall be considered at the annual meeting so long as such business relates to a proper subject matter for shareholder action. Any shareholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least 30 days before the meeting, such proposal shall be laid over for action at an adjourned, special or annual meeting of the shareholders taking place 30 days or more thereafter. A shareholder's notice to the secretary shall set forth as to each matter the shareholder proposed to bring before the annual meeting (a) a brief description of the proposal desired to be brought before the annual meeting and (b) the name and address of such shareholder and the class and number of shares of the Subsidiary Holding Company which are owned of record or beneficially by such shareholder. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees; but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. Section 15. Informal Action by Shareholders. Any action required to be taken at a meeting of shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter thereof. ARTICLE III. BOARD OF DIRECTORS Section 1. General Powers. The business and affairs of the Subsidiary Holding Company shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board from among its members and, when present, the chairman of the board shall preside at its meetings. If the chairman of the board is not present, the board shall select one of its members to preside at its meeting. Section 2. Number and Term. The board of directors shall consist of eight (8) members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually. Section 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw following the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place, for the holding of additional regular meetings without other notice than such resolution. Directors may participate in a meeting by means of a conference telephone 5 or similar communications device through which all persons participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes. Section 4. Qualification. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the Subsidiary Holding Company unless the Subsidiary Holding Company is a wholly owned subsidiary of a holding company. Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board or by one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear and speak to each other. Such participation shall constitute presence in person for all purposes. Section 6. Notice. Written notice of any special meeting shall be given to each director at least 24 hours prior thereto when delivered personally or by telegram, or at least five days prior thereto when delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid if mailed, when delivered to the telegraph company if sent by telegram or when the Subsidiary Holding Company receives notice of delivery if electronically transmitted. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 7. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III. Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the OTS or by these bylaws. Section 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. 6 Section 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Subsidiary Holding Company addressed to the chairman of the board. Unless otherwise specified, such resignation shall take effect upon receipt by the chairman of the board. More than three consecutive absences from regular meetings of the board of directors, unless excused by resolution of the board of directors, shall automatically constitute a resignation, effective when such resignation is accepted by the board of directors. Section 11. Vacancies. Any vacancy occurring in the board of directors may be filled by the affirmative vote of a majority of the remaining directors, although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders. Section 12. Compensation. Directors, as such, may receive a stated fee for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the board of directors may determine. Section 13. Presumption of Assent. A director of the Subsidiary Holding Company who is present at a meeting of the board of directors at which action on any Subsidiary Holding Company matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the minutes of the meeting or unless he or she shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Subsidiary Holding Company within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action. Section 14. Removal of Directors. At a meeting of shareholders called expressly for that purpose, any director may be removed only for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the Charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole. Section 15. Integrity of Directors. A person is not qualified to serve as a director if he or she: (1) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, or (2) is a person against who a banking agency has, within the past ten years, issued a cease and desist order 7 for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) has been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency. Section 16. Age Limitation. No person 70 years of age shall be eligible for election, reelection, appointment, or reappointment to the board of the Subsidiary Holding Company. No director shall serve as such beyond the annual meeting of the Subsidiary Holding Company following the director becoming 70. This age limitation does not apply to an advisory director. ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES Section 1. Appointment. The board of directors, by resolution adopted by a majority of the full board, may designate the chief executive officer and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation. Section 2. Authority. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the board of directors with reference to: the declaration of dividends; the amendment of the Charter or bylaws of the Subsidiary Holding Company, or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease or other disposition of all or substantially all of the property and assets of the Subsidiary Holding Company otherwise than in the usual and regular course of its business; a voluntary dissolution of the Subsidiary Holding Company; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest. Section 3. Tenure. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member of the executive committee. Section 4. Meetings. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day's notice stating the place, date and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need 8 be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting. Section 5. Quorum. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present. Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee. Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors. Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the Subsidiary Holding Company. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred. Section 10. Other Committees. The board of directors may by resolution establish an audit, loan, or other committees composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Subsidiary Holding Company and may prescribe the duties, constitution and procedures thereof. ARTICLE V. OFFICERS Section 1. Positions. The officers of the Subsidiary Holding Company shall be a chief executive officer, a president, one or more vice presidents, a secretary and a treasurer or comptroller, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The offices of the secretary and treasurer or comptroller may be held by the same person and a vice president may also be either the secretary or the treasurer or comptroller. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment 9 of such other officers as the business of the Subsidiary Holding Company may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. Section 2. Election and Term of Office. The officers of the Subsidiary Holding Company shall be elected annually at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer's death, resignation or removal in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not of itself create contractual rights. The board of directors may authorize the Subsidiary Holding Company to enter into an employment contract with any officer in accordance with regulations of the OTS; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. Section 3. Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the Subsidiary Holding Company will be served thereby, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the person so removed. Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the board of directors for the unexpired portion of the term. Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors. ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. Contracts. To the extent permitted by regulations of the OTS, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Subsidiary Holding Company to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Subsidiary Holding Company. Such authority may be general or confined to specific instances. Section 2. Loans. No loans shall be contracted on behalf of the Subsidiary Holding Company and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. 10 Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Subsidiary Holding Company shall be signed by one or more officers, employees or agents of the Subsidiary Holding Company in such manner as shall from time to time be determined by the board of directors. Section 4. Deposits. All funds of the Subsidiary Holding Company not otherwise employed shall be deposited from time to time to the credit of the Subsidiary Holding Company in any duly authorized depositories as the board of directors may select. ARTICLE VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. Certificates for Shares. Certificates representing shares of capital stock of the Subsidiary Holding Company shall be in such form as shall be determined by the board of directors and approved by the OTS. Such certificates shall be signed by the chief executive officer or by any other officer of the Subsidiary Holding Company authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the Subsidiary Holding Company itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Subsidiary Holding Company. All certificates surrendered to the Subsidiary Holding Company for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and cancelled, except that in case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Subsidiary Holding Company as the board of directors may prescribe. Section 2. Transfer of Shares. Transfer of shares of capital stock of the Subsidiary Holding Company shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his or her legal representative, who shall furnish proper evidence of such authority, or by his or her attorney authorized by a duly executed power of attorney and filed with the Subsidiary Holding Company. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Subsidiary Holding Company shall be deemed by the Subsidiary Holding Company to be the owner for all purposes. 11 ARTICLE VIII. FISCAL YEAR The fiscal year of the Subsidiary Holding Company shall end on December 31 of each year. The appointment of accountants shall be subject to annual ratification by the shareholders. ARTICLE IX. DIVIDENDS Subject to the terms of the Subsidiary Holding Company's Charter and the regulations and orders of the OTS, the board of directors may, from time to time, declare, and the Subsidiary Holding Company may pay, dividends on its outstanding shares of capital stock. ARTICLE X. CORPORATE SEAL The board of directors shall provide a Subsidiary Holding Company seal, which shall be two concentric circles between which shall be the name of the Subsidiary Holding Company. The year of incorporation or an emblem may appear in the center. ARTICLE XI. AMENDMENTS These bylaws may be amended in a manner consistent with regulations of the OTS and shall be effective after: (i) approval of the amendment by a majority vote of the authorized board of directors, or by a majority vote of the votes cast by the shareholders of the Subsidiary Holding Company at any legal meeting, and (ii) receipt of any applicable regulatory approval. When the Subsidiary Holding Company fails to meet its quorum requirements, solely due to vacancies on the board, then the affirmative vote of a majority of the sitting board will be required to amend the bylaws. ARTICLE XII. INDEMNIFICATION The Subsidiary Holding Company shall indemnify all officers, directors and employees of the Subsidiary Holding Company, and their heirs, executors and administrators, to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by them in connection with or arising out of any action, suit or proceeding in which they may be involved by reason of their having been a director or officer of the Subsidiary Holding Company, whether or not they continue to be a director or officer at the time of incurring such expenses or liabilities, such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 12 FEDERAL MUTUAL HOLDING COMPANY CHARTER FOR NAUGATUCK VALLEY MUTUAL HOLDING COMPANY Section 1. Corporate title. The name of the mutual holding company hereby chartered is Naugatuck Valley Mutual Holding Company (the "Mutual Company"). Section 2. Duration. The duration of the Mutual Company is perpetual. Section 3. Purpose and powers. The purpose of the Mutual Company is to pursue any or all of the lawful objectives of a federal mutual savings and loan holding company chartered under section 10(o) of the Home Owners' Loan Act, 12 U.S.C. 1467a(o), and to exercise all of the express, implied, and incidental powers conferred thereby and all acts amendatory thereof and supplemental thereto, subject to the Constitution and laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Office of Thrift Supervision (the "OTS"). Section 4. Capital. The Mutual Company shall have no capital stock. Section 5. Members. All holders of the savings, demand or other authorized accounts of Naugatuck Valley Savings and Loan (the "Bank") are members of the Mutual Company. With respect to all questions requiring action by the members of the Mutual Company, each holder of an account in the Bank shall be permitted to cast one vote for each $100, or fraction thereof, of the withdrawal value of the member's account. No member, however, shall cast more than 1,000 votes. All accounts shall be nonassessable. Section 6. Directors. The Mutual Company shall be under the direction of a board of directors. The authorized number of directors shall not be fewer than five nor more than fifteen, as fixed in the Mutual Company's bylaws, except that the number of directors may be decreased to a number less than five or increased to a number greater than fifteen with the prior approval of the Director of the OTS or his or her delegate. Section 7. Capital, surplus, and distribution of earnings. The Mutual Company shall distribute net earnings to account holders of the Bank on such basis and in accordance with such terms and conditions as may from time to time be authorized by the Director of the OTS; provided, however, that the Mutual Company may establish minimum-balance requirements for account holders to be eligible for distribution of earnings. All holders of accounts of the Bank shall be entitled to equal distribution of assets of the Mutual Company, pro rata to the value of their accounts in the Bank, in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Mutual Company. Section 8. Amendment of Charter. Adoption of any pre-approved charter amendment shall be effective after such pre-approved amendment has been submitted to and approved by the members at a legal meeting. Any other amendment, addition, change or repeal of this charter must be approved by the OTS prior to approval by the members at a legal meeting, and shall be effective upon filing with the OTS in accordance with regulatory procedures. Attest: NAUGATUCK VALLEY MUTUAL HOLDING COMPANY ________________________________ _____________________________________ Bernadette A. Mole John C. Roman Corporate Secretary President and Chief Executive Officer Attest: Office of Thrift Supervision ________________________________ By:__________________________________ Secretary Office of Thrift Supervision EFFECTIVE DATE:______________________ 2 BYLAWS OF NAUGATUCK VALLEY MUTUAL HOLDING COMPANY 1. Annual meeting of members. The annual meeting of the members of the Mutual Company for the election of directors and for the transaction of any other business of the Mutual Company shall be held, as designated by the board of directors, at a location within the state that constitutes the principal place of business of the Mutual Company, or at any other convenient place the board of directors may designate, on a day and time that is within 150 days after the end of the Mutual Company's fiscal year. At each annual meeting, the officers shall make a full report of the financial condition of the Mutual Company and of its progress for the preceding year and shall outline a program for the succeeding year. Annual meetings shall be conducted by the chairman of the annual meeting in accordance with the written procedures agreed to by the board of directors. 2. Special meetings of members. Special meetings of the members of the Mutual Company may be called at any time by the president or the majority of the board of directors and shall be called by the president or the secretary upon the written request of members of record, holding in the aggregate at least 10% or more of the voting capital of the Mutual Company. For purposes of this Section 2, "voting capital" shall mean the maximum number of votes eligible to be cast at a legal meeting of members as determined at the most recent practicable date. Such written request shall state the purpose of the meeting and shall be delivered at the principal place of business of the Mutual Company addressed to the chairman of the board. The business which may be brought before and acted upon at any special meeting shall be limited to those matters specified by the board of directors or, in the case of a special meeting called by the members pursuant to this Section 2, those matters specified by such members in the written request delivered to the chairman of the board or the secretary. Special meetings shall be conducted by the chairman of the special meeting in accordance with written procedures agreed to by the board of directors. 3. Notice of meeting of members. Notice of each annual or special meeting shall be either published once a week for the two successive calendar weeks (in each instance on any day of the week) immediately prior to the week in which such meeting shall convene, in a newspaper printed in the English language and of general circulation in the city or county in which the principal place of business of the Mutual Company is located, or mailed postage-prepaid at least 15 days and not more than 45 days prior to the date on which such meeting shall convene, to each of its members of record at the last address appearing on the books of the Mutual Company. Such notice shall state the name of the Mutual Company, the place of the meeting, the date and time when it shall convene, and the matters to be considered. A similar notice shall be posted in a conspicuous place in each of the offices of the Naugatuck Valley Savings and Loan (the "Bank") during the 14 days immediately preceding the date on which such meeting shall convene. If any member, in person or by authorized attorney, shall waive in writing notice of any meeting of members, notice thereof need not be given to such member. When any 1 meeting is adjourned for 30 days or more, notice of the adjournment and reconvening of the meeting shall be given as in the case of the original meeting. 4. Fixing of record date. For the purpose of determining members entitled to notice of or to vote at any meeting of members or any adjournment thereof, or in order to make a determination of members for any other proper purpose, the board of directors shall fix in advance a record date for any such determination of members. Such date shall be not more than 60 days nor fewer than 10 days prior to the date on which the action, requiring such determination of members, is to be taken. The member entitled to participate in any such action shall be the member of record on the books of the Mutual Company on such record date. The number of votes which each member shall be entitled to cast at any meeting of the members shall be determined from the books of the Mutual Company as of such record date. Any member of such record date who ceases to be a member prior to such meeting shall not be entitled to vote at that meeting. The same determination shall apply to any adjourned meeting. 5. Member quorum. Any number of members present and voting, represented in person or by proxy, at a regular or special meeting of the members shall constitute a quorum. A majority of all votes cast at any meeting of the members shall determine any question, unless otherwise required by regulation. Directors, however, are elected by a plurality of the votes cast at an election of directors. At any adjourned meeting, any business may be transacted which might have been transacted at the meeting as originally called. Members present at a duly constituted meeting may continue to transact business until adjournment. 6. Voting by proxy. Voting at any annual or special meeting of the members may be by proxy pursuant to the rules and regulations of the Office of Thrift Supervision (the "OTS"), provided, that no proxies shall be voted at any meeting unless such proxies shall have been placed on file with the secretary of the Mutual Company, for verification, prior to the convening of such meeting. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the member. All proxies with a term greater than eleven months or solicited at the expense of the Mutual Company must run to the board of directors as a whole, or to a committee appointed by a majority of such board. Accounts held by an administrator, executor, guardian, conservator or receiver may be voted in person or by proxy by such person. Accounts held by a trustee may be voted by such trustee either in person or by proxy, in accordance with the terms of the trust agreement, but no trustee shall be entitled to vote accounts without a transfer or such accounts into the trustee name. Accounts held in trust in an IRA or Keogh Account, however, may be voted by the Mutual Company if no other instructions are received. Joint accounts shall be entitled to no more than 1,000 votes, and any owner may cast all the votes unless the Mutual Company has otherwise been notified in writing. 7. Communication between members. Communication between members shall be subject to any applicable rules or regulations of the OTS. No member, however, shall have the right to inspect or copy any portion of any books or records of the Mutual Company or the Bank containing: (i) a list of 2 depositors in or borrowers from the Bank; (ii) their addresses; (iii) individual deposit or loan balances or records; or (iv) any data from which such information could reasonably be constructed. 8. Number of directors. The number of directors of the Mutual Company shall be eight (8), except where authorized by the OTS. Each director shall be a member of the Mutual Company. Directors shall be elected for periods of one to three years and until their successors are elected and qualified, but if a staggered board is chosen, provision shall be made for the election of approximately one-third or one-half of the board each year, as appropriate. 9. Meetings of the board. The board of directors shall meet at least annually at the principal place of business of the Mutual Company at an hour and date fixed by resolution of the board, provided that the place of meeting may be changed by the directors. Special meetings of the board may be held at any place specified in a notice of such meeting and shall be called by the secretary upon the written request of the chairman of the board or of three directors. All special meetings shall be held upon at least 24 hours written notice to each director unless notice is waived in writing before or after such meeting. Such notice shall state the place, date, time, and purposes of such meeting. A majority of the authorized directors shall constitute a quorum for the transaction of business. The act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board. Action may be taken without a meeting if unanimous written consent is obtained for such action. Members of the board of directors may participate in meetings by means of conference telephone or in similar communications equipment by which all persons participating in the meeting can hear and speak to each other. The meetings shall be under the direction of a chairman, appointed annually by the board, or in the absence of the chairman, the meetings shall be under the direction of another member designated by the Board. Regular and special meetings of the board shall be conducted in accordance with the rules determined by the chairman. 10. Officers, employees and agents. Annually at the meeting of the board of directors of the Mutual Company following the annual meeting of the members of the Mutual Company, the board of directors shall elect a president, one or more vice presidents, a secretary, officer and a treasurer or comptroller; Provided, that the offices of president and secretary may not be held by the same person and a vice president may also be the treasurer or comptroller. The board may appoint such additional officers, employees and agents as it may from time to time determine, including a chief executive officer. The board of directors may also designate the chairman of the board as an officer. The term of office of all officers shall be one year or until their respective successors are elected and qualified. Any officer may be removed at any time by the board with or without cause, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the person so removed. In the absence of designation from time to time of powers and duties by the board, the officers shall have such powers and duties as generally pertain to their respective offices. 3 11. Vacancies, resignation or removal of directors. Members of the Mutual Company shall elect directors by ballot; provided, that in the event of a vacancy on the board between meetings of members, the board of directors may, by their affirmative vote, fill such vacancy, even if the remaining directors constitute less than a quorum. A director elected to fill a vacancy shall be elected to serve only until the next election of directors by the members. Any director may resign at any time by sending a written notice of such resignation to the office of the Mutual Company delivered to the secretary. Unless otherwise specified therein such resignation shall take effect upon receipt by the secretary. More than three consecutive absences from regular meetings of the board, unless excused by resolution of the board, shall automatically constitute a resignation, effective when such resignation is accepted by the board. At a meeting of members called expressly for that purpose, directors or the entire board may be removed, only with cause, by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. 12. Integrity of Directors. A person is not qualified to serve as a director if he or she: (1) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, or (2) is a person against who a banking agency has, within the past ten years, issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) has been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency. 13. Powers of the board. The board of directors shall have the power: (a) By resolution, to appoint from among its members and remove an executive committee, which committee shall have and may exercise the powers of the board between the meetings of the board, but no such committee shall have the authority of the board to amend the charter or bylaws, adopt a plan of merger, consolidation, dissolution, or provide for the disposition of all or substantially all of the property and assets of the Mutual Company. Such committee shall not operate to relieve the board, or any member thereof, of any responsibility imposed by law; (b) To appoint and remove by resolution the members of such other committees as may be deemed necessary and prescribe the duties thereof; (c) To fix the compensation of directors, officers, and employees; and to remove any officer or employee at any time with or without cause; 4 (d) To extend leniency and indulgence to borrowing members who are in distress and generally to compromise and settle any debts and claims; (e) To limit payments on capital which may be accepted; (f) To reject an application for an account or membership; and (g) To exercise any and all of the powers of the Mutual Company not expressly reserved by the charter to the members. 14. Execution of instruments, generally. All documents and instruments or writings of any nature shall be signed, executed, verified, acknowledged, and delivered by such officers, agents, or employees of the Mutual Company or any one of them and in such manner as from time to time may be determined by resolution of the board. All notes, drafts, acceptances, checks, endorsements, and all evidences of indebtedness of the Mutual Company whatsoever shall be signed by such officer or officers or such agent or agents of the Mutual Company and in such manner as the board may from time to time determine. Endorsements for deposit to the credit of the Mutual Company in any of its duly authorized depositories shall be made in such manner as the board may from time to time determine. Proxies to vote with respect to shares or accounts of other associations or stock of other corporations owned by, or standing in the name of, the Mutual Company may be executed and delivered from time to time on behalf of the Mutual Company by the president and the secretary of the Mutual Company or by any other persons so authorized by the board. 15. Nominating committee. The chairman, at least 30 days prior to the date of each annual meeting, shall appoint a nominating committee of three persons who are members of the Mutual Company. Such committee shall make nominations for directors in writing and deliver to the secretary such written nominations at least 15 days prior to the date of the annual meeting, which nominations shall then be posted in a prominent place in the principal place of business for the 15-day period prior to the date of the annual meeting, except in the case of a nominee substituted as a result of death or other incapacity. Provided such committee is appointed and makes such nominations, no nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by members are made in writing and delivered to the secretary of the Mutual Company at least 10 days prior to the date of the annual meeting, which nominations shall then be posted in a prominent place in the principal place of business for the 10-day period prior to the date of the annual meeting, except in the case of a nominee substituted as a result of death or other incapacity. Ballots bearing the names of all persons nominated by the nominating committee and by other members prior to the annual meeting shall be provided for use by the members at the annual meeting. If at any time the chairman shall fail to appoint such nominating committee, or the nominating committee shall fail or refuse to act at least 15 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any member and shall be voted upon. 5 16. New business. Any new business to be taken up at the annual meeting, including any proposal to increase or decrease the number of directors of the Mutual Company, shall be stated in writing and filed with the secretary of the Mutual Company at least 30 days before the date of the annual meeting, and all business so stated, proposed, and filed shall be considered at the annual meeting; but no other proposal shall be acted upon at the annual meeting. Any member may make any other proposal at the annual meeting and the same may be discussed and considered; but unless stated in writing and filed with the secretary 30 days before the meeting, such proposal shall be laid over for action at an adjourned, special, or regular meeting of the members taking place at least 30 days thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of the reports of officers and committees, but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. 17. Seal. The seal shall be two concentric circles between which shall be the name of the Mutual Company. The year of incorporation, the word "incorporated," or an emblem may appear in the center. 18. Indemnification. The Mutual Company shall indemnify all officers, directors and employees of the Mutual Company, and their heirs, executors and administrators, to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by them in connection with or arising out of any action, suit or proceeding in which they may be involved by reason of their having been a director or officer of the Mutual Company, whether or not they continue to be a director or officer at the time of incurring such expenses or liabilities, such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 19. Amendment. Adoption of any bylaw amendment pursuant to Section 544.5 of the OTS's regulations, as long as consistent with applicable law, rules and regulations, and which adequately addresses the subject and purpose of the stated bylaw section, shall be effective after: (i) approval of the amendment by a majority vote of the authorized board, or by a vote of the members of the Mutual Company at a legal meeting, and (ii) receipt of any applicable regulatory approval. When the Mutual Company fails to meet its quorum requirement, solely due to vacancies on the board, the bylaws may be amended by an affirmative vote of a majority of the sitting board. 20. Age Limitation. No person 70 years of age shall be eligible for election, reelection, appointment, or reappointment to the board of the Mutual Company. No director shall serve as such beyond the annual meeting of the Mutual Company following the director becoming 70. This age limitation does not apply to an advisory director. 6 EX-3.1 4 g89544exv3w1.txt EX-3.1 CHARTER EXHIBIT 3.1 FEDERAL MHC SUBSIDIARY HOLDING COMPANY CHARTER FOR NAUGATUCK VALLEY FINANCIAL CORPORATION SECTION 1. CORPORATE TITLE. The full corporate title of the MHC subsidiary holding company is Naugatuck Valley Financial Corporation (the "Holding Company"). SECTION 2. DOMICILE The domicile of the Holding Company is in the Borough of Naugatuck, in the State of Connecticut. SECTION 3. DURATION. The duration of the Holding Company is perpetual. SECTION 4. PURPOSE AND POWERS. The purpose of the Holding Company is to pursue any or all of the lawful objectives of a federal mutual holding company chartered under Section 10(o) of the Home Owners' Loan Act, 12 U.S.C. 1467a(o), and to exercise all the express, implied, and incidental powers conferred thereby and by all acts amendatory thereof and supplemental thereto, subject to the Constitution and laws of the United States as they are now in effect, or as they may hereafter be amended, and subject to all lawful and applicable rules, regulations, and orders of the Office of Thrift Supervision ("OTS"). SECTION 5. CAPITAL STOCK. The total number of shares of all classes of the capital stock which the Holding Company has authority to issue is twenty-six million shares (26,000,000), of which twenty-five million shares (25,000,000) shall be common stock, par value $.01 per share, and of which one million shares (1,000,000) shall be preferred stock, par value $.01 per share. The shares may be issued from time to time as authorized by the Board of Directors without further approval of shareholders except as otherwise provided in this Section 5 or to the extent that such approval is required by governing law, rule, or regulation. The consideration for the issuance of the shares shall be paid in full before their issuance and shall not be less than the par value. Neither promissory notes nor future services shall constitute payment or part payment for the issuance of shares of the Holding Company. The consideration for the shares shall be cash, tangible or intangible property (to the extent direct investment in such property would be permitted), labor, or services actually performed for the Holding Company, or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such 1 property, labor, or services, as determined by the Board of Directors of the Holding Company, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the retained earnings of the Holding Company that is transferred to common stock or paid-in capital accounts upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance. Except for the initial offering of shares of the Holding Company, no shares of capital stock (including shares issuable upon conversion, exchange, or exercise of other securities) shall be issued, directly or indirectly, to officers, directors, or controlling persons of the Holding Company other than as part of a general public offering or as qualifying shares to a director, unless their issuance or the plan under which they would be issued has been approved by a majority of the total votes eligible to be cast at a legal meeting. Nothing contained in this Section 5 (or in any supplementary sections hereto) shall entitle the holders of any class or series of capital stock to vote as a separate class or series or to more than one vote per share: provided, that this restriction on voting separately by class or series shall not apply: (i) To any provision which would authorize the holders of preferred stock, voting as a class or series, to elect some members of the Board of Directors, less than a majority thereof, in the event of default in the payment of dividends on any class or series of preferred stock; (ii) To any provision which would require the holders of preferred stock, voting as a class or series, to approve the merger or consolidation of the Holding Company with another corporation or the sale, lease, or conveyance (other than by mortgage or pledge) of properties or business in exchange for securities of a corporation other than the Holding Company if the preferred stock is exchanged for securities of such other corporation; provided, that no provision may require such approval for transactions undertaken with the assistance or pursuant to the direction of the OTS or the Federal Deposit Insurance Corporation; (iii) To any amendment which would adversely change the specific terms of any class or series of capital stock as set forth in this Section 5 (or in any supplementary sections hereto), including any amendment which would create or enlarge any class or series ranking prior thereto in rights and preferences. An amendment which increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving Holding Company in a merger or consolidation for the Holding Company, shall not be considered to be such an adverse change. 2 A description of the different classes and series (if any) of the Holding Company's capital stock and a statement of the designations, and the relative rights, preferences, and limitations of the shares of each class of and series (if any) of capital stock are as follows: A. Common Stock. Except as provided in this Section 5 (or in any supplementary sections thereto) the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holder and there shall be no right to cumulate votes in an election of directors. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of sinking fund, or retirement fund, or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends out of any assets legally available for the payment of dividends. In the event of any liquidation, dissolution, or winding up of the Holding Company, the holders of the common stock (and the holders of any class or series of stock entitled to participate with the common stock in the distribution of assets) shall be entitled to receive, in cash or in kind, the assets of the Holding Company available for distribution remaining after: (i) payment or provision for payment of the Holding Company's debts and liabilities; (ii) distributions or provision for distributions in settlement of a liquidation account; and (iii) distributions or provision for distributions to holders of any class or series of stock having preference over the common stock in the liquidation, dissolution, or winding up of the Holding Company. Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock. B. Preferred Stock. The Holding Company may provide in supplementary sections to its charter for one or more classes of preferred stock, which shall be separately identified. The shares of any class may be divided into and issued in series, with each series separately designated so as to distinguish the shares thereof from the shares of all other series and classes. The terms of each series shall be set forth in a supplementary section to the charter. All shares of the same class shall be identical except as to the following relative rights and preferences, as to which there may be variations between different series: 3 (a) The distinctive serial designation and the number of shares constituting such series; (b) The dividend rate or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date(s) the payment date(s) for dividends, and the participating or other special rights, if any, with respect to dividends; (c) The voting powers, full or limited, if any, of the shares of such series; (d) Whether the shares of such series shall be redeemable and, if so, the price(s) at which, and the terms and conditions on which, such shares may be redeemed; (e) The amount(s) payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Holding Company; (f) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price(s) at which such shares may be redeemed or purchased through the application of such fund; (g) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes of stock of the Holding Company and, if so, the conversion price(s) or the rate(s) of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (h) The price or other consideration for which the shares of such series shall be issued; and (i) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial preferred stock. Each share of each series of serial preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series. The Board of Directors shall have authority to divide, by the adoption of supplementary charter sections, any authorized class of preferred stock into series, and, within the limitations set forth in this 4 section and the remainder of this charter, fix and determine the relative rights and preferences of the shares of any series so established. Prior to the issuance of any preferred shares of a series established by a supplementary charter section adopted by the Board of Directors, the Holding Company shall file with the Secretary to the OTS a dated copy of that supplementary section of this charter establishing and designating the series and fixing and determining the relative rights and preferences thereof. SECTION 6. CERTAIN PROVISIONS APPLICABLE FOR FIVE YEARS. Notwithstanding anything contained in the Holding Company's charter or bylaws to the contrary, for a period of five years from the date of an initial minority stock offering of shares of common stock of the Holding Company, the following provisions shall apply: A. Beneficial Ownership Limitation. No person other than Naugatuck Valley Mutual Holding Company shall directly or indirectly offer to acquire or acquire the beneficial ownership of more than 10 percent of any class of any equity security of the Holding Company. This limitation shall not apply to a transaction in which the Holding Company forms a holding company in conjunction with conversion, or thereafter, if such formation is without change in the respective beneficial ownership interests of the Holding Company's shareholders other than pursuant to the exercise of any dissenter and appraisal rights, the purchase of shares by underwriters in connection with a public offering, or the purchase of shares by a tax-qualified employee stock benefit plan which is exempt from the approval requirements under Section 574.3(c)(1)(vi) of the OTS's Regulations. In the event shares are acquired in violation of this Section 6, all shares beneficially owned by any person in excess of 10 percent shall be considered "excess shares" and shall not be counted as shares entitled to vote and shall not be voted by any person or counted as voting shares in connection with any matters submitted to the shareholders for a vote. For the purposes of this Section 6, the following definitions apply: (i) The term "person" includes an individual, a group acting in concert, a corporation, a partnership, an association, a joint stock company, a trust, any unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of the equity securities of the Holding Company. 5 (ii) The term "offer" includes every offer to buy or otherwise acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tenders of, a security or interest in a security for value. (iii) The term "acquire" includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise. (iv) The term "acting in concert" means (a) knowing participation in a joint activity or conscious parallel action towards a common goal whether or not pursuant to an express agreement, or (b) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise. B. Call for Special Meetings. Special meetings of shareholders relating to changes in control of the Holding Company or amendments to its charter shall be called only at the direction of the Board of Directors. SECTION 7. PREEMPTIVE RIGHTS. Holders of the capital stock of the Holding Company are not entitled to preemptive rights with respect to any shares of the Holding Company that may be issued. SECTION 8. DIRECTORS. The Holding Company shall be under the direction of a Board of Directors. The authorized number of directors, as stated in the Holding Company's bylaws, shall be not be fewer than five nor more than 15 except when a greater or lesser number is approved by the Director of the OTS, or his or her delegate. SECTION 9. AMENDMENT OF CHARTER. Except as provided in Section 5, no amendment, addition, alteration, change, or repeal of this charter shall be made, unless such is proposed by the Board of Directors of the Holding Company, approved by the shareholders by a majority of the votes eligible to be cast at a legal meeting, unless a higher vote is otherwise is required, and approved or preapproved by the OTS. 6 NAUGATUCK VALLEY FINANCIAL CORPORATION Attest: ____________________________ _____________________________________ Bernadette A. Mole John C. Roman Corporate Secretary President and Chief Executive Officer Attest: Office of Thrift Supervision __________________________ By: __________________________ Secretary Office of Thrift Supervision EFFECTIVE DATE:______________________ 7 EX-3.2 5 g89544exv3w2.txt EX-3.2 BYLAWS EXHIBIT 3.2 BYLAWS OF NAUGATUCK VALLEY FINANCIAL CORPORATION ARTICLE I. HOME OFFICE The home office of Naugatuck Valley Financial Corporation (the "Subsidiary Holding Company") is 333 Church Street, Naugatuck, in the County of New Haven, in the State of Connecticut. ARTICLE II. SHAREHOLDERS Section 1. Place of Meetings. All annual and special meetings of shareholders shall be held at the home office of the Subsidiary Holding Company or at such other convenient place as the board of directors may determine. Section 2. Annual Meeting. A meeting of the shareholders of the Subsidiary Holding Company for the election of directors and for the transaction of any other business of the Subsidiary Holding Company shall be held annually within 150 days after the end of the Subsidiary Holding Company's fiscal year on such date as the board of directors may determine. Section 3. Special Meetings. Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by the regulations of the Office of Thrift Supervision ("OTS") or the Federal Stock Charter of the Subsidiary Holding Company, may be called at any time by the chairman of the board, the president or a majority of the board of directors, and shall be called by the chairman of the board, the president or the secretary upon the written request of the holders of not less than one-tenth of all of the outstanding capital stock of the Subsidiary Holding Company entitled to vote at the meeting. Such written request shall state the purpose or purposes of the meeting and shall be delivered to the home office of the Subsidiary Holding Company addressed to the chairman of the board, the president or the secretary. Section 4. Conduct of Meetings. Annual and special meetings shall be conducted by the person designated by the board of directors to preside at such meetings in accordance with the written procedures agreed to by the board of directors. The board of directors shall designate, when present, either the chairman of the board or such other person as designated by the board of directors to preside at such meetings. Section 5. Notice of Meetings. Written notice stating the place, day and hour of the meeting and the purpose(s) for which the meeting is called shall be delivered not fewer than 20 nor more than 50 days before the date of the meeting, either personally or by mail, by or at the direction of the chairman of the board, the president, the secretary or the directors calling the meeting, to each shareholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be 1 delivered when deposited in the mail, addressed to the shareholder at the address as it appears on the stock transfer books or records of the Subsidiary Holding Company as of the record date prescribed in Section 6 of this Article II, with postage prepaid. When any shareholders' meeting, either annual or special, is adjourned for 30 days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than 30 days or of the business to be transacted at the meeting, other than an announcement at the meeting at which such adjournment is taken. Section 6. Fixing of Record Date. For the purpose of determining shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment, or shareholders entitled to receive payment of any dividend, or in order to make a determination of shareholders for any other proper purpose, the board of directors shall fix in advance a date as the record date for any such determination of shareholders. Such date in any case shall be not more than 60 days and, in case of a meeting of shareholders, not fewer than 10 days prior to the date on which the particular action, requiring such determination of shareholders, is to be taken. When a determination of shareholders entitled to vote at any meeting of shareholders has been made as provided in this section, such determination shall apply to any adjournment. Section 7. Voting Lists. At least 20 days before each meeting of the shareholders, the officer or agent having charge of the stock transfer books for shares of the Subsidiary Holding Company shall make a complete list of the shareholders entitled to vote at such meeting, or any adjournment thereof, arranged in alphabetical order, with the address and the number of shares held by each. This list of shareholders shall be kept on file at the home office of the Subsidiary Holding Company and shall be subject to inspection by any shareholder of record or the shareholder's agent at any time during usual business hours, for a period of 20 days prior to such meeting. Such list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder of record or any shareholder's agent during the entire time of the meeting. The original stock transfer book shall constitute prima facie evidence of the shareholders entitled to examine such list or transfer books or to vote at any meeting of shareholders. In lieu of making the shareholder list available for inspection by shareholders as provided in the preceding paragraph, the board of directors may elect to follow the procedures prescribed in Section 552.6(d) of the OTS's Regulations as now or hereafter in effect. Section 8. Quorum. A majority of the outstanding shares of the Subsidiary Holding Company entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders. If less than a majority of the outstanding shares is represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The shareholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the 2 withdrawal of enough shareholders to constitute less than a quorum. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the shareholders, unless the vote of a greater number of shareholders voting together or voting by classes is required by law or the charter. Directors, however, are elected by a plurality of the votes cast at an election of directors. Section 9. Proxies. At all meetings of shareholders, a shareholder may vote by proxy executed in writing by the shareholder or by his duly authorized attorney in fact. Proxies may be given telephonically or electronically as long as the holder uses a procedure for verifying the identity of the shareholder. Proxies solicited on behalf of the management shall be voted as directed by the shareholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid more than eleven months from the date of its execution except for a proxy coupled with an interest. Section 10. Voting of Shares in the Name of Two or More Persons. When ownership stands in the name of two or more persons, in the absence of written directions to the Subsidiary Holding Company to the contrary, at any meeting of the shareholders of the Subsidiary Holding Company any one or more of such shareholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. Section 11. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares held in trust in an IRA or Keogh Account, however, may be voted by the Subsidiary Holding Company if no other instructions are received. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A shareholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. 3 Neither treasury shares of its own stock held by the Subsidiary Holding Company, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Subsidiary Holding Company, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting. Section 12. Inspectors of Election. In advance of any meeting of shareholders, the board of directors may appoint any persons other than nominees for office as inspectors of election to act at such meeting or any adjournment. The number of inspectors shall be either one or three. Any such appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may, or on the request of not fewer than 10 percent of the votes represented at the meeting shall, make such appointment at the meeting. If appointed at the meeting, the majority of the votes present shall determine whether one or three inspectors are to be appointed. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting, or at the meeting by the chairman of the board or the president. Unless otherwise prescribed by regulations of the OTS, the duties of such inspectors shall include: determining the number of shares of stock and the voting power of each share, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies; receiving votes, ballots, or consents; hearing and determining all challenges and questions in any way arising in connection with the rights to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all shareholders. Section 13. Nominating Committee. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least 20 days prior to the date of the annual meeting. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Subsidiary Holding Company. No nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by shareholders are made in writing and delivered to the secretary of the Subsidiary Holding Company at least 30 days prior to the date of the annual meeting; provided, however, that in the event that less than 40 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder must be received not later than the close of business on the 10th day following the day on which notice of the date of the annual meeting was mailed or such public disclosure was made. Upon delivery, such nominations shall be posted in a conspicuous place in each office of the Subsidiary Holding Company. Ballots bearing the names of all persons nominated by the nominating committee and by shareholders shall be provided for use at the annual meeting. However, if the nominating committee shall fail or refuse to act at least 20 days prior to the annual meeting, nominations for directors may be made at the annual meeting by any shareholder entitled to vote and shall be voted upon. 4 Section 14. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary at least 30 days before the date of the annual meeting; provided, however, that in the event that less than 40 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder must be received not later than the close of business on the 10th day following the day on which notice of the date of the annual meeting was mailed or such public disclosure was made, and all business so stated, proposed and filed shall be considered at the annual meeting so long as such business relates to a proper subject matter for shareholder action. Any shareholder may make any other proposal at the annual meeting and the same may be discussed and considered, but unless stated in writing and filed with the secretary at least 30 days before the meeting, such proposal shall be laid over for action at an adjourned, special or annual meeting of the shareholders taking place 30 days or more thereafter. A shareholder's notice to the secretary shall set forth as to each matter the shareholder proposed to bring before the annual meeting (a) a brief description of the proposal desired to be brought before the annual meeting and (b) the name and address of such shareholder and the class and number of shares of the Subsidiary Holding Company which are owned of record or beneficially by such shareholder. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees; but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. Section 15. Informal Action by Shareholders. Any action required to be taken at a meeting of shareholders, or any other action which may be taken at a meeting of the shareholders, may be taken without a meeting if consent in writing, setting forth the action so taken, shall be given by all of the shareholders entitled to vote with respect to the subject matter thereof. ARTICLE III. BOARD OF DIRECTORS Section 1. General Powers. The business and affairs of the Subsidiary Holding Company shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board from among its members and, when present, the chairman of the board shall preside at its meetings. If the chairman of the board is not present, the board shall select one of its members to preside at its meeting. Section 2. Number and Term. The board of directors shall consist of eight (8) members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected and qualified. One class shall be elected by ballot annually. Section 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this bylaw following the annual meeting of shareholders. The board of directors may provide, by resolution, the time and place, for the holding of additional regular meetings without other notice than such resolution. Directors may participate in a meeting by means of a conference telephone 5 or similar communications device through which all persons participating can hear each other at the same time. Participation by such means shall constitute presence in person for all purposes. Section 4. Qualification. Each director shall at all times be the beneficial owner of not less than 100 shares of capital stock of the Subsidiary Holding Company unless the Subsidiary Holding Company is a wholly owned subsidiary of a holding company. Section 5. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board or by one-third of the directors. The persons authorized to call special meetings of the board of directors may fix any place as the place for holding any special meeting of the board of directors called by such persons. Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear and speak to each other. Such participation shall constitute presence in person for all purposes. Section 6. Notice. Written notice of any special meeting shall be given to each director at least 24 hours prior thereto when delivered personally or by telegram, or at least five days prior thereto when delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid if mailed, when delivered to the telegraph company if sent by telegram or when the Subsidiary Holding Company receives notice of delivery if electronically transmitted. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 7. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 6 of this Article III. Section 8. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by regulation of the OTS or by these bylaws. Section 9. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors. 6 Section 10. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Subsidiary Holding Company addressed to the chairman of the board. Unless otherwise specified, such resignation shall take effect upon receipt by the chairman of the board. More than three consecutive absences from regular meetings of the board of directors, unless excused by resolution of the board of directors, shall automatically constitute a resignation, effective when such resignation is accepted by the board of directors. Section 11. Vacancies. Any vacancy occurring in the board of directors may be filled by the affirmative vote of a majority of the remaining directors, although less than a quorum of the board of directors. A director elected to fill a vacancy shall be elected to serve until the next election of directors by the shareholders. Any directorship to be filled by reason of an increase in the number of directors may be filled by election by the board of directors for a term of office continuing only until the next election of directors by the shareholders. Section 12. Compensation. Directors, as such, may receive a stated fee for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the board of directors may determine. Section 13. Presumption of Assent. A director of the Subsidiary Holding Company who is present at a meeting of the board of directors at which action on any Subsidiary Holding Company matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the minutes of the meeting or unless he or she shall file a written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Subsidiary Holding Company within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a director who voted in favor of such action. Section 14. Removal of Directors. At a meeting of shareholders called expressly for that purpose, any director may be removed only for cause by a vote of the holders of a majority of the shares then entitled to vote at an election of directors. Whenever the holders of the shares of any class are entitled to elect one or more directors by the provisions of the Charter or supplemental sections thereto, the provisions of this section shall apply, in respect to the removal of a director or directors so elected, to the vote of the holders of the outstanding shares of that class and not to the vote of the outstanding shares as a whole. Section 15. Integrity of Directors. A person is not qualified to serve as a director if he or she: (1) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, or (2) is a person against who a banking agency has, within the past ten years, issued a cease and desist order 7 for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, or (3) has been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency. Section 16. Age Limitation. No person 70 years of age shall be eligible for election, reelection, appointment, or reappointment to the board of the Subsidiary Holding Company. No director shall serve as such beyond the annual meeting of the Subsidiary Holding Company following the director becoming 70. This age limitation does not apply to an advisory director. ARTICLE IV. EXECUTIVE AND OTHER COMMITTEES Section 1. Appointment. The board of directors, by resolution adopted by a majority of the full board, may designate the chief executive officer and two or more of the other directors to constitute an executive committee. The designation of any committee pursuant to this Article IV and the delegation of authority shall not operate to relieve the board of directors, or any director, of any responsibility imposed by law or regulation. Section 2. Authority. The executive committee, when the board of directors is not in session, shall have and may exercise all of the authority of the board of directors except to the extent, if any, that such authority shall be limited by the resolution appointing the executive committee; and except also that the executive committee shall not have the authority of the board of directors with reference to: the declaration of dividends; the amendment of the Charter or bylaws of the Subsidiary Holding Company, or recommending to the shareholders a plan of merger, consolidation, or conversion; the sale, lease or other disposition of all or substantially all of the property and assets of the Subsidiary Holding Company otherwise than in the usual and regular course of its business; a voluntary dissolution of the Subsidiary Holding Company; a revocation of any of the foregoing; or the approval of a transaction in which any member of the executive committee, directly or indirectly, has any material beneficial interest. Section 3. Tenure. Subject to the provisions of Section 8 of this Article IV, each member of the executive committee shall hold office until the next regular annual meeting of the board of directors following his or her designation and until a successor is designated as a member of the executive committee. Section 4. Meetings. Regular meetings of the executive committee may be held without notice at such times and places as the executive committee may fix from time to time by resolution. Special meetings of the executive committee may be called by any member thereof upon not less than one day's notice stating the place, date and hour of the meeting, which notice may be written or oral. Any member of the executive committee may waive notice of any meeting and no notice of any meeting need 8 be given to any member thereof who attends in person. The notice of a meeting of the executive committee need not state the business proposed to be transacted at the meeting. Section 5. Quorum. A majority of the members of the executive committee shall constitute a quorum for the transaction of business at any meeting thereof, and action of the executive committee must be authorized by the affirmative vote of a majority of the members present at a meeting at which a quorum is present. Section 6. Action Without a Meeting. Any action required or permitted to be taken by the executive committee at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the members of the executive committee. Section 7. Vacancies. Any vacancy in the executive committee may be filled by a resolution adopted by a majority of the full board of directors. Section 8. Resignations and Removal. Any member of the executive committee may be removed at any time with or without cause by resolution adopted by a majority of the full board of directors. Any member of the executive committee may resign from the executive committee at any time by giving written notice to the president or secretary of the Subsidiary Holding Company. Unless otherwise specified, such resignation shall take effect upon its receipt; the acceptance of such resignation shall not be necessary to make it effective. Section 9. Procedure. The executive committee shall elect a presiding officer from its members and may fix its own rules of procedure which shall not be inconsistent with these bylaws. It shall keep regular minutes of its proceedings and report the same to the board of directors for its information at the meeting held next after the proceedings shall have occurred. Section 10. Other Committees. The board of directors may by resolution establish an audit, loan, or other committees composed of directors as they may determine to be necessary or appropriate for the conduct of the business of the Subsidiary Holding Company and may prescribe the duties, constitution and procedures thereof. ARTICLE V. OFFICERS Section 1. Positions. The officers of the Subsidiary Holding Company shall be a chief executive officer, a president, one or more vice presidents, a secretary and a treasurer or comptroller, each of whom shall be elected by the board of directors. The board of directors may also designate the chairman of the board as an officer. The offices of the secretary and treasurer or comptroller may be held by the same person and a vice president may also be either the secretary or the treasurer or comptroller. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment 9 of such other officers as the business of the Subsidiary Holding Company may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices. Section 2. Election and Term of Office. The officers of the Subsidiary Holding Company shall be elected annually at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until a successor has been duly elected and qualified or until the officer's death, resignation or removal in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not of itself create contractual rights. The board of directors may authorize the Subsidiary Holding Company to enter into an employment contract with any officer in accordance with regulations of the OTS; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V. Section 3. Removal. Any officer may be removed by the board of directors whenever in its judgment the best interests of the Subsidiary Holding Company will be served thereby, but such removal, other than for cause, shall be without prejudice to the contractual rights, if any, of the person so removed. Section 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the board of directors for the unexpired portion of the term. Section 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors. ARTICLE VI. CONTRACTS, LOANS, CHECKS AND DEPOSITS Section 1. Contracts. To the extent permitted by regulations of the OTS, and except as otherwise prescribed by these bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Subsidiary Holding Company to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Subsidiary Holding Company. Such authority may be general or confined to specific instances. Section 2. Loans. No loans shall be contracted on behalf of the Subsidiary Holding Company and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances. 10 Section 3. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Subsidiary Holding Company shall be signed by one or more officers, employees or agents of the Subsidiary Holding Company in such manner as shall from time to time be determined by the board of directors. Section 4. Deposits. All funds of the Subsidiary Holding Company not otherwise employed shall be deposited from time to time to the credit of the Subsidiary Holding Company in any duly authorized depositories as the board of directors may select. ARTICLE VII. CERTIFICATES FOR SHARES AND THEIR TRANSFER Section 1. Certificates for Shares. Certificates representing shares of capital stock of the Subsidiary Holding Company shall be in such form as shall be determined by the board of directors and approved by the OTS. Such certificates shall be signed by the chief executive officer or by any other officer of the Subsidiary Holding Company authorized by the board of directors, attested by the secretary or an assistant secretary, and sealed with the corporate seal or a facsimile thereof. The signatures of such officers upon a certificate may be facsimiles if the certificate is manually signed on behalf of a transfer agent or a registrar, other than the Subsidiary Holding Company itself or one of its employees. Each certificate for shares of capital stock shall be consecutively numbered or otherwise identified. The name and address of the person to whom the shares are issued, with the number of shares and date of issue, shall be entered on the stock transfer books of the Subsidiary Holding Company. All certificates surrendered to the Subsidiary Holding Company for transfer shall be cancelled and no new certificate shall be issued until the former certificate for a like number of shares has been surrendered and cancelled, except that in case of a lost or destroyed certificate, a new certificate may be issued upon such terms and indemnity to the Subsidiary Holding Company as the board of directors may prescribe. Section 2. Transfer of Shares. Transfer of shares of capital stock of the Subsidiary Holding Company shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record or by his or her legal representative, who shall furnish proper evidence of such authority, or by his or her attorney authorized by a duly executed power of attorney and filed with the Subsidiary Holding Company. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Subsidiary Holding Company shall be deemed by the Subsidiary Holding Company to be the owner for all purposes. 11 ARTICLE VIII. FISCAL YEAR The fiscal year of the Subsidiary Holding Company shall end on December 31 of each year. The appointment of accountants shall be subject to annual ratification by the shareholders. ARTICLE IX. DIVIDENDS Subject to the terms of the Subsidiary Holding Company's Charter and the regulations and orders of the OTS, the board of directors may, from time to time, declare, and the Subsidiary Holding Company may pay, dividends on its outstanding shares of capital stock. ARTICLE X. CORPORATE SEAL The board of directors shall provide a Subsidiary Holding Company seal, which shall be two concentric circles between which shall be the name of the Subsidiary Holding Company. The year of incorporation or an emblem may appear in the center. ARTICLE XI. AMENDMENTS These bylaws may be amended in a manner consistent with regulations of the OTS and shall be effective after: (i) approval of the amendment by a majority vote of the authorized board of directors, or by a majority vote of the votes cast by the shareholders of the Subsidiary Holding Company at any legal meeting, and (ii) receipt of any applicable regulatory approval. When the Subsidiary Holding Company fails to meet its quorum requirements, solely due to vacancies on the board, then the affirmative vote of a majority of the sitting board will be required to amend the bylaws. ARTICLE XII. INDEMNIFICATION The Subsidiary Holding Company shall indemnify all officers, directors and employees of the Subsidiary Holding Company, and their heirs, executors and administrators, to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by them in connection with or arising out of any action, suit or proceeding in which they may be involved by reason of their having been a director or officer of the Subsidiary Holding Company, whether or not they continue to be a director or officer at the time of incurring such expenses or liabilities, such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements. 12 EX-4.1 6 g89544exv4w1.txt EX-4.1 SPECIMAN STOCK CERTIFICATE COMMON STOCK COMMON STOCK CERTIFICATE NO. SHARES NAUGATUCK VALLEY FINANCIAL CORPORATION ORGANIZED UNDER THE LAWS OF THE UNITED STATES [SPECIMEN] is the owner of: FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK $0.01 PAR VALUE PER SHARE OF NAUGATUCK VALLEY FINANCIAL CORPORATION A SUBSIDIARY STOCK HOLDING COMPANY ORGANIZED UNDER THE LAWS OF THE UNITED STATES. The shares represented by this certificate are transferable only on the stock transfer books of Naugatuck Valley Financial Corporation (the "Company") by the holder of record hereof, or by his duly authorized attorney or legal representative, upon the surrender of this certificate properly endorsed. This certificate and the shares represented hereby are issued and shall be held subject to all the provisions of the Charter of the Company and any amendments thereto (copies of which are on file with the Corporate Secretary of the Company), to all of which provisions the holder by acceptance hereof, assents. The shares evidenced by this certificate are not of an insurable type and are not insured by the Federal Deposit Insurance Corporation. IN WITNESS WHEREOF, NAUGATUCK VALLEY FINANCIAL CORPORATION has caused this certificate to be executed by the signatures of its duly authorized officers and has caused its corporate seal to be hereunto affixed. Dated: [SEAL] President and Chief Executive Officer Corporate Secretary The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM - as tenants in common UNIF GIFTS MIN ACT _____ custodian ______ (Cust) (Minor) TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act -------------------- (State) JT TEN - as joint tenants with right of survivorship and not as tenants in common Additional abbreviations may also be used though not in the above list. For value received __________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFICATION NUMBER OF ASSIGNEE - ------------------------------------------------------------------------------- PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE OF ASSIGNEE. __________________________________________________ SHARES OF THE COMMON STOCK REPRESENTED BY THIS CERTIFICATE AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT ______________________________________________________________________________, ATTORNEY, TO TRANSFER THE SAID STOCK ON THE BOOKS OF THE WITHIN-NAMED BANK WITH FULL POWER OF SUBSTITUTION IN THE PREMISES. DATED ---------------------- ---------------------------------------------- NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE GUARANTEED: --------------------------------------- THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION, (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15 EX-5.1 7 g89544exv5w1.txt EX-5.1 OPINION OF MULDOON MURPHY FAUCETTE & AGUGGI EXHIBIT 5.1 , 2004 ---------- Board of Directors Naugatuck Valley Financial Corporation 333 Church Street Naugatuck, Connecticut 06770 Re: Registration Statement on Form S-1 Gentlemen: We have acted as special counsel for Naugatuck Valley Financial Corporation, a federally chartered stock holding company (the "Company"), in connection with the registration statement on Form S-1 (the "Registration Statement") initially filed on __________, 2004, by the Company with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act"), and the regulations promulgated thereunder. The Registration Statement relates to the proposed issuance by the Company of up to __________ shares ("Offered Shares") of common stock, $0.01 par value per share, of the Company ("Common Stock") in a subscription offering, a community offering and a syndicated community offering (the "Offerings") pursuant to the Plan of Reorganization and Minority Stock Issuance adopted by Naugatuck Valley Savings and Loan, S.B. (the "Bank"). The Registration Statement also relates to the proposed issuance by the Company of up to __________ shares of Common Stock to Naugatuck Valley Savings and Loan Foundation, a privately-owned charitable foundation to be formed in connection with the transaction. The issuances are both pursuant to the Plan of Reorganization and Minority Stock Issuance, as amended and restated. In the preparation of this opinion, we have examined originals or copies identified to our satisfaction of: (i) the Company's charter to be filed with the Office of Thrift Supervision (the "Charter"); (ii) the Company's Bylaws; (iii) the Registration Statement, including the prospectus contained therein and the exhibits thereto; (iv) certain resolutions of the Organizer of the Company relating to the issuance of the Common Stock being registered under the Registration Statement; (v) the Plan of Reorganization and Minority Stock Issuance; (vi) the trust agreement for the Bank's employee stock ownership plan ("ESOP") and the form of loan agreement between the Company and the ESOP; (vii) the form of stock certificate approved by the Organizer of the Company to represent shares of Board of Directors Naugatuck Valley Financial Corporation , 2004 - ---------- Page 2 Common Stock; and (viii) the gift instrument whereby shares of Common Stock will be contributed to Naugatuck Valley Savings and Loan Foundation. We have also examined originals or copies of such documents, corporate records, certificates of public officials and other instruments, and have conducted such other investigations of law and fact, as we have deemed necessary or advisable for purposes of our opinion. In our examination, we have assumed, without verification, the genuineness of all signatures, the authenticity of all documents and instruments submitted to us as originals, the conformity to the originals of all documents and instruments submitted to us as certified or conformed copies, the correctness of all certificates, and the accuracy and completeness of all records, documents, instruments and materials made available to us by the Company. Our opinion is limited to the matters set forth herein, and we express no opinion other than as expressly set forth herein. In rendering the opinion set forth below, we do not express any opinion concerning law other than federal law. Our opinion is expressed as of the date hereof and is based on laws currently in effect. Accordingly, the conclusions set forth in this opinion are subject to change in the event that any laws should change or be enacted in the future. We are under no obligation to update this opinion or to otherwise communicate with you in the event of any such change. For purposes of this opinion, we have assumed that, prior to the issuance of any shares, (i) the Registration Statement, as finally amended, will have become effective under the Act and (ii) the reorganization of the Bank will have become effective. Based upon and subject to the foregoing, it is our opinion that upon the due adoption by the Organizer of the Company (or authorized committee thereof) of a resolution fixing the number of shares of Common Stock to be sold in the Offerings and contributed to Naugatuck Valley Savings and Loan Foundation, such shares when issued and sold, or contributed in the case of Naugatuck Valley Savings and Loan Foundation, in the manner described in the Registration Statement, or in the accordance with the gift instrument in the case of Naugatuck Valley Savings and Loan Foundation, will be validly issued, fully paid and nonassessable. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the Bank's Notice of Mutual Holding Company Reogranziation on Form MHC-1 (the "Form MHC-1") and Application Form MHC-2 (the "Form MHC-2) to the Office of Thrift Supervision, and to the reference to our firm under the heading "Legal and Tax Opinions" in the prospectus which is part of the Registration Statement as such may be amended or supplemented, or incorporated by reference in any Registration Statement covering additional shares of Common Stock to be issued or sold under the Plan of Reorganization and Minority Stock Issuance that is filed pursuant to Rule 462(b) of the Act, and to the reference to our firm in the Form MHC-1 and Form MHC-2. In giving such consent, we do not Board of Directors Naugatuck Valley Financial Corporation , 2004 - ---------- Page 3 hereby admit that we are experts or are otherwise within the category of persons whose consent is required under Section 7 of the Act or the rules or regulations of the Securities and Exchange Commission thereunder. Very truly yours, MULDOON MURPHY FAUCETTE & AGUGGIA LLP EX-8.1 8 g89544exv8w1.txt EX-8.1 OPINION OF MULDOON MURPHY FAUCETTE & AGUGGI EXHIBIT 8.1 __________, 2004 Board of Directors Naugatuck Valley Financial Corporation 333 Church Street Naugatuck, Connecticut 06770 Dear Board Members: You have asked our opinion regarding certain federal income tax consequences of the proposed transactions (collectively, the "Reorganization and Charter Conversion"), more fully described below, pursuant to which Naugatuck Valley Savings and Loan, S.B. (the "Bank") will (i) convert from a Connecticut-chartered mutual savings bank to a federal mutual savings bank (the "Charter Conversion") and (ii) the federal savings bank will reorganize into the federally chartered mutual holding company structure (the "Reorganization"). We are rendering this opinion pursuant to Section 22 of the Plan of Reorganization and Minority Stock Issuance ("Plan of Reorganization") and Section 6 of the Plan of Charter Conversion. As used in this letter, "Mutual State Savings Bank" refers to the Bank before the Charter Conversion, Mutual Federal Savings Bank" refers to the Bank after the Charter Conversion and before the Reorganization and "Stock Savings Bank" refers to the Savings Bank after the Reorganization. All other capitalized terms used but not defined in this letter shall have the meanings assigned to them in the Plan of Reorganization and Plan of Charter Conversion. The Reorganization and Charter Conversion will be effected, pursuant to the Plan of Reorganization and Plan of Charter Conversion, as follows: (i) the Mutual State Saving Bank will exchange its Connecticut charter for a federal mutual savings bank charter; (ii) the Mutual Federal Savings Bank will organize an interim federal stock savings bank as a wholly owned subsidiary ("Interim One"); (iii) Interim One will organize a stock corporation as a wholly owned subsidiary ("Naugatuck Valley Financial Corporation"); (iv) Interim One will organize an interim federal stock savings bank as a wholly owned Board of Directors __________, 2004 Page 2 subsidiary ("Interim Two"); (v) the Mutual Federal Savings Bank will convert its charter to a federal stock savings bank charter to become the Stock Savings Bank (the "Conversion") and Interim One will exchange its charter for a federal mutual holding company charter to become the "Mutual Holding Company"; (vi) sequentially with step (iv), Interim Two will merge with and into Stock Savings Bank with Stock Savings Bank as the resulting institution; (vii) 100% of the issued common stock of the Stock Savings Bank will be transferred to the Mutual Holding Company in exchange for membership interests in Mutual Federal Savings Bank which are conveyed to the Mutual Holding Company; and (viii) the Mutual Holding Company will transfer 100% of the issued common stock of the Stock Savings Bank to Naugatuck Valley Financial Corporation in a capital distribution. Simultaneously with the Reorganization, Naugatuck Valley Financial Corporation will offer to sell additional shares of its common stock pursuant to the Plan of Reorganization, with priority subscription rights granted in descending order as follows: (i) to depositors of the Bank with deposits having an aggregate account balance of at least fifty dollars on April 30, 2003 ("Eligible Account Holders"); (ii) to tax-qualified employee benefit plans of the Bank; (iii) to depositors of the Bank with deposits having an aggregate account balance of at least fifty dollars on the last day of the calendar quarter preceding the Office of Thrift Supervision's approval of the Reorganization ("Supplemental Eligible Account Holders"); (iv) to other depositors of the Bank who do not already have subscription rights pursuant to (i) through (iii), above ("Other Members"); and (v) to members of the general public. In connection with the opinions expressed below, we have examined and relied upon originals, or copies certified or otherwise identified to our satisfaction, of the Plan of Reorganization, Plan of Charter Conversion, the Prospectus, and of such corporate records of the parties to the Reorganization as we have deemed appropriate. We have also relied, without independent verification, upon the representations of the Bank included in a Certificate of Representations dated __________, 2004. We have assumed that Board of Directors __________, 2004 Page 3 such representations are true and that the parties to the Reorganization and Charter Conversion will act in accordance with the Plan of Reorganization and the Plan of Charter Conversion. We express no opinion concerning the effects, if any, of variations from the foregoing. In issuing the opinions set forth below, we have referred solely to existing provisions of the Internal Revenue Code of 1986, as amended (the "Code"), existing and proposed Treasury Regulations thereunder, current administrative rulings, notices, procedures and court decisions. Such laws, regulations, administrative rulings, notices and procedures and court decisions are subject to change at any time. Any such change could affect the continuing validity of the opinions set forth below. This opinion is as of the date hereof, and we disclaim any obligation to advise you of any change in any matter considered herein after the date hereof. Based on and subject to the foregoing, it is our opinion that for federal income tax purposes, under current tax law: (a) With regard to the Charter Conversion: (1) The Charter Conversion will constitute a reorganization under Section 368(a)(1)(F) of the Code; and (2) The Bank, in either its status as the Mutual State Savings Bank or the Mutual Federal Savings Bank, will recognize no gain or loss as a result of the Charter Conversion. (b) With regard to the Conversion: (1) the Conversion will constitute a reorganization under section 368(a)(1)(F) of the Code, and the Savings Bank (in either its status as a Mutual Federal Savings Bank or Stock Savings Bank) will recognize no gain or loss as a result of the Conversion; (2) the basis of each asset of Mutual Federal Savings Bank held by Stock Savings Bank immediately after the Conversion will be the same as Mutual Federal Savings Bank's basis for such asset immediately prior to the Conversion; (3) the holding period of each asset of Mutual Federal Savings Bank held by Stock Savings Bank immediately after the Conversion will include the period during which such asset was held by Mutual Federal Savings Bank prior to the Conversion; Board of Directors __________, 2004 Page 4 (4) for purposes of Code section 381(b), Stock Savings Bank will be treated as if there had been no reorganization and, accordingly, the taxable year of the Mutual Federal Savings Bank will not end on the effective date of the Conversion and the tax attributes of Mutual Federal Savings Bank (subject to application of Code Sections 381, 382 and 384), including Mutual Federal Savings Bank's bad debt reserves and earnings and profits, will be taken into account by Stock Savings Bank as if the Conversion had not occurred; (5) Mutual Federal Savings Bank's members will recognize no gain or loss upon their constructive receipt of shares of Stock Savings Bank common stock, pursuant to the Conversion, solely in exchange for their mutual ownership interest (i.e., liquidation and voting rights) in Mutual Federal Savings Bank; and (6) Mutual Federal Savings Bank's members will recognize no gain or loss upon the issuance to them of deposits in Stock Savings Bank in the same dollar amount and upon the same terms as their deposits in Mutual Federal Savings Bank. (c) With regard to the Exchange: (1) the Exchange will qualify as an exchange of property for stock under Code section 351; (2) the initial shareholders of Stock Savings Bank (the former Mutual Federal Savings Bank members) will recognize no gain or loss upon the constructive transfer to the Mutual Holding Company of the shares of Stock Savings Bank common stock they constructively received in the Conversion solely in exchange for mutual ownership interests (i.e., liquidation and voting rights) in the Mutual Holding Company; and (3) the Mutual Holding Company will recognize no gain or loss upon its receipt from the shareholders of Stock Savings Bank of shares of Stock Savings Bank common stock solely in exchange for membership interests in the Mutual Holding Company. (d) With regard to the Mutual Holding Company's transfer of 100% of the common stock of Stock Savings Bank to Naugatuck Valley Financial Corporation: (1) Naugatuck Valley Financial Corporation will recognize no gain or loss upon its receipt of 100% of the common stock of Stock Savings Bank from the Mutual Holding Company; and Board of Directors __________, 2004 Page 5 (2) the Mutual Holding Company will recognize no gain or loss upon its transfer of 100% of the common stock of Stock Savings Bank from the Mutual Holding Company. (e) With regard to those who hold subscription rights: (1) it is more likely than not that the fair market value of the non-transferable subscription rights to purchase shares of common stock of Naugatuck Valley Financial Corporation to be issued to Eligible Account Holders, Supplemental Eligible Account Holders and Other Members is zero (the "Subscription Right") and, accordingly, that no income will be realized by Eligible Account Holders, Supplemental Eligible Account Holders and Other Members upon the issuance to them of the Subscription Rights (Section 356(a) of the Code) or upon the exercise of the Subscription Rights (Rev. Rul. 56-572, 1956-2 C.B. 182); (2) it is more likely than not that the tax basis to the holders of shares of common stock purchased in the offering pursuant to the exercise of the Subscription Rights will be the amount paid therefor, and that the holding period for such shares of common stock will begin on the date of completion of the Reorganization (Section 1012 of the Code); and (3) the holding period for shares of common stock purchased in the Community Offering or Syndicated Community Offering will begin on the day after the date of the purchase (Section 1223(6) of the Code). The opinions set forth in (e)(1) and (e)(2) above are based on the position that the subscription rights do not have any market value at the time of distribution or at the time they are exercised. Whether subscription rights have a market value for federal income tax purposes is a question of fact, depending upon all relevant facts and circumstances. The Internal Revenue Service will not issue rulings on whether subscription rights have a market value. We are unaware of any instance in which the Internal Revenue Service has taken the position that nontransferable subscription rights issued by a converting financial institution have a market value. The subscription rights will be granted at no cost to the recipients, will be nontransferable and of short duration, and will afford the recipients the right only to purchase Naugatuck Valley Financial Corporation common stock at a price equal to its estimated fair market value, which will be the same price as the purchase price for the unsubscribed shares of common stock. We believe that it is more likely than not (i.e., that there is a more than a 50% likelihood) that the subscription rights have no market value for federal income tax purposes. This opinion is given solely for the benefit of the parties to the Plan of Reorganization, the Plan of Charter Conversion, the shareholders of Stock Savings Bank and Eligible Account Holders, Supplemental Board of Directors __________, 2004 Page 6 Eligible Account Holders and other investors who purchase pursuant to the Plan of Reorganization, and may not be relied upon by any other party or entity or referred to in any document without our express written consent. We consent to the filing of this opinion as an exhibit to the Forms MHC-1, MHC-2 and H-(e)1-S filed with the Office of Thrift Supervision and as an exhibit to the registration statement on Form S-1 filed by Naugatuck Valley Financial Corporation with the Securities and Exchange Commission in connection with the Reorganization , and to the reference thereto in the prospectus included in the registration statement on Form S-1 under the headings "The Reorganization and Stock Issuance- Material Income Tax Consequences" and "Legal and Tax Opinions." In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended. Very truly yours, MULDOON MURPHY FAUCETTE & AGUGGIA LLP EX-8.2 9 g89544exv8w2.txt EX-8.2 OPINION OF SNYDER & HALLER, P.C. [LETTERHEAD OF SNYDER & HALLER, P.C.] EXHIBIT 8.2 [DRAFT] CONNECTICUT BUSINESS TAX OPINION ___________, 2004 Board of Directors Naugatuck Valley Financial Corporation 333 Church Street Naugatuck, Connecticut 06770 Dear Board Members: You have requested our opinion regarding certain Connecticut income tax consequences of the proposed transaction (collectively, the "Reorganization and Charter Conversion"), more fully described below, pursuant to which Naugatuck Valley Savings and Loan, S.B. (the "Bank") will (i) convert from a Connecticut-chartered mutual savings bank to a federal mutual savings bank (the "Charter Conversion") and (ii) the federal savings bank will reorganize into the federally chartered mutual holding company structure (the "Reorganization"). We are rendering this opinion pursuant to Section 22 of the Plan of Reorganization and Minority Stock Issuance (the "Plan of Reorganization") and Section 6 of the Plan of Charter Conversion. As used in this letter, "Mutual State Savings Bank" refers to the Bank before the Charter Conversion, "Mutual Federal Savings Bank" refers to the Bank after the Charter Conversion and before the Reorganization, and "Stock Savings Bank" refers to the Bank after the Reorganization. All other capitalized terms used but not defined in this letter shall have the meanings assigned to them in the Plan of Reorganization and Plan of Conversion. The proposed transaction and its federal income tax consequences are described in an opinion letter dated __________, 2004, from Muldoon Murphy & Faucette LLP (the "Federal Opinion Letter") stating that the: (a) The Bank, in either its status as the Mutual State Savings Bank or the Mutual Federal Savings Bank, will recognize no gain or loss as a result of the Charter Conversion; (b) the Savings Bank (in either its status as a Mutual Federal Savings Bank or Stock Savings Bank) will recognize no gain or loss as a result of the Reorganization; (c) the basis of each asset of Mutual Federal Savings Bank held by Stock Savings Bank immediately after the Reorganization will be the same as Mutual Federal Savings Bank's basis for such asset immediately prior to the Reorganization; (d) the holding period of each asset of Mutual Federal Savings Bank held by Stock Savings Bank immediately after the Reorganization will include the period during which such asset was held by Mutual Federal Savings Bank prior to the Reorganization; (e) the initial shareholders of Stock Savings Bank (the former Mutual Federal Savings Bank members) will recognize no gain or loss upon the constructive transfer to the Mutual Holding Company of the shares of Stock Savings Bank common stock that they constructively received in the Reorganization solely in exchange for mutual ownership interests (i.e., liquidation and voting rights) in the Mutual Holding Company; (f) the Mutual Holding Company will recognize no gain or loss upon its receipt from the shareholders of Stock Savings Bank of shares of Stock Savings Bank common stock solely in exchange for membership interests in the Mutual Holding Company; (g) Naugatuck Valley Financial Corporation will recognize no gain or loss upon its receipt of 100% of the common stock of Stock Savings Bank from the Mutual Holding Company; (h) the Mutual Holding Company will recognize no gain or loss upon its transfer of 100% of the common stock of Stock Savings Bank from Mutual Holding Company; and (i) it is more likely than not that the fair market value of the non-transferable subscription rights to purchase shares of common stock of Naugatuck Valley Financial Corporation to be issued to Eligible Account Holders, Supplemental Eligible Account Holders and Other Members is zero (the "Subscription Right") and, accordingly, that no income will be realized by Eligible Account Holders, Supplemental Eligible Account Holders and Other Members upon issuance to them of the Subscription Rights. The facts, assumptions and representations and the federal tax consequences set forth in the Federal Opinion Letter are incorporated in this opinion letter by reference as if fully set forth herein. References and abbreviations used in the Federal Opinion Letter are also used herein. In connect with the opinions expressed below, we have examined and relied upon originals, or copies certified or otherwise identified to our satisfaction, of the Plan of Reorganization, Plan of Charter Conversion, the Prospectus, and of such corporate records of the parties to the Reorganization as we have deemed appropriate. We have also relied, without independent verification, upon the representations of the Bank included in a Certificate of Representation dated ___________, 2004. We have assumed that such representations are true and that the parties to the Reorganization and Charter Conversion will act in accordance with the Plan of Reorganization and the Plan of Charter Conversion. We express no opinion concerning the effects, if any, of variations from the foregoing. Page 2 OPINION Based on the foregoing, we are of the opinion that, for purposes of the Connecticut Corporate Business Tax only: 1. No gross income, gain or loss will be recognized by the Bank (either Mutual State Savings Bank or Mutual Federal Savings Bank ), or Mutual Holding Company, as a result of the Reorganization and Charter Conversion. Pursuant to Section 12-213(a)(9) of the General Statutes, Connecticut taxable gross income is based on income as calculated pursuant to the Internal Revenue Code of 1986, as amended (the "Code"). 2. The basis and holding period of each asset of Mutual Federal Savings Bank held by Stock Savings Bank immediately after the Reorganization will be the same as Mutual Federal Savings Bank's basis and holding period for such asset immediately prior to the Reorganization. 3. No gross income, gain or loss will be recognized by any entity or natural person holding a deposit account with the Bank as a result of the non-transferable subscription rights to purchase the common stock of Naugatuck Valley Financial Corporation in accordance with the Plan of Reorganization provided that the non-transferable subscription rights have no value as set forth in the Federal Tax Opinion of Muldoon Murphy Faucette & Aguggia LLP With respect to the Connecticut tax treatment of the Reorganization, we do not express an opinion as to the sales and use, property, conveyance, or any other non-income tax consequences thereof. We base our opinion upon the General Statutes and the Code, the regulations issued thereunder, and relevant administrative interpretations and judicial precedents as of the date hereof. There can be no assurance that positions contrary to those set forth in our opinion may not be taken by the Connecticut Department of Revenue Services or that a court considering the issues would not make a determination contrary or inconsistent with our opinions. Also, if there is any change in the applicable law or regulations, or administrative or judicial interpretations thereof, any or all of the opinions expressed herein may become in applicable. We undertake no responsibility to update this opinion if such events occur. No opinions should be inferred as to any other matters or as to the tax treatment of the transactions that we do not specifically address. We express no opinion as to other Connecticut laws or as to factual or legal matters other than as set forth herein. This opinion is given solely for the benefit of the parties to the Plan of Reorganization, the Plan of Charter Conversion, the shareholders of Stock Savings Bank and Eligible Account Holders, Supplemental Eligible Account Holders, and other investors who purchase shares pursuant to the Plan of Reorganization, and may not be relied upon by any other party or entity or referred to in any document without our express written consent. Page 3 We consent to the filing of this opinion as an exhibit to Forms MHC-1, MHC-2 and H-(e)1-S filed with the Office of Thrift Supervision and as an exhibit to the registration statement on Form S-1 filed by Naugatuck Valley Financial Corporation with the Securities and Exchange Commission in connection with the Reorganization, and to the reference thereto in the prospectus included in the registration statement on Form S-1 under the headings "The Reorganization and Stock Issuance - Material Income Tax Consequences" and "Legal and Tax Opinions." In giving such consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended. Very truly yours, Page 4 EX-10.1 10 g89544exv10w1.txt EX-10.1 EMPLOYEE STOCK OWNERSHIP PLAN EXHIBIT 10.1 FORM OF NAUGATUCK VALLEY SAVINGS AND LOAN EMPLOYEE STOCK OWNERSHIP PLAN EFFECTIVE AS OF [DATE] NAUGATUCK VALLEY SAVINGS AND LOAN EMPLOYEE STOCK OWNERSHIP PLAN CERTIFICATION I, John C. Roman, President and Chief Executive Officer of Naugatuck Valley Savings and Loan hereby certify that the attached Naugatuck Valley Savings and Loan Employee Stock Ownership Plan, effective [date], was adopted at a duly held meeting of the Board of Directors of the Bank. ATTEST: NAUGATUCK VALLEY SAVINGS AND LOAN _______________________ By: _____________________________________ John C. Roman President and Chief Executive Officer Date:____________________________________ NAUGATUCK VALLEY SAVINGS AND LOAN EMPLOYEE STOCK OWNERSHIP PLAN TABLE OF CONTENTS Section 1 - Introduction........................................................ 1 Section 2 - Definitions......................................................... 1 Section 3 - Eligibility and Participation....................................... 8 Section 4 - Contributions....................................................... 10 Section 5 - Plan Accounting..................................................... 12 Section 6 - Vesting and Forfeitures............................................. 18 Section 7 - Distributions....................................................... 20 Section 8 - Voting of Company Stock and Tender Offers........................... 25 Section 9 - The Committee and Plan Administration............................... 26 Section 10 - Rules Governing Benefit Claims .................................... 29 Section 11 - The Trust.......................................................... 30 Section 12 - Adoption, Amendment and Termination................................ 31 Section 13 - General Provisions................................................. 33 Section 14 - Top-Heavy Provisions............................................... 34

SECTION 1 INTRODUCTION SECTION 1.01 NATURE OF THE PLAN. Effective as of [date] (the "Effective Date"), Naugatuck Valley Savings and Loan (the "Bank") hereby establishes the Naugatuck Valley Savings and Loan Employee Stock Ownership Plan (the "Plan") to enable Eligible Employees (as defined in Section 2.01(o) of the Plan) to acquire stock ownership interests in Naugatuck Valley Financial Corporation (the "Company"), the holding company of the Bank. The Bank intends this Plan to be a tax-qualified stock bonus plan under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and an employee stock ownership plan within the meaning of Section 407(d)(6) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Sections 409 and 4975(e)(7) of the Code. The Plan is designed to invest primarily in the common stock of the Company, which stock constitutes "qualifying employer securities" within the meaning of Section 407(d)(5) of ERISA and Sections 409(l) and 4975(e)(8) of the Code. Accordingly, the Plan and Trust Agreement (as defined in Section 2.01(mm) of the Plan) shall be interpreted and applied in a manner consistent with the Bank's intent for it to be a tax-qualified plan designed to invest primarily in qualifying employer securities. The Plan reflects certain provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"). The provisions related to EGTRRA are intended as good faith compliance with EGTRRA and the guidance issued thereunder. To the extent any provision of the Plan was operated according to an effective date earlier than as required by law, then such date shall be the effective date with respect to that provision of the Plan. SECTION 1.02 EMPLOYERS AND AFFILIATES. The Bank and each of its Affiliates (as defined in Section 2.01(c) of the Plan) that, with the consent of the Bank, adopt the Plan pursuant to the provisions of Section 12.01 of the Plan are collectively referred to as the "Employers" and individually as an "Employer." The Plan shall be treated as a single plan with respect to all participating Employers. SECTION 2 DEFINITIONS SECTION 2.01 DEFINITIONS. In this Plan, whenever the context so indicates, the singular or the plural number and the masculine or feminine gender shall be deemed to include the other, the terms "he," "his," and "him," shall refer to a Participant or Beneficiary, as the case may be, and, except as otherwise provided, or unless the context otherwise requires, the capitalized terms shall have the following meanings: (a) "ACCOUNT" or "ACCOUNTS" mean a Participant's or Beneficiary's Company Stock Account and/or his Other Investments Account, as the context so requires. 1 (b) "ACQUISITION LOAN" means a loan or other extension of credit, including an installment obligation to a "party in interest" (as defined in Section 3(14) of ERISA) incurred by the Trustee in connection with the purchase of Company Stock. (c) "AFFILIATE" means any corporation, trade or business, which, at the time of reference, is together with the Bank, a member of a controlled group of corporations, a group of trades or businesses (whether or not incorporated) under common control, or an affiliated service group, as described in Sections 414(b), 414(c), and 414(m) of the Code, respectively, or any other organization treated as a single employer with the Bank under Section 414(o) of the Code; provided, however, that, where the context so requires, the term "Affiliate" shall be construed to give full effect to the provisions of Sections 409(l)(4) and 415(h) of the Code. (d) "BANK" means Naugatuck Valley Savings and Loan, and any entity that succeeds to the business of the Naugatuck Valley Savings and Loan and adopts this Plan in accordance with the provisions of Section 12.02 of the Plan, or by written agreement assumes the obligations of the Plan. (e) "BENEFICIARY" means the person(s) entitled to receive benefits under the Plan following a Participant's death, pursuant to Section 7.03 of the Plan. (f) "CHANGE IN CONTROL" means any one of the following events occurs: (i) Merger: The Company merges into or consolidates with another corporation, or merges another corporation into the Company, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were stockholders of the Company immediately before the merger or consolidation; (ii) Acquisition of Significant Share Ownership: The Company files, or is required to file, a report on Schedule 13D or another form or schedule (other than Schedule 13G) required under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 25% or more of a class of the Company's voting securities, but this clause (b) shall not apply to beneficial ownership of Company voting shares held in a fiduciary capacity by an entity of which the Company directly or indirectly beneficially owns 50% or more of its outstanding voting securities; (iii) Change in Board Composition: During any period of two consecutive years, individuals who constitute the Company's Board of Directors at the beginning of the two-year period cease for any reason to constitute at least a majority of the Company's Board of Directors; provided, however, that for purposes of this clause (iii), each director who is first elected by the board (or first nominated by the board for election by the stockholders) by a vote of at least two-thirds (2/3) of 2 the directors who were directors at the beginning of the two-year period shall be deemed to have also been a director at the beginning of such period; or (iv) Sale of Assets: The Company sells to a third party all or substantially all of its assets. Notwithstanding anything in this Plan to the contrary, in no event shall the conversion of the Bank from the mutual to stock form (including, without limitation, the formation of a stock holding company), or the reorganization of the Bank into the mutual holding company form of organization, constitute a "Change in Control" for purposes of this Plan. (g) "CODE" means the Internal Revenue Code of 1986, as amended. (h) "COMMITTEE" means the individual(s) responsible for the administration of the Plan in accordance with Section 9 of the Plan. (i) "COMPANY" means Naugatuck Valley Financial Corporation and any entity which succeeds to the business of Naugatuck Valley Financial Corporation. (j) "COMPANY STOCK" means shares of the voting common stock or preferred stock, meeting the requirements of Section 409 of the Code and Section 407(d)(5) of ERISA, issued by the Company or its Affiliates. (k) "COMPANY STOCK ACCOUNT" means the account established and maintained in the name of each Participant or Beneficiary to reflect his share of the Trust Fund invested in Company Stock. (l) "COMPENSATION" means: [(i) AN EMPLOYEE'S BASE COMPENSATION AS REPORTED ON FORM W-2 FOR FEDERAL TAX PURPOSES AND PAID DURING THE PLAN YEAR BY THE EMPLOYER. (ii) COMPENSATION SHALL ALSO INCLUDE THE AMOUNTS OF ANY EMPLOYER CONTRIBUTIONS MADE PURSUANT TO A SALARY REDUCTION AGREEMENT ENTERED INTO BY THE PARTICIPANT AND NOT INCLUDIBLE IN THE GROSS INCOME OF THE EMPLOYEE UNDER SECTIONS 125, 132(f), 402(e)(3), 402(h), 403(b), 414(h) OR 457 OF THE CODE.] A Participant's Compensation shall not exceed $200,000 (as periodically adjusted pursuant to Section 401(a)(17) of the Code). If the Plan Year for which a Participant's Compensation is measured is less than twelve (12) calendar months, then the amount of Compensation taken into account for such Plan Year shall be the adjusted amount for such Plan Year, as prescribed by the Secretary of the Treasury under Section 401(a)(17) of the Code, multiplied by a fraction, the numerator of which is the number of months taken into account for such Plan Year and the denominator of which is twelve (12). In 3 determining the dollar limitation hereunder, Compensation received from an Affiliate shall be recognized as Compensation. (m) "DISABILITY" means a physical or mental condition of a Participant resulting from bodily injury, disease, or mental disorder which renders the Participant incapable of continuing any gainful occupation and which condition constitutes total disability under the federal Social Security Act. The Disability of a Participant shall be determined by the Plan Administrator, in its sole discretion. (n) "EFFECTIVE DATE" means [DATE]. (o) "ELIGIBLE EMPLOYEE" means any Employee who is not precluded from participating in the Plan by reason of the provisions of Section 3.02 of the Plan. (p) "EMPLOYEE" means any person who is actually performing services for the Employer or an Affiliate in a common-law, employer-employee relationship as determined under Sections 31.3121(d)-1, 31.3306(i)-1, or 31.3401(c)-1 of the Treasury Regulations and any "Leased Employee" as defined in Section 3.02(b) of this Plan. (q) "EMPLOYER" or "EMPLOYERS" means the Bank and any of its Affiliates that adopt the Plan in accordance with the provisions of Section 12.01 of the Plan, and any entity which succeeds to the business of the Bank or its Affiliates and which adopts the Plan in accordance with the provisions of Section 12.02 of the Plan, or by written agreement assumes the obligations under the Plan. (r) "ENTRY DATE" means [JANUARY 1ST OR JULY 1ST] coinciding with or next following the date the Employee satisfies the requirements for participation under Section 3.01 of the Plan. (s) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (t) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended. (u) "FINANCED SHARES" means shares of Company Stock acquired by the Trustee with the proceeds of an Acquisition Loan, which shall constitute "qualifying employer securities" under Section 409(l) of the Code and any shares of Company Stock received upon conversion or exchange of such shares. (v) "HIGHLY COMPENSATED EMPLOYEE" means an Employee who, for a particular Plan Year, satisfies one of the following conditions: (i) was a "5-percent owner" (as defined in Section 414(q)(2) of the Code) during the year or the preceding year, or (ii) for the preceding year, had "compensation" (as defined in Section 414(q)(4) of the Code) from the Bank and its Affiliates exceeding $90,000 (as periodically adjusted pursuant to Section 414(q)(1) of the Code). 4 (w) "HOURS OF SERVICE" means: (i) Each hour for which an Employee is paid, or entitled to payment, for performing duties for the Employer during the applicable computation period. (ii) Each hour for which an Employee is paid, or entitled to payment, for a period during which no duties are performed (irrespective of whether the employment relationship has terminated) due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence. Notwithstanding the preceding sentence, no credit shall be given to the Employee for: (A) more than 501 hours under this clause (ii) because of any single continuous period in which the Employee performs no duties (whether or not such period occurs in a single computation period); (B) an hour for which the Employee is directly or indirectly paid, or entitled to payment, because of a period in which no duties are performed if such payment is made or due under a plan maintained solely for the purpose of complying with applicable worker's or workmen's compensation, unemployment, or disability insurance laws; or (C) an hour or a payment which solely reimburses the Employee for medical or medically-related expenses incurred by the Employee. (iii) Each hour for which back pay, irrespective of mitigation of damages, is either awarded or agreed to by the Employer; provided, however, that hours credited under either clause (i) or (ii) above shall not also be credited under this clause (iii). Crediting of hours for back pay awarded or agreed to with respect to periods described in clause (ii) above will be subject to the limitations set forth in that clause. The crediting of Hours of Service shall be determined by the Committee in accordance with the rules set forth in Section 2530.200b-2 of the regulations prescribed by the Department of Labor, which rules shall be consistently applied with respect to all Employees within the same job classification. If an Employer finds it impracticable to count actual Hours of Service for any class or group of non-hourly Employees, each Employee in that class or group shall be credited with 45 Hours of Service for each weekly period in which he has at least one Hour of Service. However, an Employee shall be credited with Hours of Service only for his normal working hours during a paid absence. Hours of Service shall be credited for employment with an Affiliate. For purposes of determining whether an Employee has incurred a One Year Break in Service and for vesting and participation purposes, if an Employee begins a maternity/paternity leave of absence described in Section 411(a)(6)(E)(i) of the Code, his Hours of Service shall include the 5 Hours of Service that would have been credited to him if he had not been so absent (or 45 Hours of Service for each week of such absence if the actual Hours of Service cannot be determined). An Employee shall be credited for such Hours of Service (up to a maximum of 501 Hours of Service) in the Plan Year in which his absence begins (if such crediting will prevent him from incurring a One Year Break in Service in such Plan Year) or, in all other cases, in the following Plan Year. An absence from employment for maternity or paternity reasons means an absence: (i) by reason of pregnancy of the Employee, (ii) by reason of the birth of a child of the Employee, (iii) by reason of the placement of a child with the Employee in connection with the adoption of such child by such Employee, or (iv) for purposes of caring for such child for a period beginning immediately following such birth or placement. (x) "LATER RETIREMENT DATE" means the first day of the month coincident with or next following a Participant's date of actual retirement which occurs after his Normal Retirement Date. (y) "LOAN SUSPENSE ACCOUNT" means that portion of the Trust Fund consisting of Company Stock acquired with an Acquisition Loan which has not yet been allocated to the Participants' Accounts. (z) "NORMAL RETIREMENT AGE" means the later of a Participant's [ATTAINMENT OF AGE 65 OR THE FIFTH (5TH) ANNIVERSARY OF THE FIRST DAY OF THE PLAN YEAR IN WHICH THE PARTICIPANT COMMENCED PARTICIPATION IN THE PLAN.] (aa) "NORMAL RETIREMENT DATE" means the first day of the month coincident with or next following the Participant's attainment of Normal Retirement Age. (bb) "ONE YEAR BREAK IN SERVICE" means a twelve (12) consecutive month period during which the Participant does not complete more than 500 Hours of Service. (cc) "OTHER INVESTMENTS ACCOUNT" means the account established and maintained in the name of each Participant or Beneficiary to reflect his share of the Trust Fund, other than Company Stock. (dd) "PARTICIPANT" means any Eligible Employee who has become a Participant in accordance with Section 3.01 of the Plan or any other person with an Account balance under the Plan. (ee) "PLAN" means this Naugatuck Valley Savings and Loan Employee Stock Ownership Plan, as amended from time to time. 6 (ff) "PLAN YEAR" means the calendar year. (gg) "RECOGNIZED ABSENCE" means a period for which: (i) an Employer grants an Employee a leave of absence for a limited period of time, but only if an Employer grants such leaves of absence on a nondiscriminatory basis to all Eligible Employees; or (ii) an Employee is temporarily laid off by an Employer because of a change in the business conditions of the Employer; or (iii) an Employee is on active military duty, but only to the extent that his employment rights are protected by the Military Selective Service Act of 1967 and the Uniformed Services Employment and Reemployment Rights Act of 1994. (hh) "RETIREMENT DATE" means a Participant's Normal or Later Retirement Date, whichever is applicable. (ii) "SERVICE" means employment with the Bank or an Affiliate. (jj) "TERMINATION OF SERVICE" means the earlier of (a) the date on which an Employee's Service is terminated by reason of his resignation, retirement, discharge, death or Disability or (b) the first anniversary of the date on which such Employee's service is terminated for disability of a short-term nature or any other reason. Service in the Armed Forces of the United States shall not constitute a Termination of Service but shall be considered to be a period of employment by the Employer provided (i) such military service is caused by war or other emergency or the Employee is required to serve under the laws of conscription in time of peace, (ii) the Employee returns to employment with the Employer within six (6) months following discharge from such military service and (iii) such Employee is reemployed by the Employer at a time when the Employee had a right to reemployment at his former position or substantially similar position upon separation from such military duty in accordance with seniority rights as protected under the laws of the United States. A leave of absence granted to an Employee by the Employer shall not constitute a Termination of Service provided that the Participant returns to the active service of the Employer at the expiration of any such period for which leave has been granted. Notwithstanding the foregoing, an Employee who is absent from service with the Employer beyond the first anniversary of the first date of his absence for maternity or paternity reasons set forth in Section 2.01 of the Plan shall incur a Termination of Service for purposes of the Plan on the second anniversary of the date of such absence. (kk) "TREASURY REGULATIONS" mean the regulations promulgated by the Department of the Treasury under the Code. (ll) "TRUST" means the Naugatuck Valley Savings and Loan Employee Stock Ownership Plan Trust created in connection with the establishment of the Plan. 7 (mm) "TRUST AGREEMENT" means the trust agreement establishing the Trust. (nn) "TRUST FUND" means the assets held in the Trust for the benefit of Participants and their Beneficiaries. (oo) "TRUSTEE" means the trustee or trustees from time to time in office under the Trust Agreement. (pp) "VALUATION DATE" means the last day of the Plan Year and each other date as of which the Committee shall determine the investment experience of the Trust Fund and adjust Participants' Accounts accordingly. (qq) "VALUATION PERIOD" means the period following a Valuation Date and ending with the next Valuation Date. (rr) "YEAR OF SERVICE" shall mean a Plan Year in which an Employee is credited with at least [1,000 HOURS OF SERVICE.] SECTION 3 ELIGIBILITY AND PARTICIPATION SECTION 3.01 PARTICIPATION. (a) All Eligible Employees who [PARTICIPATE IN THE BANK'S 401(k) PLAN ON THE DATE THE COMPANY FIRST ISSUES COMMON STOCK PURSUANT TO ITS REORGANIZATION FROM A MUTUAL SAVINGS AND LOAN ASSOCIATION TO A MUTUAL HOLDING COMPANY (THE "REORGANIZATION DATE") SHALL ENTER THE PLAN AND BECOME PARTICIPANTS ON THE EARLIER OF THE EFFECTIVE DATE OR THE DATE ON WHICH THE ELIGIBLE EMPLOYEE FIRST PERFORMED AN HOUR OF SERVICE FOR AN EMPLOYER.] (b) An Eligible Employee who is first employed by an Employer after the Reorganization Date shall become a Participant in the Plan upon satisfying the following requirements: [(i) THE ELIGIBLE EMPLOYEE IS AT LEAST 21 YEARS OF AGE; AND (ii) THE ELIGIBLE EMPLOYEE HAS BEEN EMPLOYED BY THE EMPLOYER FOR SIX MONTHS.] (c) An Eligible Employee who has satisfied the eligibility requirements of Section 3.01(b) shall enter the Plan and become a Participant on the earlier of the Effective Date or the Entry Date coincident with or next following the date he satisfies such requirements. 8 SECTION 3.02 CERTAIN EMPLOYEES INELIGIBLE. The following Employees are ineligible to participate in the Plan: (a) Employees covered by a collective bargaining agreement between the Employer and the Employee's collective bargaining representative if: (i) retirement benefits have been the subject of good faith bargaining between the Employer and the representative, and (ii) the collective bargaining agreement does not expressly provide that Employees of such unit be covered under the Plan; (b) Employees who are nonresident aliens and who receive no earned income from an Employer which constitutes income from sources within the United States; and (c) Employees of an Affiliate of the Bank that has not adopted the Plan pursuant to Sections 12.01 or 12.02 of the Plan. SECTION 3.03 TRANSFER TO AND FROM ELIGIBLE EMPLOYMENT. (a) If an Employee ineligible to participate in the Plan by reason of Section 3.02 of the Plan transfers to employment as an Eligible Employee, he shall enter the Plan as of the later of: (i) the first Entry Date after the date of transfer, or (ii) the first Entry Date on which he could have become a Participant pursuant to Section 3.01 of the Plan. (b) If a Participant transfers to an employment position that makes him ineligible to participate in the Plan as of the date of such transfer, he shall cease active participation in the Plan as of such date and his transfer shall be treated for all purposes under the Plan in the same manner as any other termination of Service. SECTION 3.04 PARTICIPATION AFTER REEMPLOYMENT. (a) If an Employee incurs a One Year Break in Service prior to satisfying the eligibility requirements of Section 3.01 of the Plan, Service prior to such One Year Break in Service shall be disregarded and the Employee must satisfy the eligibility requirements of Section 3.01 as a new Employee. (b) If an Employee incurs a One Year Break in Service after satisfying the eligibility requirements of Section 3.01 of the Plan and again performs an Hour of Service, the Employee shall receive credit for Service prior to his One Year Break in Service and 9 shall be eligible to participate in the Plan immediately upon reemployment, provided the Employee is not excluded from participation under the provisions of Section 3.02 of the Plan. SECTION 3.05 PARTICIPATION NOT GUARANTEE OF EMPLOYMENT. Participation in the Plan does not constitute a guarantee or contract of employment and will not give any Employee the right to be retained in the employ of the Bank or any of its Affiliates nor any right or claim to any benefit under the terms of the Plan unless such right or claim has specifically accrued under the Plan. SECTION 4 CONTRIBUTIONS SECTION 4.01 EMPLOYER CONTRIBUTIONS. (a) DISCRETIONARY CONTRIBUTIONS. Each Plan Year, each Employer, in its discretion, may make a contribution to the Trust. Each Employer making a contribution for any Plan Year under this Section 4.01(a) will contribute to the Trustee cash equal to, or Company Stock or other property having an aggregate fair market value equal to, such amount as the Board of Directors of the Employer shall determine by resolution. Notwithstanding the Employer's discretion with respect to the medium of contribution, an Employer shall not make a contribution in any medium which would make such contribution a prohibited transaction (for which no exemption is provided) under Section 406 of ERISA or Section 4975 of the Code. (b) EMPLOYER CONTRIBUTIONS FOR ACQUISITION LOANS. Each Plan Year, the Employers shall, subject to any regulatory prohibitions, contribute an amount of cash sufficient to enable the Trustee to discharge any indebtedness incurred with respect to an Acquisition Loan pursuant to the terms of the Acquisition Loan. The Employers' obligation to make contributions under this Section 4.01(b) shall be reduced to the extent of any investment earnings attributable to such contributions and any cash dividends paid with respect to Company Stock held by the Trustee in the Loan Suspense Account. If there is more than one Acquisition Loan, the Employers shall designate the one to which any contribution pursuant to this Section 4.01(b) is to be applied. SECTION 4.02 LIMITATIONS ON CONTRIBUTIONS. In no event shall an Employer's contribution(s) made under Section 4.01 of the Plan for any Plan Year exceed the lesser of: (a) The maximum amount deductible under Section 404 of the Code by that Employer as an expense for Federal income tax purposes; and (b) The maximum amount which can be credited for that Plan Year in accordance with the allocation limitation provisions of Section 5.05 of the Plan. 10 SECTION 4.03 ACQUISITION LOANS. The Trustee may incur Acquisition Loans from time to time to finance the acquisition of Company Stock for the Trust or to repay a prior Acquisition Loan. An Acquisition Loan shall be for a specific term, shall bear a reasonable rate of interest, shall not be payable in demand, except in the event of default, and shall be primarily for the benefit of Participants and Beneficiaries of the Plan. An Acquisition Loan may be secured by a collateral pledge of the Financed Shares so acquired and any other Plan assets which are permissible securities within the provisions of Section 54.4975-7(b) of the Treasury Regulations. No other assets of the Plan or Trust may be pledged as collateral for an Acquisition Loan, and no lender shall have recourse against any other Trust assets. Any pledge of Financed Shares must provide for the release of shares so pledged on a basis equal to the principal and interest (or if the requirements of Section 54.4975-7(b)(8)(ii) of the Treasury Regulations are met and the Employer so elects, principal payments only), paid by the Trustee on the Acquisition Loan. The released Financed Shares shall be allocated to Participants' Accounts in accordance with the provisions of Sections 5.04 or 5.08 of the Plan, whichever is applicable. Payment of principal and interest on any Acquisition Loan shall be made by the Trustee only from the Employer contributions paid in cash to enable the Trustee to repay such loan in accordance with Section 4.01(b) of the Plan, from earnings attributable to such contributions, and any cash dividends received by the Trustee on Financed Shares acquired with the proceeds of the Acquisition Loan (including contributions, earnings and dividends received during or prior to the year of repayment less such payments in prior years), whether or not allocated. Financed Shares shall initially be credited to the Loan Suspense Account and shall be transferred for allocation to the Company Stock Accounts of Participants only as payments of principal and interest (or, if the requirements of Section 54.4975-7(b)(8)(ii) of the Treasury Regulations are met and the Employer so elects, principal payments only), on the Acquisition Loan are made by the Trustee. The number of Financed Shares to be released from the Loan Suspense Account for allocation to Participants' Company Stock Account for each Plan Year shall be based on the ratio that the payments of principal and interest (or, if the requirements of Section 54.4975-7(b)(8)(ii) of the Treasury Regulations are met and the Employer so elects, principal payments only), on the Acquisition Loan for that Plan Year bears to the sum of the payments of principal and interest on the Acquisition Loan for that Plan Year plus the total remaining payment of principal and interest projected (or, if the requirements of Section 54.4975-7(b)(8)(ii) of the Treasury Regulations are met and the Employer so elects, principal payments only), on the Acquisition Loan over the duration of the Acquisition Loan repayment period, subject to the provisions of Section 5.05 of the Plan. SECTION 4.04 CONDITIONS AS TO CONTRIBUTIONS. In addition to the provisions of Section 12.03 of the Plan for the return of an Employer's contributions in connection with a failure of the Plan to qualify initially under the Code, any amount contributed by an Employer due to a good faith mistake of fact, or based upon a good faith but erroneous determination of its deductibility under Section 404 of the Code, shall be returned to the Employer within one year after the date on which the Employer originally made such contribution, or within one year after its nondeductibility has been finally determined. However, the amount to be returned shall be reduced to take account of any adverse investment 11 experience within the Trust in order that the balance credited to each Participant Account is not less than it would have been if the contribution had never been made by the Employer. SECTION 4.05 EMPLOYEE CONTRIBUTIONS. Employee contributions are neither required nor permitted under the Plan. SECTION 4.06 ROLLOVER CONTRIBUTIONS. Rollover contributions to the Plan of assets from other tax-qualified retirement plans are not permitted under the Plan. SECTION 4.07 TRUSTEE-TO-TRUSTEE TRANSFERS. Trustee-to-trustee transfers of assets from other tax-qualified retirement plans are not permitted under the Plan. SECTION 5 PLAN ACCOUNTING SECTION 5.01 ACCOUNTING FOR ALLOCATIONS. The Committee shall establish the Accounts (and sub-accounts, if deemed necessary) for each Participant, and the accounting procedures for the purpose of making allocations to Participants' Accounts as provided for in this Section 5. The Committee shall maintain adequate records of the cost basis of shares of Company Stock allocated to each Participant's Company Stock Account. The Committee also shall keep separate records of Financed Shares attributable to each Acquisition Loan and of contributions made by the Employers (and any earnings thereon) made for the purpose of enabling the Trustee to repay any Acquisition Loan. From time to time, the Committee may modify its accounting procedures for the purpose of achieving equitable and nondiscriminatory allocations among the Accounts of Participants, in accordance with the provisions of this Section 5 and the applicable requirements of the Code and ERISA. In accordance with Section 9 of the Plan, the Committee may delegate the responsibility for maintaining Accounts and records. SECTION 5.02 MAINTENANCE OF PARTICIPANTS' COMPANY STOCK ACCOUNTS. As of each Valuation Date, the Committee shall adjust the Company Stock Account of each Participant to reflect activity during the Valuation Period as follows: (a) First, charge to each Participant's Company Stock Account all distributions and payments made to the Participant that have not been previously charged; (b) Next, credit to each Participant's Company Stock Account the shares of Company Stock, if any, that have been purchased with amounts from the Participant's Other Investments 12 Account, and adjust such Other Investments Account in accordance with the provisions of Section 5.03 of the Plan; (c) Next, credit to each Participant's Company Stock Account the shares of Company Stock representing contributions made by the Employers in the form of Company Stock and the number of Financed Shares released from the Loan Suspense Account under Section 4.03 of the Plan that are to be allocated and credited as of that date in accordance with the provisions of Section 5.04 of the Plan; and (d) Finally, credit to each Participant's Company Stock Account the shares of Company Stock released from the Loan Suspense Account that are to be allocated in accordance with the provisions of Section 5.09 of the Plan. SECTION 5.03 MAINTENANCE OF PARTICIPANTS' OTHER INVESTMENTS ACCOUNTS. Except as otherwise provided for under Section 5.08 of the Plan, as of each Valuation Date, the Committee shall adjust the Other Investments Account of each Participant to reflect activity during the Valuation Period as follows: (a) First, charge to each Participant's Other Investments Account all distributions and payments made to the Participant that have not previously been charged; (b) Next, if Company Stock is purchased with assets from a Participant's Other Investments Account, charge the Participant's Other Investments Account accordingly; (c) Next, subject to the dividend provisions of Section 5.09 of the Plan, credit to the Other Investments Account of each Participant any cash dividends paid to the Trustee on shares of Company Stock held in that Participant's Company Stock Account (as of the record date for such cash dividends) and dividends paid on shares of Company Stock held in the Loan Suspense Account that have not been used to repay any Acquisition Loan. Subject to the provisions of Section 5.09 of the Plan, cash dividends that have not been used to repay any Acquisition Loan and have been credited to a Participant's Other Investments Account shall be applied by the Trustee to purchase shares of Company Stock, which shares shall then be credited to the Company Stock Account of such Participant. The Participant's Other Investments Account shall then be charged by the amount of cash used to purchase such Company Stock. In addition, any earnings on: (i) Participants' Other Investments Accounts will be allocated to Accounts, pro rata, based on Participants' Other Investments Account balances as of the first day of the Valuation Period, and (ii) the Loan Suspense Account, other than dividends used to repay the Acquisition Loan, will be allocated to Participants' Other Investments Accounts, pro rata, based on their Other Investments Account balances as of the first day of the Valuation Period; 13 (d) Next, allocate and credit the Employer contributions made pursuant to Section 4.01(b) of the Plan for the purpose of repaying any Acquisition Loan, in accordance with Section 5.04 of the Plan. Such amount shall then be used to repay any Acquisition Loan and such Participant's Other Investments Account shall be charged accordingly; and (e) Finally, allocate and credit the Employer contributions (other than amounts contributed to repay an Acquisition Loan) that are made in cash (or property other than Company Stock) for the Plan Year to the Other Investments Account of each Participant in accordance with Section 5.04 of the Plan. SECTION 5.04 ALLOCATION AND CREDITING OF EMPLOYER CONTRIBUTIONS. (a) Except as otherwise provided for in Sections 5.08 and 5.09 of the Plan, as of the Valuation Date for each Plan Year: (i) Company Stock released from the Loan Suspense Account for that year and shares of Company Stock contributed directly to the Plan shall be allocated and credited to each Active Participant's (as defined in paragraph (b) of this Section 5.04) Company Stock Account based on the ratio that each Active Participant's Compensation bears to the aggregate Compensation of all Active Participants for the Plan Year, and then (ii) The cash contributions not used to repay an Acquisition Loan and any other property contributed for that year shall be allocated and credited to each Active Participant's Other Investments Account based on the ratio determined by comparing each Active Participant's Compensation while a Participant to the aggregate Compensation of all Active Participants for the Plan Year. (b) For purposes of this Section 5.04, the term "Active Participant" means those Eligible Employees who: (i) are employed on the last day of the Plan Year [AND HAVE COMPLETED 1,000 HOURS OF SERVICE DURING THE PLAN YEAR]; or (ii) terminated employment during the Plan Year by reason of death, Disability, or attainment of their Normal or Later Retirement Date. SECTION 5.05 LIMITATIONS ON ALLOCATIONS. (a) IN GENERAL. Subject to the provisions of this Section 5.05, Section 415 of the Code shall be incorporated by reference into the terms of the Plan. No allocation shall be made under Section 5.04 of the Plan that would result in a violation of Section 415 of the Code. (b) CODE SECTION 415 COMPENSATION. For purposes of this Section 5.05, Compensation shall be adjusted to reflect the general rule of Section 1.415-2(d) of the Treasury Regulations. 14 (c) LIMITATION YEAR. The "limitation year" (within the meaning of Section 415 of the Code) shall be the calendar year. (d) MULTIPLE DEFINED CONTRIBUTION PLANS. In any case where a Participant also participates in another defined contribution plan of the Bank or its Affiliates, the appropriate committee of such other plan shall first reduce the after-tax contributions under any such plan, shall then reduce any elective deferrals under any such plan subject to Section 401(k) of the Code, shall then reduce all other contributions under any other such plan and, if necessary, shall then reduce contributions under this Plan. (e) EXCESS ALLOCATIONS. If, after applying the allocation provisions under Section 5.04 of the Plan, allocations under Section 5.04 of the Plan would otherwise result in a violation of Section 415 of the Code, the Committee shall allocate and reallocate employer contributions to other Participants in the Plan for the limitation year or, if such allocation and reallocation causes the limitations of Section 415 of the Code to be exceeded, shall hold excess amounts in an unallocated suspense account for allocation in a subsequent Plan Year in accordance with Section 1.415-6(b)(6)(i) of the Treasury Regulations. Such suspense account, if permitted, will be credited before any allocation of contributions for subsequent limitation years. (f) ALLOCATIONS PURSUANT TO SECTION 5.08. For purposes of this Section 5.05, no amount credited to any Participant's Account pursuant to Section 5.08 of the Plan shall be counted as an "annual addition" for purposes of Section 415 of the Code. In the event any amount cannot be allocated to Affected Participants (as defined in Section 5.08 of the Plan) under the Plan pursuant to Section 5.08 of the Plan in the year of a Change in Control, the amount which may not be so allocated in the year of the Change in Control shall be treated in accordance with paragraph (e) of this Section 5.05. SECTION 5.06 OTHER LIMITATIONS. Aside from the limitations set forth in Section 5.05 of the Plan, in no event shall more than one-third of the Employer contributions to the Plan be allocated to the Accounts of Highly Compensated Employees. In order to ensure that such allocations are not made, the Committee shall, beginning with the Participants whose Compensation exceeds the limit then in effect under Section 401(a)(17) of the Code, reduce the amount of Compensation of such Highly Compensated Employees on a pro-rata basis per individual that would otherwise be taken into account for purposes of allocating benefits under Section 5.04 of the Plan. If, in order to satisfy this Section 5.06, any such Participant's Compensation must be reduced to an amount that is lower than the Compensation amount of the next highest paid (based on such Participant's Compensation) Highly Compensated Employee (the "breakpoint amount"), then, for purposes of allocating benefits under Section 5.04 of the Plan, the Compensation of all concerned Participants shall be reduced to an amount not to exceed such breakpoint amount. 15 SECTION 5.07 LIMITATIONS AS TO CERTAIN SECTION 1042 TRANSACTIONS. To the extent that a shareholder of Company Stock sells qualifying Company Stock to the Plan and elects (with the consent of the Bank) nonrecognition of gain under Section 1042 of the Code, no portion of the Company Stock purchased in such nonrecognition transaction (or other dividends or other income attributable thereto) may accrue or be allocated during the nonallocation period (the ten (10) year period beginning on the later of the date of the sale of the qualified Company Stock, or the date of the Plan allocation attributable to the final payment of an Acquisition Loan incurred in connection with such sale) for the benefit of: (a) the selling shareholder; (b) the spouse, brothers or sisters (whether by the whole or half blood), ancestors or lineal descendants of the selling shareholder or descendant referred to in (a) above; or (c) any other person who owns, after application of Section 318(a) of the Code, more than twenty-five percent (25%) of: (i) any class of outstanding stock of the Company or any Affiliate, or (ii) the total value of any class of outstanding stock of the Company or any Affiliate. For purposes of this Section 5.07, Section 318(a) of the Code shall be applied without regard to the employee trust exception of Section 318(a)(2)(B)(i) of the Code. SECTION 5.08 ALLOCATIONS UPON TERMINATION PRIOR TO SATISFACTION OF ACQUISITION LOAN. (a) Notwithstanding any other provision of the Plan, in the event of a Change in Control, the Plan shall terminate as of the effective date of the Change in Control and, as soon as practicable thereafter, the Trustee shall repay in full any outstanding Acquisition Loan. In connection with such repayment, the Trustee shall: (i) apply cash, if any, received by the Plan in connection with the transaction constituting a Change in Control, with respect to the unallocated shares of Company Stock acquired with the proceeds of the Acquisition Loan, and (ii) to the extent additionally required to effect the repayment of the Acquisition Loan, obtain cash through the sale of any stock or security received by the Plan in connection with such transaction, with respect to such unallocated shares of Company Stock. After repayment of the Acquisition Loan, all remaining shares of Company Stock held in the Loan Suspense Account, all other stock or securities, and any cash proceeds from the sale or other disposition of any shares of Company Stock held in the Loan Suspense Account, shall be allocated among the Accounts of all Participants who were employed by an Employer on the date immediately preceding the effective date of the Change in Control. Such allocations of shares or cash proceeds shall be credited as earnings for purposes of Section 5.05 of the Plan and Section 415 of the Code, as of the effective date of the Change in Control, to the Account of each Participant who is either in active Service with an Employer, or is on a Recognized Absence, on the date immediately preceding the effective date of the Change of Control (each an "Affected 16 Participant"), in proportion to the opening balances in their Company Stock Accounts as of the first day of the current Valuation Period. As of the effective date of a Change in Control, all Participant Accounts shall be fully vested and nonforfeitable. (b) In the event of a termination of the Plan in connection with a Change in Control, this Section 5.08 shall have no force and effect unless the price paid for the Company Stock in connection with a Change in Control is greater than the average basis of the unallocated Company Stock held in the Loan Suspense Account as of the date of the Change in Control. SECTION 5.09 DIVIDENDS. (a) STOCK DIVIDENDS. Dividends on Company Stock which are received by the Trustee in the form of additional Company Stock shall be retained in the portion of the Trust Fund consisting of Company Stock, and shall be allocated among the Participants' Accounts and the Loan Suspense Account in accordance with their holdings of the Company Stock on which the dividends have been paid. (b) CASH DIVIDENDS ON ALLOCATED SHARES. Dividends on Company Stock credited to Participants' Accounts which are received by the Trustee in the form of cash shall, at the direction of the Bank, either: (i) be credited to Participants' Accounts in accordance with Section 5.03 of the Plan and invested as part of the Trust Fund; (ii) be distributed immediately to the Participants; (iii) be distributed to the Participants within ninety (90) days of the close of the Plan Year in which paid; or (iv) be used to repay principal and interest on the Acquisition Loan used to acquire Company Stock on which the dividends were paid. In addition to the alternatives specified in the preceding paragraph regarding the treatment of cash dividends paid with respect to shares of Company Stock credited to Participants' Accounts, if authorized by the Committee for the Plan Year, a Participant may elect that cash dividends paid on Company Stock credited to the Participant's Account shall either be: (i) paid to the Plan, reinvested in Company Stock and credited to the Participant's Account; (ii) distributed in cash to the Participant; or (iii) distributed to the Participant within ninety (90) days of the close of the Plan Year in which paid. 17 Dividends subject to an election under this paragraph (and any Company Stock acquired therewith pursuant to a Participant's election) shall at all times be fully vested. To the extent the Committee authorizes dividend elections pursuant to this paragraph, the Committee shall establish policies and procedures relating to Participant elections and, if applicable, the reinvestment of cash dividends in Company Stock, which are consistent with guidance issued under Section 404(k) of the Code. (c) CASH DIVIDENDS ON UNALLOCATED SHARES. Dividends on Company Stock held in the Loan Suspense Account received by the Trustee in the form of cash shall be applied as soon as practicable to payments of principal and interest under the Acquisition Loan incurred with the purchase of Company Stock. (d) FINANCED SHARES. Financed Shares released from the Loan Suspense Account by reason of dividends paid with respect to Company Stock shall be allocated under Sections 5.03 and 5.04 of the Plan as follows: (i) First, Financed Shares with a fair market value at least equal to the dividends paid with respect to the Company Stock allocated to Participants' Accounts shall be allocated among and credited to the Accounts of such Participants, pro rata, according to the number of shares of Company Stock held in such accounts on the date the dividend is declared by the Company; and (ii) Next, any remaining Financed Shares released from the Loan Suspense Account by reason of dividends paid with respect to Company Stock held in the Loan Suspense Account shall be allocated among and credited to the Accounts of all Participants, pro rata, according to each Participant's Compensation. SECTION 6 VESTING AND FORFEITURES SECTION 6.01 DEFERRED VESTING IN ACCOUNTS. (a) [A PARTICIPANT SHALL VEST IN HIS ACCOUNTS IN ACCORDANCE WITH THE FOLLOWING SCHEDULE:
YEARS OF SERVICE VESTED PERCENTAGE ---------------- ----------------- LESS THAN TWO (2) YEARS 0% TWO (2) YEARS 20% THREE (3) YEARS 40% FOUR (4) YEARS 60% FIVE (5) YEARS 80% SIX (6) YEARS 100%]
(b) For purposes of determining a Participant's Years of Service under this Section 6.01, a Participant must be credited employment with the Bank or an Affiliate shall be deemed employment with the Employer. For purposes of determining a Participant's vested 18 percentage in his Accounts, [ALL YEARS OF SERVICE SHALL BE INCLUDED, BEGINNING WITH THE EMPLOYEE'S INITIAL SERVICE WITH THE EMPLOYER.] SECTION 6.02 IMMEDIATE VESTING IN CERTAIN SITUATIONS. (a) Notwithstanding Section 6.01(a) of the Plan, a Participant shall become fully vested in his Accounts upon the earlier of: (i) termination of the Plan or upon the permanent and complete discontinuance of contributions by the Employer to the Plan; provided, however, that in the event of a partial termination of the Plan, the interest of each Participant shall fully vest only with respect to that part of the Plan which is terminated; (ii) Termination of Service on or after the Participant's Normal or Later Retirement Date; (iii) a Change in Control; or (iv) Termination of Service by reason of death or Disability. SECTION 6.03 TREATMENT OF FORFEITURES. (a) If a Participant who is not fully vested in his Accounts terminates employment, that portion of his Accounts in which he is not vested shall be forfeited upon the earlier of: (i) the date the Participant receives a distribution of his entire vested benefits under the Plan, or (ii) the date at which the Participant incurs five (5) consecutive One Year Breaks in Service. (b) If a Participant who has terminated employment and has received a distribution of his entire vested benefits under the Plan is subsequently reemployed by an Employer prior to incurring five (5) consecutive One Year Breaks in Service, he shall have the portion of his Accounts which was previously forfeited restored to his Accounts, provided he repays to the Trustee within five (5) years of his subsequent employment date an amount equal to the previous distribution. The amount restored to the Participant's Account shall be credited to his Account as of the last day of the Plan Year in which the Participant repays the distributed amount to the Trustee and the restored amount shall come from other Employees' forfeitures and, if such forfeitures are insufficient, from a special contribution by the Employer for that year. If a Participant's employment terminates prior to his Account having become vested, such Participant shall be deemed to have received a distribution of his entire vested interest as of the Valuation Date next following his termination of employment. 19 (c) If a Participant who has terminated employment but has not received a distribution of his entire vested benefits under the Plan is subsequently reemployed by an Employer subsequent to incurring five (5) consecutive One Year Breaks in Service, any undistributed balance of his Accounts from his prior participation which was not forfeited shall be maintained as a fully vested subaccount within his Account. (d) If a portion of a Participant's Account is forfeited, assets other than Company Stock must be forfeited before any Company Stock may be forfeited. (e) Forfeitures shall be reallocated among the other Participants in the Plan. SECTION 6.04 ACCOUNTING FOR FORFEITURES. A forfeiture shall be charged to the Participant's Account as of the first day of the first Valuation Period in which the forfeiture becomes certain pursuant to Section 6.03 of the Plan. Except as otherwise provided in Section 6.03 of the Plan, a forfeiture shall be added to the contributions of the terminated Participant's Employer which are to be credited to other Participants pursuant to Section 5 as of the last day of the Plan Year in which the forfeiture becomes certain. SECTION 6.05 VESTING UPON REEMPLOYMENT. If a Participant incurs a One Year Break in Service and again performs an Hour of Service, such Participant shall receive credit, for purposes of Section 6.01 of the Plan, for his Years of Service prior to his One Year Break in Service. SECTION 7 DISTRIBUTIONS SECTION 7.01 DISTRIBUTION OF BENEFIT UPON A TERMINATION OF EMPLOYMENT. (a) A Participant whose employment terminates for any reason shall receive the entire vested portion of his Accounts in a single payment on a date selected by the Committee; provided, however, that such date shall be on or before the 60th day after the end of the Plan Year in which the Participant's employment terminated. The benefits from that portion of the Participant's Other Investments Account shall be calculated on the basis of the most recent Valuation Date before the date of payment. Subject to the provisions of Section 7.05 of the Plan, if the Committee so provides, a Participant may elect that his benefits be distributed to him in the form of either Company Stock, cash, or some combination thereof. (b) Notwithstanding paragraph (a) of this Section 7.01, if the balance credited to a Participant's Accounts exceeds, at the time such benefit was distributable, $5,000, his benefits shall not be paid before the latest of his 65th birthday or the tenth anniversary of the year in which he commenced participation in the Plan, unless he elects an early payment date in a written election filed with the Committee. Such an election is not valid unless it is made after the Participant has received the required notice under Section 20 1.411(a)-11(c) of the Treasury Regulations that provides a general description of the material features of a lump sum distribution and the Participant's right to defer receipt of his benefits under the Plan. The notice shall be provided no less than 30 days and no more than 90 days before the first day on which all events have occurred which entitle the Participant to such benefit. Written consent of the Participant to the distribution generally may not be made within 30 days of the date the Participant receives the notice and shall not be made more than 90 days from the date the Participant receives the notice. However, a distribution may be made less than 30 days after the notice provided under Section 1.411(a)-11(c) of the Treasury Regulations is given, if: (i) the Committee clearly informs the Participant that he has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and if applicable, a particular distribution option), and (ii) the Participant, after receiving the notice, affirmatively elects a distribution. A Participant may modify such an election at any time, provided any new benefit payment date is at least 30 days after a modified election is delivered to the Committee. SECTION 7.02 MINIMUM DISTRIBUTION REQUIREMENTS. With respect to all Participants, other than those who are "5% owners" (as defined in Section 416 of the Code), benefits shall be paid on the required beginning date which is no later than the April 1st of the later of: (i) the calendar year following the calendar year in which the Participant attains age 70-1/2, or (ii) the calendar year in which the Participant retires. With respect to all Participants who are 5% owners within the meaning of Section 416 of the Code, such Participants' benefits shall be paid no later than the April 1st of the calendar year following the calendar year in which the Participant attains age 70-1/2. SECTION 7.03 BENEFITS ON A PARTICIPANT'S DEATH. (a) If a Participant dies before his benefits are paid pursuant to Section 7.01 of the Plan, the balance credited to his Accounts shall be paid to his Beneficiary in a single distribution on or before the 60th day after the end of the Plan Year in which the Participant died. If the Participant has not named a Beneficiary or his named Beneficiary should not survive him, then the balance in his Accounts shall be paid to his estate. The benefits from that portion of the Participant's Other Investments Account shall be calculated on the basis of the most recent Valuation Date before the date of payment. (b) If a married Participant dies before his benefit payments begin, then, unless he has specifically elected otherwise, the Committee shall cause the balance in his Accounts to 21 be paid to his spouse, as Beneficiary. A married Participant may name an individual other than his spouse as Beneficiary provided that such election is accompanied by the spouse's written consent which must: (i) acknowledge the effect of the election; (ii) explicitly provide either that the designated Beneficiary may not subsequently be changed by the Participant without the spouse's further consent or that it may be changed without such consent; and (iii) must be witnessed by the Committee, its representative, or a notary public. This requirement shall not apply if the Participant establishes to the Committee's satisfaction that the spouse may not be located. (c) The Committee shall, from time to time, take whatever steps it deems appropriate to keep informed of each Participant's marital status. Each Employer shall provide the Committee with the most reliable information in the Employer's possession regarding its Participants' marital status, and the Committee may, in its discretion, require a notarized affidavit from any Participant as to his marital status. The Committee, the Plan, the Trustee, and the Employers shall be fully protected and discharged from any liability to the extent of any benefit payments made as a result of the Committee's good faith and reasonable reliance upon information obtained from a Participant as to the Participant's marital status. SECTION 7.04 DELAY IN BENEFIT DETERMINATION. If the Committee is unable to determine the benefits payable to a Participant or Beneficiary on or before the latest date prescribed for payment pursuant to this Section 7, the benefits shall in any event be paid within 60 days after they can first be determined. SECTION 7.05 OPTIONS TO RECEIVE AND SELL COMPANY STOCK. (a) Unless ownership of virtually all Company Stock is restricted to active Employees and qualified retirement plans for the benefit of Employees pursuant to the certificates of incorporation or by-laws of the Employers issuing Company Stock, a terminated Participant or the Beneficiary of a deceased Participant may instruct the Committee to distribute the Participant's entire vested interest in his Accounts in the form of Company Stock. In that event, the Committee shall apply the Participant's vested interest in his Other Investments Account to purchase sufficient Company Stock to make the required distribution. (b) Any Participant who receives Company Stock pursuant to this Section 7.05, and any person who has received Company Stock from the Plan or from such a Participant by reason of the Participant's death or incompetency, by reason of divorce or separation from the Participant, or by reason of a rollover distribution described in Section 402(c) of 22 the Code, shall have the right to require the Employer which issued the Company Stock to purchase the Company Stock for its current fair market value (hereinafter referred to as the "put right"). The put right shall be exercisable by written notice to the Committee during the first 60 days after the Company Stock is distributed by the Plan, and, if not exercised in that period, during the first 60 days in the following Plan Year after the Committee has communicated to the Participant its determination as to the Company Stock's current fair market value. If the put right is exercised, the Trustee may, if so directed by the Committee in its sole discretion, assume the Employer's rights and obligations with respect to purchasing the Company Stock. However, the put right shall not apply to the extent that the Company Stock, at the time the put right would otherwise be exercisable, may be sold on an established market in accordance with federal and state securities laws and regulations. (c) With respect to a put right, the Employer or the Trustee, as the case may be, may elect to pay for the Company Stock in equal periodic installments, not less frequently than annually, over a period not longer than five (5) years from the 30th day after the put right is exercised pursuant to paragraph (b) of this Section 7.05, with adequate security and interest at a reasonable rate on the unpaid balance, all such terms to be set forth in a promissory note delivered to the seller with normal terms as to acceleration upon any uncured default. (d) Nothing contained in this Section 7.05 shall be deemed to obligate any Employer to register any Company Stock under any federal or state securities law or to create or maintain a public market to facilitate the transfer or disposition of any Company Stock. The put right described in this Section 7.05 may only be exercised by a person described in paragraph (b) of this Section 7.05, and may not be transferred with any Company Stock to any other person. As to all Company Stock purchased by the Plan in exchange for any Acquisition Loan, the put right must be nonterminable. The put right for Company Stock acquired through an Acquisition Loan shall continue with respect to such Company Stock after the Acquisition Loan is repaid or the Plan ceases to be an employee stock ownership plan. Except as provided above, in accordance with the provisions of Sections 54.4975-7(b)(4) of the Treasury Regulations, no Company Stock acquired with the proceeds of an Acquisition Loan may be subject to any put, call or other option or buy-sell or similar arrangement while held by, and when distributed from, the Plan, whether or not the Plan is then an employee stock ownership plan. SECTION 7.06 RESTRICTIONS ON DISPOSITION OF COMPANY STOCK. Except in the case of Company Stock which is traded on an established market, a Participant who receives Company Stock pursuant to this Section 7, and any person who has received Company Stock from the Plan or from such a Participant by reason of the Participant's death or incompetency, divorce or separation from the Participant, or a rollover distribution described in Section 402(c) of the Code, shall, prior to any sale or other transfer of the Company Stock to any other person, first offer the Company Stock to the issuing Employer and to the Plan at its current fair market value. This restriction shall apply to any transfer, whether voluntary, involuntary, or by operation of law, and whether for consideration or gratuitous. Either the Employer or the 23 Trustee may accept the offer within 14 days after it is delivered. Any Company Stock distributed by the Plan shall bear a conspicuous legend describing the right of first refusal under this Section 7.06, as applicable, as well as any other restrictions upon the transfer of the Company Stock imposed by federal and state securities laws and regulations. SECTION 7.07 DIRECT TRANSFER OF ELIGIBLE PLAN DISTRIBUTIONS. (a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a distributee's election under this Section, a distributee (as defined below) may elect to have any portion of an eligible rollover distribution (as defined below) paid directly to an eligible retirement plan (as defined below) specified by the distributee in a direct rollover (as defined below). A "distributee" includes a Participant or former Participant. In addition, the Participant's or former Participant's surviving spouse and the Participant's or former Participant's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Section 414(p) of the Code, are distributees with regard to the interest of the spouse or former spouse. For purposes of this Section 7.07 a "direct rollover" is a payment by the Plan to the eligible retirement plan specified by the distributee. (b) To effect such a direct transfer, the distributee must notify the Committee that a direct rollover is desired and provide to the Committee sufficient information regarding the eligible retirement plan to which the payment is to be made. Such notice shall be made in such form and at such time as the Committee may prescribe. Upon receipt of such notice, the Committee shall direct the Trustee to make a trustee-to-trustee transfer of the eligible rollover distribution to the eligible retirement plan so specified. (c) For purposes of this Section 7.07, an "eligible rollover distribution" shall have the meaning set forth in Section 402(c)(4) of the Code and any Treasury Regulations promulgated thereunder. To the extent such meaning is not inconsistent with the above references, an eligible rollover distribution shall mean any distribution of all or any portion of the Participant's Account, except that such term shall not include any distribution which is one of a series of substantially equal periodic payments (not less frequently than annually) made (i) for the life (or life expectancy) of the Participant or the joint lives (or joint life expectancies) of the Participant and a designated Beneficiary, or (ii) for a period of ten years or more. Further, the term "eligible rollover distribution" shall not include any distribution required to be made under Section 401(a)(9) of the Code or, the portion of any distribution that is not includible in gross income (determined without regard to the exclusions for net unrealized appreciation with respect to Company Stock). To the extent applicable under the Plan, "eligible rollover distributions" shall also not include any hardship distribution described in Section 401(k)(2)(B)(i)(IV) of the Code. (d) For purposes of this Section 7.07, an "eligible retirement plan" shall have the meaning set forth in Section 402(c)(8) of the Code and any Treasury Regulations promulgated thereunder. To the extent such meaning is not consistent with the above references, an eligible retirement plan shall mean: (i) an individual retirement account described in 24 Section 408(a) of the Code, (ii) an individual retirement annuity described in Section 408(b) of the Code, (iii) an annuity or annuity plan described in Section 403(a) or Section 403(b) of the Code, (iv) a qualified trust described in Section 401(a) of the Code, or (v) a governmental plan under Section 457 of the Code that accepts the distributee's eligible rollover distribution. However, in the case of an eligible rollover distribution to a surviving spouse, an eligible retirement plan means an individual retirement account or individual retirement annuity. SECTION 8 VOTING OF COMPANY STOCK AND TENDER OFFERS SECTION 8.01 VOTING OF COMPANY STOCK. (a) IN GENERAL. The Trustee shall generally vote all shares of Company Stock held in the Trust in accordance with the provisions of this Section 8.01. (b) ALLOCATED SHARES. Shares of Company Stock which have been allocated to Participants' Accounts shall be voted by the Trustee in accordance with the Participants' written instructions. (c) UNINSTRUCTED AND UNALLOCATED SHARES. Shares of Company Stock which have been allocated to Participants' Accounts but for which no written instructions have been received by the Trustee regarding voting shall be voted by the Trustee in a manner calculated to most accurately reflect the instructions the Trustee has received from Participants regarding voting shares of allocated Company Stock. Shares of unallocated Company Stock shall also be voted by the Trustee in a manner calculated to most accurately reflect the instructions the Trustee has received from Participants regarding voting shares of allocated Company Stock. Notwithstanding the preceding two sentences, all shares of Company Stock which have been allocated to Participants' Accounts and for which the Trustee has not timely received written instructions regarding voting and all unallocated shares of Company Stock must be voted by the Trustee in a manner determined by the Trustee to be solely in the best interests of the Participants and Beneficiaries. (d) VOTING PRIOR TO ALLOCATION. In the event no shares of Company Stock have been allocated to Participants' Accounts at the time Company Stock is to be voted, each Participant shall be deemed to have one share of Company Stock allocated to his Accounts for the sole purpose of providing the Trustee with voting instructions. (e) PROCEDURE AND CONFIDENTIALITY. Whenever such voting rights are to be exercised, the Employers, the Committee, and the Trustee shall see that all Participants and Beneficiaries are provided with the same notices and other materials as are provided to other holders of the Company Stock, and are provided with adequate opportunity to deliver their instructions to the Trustee regarding the voting of Company Stock allocated to their Accounts or deemed allocated to their Accounts for purposes of voting. The 25 instructions of the Participants with respect to the voting of shares of Company Stock shall be confidential. SECTION 8.02 TENDER OFFERS. In the event of a tender offer, Company Stock shall be tendered by the Trustee in the same manner set forth in Section 8.01 of the Plan regarding the voting of Company Stock. SECTION 9 THE COMMITTEE AND PLAN ADMINISTRATION SECTION 9.01 IDENTITY OF THE COMMITTEE. The Committee shall consist of three or more individuals selected by the Bank. Any individual, including a director, trustee, shareholder, officer, or Employee of an Employer, shall be eligible to serve as a member of the Committee. The Bank shall have the power to remove any individual serving on the Committee at any time without cause upon ten (10) days' written notice to such individual and any individual may resign from the Committee at any time without reason upon ten (10) days' written notice to the Bank. The Bank shall notify the Trustee of any change in membership of the Committee. SECTION 9.02 AUTHORITY OF COMMITTEE. (a) The Committee shall be the "plan administrator" within the meaning of ERISA and shall have exclusive responsibility and authority to control and manage the operation and administration of the Plan, including the interpretation and application of its provisions, except to the extent such responsibility and authority are otherwise specifically: (i) allocated to the Bank, the Employers, or the Trustee under the Plan and Trust Agreement; (ii) delegated in writing to other persons by the Bank, the Employers, the Committee, or the Trustee; or (iii) allocated to other parties by operation of law. (b) The Committee shall have exclusive responsibility regarding decisions concerning the payment of benefits under the Plan. (c) The Committee shall have full investment responsibility with respect to the Investment Fund except to the extent, if any, specifically provided for in the Trust Agreement. (d) In the discharge of its duties, the Committee may employ accountants, actuaries, legal counsel, and other agents (who also may be employed by an Employer or the Trustee in the same or some other capacity) and may pay such individuals reasonable compensation 26 and expenses for their services rendered with respect to the operation or administration of the Plan, to the extent such payments are not otherwise prohibited by law. SECTION 9.03 DUTIES OF COMMITTEE. (a) The Committee shall keep whatever records may be necessary in connection with the maintenance of the Plan and shall furnish to the Employers whatever reports may be required from time to time by the Employers. The Committee shall furnish to the Trustee whatever information may be necessary to properly administer the Trust. The Committee shall see to the filing with the appropriate government agencies of all reports and returns required with respect to the Plan under ERISA, the Code and other applicable laws and regulations. (b) The Committee shall have exclusive responsibility and authority with respect to the Plan's holdings of Company Stock and shall direct the Trustee in all respects regarding the purchase, retention, sale, exchange, and pledge of Company Stock and the creation and satisfaction of any Acquisition Loan to the extent such responsibilities are not set forth in the Trust Agreement. (c) The Committee shall at all times act consistently with the Bank's long-term intention that the Plan, as an employee stock ownership plan, be invested primarily in Company Stock. Subject to the direction of the Committee with respect to any Acquisition Loan pursuant to the provisions of Section 4.03 of the Plan, and subject to the provisions of Sections 7.05 and 11.04 of the Plan as to Participants' rights under certain circumstances to have their Accounts invested in Company Stock or in assets other than Company Stock, the Committee shall determine, in its sole discretion, the extent to which assets of the Trust shall be used to repay any Acquisition Loan, to purchase Company Stock, or to invest in other assets selected by the Committee or an investment manager. No provision of the Plan relating to the allocation or vesting of any interests in Company Stock or investments other than Company Stock shall restrict the Committee from changing any holdings of the Trust Fund, whether the changes involve an increase or a decrease in the Company Stock or other assets credited to Participants' Accounts. In determining the proper extent of the Trust Fund's investment in Company Stock, the Committee shall be authorized to employ investment counsel, legal counsel, appraisers, and other agents and to pay their reasonable compensation and expenses to the extent such payments are not prohibited by law. (d) If the valuation of any Company Stock is not established by reported trading on a generally recognized public market, then the Committee shall have the exclusive authority and responsibility to determine the value of the Company Stock for all purposes under the Plan. Such value shall be determined as of each Valuation Date and on any other date as of which the Trustee purchases or sells Company Stock in a manner consistent with Section 4975 of the Code and the Treasury Regulations issued thereunder. The Committee shall use generally accepted methods of valuing stock of similar corporations for purposes of arm's length business and investment transactions, and in this connection the Committee shall obtain, and shall be protected in relying upon, the 27 valuation of Company Stock as determined by an independent appraiser (as defined in Section 401(a)(28)(c) of the Code). SECTION 9.04 COMPLIANCE WITH ERISA AND THE CODE. The Committee shall perform all acts necessary to ensure the Plan's compliance with ERISA and the Code. Each individual member of the Committee shall discharge his duties in good faith and in accordance with the applicable requirements of ERISA and the Code. SECTION 9.05 ACTION BY COMMITTEE. All actions of the Committee shall be governed by the affirmative vote of a majority of the total number of Committee members. The members of the Committee may meet informally and may take any action without meeting as a group. SECTION 9.06 EXECUTION OF DOCUMENTS. Any instrument to be executed by the Committee may be signed by any member of the Committee. SECTION 9.07 ADOPTION OF RULES. The Committee shall adopt such rules and regulations of uniform applicability as it deems necessary or appropriate for the proper operation, administration and interpretation of the Plan. SECTION 9.08 RESPONSIBILITIES TO PARTICIPANTS. The Committee shall determine which Employees qualify to participate in the Plan. The Committee shall furnish to each Eligible Employee whatever summary plan descriptions, summary annual reports, and other notices and information that may be required under ERISA. The Committee also shall determine when a Participant or his Beneficiary qualifies for the payment of benefits under the Plan. The Committee shall furnish to each such Participant or Beneficiary whatever information is required under ERISA or the Code (or is otherwise appropriate) to enable the Participant or Beneficiary to make whatever elections may be available pursuant to Section 7, and the Committee shall provide for the payment of benefits in the proper form and amount from the Trust. The Committee may decide in its sole discretion to permit modifications of elections and to defer or accelerate benefits to the extent consistent with the terms of the Plan, applicable law, and the best interests of the individuals concerned. SECTION 9.09 ALTERNATIVE PAYEES IN EVENT OF INCAPACITY. If the Committee finds at any time that an individual qualifying for benefits under this Plan is a minor or is incompetent, the Committee may direct the benefits to be paid, in the case of a minor, to his parents, his legal guardian, a custodian for him under the Uniform Transfers to Minors Act, or the person having actual custody of him, or, in the case of an incompetent, to his spouse, his legal guardian, or the person having actual custody of him. The Committee and the Trustee 28 shall not be obligated to inquire as to the actual use of the funds by the person receiving them under this Section 9.09, and any such payment shall completely discharge the obligations of the Plan, the Trustee, the Committee, and the Employers to the extent of the payment. SECTION 9.10 INDEMNIFICATION BY EMPLOYERS. Except as separately agreed upon in writing, the Committee, and any member or employee of the Committee, shall be indemnified and held harmless by the Employers, jointly and severally, to the fullest extent permitted by law, against any and all costs, damages, expenses, and liabilities reasonably incurred by or imposed upon the Committee or such individual in connection with any claim made against the Committee or such individual, or in which the Committee or such individual may be involved by reason of being, or having been, the Committee, or a member or employee of the Committee, to the extent such amounts are not paid by insurance. SECTION 9.11 ABSTENTION BY INTERESTED MEMBER. Any member of the Committee who is also a Participant in the Plan shall take no part in any determination specifically relating to his own participation or benefits under the Plan, unless an abstention would render the Committee incapable of acting on the matter. SECTION 10 RULES GOVERNING BENEFIT CLAIMS SECTION 10.01 CLAIM FOR BENEFITS. Any Participant or Beneficiary who qualifies for the payment of benefits shall file a claim for benefits with the Committee on a form provided by the Committee. The claim, including any election of an alternative benefit form, shall be filed at least 30 days before the date on which the benefits are to begin. If a Participant or Beneficiary fails to file a claim by the 30th day before the date on which benefits become payable, he shall be presumed to have filed a claim for payment for the Participant's benefits in the standard form prescribed by Section 7 of the Plan. SECTION 10.02 NOTIFICATION BY COMMITTEE. Within 90 days after receiving a claim for benefits (or within 180 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary within 90 days after receiving the claim for benefits), the Committee shall notify the Participant or Beneficiary whether the claim has been approved or denied. If the Committee denies a claim in any respect, the Committee shall set forth in a written notice to the Participant or Beneficiary: (a) each specific reason for the denial; (b) specific references to the pertinent Plan provisions on which the denial is based; 29 (c) a description of any additional material or information which could be submitted by the Participant or Beneficiary to support his claim, with an explanation of the relevance of such information; and (d) an explanation of the claims review procedures set forth in Section 10.03 of the Plan. SECTION 10.03 CLAIMS REVIEW PROCEDURE. Within 60 days after a Participant or Beneficiary receives notice from the Committee that his claim for benefits has been denied in any respect, he may file with the Committee a written notice of appeal setting forth his reasons for disputing the Committee's determination. In connection with his appeal, the Participant or Beneficiary or his representative may inspect or purchase copies of pertinent documents and records to the extent not inconsistent with other Participants' and Beneficiaries' rights of privacy. Within 60 days after receiving a notice of appeal from a prior determination (or within 120 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary and his representative within 60 days after receiving the notice of appeal), the Committee shall furnish to the Participant or Beneficiary and his representative, if any, a written statement of the Committee's final decision with respect to his claim, including the reasons for such decision and the particular Plan provisions upon which it is based. SECTION 11 THE TRUST SECTION 11.01 CREATION OF TRUST FUND. All amounts received under the Plan from an Employer and investments shall be held in a Trust Fund pursuant to the terms of this Plan and the Trust Agreement. The benefits described in this Plan shall be payable only from the assets of the Trust Fund. Neither the Bank, any other Employer, its board of directors or trustees, its stockholders, its officers, its employees, the Committee, nor the Trustee shall be liable for payment of any benefit under this Plan except from the Trust Fund. SECTION 11.02 COMPANY STOCK AND OTHER INVESTMENTS. The Trust Fund held by the Trustee shall be divided into Company Stock and investments other than Company Stock. The Trustee shall have no investment responsibility for the portion of the Trust Fund consisting of Company Stock, but shall accept any Employer contributions made in the form of Company Stock, and shall acquire, sell, exchange, distribute, and otherwise deal with and dispose of Company Stock in accordance with the instructions of the Committee. SECTION 11.03 ACQUISITION OF COMPANY STOCK. From time to time the Committee may, in its sole discretion, direct the Trustee to acquire Company Stock from the issuing Employer or from shareholders, including shareholders who are or have been Employees, Participants, or fiduciaries with respect to the Plan. The Trustee shall 30 pay for such Company Stock no more than its fair market value, which shall be determined conclusively by the Committee pursuant to Section 9.03(d) of the Plan. The Committee may direct the Trustee to finance the acquisition of Company Stock through an Acquisition Loan subject to the provisions of Section 4.03 of the Plan. SECTION 11.04 PARTICIPANTS' OPTION TO DIVERSIFY. The Committee shall establish a procedure under which each Participant may, during the first five years of a certain six-year period, elect to have up to 25 percent of the value of his Accounts committed to alternative investment options within an "Investment Fund." For the sixth year in this period, the Participant may elect to have up to 50 percent of the value of his Accounts committed to other investments. The six-year period shall begin with the Plan Year following the first Plan Year in which the Participant has both reached age 55 and completed 10 years of participation in the Plan; a Participant's election to diversify his Accounts must be made within the 90-day period immediately following the last day of each of the six Plan Years. The Committee shall see that the Investment Fund includes a sufficient number of investment options to comply with Section 401(a)(28)(B) of the Code. The Committee may, in its discretion, permit a transfer of a portion of the Participant's Accounts to the Naugatuck Valley Savings and Loan Profit Sharing and 401(k) Plan in order to satisfy this Section 11.04, provided such investments comply with Section 401(a)(28)(B) of the Code and such transfer is not otherwise prohibited under the Code or ERISA. The Trustee shall comply with any investment directions received from Participants in accordance with the procedures adopted from time to time by the Committee under this Section 11.04. SECTION 12 ADOPTION, AMENDMENT AND TERMINATION SECTION 12.01 ADOPTION OF PLAN BY OTHER EMPLOYERS. With the consent of the Bank, any entity may become a participating Employer under the Plan by: (a) taking such action as shall be necessary to adopt the Plan; (b) becoming a party to the Trust Agreement establishing the Trust Fund; and (c) executing and delivering such instruments and taking such other action as may be necessary or desirable to put the Plan into effect with respect to the entity's Employees. SECTION 12.02 ADOPTION OF PLAN BY SUCCESSOR. In the event that any Employer shall be reorganized by way of merger, consolidation, transfer of assets or otherwise, so that an entity other than an Employer shall succeed to all or substantially all of the Employer's business, the successor entity may be substituted for the Employer under the Plan by adopting the Plan and becoming a party to the Trust Agreement. Contributions by the Employer shall be automatically suspended from the effective date of any such 31 reorganization until the date upon which the substitution of the successor entity for the Employer under the Plan becomes effective. If, within 90 days following the effective date of any such reorganization, the successor entity shall not have elected to become a party to the Plan, or if the Employer shall adopt a plan of complete liquidation other than in connection with a reorganization, the Plan shall be automatically terminated with respect to Employees of the Employer as of the close of business on the 90th day following the effective date of the reorganization, or as of the close of business on the date of adoption of a plan of complete liquidation, as the case may be. SECTION 12.03 PLAN ADOPTION SUBJECT TO QUALIFICATION. Notwithstanding any other provision of the Plan, the adoption of the Plan and the execution of the Trust Agreement are conditioned upon their being determined initially by the Internal Revenue Service to meet the qualification requirements of Section 401(a) of the Code, so that the Employers may deduct currently for federal income tax purposes their contributions to the Trust and so that the Participants may exclude the contributions from their gross income and recognize income only when they receive benefits. In the event that this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a) of the Code, the Plan may be amended retroactively to the earliest date permitted by the Code and the applicable Treasury Regulations in order to secure qualification under Section 401(a) of the Code. If this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a) of the Code either as originally adopted or as amended, each Employer's contributions to the Trust under this Plan (including any earnings thereon) shall be returned to it and this Plan shall be terminated. In the event that this Plan is amended after its initial qualification, and the Plan, as amended, is held by the Internal Revenue Service not to qualify under Section 401(a) of the Code, the amendment may be modified retroactively to the earliest date permitted by the Code and the applicable Treasury Regulations in order to secure approval of the amendment under Section 401(a) of the Code. SECTION 12.04 RIGHT TO AMEND OR TERMINATE. (a) The Bank intends to continue this Plan as a permanent program. However, each participating Employer separately reserves the right to suspend, supersede, or terminate the Plan at any time and for any reason, as it applies to that Employer's Employees, and the Bank reserves the right to amend, suspend, supersede, merge, consolidate, or terminate the Plan at any time and for any reason, as it applies to the Employees of all Employers. (b) No amendment, suspension, supersession, merger, consolidation, or termination of the Plan shall reduce any Participant's or Beneficiary's proportionate interest in the Trust Fund, or shall divert any portion of the Trust Fund to purposes other than the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan. Except as is required for purposes of compliance with the Code or ERISA, neither the provisions of Section 5.04 relating to the crediting of contributions, forfeitures and shares of Company Stock released from the Loan Suspense Account, nor any other provision of the Plan relating to the allocation of benefits to Participants, may 32 be amended more frequently than once every six months. Moreover, there shall not be any transfer of assets to a successor plan or merger or consolidation with another plan unless, in the event of the termination of the successor plan or the surviving plan immediately following such transfer, merger, or consolidation, each participant or beneficiary would be entitled to a benefit equal to or greater than the benefit he would have been entitled to if the plan in which he was previously a participant or beneficiary had terminated immediately prior to such transfer, merger, or consolidation. Following a termination of this Plan by the Bank, the Trustee shall continue to administer the Trust and pay benefits in accordance with the Plan and the Committee's instructions. (c) In the event of a Change in Control, the Plan shall be terminated and allocations made to Participants in accordance with the provisions of Section 5.08 of the Plan. SECTION 13 GENERAL PROVISIONS SECTION 13.01 NONASSIGNABILITY OF BENEFITS. The interests of Participants and other persons entitled to benefits under the Plan shall not be subject to the claims of their creditors and may not be voluntarily or involuntarily assigned, alienated, pledged, encumbered, sold, or transferred. The prohibitions set forth in this Section 13.01 shall also apply to any judgment, decree, or order (including approval of a property or settlement agreement) which relates to the provision of child support, alimony, or property rights to a present or former spouse, child, or other dependent of a Participant pursuant to a domestic relations order, unless such judgment, decree or order is determined to be a "qualified domestic relations order" as defined in Section 414(p) of the Code. SECTION 13.02 LIMIT OF EMPLOYER LIABILITY. The liability of the Employers with respect to Participants and other persons entitled to benefits under the Plan shall be limited to making contributions to the Trust from time to time, in accordance with Section 4 of the Plan. SECTION 13.03 PLAN EXPENSES. All expenses incurred by the Committee or the Trustee in connection with administering the Plan and Trust shall be paid by the Trustee from the Trust Fund to the extent the expenses have not been paid or assumed by the Employer. SECTION 13.04 NONDIVERSION OF ASSETS. Except as provided in Sections 5.05 and 12.03 of the Plan, under no circumstances shall any portion of the Trust Fund be diverted to or used for any purpose other than the exclusive benefit of Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan. 33 SECTION 13.05 SEPARABILITY OF PROVISIONS. If any provision of the Plan is held to be invalid or unenforceable, the other provisions of the Plan shall not be affected but shall be applied as if the invalid or unenforceable provision had not been included in the Plan. SECTION 13.06 SERVICE OF PROCESS. The agent for the service of process upon the Plan shall be the Chairman of the Board of the Bank and the Trustee, or such other person as may be designated from time to time by the Bank. SECTION 13.07 GOVERNING LAW. The Plan is established under, and its validity, construction and effect shall be governed by the laws of the State of Connecticut to the extent those laws are not preempted by federal law, including the provisions of ERISA. SECTION 13.08 SPECIAL RULES FOR PERSONS SUBJECT TO SECTION 16(b) REQUIREMENTS. Notwithstanding anything herein to the contrary, any former Participant who is subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934, who becomes eligible to again participate in the Plan, may not become a Participant prior to the date that is six months from the date such former Participant terminated participation in the Plan. In addition, any person subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934 Act receiving a distribution of Company Stock from the Plan must hold such Company Stock for a period of six months, commencing with the date of distribution. However, this restriction will not apply to Company Stock distributions made in connection with death, retirement, Disability or termination of employment, or made pursuant to the terms of a qualified domestic relations order. SECTION 13.09 MILITARY SERVICE. Notwithstanding any other provision of this Plan to the contrary, contributions, benefits and Service credit with respect to qualified military service will be provided in accordance with Section 414(u) of the Code. SECTION 14 TOP-HEAVY PROVISIONS SECTION 14.01 TOP-HEAVY PROVISIONS. If, as of the last day of the first Plan Year, or thereafter, if as of the day next preceding the beginning of any Plan Year (the "Determination Date"), the Plan is a "top-heavy plan" (determined in accordance with the provisions of Section 416(g) of the Code), that is, the aggregate present value of the accrued benefits and account balances of all "Key Employees" (within the meaning of Section 416(i) of the Code, and for this purpose using the definition of 34 Compensation, as modified under Section 5.05(b) of the Plan) and their Beneficiaries, exceeds sixty percent (60%) of the aggregate present value of the accrued benefits and account balances of all employees and their beneficiaries, the provision specified in this Section 14 will automatically become effective as of the first day of the Plan Year. This calculation shall be made in accordance with Section 416(g) of the Code, taking into consideration plans which are considered part of the Aggregation Group. The term "Aggregation Group" shall include each plan of the Bank or any of its Affiliates that includes a Key Employee and each plan of the Bank or any of its Affiliates that allows the Plan to meet the requirements of Section 401(a)(4) of the Code or Section 410 of the Code and may include any other plan of the Bank or any of its Affiliates, if the Aggregation Group would continue to meet the requirements of Sections 401(a)(4) and 410 of the Code. SECTION 14.02 PLAN MODIFICATIONS UPON BECOMING TOP-HEAVY. (a) MINIMUM ACCRUALS. Section 5.04 of the Plan will be modified to provide that the aggregate amount of Employer contributions allocated in each Plan Year to the Accounts of each Participant who is a non-Key Employee (as defined under Section 416(i)(1) of the Code), and who is employed by an Employer as of the last day of the Plan Year, may not be less than the lesser of: (i) three percent of his Compensation for the Plan Year; and (ii) a percentage of his Compensation equal to the largest percentage obtained by dividing the sum of the amount credited to the Accounts of any Key Employee by that Key Employee's Compensation. (b) The preceding provision will remain in effect for the period in which the Plan is top-heavy. If, for any particular year thereafter, the Plan is no longer top-heavy, the provisions contained in this Section 14.02 shall cease to apply, except that any previously vested portion of any Account balance shall remain nonforfeitable. 35 FORM OF TRUST AGREEMENT BETWEEN NAUGATUCK VALLEY SAVINGS AND LOAN AND ---------------------------------------- FOR THE NAUGATUCK VALLEY SAVINGS AND LOAN EMPLOYEE STOCK OWNERSHIP PLAN TRUST CONTENTS
Page ---- Section 1 Creation of Trust.................................. 1 Section 2 Investment of Trust Fund and Administrative Powers of the Trustee............................................ 2 Section 3 Compensation and Indemnification of Trustee and Payment of Expenses and Taxes.......................................... 7 Section 4 Records and Valuation.............................. 9 Section 5 Instructions from Committee........................ 10 Section 6 Change of Trustee.................................. 11 Section 7 Miscellaneous...................................... 11
This TRUST AGREEMENT dated ______________, 2004, between NAUGATUCK VALLEY SAVINGS AND LOAN with its administrative office at 333 Church Street, Naugatuck, CT 06770 (hereinafter called the "Bank"), and__________________________ with its administrative office at___________________________ (hereinafter called the "Trustee"). W I T N E S S E T H T H A T: WHEREAS, the Bank has approved and adopted an employee stock ownership plan for the benefit of its employees, the Naugatuck Valley Savings and Loan Employee Stock Ownership Plan (hereinafter called the "Plan"); and WHEREAS, the Bank has authorized the execution of this Trust Agreement and has appointed________________________ as Trustee of the Trust Fund created pursuant to the Plan; and WHEREAS,____________________________ has agreed to act as Trustee and to hold and administer the assets of the Plan in accordance with the terms of this Trust Agreement. NOW, THEREFORE, the Bank and the Trustee agree as follows: Section 1. Creation of Trust 1.1 Trustee shall serve as Trustee of the --------------------------------------- Trust Fund created in accordance with and in furtherance of the Plan, and shall serve as Trustee until their removal or resignation in accordance with Section 6. 1.2 Trust Fund The Trustee hereby agrees to accept contributions from the ---------- Employer as defined in the Plan and amounts transferred from other qualified retirement plans from time to time in accordance with the terms of the Plan. All such property and contributions, together with income thereon and increments thereto, shall constitute the "Trust Fund" to be held in accordance with the terms of the Trust Agreement. 1.3 Incorporation of Plan An instrument entitled "Naugatuck Valley Savings --------------------- and Loan Employee Stock Ownership Plan" is incorporated herein by reference, and this Trust Agreement shall be interpreted consistently with that Plan. All words and phrases defined in that Plan shall have the same meaning when used in this Trust Agreement. 1.4 Name The name of this trust shall be "Naugatuck Valley Savings and ---- Loan Employee Stock Ownership Plan Trust." 1.5 Nondiversion of Assets In no event shall any part of the corpus or ---------------------- income of the Trust Fund be used for, or diverted to, purposes other than for the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan, except to the extent that assets may be returned to the Employer in accordance with the Plan where the Plan fails to qualify initially under Section 401(a) of the Internal Revenue Code (the "Code"), or where they are attributable to contributions made by mistake of fact or in excess of the deductibility allowed under the Code. Section 2. Investment of Trust Fund and Administrative Powers of the --------------------------------------------------------- Trustee - ------- 2.1 Bank Stock and Other Investments The basic investment policy of the -------------------------------- Plan shall be to invest primarily in Bank Stock of the Employer for the exclusive benefit of the Participants and their Beneficiaries. The Committee shall have full and complete investment authority and responsibility with respect to the purchase, retention, sale, exchange, and pledge of Bank Stock and the payment of Stock Obligations, and the Trustee shall not deal in any way with Bank Stock except in accordance with their obligations pursuant to this Trust Agreement and the written instructions of the Committee. The Trustee shall invest, or keep invested, all or a portion of the Trust Fund in Bank Stock, and shall pay Stock Obligations out of assets of the Trust Fund, as instructed from time to time by the Committee. The Trustee shall invest any balance of the Trust Fund (the "Investment Fund") in such other property as the Committee, in its sole discretion, shall deem advisable, subject to any delegation of such investment responsibility pursuant to Section 2.2. Nothing contained herein shall provide investment discretion authority or any like kind responsibility in regard to the assets of the Trust Fund. In connection with instructions to acquire Bank Stock, the Trustee may purchase newly issued or outstanding Bank Stock from the Employer or any other holders of Bank Stock, including Participants, Beneficiaries, and Plan fiduciaries. All purchases and sales of Stock shall be made by the Trustee at fair market value as determined by the Committee in good faith and in accordance with any applicable requirements under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Such purchases may be made with assets of the Trust Fund, with funds borrowed for this purpose (with or without guarantees of repayment to the lender by the Employer), or by any combination of the foregoing. Notwithstanding any other provision of this Trust Agreement or the Plan, neither the Committee nor the Trustee shall make any purchase, sale, exchange, investment, pledge, valuation, or loan, or take any other action involving those assets for which they are responsible which (i) is inconsistent with the policy of the Plan and Trust, (ii) is inconsistent with the prudence and diversification requirements set forth in Sections 404(a)(1)(B) and (C) of ERISA (to the extent such requirements apply to an employee stock ownership plan and trust), (iii) is prohibited by Section 406 or 407 of ERISA, or (iv) would impair the qualification of the Plan or the exemption of the Trust under Sections 401 and 501, respectively, of the Code. 2.2 Delegation of Investment Responsibility The Committee may, by written --------------------------------------- notice and in accordance with the Plan, direct the Trustee to segregate any portion or all of the Investment Fund into one or more separate accounts for each of which full investment responsibility will be delegated to an investment manager appointed in such notice pursuant to Section 402(c)(3) of ERISA (hereinafter a "Manager"). For any separate account where the Trustee is to maintain custody of the assets, the Trustee and the Manager shall agree upon procedures for the transmittal 2 of investment instructions from the Manager to the Trustee, and the Trustee may provide the Manager with such documents as may be necessary to authorize the Manager to effect transactions directly on behalf of the segregated account. Further, the Committee may, by written notice and in accordance with the Plan, direct the Trustee to segregate any portion or all of the Investment Fund into one or more separate accounts for each of which full investment responsibility will be delegated to an insurance company through one or more group annuity contracts, deposit administration contracts, or similar contracts, which may provide for investments in any commingled separate accounts established under such contracts. An insurance company shall be a Manager with respect to any amounts held under such a contract except to the extent the insurer's assets are not deemed assets of the Plan and Trust Fund pursuant to Section 401(b)(2) of ERISA. The allocation of amounts held under such a contract among the insurer's general account and one or more individual or commingled separate accounts shall be determined by the Committee except as otherwise agreed by the Committee and the insurer. Any Manager shall have all of the powers given to the Trustee pursuant to Section 2.3 with respect to the portion of the Trust Fund committed to its investment discretion and control. The Trustee shall be responsible for the safekeeping of any assets which remain in their custody, but in no event shall the Trustee be under any duty to question or make any inquiry or suggestion regarding the action or inaction of a Manager or an insurer or the advisability of acquiring, retaining, or disposing of any asset of a segregated account. The Employer shall indemnify and hold the Trustee harmless from any and all costs, damages, expenses, and liabilities which the Trustee may incur by reason of any action taken or omitted to be taken by the Trustee upon directions from the Committee, a Manager, or an insurer pursuant to this Section 2.2. 2.3 Trustee Powers In addition to and not by way of limitation upon the -------------- fiduciary powers granted to it by law, the Trustee shall have the following specific powers, subject to the limitations set forth in Section 2.1: 2.3-1 to receive, hold, manage, invest and reinvest the money or other property which constitutes the Trust Fund, without distinction between principal and income; 2.3-2 to hold funds uninvested temporarily, provided it is a period of time that is not unreasonable, without liability for interest thereon, and to deposit funds in one or more savings or similar accounts with any banks and savings and loan associations which are insured by an instrumentality of the federal government, including the Trustee if it is such an institution; 2.3-3 at the direction of the Committee, to invest or reinvest the whole or any portion of the money or other property which constitutes the Trust Fund in such common or preferred stocks, investment trust shares, mutual funds, commingled trust funds, partnership interests, bonds, notes, or other evidences of indebtedness, and real and personal property as the Trustee in their absolute judgment and discretion may deem to be for the best interests of the Trust Fund, 3 regardless of nondiversification to the extent that such nondiversification is clearly prudent, and regardless of whether any such investment or property is authorized by law regarding the investment of trust funds, of a wasting asset nature, temporarily nonincome producing, or within or without the United States; 2.3-4 to invest in common and preferred stocks, bonds, notes, or other obligations of any corporation or business enterprise in which an Employer or its owners may own an interest; 2.3-5 at the direction of the Committee, to exchange any investment or property, real or personal, for other investments or properties at such time and upon such terms as the Trustee shall deem proper; 2.3-6 at the direction of the Committee, to sell, transfer, convey or otherwise dispose of any investment or property, real or personal, for cash or on credit, in such manner and upon such terms and conditions as the Trustee shall deem advisable, and no person dealing with the Trustee shall be under any duty to inquire as to the validity, expediency, or propriety of any such sale or as to the application of the purchase money paid to the Trustee; 2.3-7 to hold any investment or property in the name of the Trustee, with or without the designation of any fiduciary capacity, or in the name of a nominee, or unregistered, or in such other form that title may pass by delivery; provided, however, that the Trustee's records always show that such investment or property belongs to the Trust Fund and the Trustee shall not be relieved hereby of its responsibility to maintain safe custody of such investment or property; 2.3-8 to organize one or more corporations to hold, manage, or liquidate any property, including real estate, owned or acquired by the Trust Fund if in the sole discretion of the Trustee the organization of such corporation or corporations is for the best interests of the Trust and the Plan Participants and Beneficiaries; 2.3-9 to extend the time for payment of, to modify, to renew, or to release security from any mortgage, note or other evidence of indebtedness, or to take advantage of or waive any default; to foreclose mortgages and bid on property under foreclosure or to take title to property by conveyance in lieu of foreclosure, either with or without the payment of additional consideration; 2.3-10 to vote in person or by proxy all stocks and other securities having voting privileges; to exercise or refrain from exercising any option or privilege with respect to stocks and other securities, including any right or privilege to subscribe for or otherwise to acquire stocks and other securities; or to sell any such right or privilege; to assent to and join in any plan of refinance, merger, consolidation, reorganization or liquidation of any corporation or other enterprise in which this Trust may have an interest, to deposit stocks and other securities with any committee formed to effectuate the same, to pay any expense incidental thereto, to exchange stocks and other securities for those which may be issued pursuant to any such plan, and to retain 4 as an investment the stocks and other securities received by the Trustee; and to deposit any investment in a voting trust; notwithstanding the preceding, Participants and Beneficiaries shall be entitled to direct the manner in which stock allocated to their respective accounts are to be voted on all matters. All stock which has been allocated to Participants' Accounts for which the Trustee has received no written direction and all unallocated Employer securities will be voted by the Trustee in direct proportion to all Participants' directions received and solely in the interest of the Participants and Beneficiaries. Whenever such voting rights are to be exercised, the Employer, the Committee and the Trustee shall see that all Participants and Beneficiaries are provided with adequate opportunity to deliver their instructions to the Trustee regarding voting of stock allocated to their accounts. The instructions of the Participants with respect to the voting of allocated shares hereunder shall be confidential; 2.3-11 to abandon any property, real or personal, which the Trustee shall consider to be worthless or not of sufficient value to warrant its keeping or protecting; to abstain from the payment of taxes, water rents, assessments, repairs, maintenance, and upkeep of any such property; to permit any such property to be lost by tax sale or other proceedings, and to convey any such property for a nominal consideration or without consideration; 2.3-12 to borrow money from the Employer or from others (including the Trustee), and to enter into installment contracts, for the purchase of Stock upon such terms and conditions and at such reasonable rates of interest as the Committee may deem to be advisable, to issue its promissory notes as Trustee to evidence such debt, to secure the payment of such notes by pledging any property of the Trust Fund, and to authorize the holders of any such notes to pledge them to secure obligations of the holders and in connection therewith to repledge any assets of the Trust as security therefor; provided that, with respect to any extension of credit to the Trust involving, as a lender or guarantor, the Employer or other "disqualified person" within the meaning of Section 4975(e)(2) of the Code -- (a) each loan or installment contract is primarily for the benefit of Participants and Beneficiaries of the Plan; (b) any interest on a loan or installment contract does not exceed a reasonable rate; (c) the proceeds of any loan shall be used only to acquire Stock, to repay the loan, or to repay a previous loan meeting these conditions, and the subject of any installment contract shall be only the Trust's purchase of Stock; (d) any collateral pledged to a creditor by the Trustee shall consist only of qualifying employer securities as that term is defined under Section 4975(e)(8) of the Code and the creditor shall have no recourse against the Trust Fund except with respect to the collateral (although the creditor may have recourse against an Employer as guarantor); (e) payments with respect to a loan or installment contract shall be made only from those amounts contributed by the Employer to the Trust Fund, from amounts earned on such contributions, and from cash dividends received on unallocated Stock held by the Trust as collateral for such an obligation; and 5 (f) upon the payment of any portion of balance due on a loan or upon any installment payment, a proportionate part of any qualified employer securities originally pledged as collateral for such indebtedness shall be released from encumbrance in accordance with Section 4.2 of the Plan and the Committee shall at least annually advise the Trustee of the number of shares of Stock so released and the proper allocation of such shares under the terms of the Plan; 2.3-13 to manage and operate any real property which shall at any time constitute an asset of the Trust Fund; to make repairs, alterations, and improvements thereto; to insure such property against loss by fire or other casualty; to lease or grant options for the sale of such property, which lease or option may be for a period of time which may extend beyond the life of this Trust; and to take any other action or enter into any other contract respecting such property which is consistent with the best interests of the Trust; 2.3-14 to pay any and all reasonable and normal expenses incurred in connection with the exercise of any power, right, authority or discretion granted herein, and, upon prior notice to the Bank, to employ and compensate agents, investment counsel, custodians, actuaries, attorneys, and accountants in such connection; 2.3-15 to employ and consult with any legal counsel, who also may be counsel to an Employer or the Administrator, with respect to the meaning or construction of this Trust Agreement, the extent of the Trustee's obligations and duties hereunder, and whether the Trustee should take or decline to take a particular action hereunder, and the Trustee shall be fully protected with respect to any action taken or omitted by such Trustee in good faith pursuant to such advice; 2.3-16 to defend any action or proceeding instituted against the Trust Fund, to institute any action on behalf of the Trust Fund, and to compromise or submit to arbitration any dispute concerning the Trust Fund; 2.3-17 to make, execute, acknowledge and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted; 2.3-18 to commingle the Trust Fund created pursuant hereto, in whole or in part, in a single trust with all or any portion of any other trust fund, assigning an undivided interest to each such commingled trust fund, provided that such commingled trust is itself exempt from taxation pursuant to Section 501(a) of the Code, or its successor Section; and provided further that the trust agreement governing such commingled trust shall be deemed incorporated by reference in the Plan; 2.3-19 where two or more trusts governed by this Trust Agreement have an undivided interest in any property, to credit the income from such property to such trusts in proportion to 6 their undivided interests, and when non pro rata distributions of property or money are made from such trusts, to make appropriate adjustments to the undivided fractional interests of such trusts; 2.3-20 to invest all or any portion of the Trust Fund in one or more group annuity contracts, deposit administration contracts, and other such contracts with insurance companies, including any commingled separate accounts established under such contracts; 2.3-21 generally, with respect to all cash, stocks and other securities, and property, both real and personal, received or held in the Trust Fund by the Trustee, to exercise all the same rights and powers as are or may be lawfully exercised by persons owning cash, or stocks and other securities, or such property in their own right; and to do all other acts, whether or not expressly authorized, which it may deem necessary or proper for the protection of the Trust Fund; and 2.3-22 whenever more than two persons shall qualify to act as co-Trustee, to exercise and perform every power (including discretionary powers), authority or duty by the concurrence of a majority of them the same effect as if all had joined therein, except that the unanimous vote of such persons shall be necessary to determine the number (one or more) and identity of persons who may sign checks, make withdrawals from financial institutions, have access to safe deposit boxes, or direct the sale of trust assets and the disposition of the proceeds. 2.4 Brokerage If permitted in writing by the Committee the Trustee shall --------- have the power and authority, to be exercised in their sole discretion at any time and from time to time, to issue and place orders for the purchase or sale of securities with qualified brokers and dealers. Such orders may be placed with such qualified brokers and/or dealers who also provide investment information or other research or statistical services to the Trustee in its capacity as a fiduciary or investment manager for other clients. Section 3. Compensation and Indemnification of Trustee and Payment of ---------------------------------------------------------- Expenses and Taxes ------------------ 3.1 Fees and Expenses from Fund In consideration for rendering services --------------------------- pursuant to this Trust Agreement the Trustee shall be paid fees in accordance with the Trustee's fee schedule as in effect from time to time. Fee changes resulting in fee increases shall be effective upon not less than 30 days' notice to the Bank. In addition, the Trustee shall be reimbursed for any reasonable expenses, including reasonable attorneys' fees, incurred in the administration of the Trust created hereby. Fees and expenses shall be allocated to Participants' Accounts, if any, unless paid directly by the Employer. All compensation and expenses of the Trustee shall be paid out of the Trust Fund or by the Employer as specified in the Plan. If and to the extent the Trust Fund shall not be sufficient, such compensation and expenses shall be paid by the Employer upon demand. If payment is due but not paid by the Employer, such amount shall be paid from the assets of the Trust Fund. The Trustee is hereby empowered to withdraw all such 7 compensation and expenses which are 60 days past due from the Trust Fund, and, in furtherance thereof, liquidate any assets of the Trust Fund, without further authorization or direction from or by any person. Notwithstanding the foregoing, in the event any officer or director of Naugatuck Valley Savings and Loan serves as trustee of the Plan, no compensation shall be paid to the officer or director in exchange for his or her services as trustee. 3.2 Indemnification Notwithstanding any other provision of this Trust ------------------------------- Agreement, any individual designated as a trustee hereunder shall be indemnified and held harmless by the Employer to the fullest extent permitted by law against any and all costs, damages, expenses and liabilities including, but not limited to attorneys' fees and disbursements reasonably incurred by or imposed upon such individual in connection with any claim made against him or in which he may be involved by reason of his being, or having been, a trustee hereunder, to the extent such amounts are not satisfied by insurance maintained by the Employer, except liability which is adjudicated to have resulted from the gross negligence or willful misconduct of the Trustee by reason of any action so taken. Further, any corporate trustee and its officers, directors and agents may be indemnified and held harmless by the Employer to the fullest extent permitted by law against any and all costs, damages, expenses and liabilities including, but not limited to, attorneys' fees and disbursements reasonably incurred by or imposed upon such persons and/or corporation in connection with any claim made against it or them or in which such persons and/or corporation may be involved by reason of its being, or having been, a trustee hereunder as may be agreed between the Employer and such trustee, except liability which is adjudicated to have resulted from the gross negligence or willful misconduct of the Trustee by reason of any action so taken. 3.3 Expenses All expenses of administering the Trust and the Plan, whether -------- incurred by the Trustee or the Committee, shall be paid by the Trustee from the Trust Fund to the extent such expenses shall not have been assumed by the Employer. 3.4 Taxes All taxes that may be levied or assessed upon or in respect of ----- the Trust Fund shall be paid from the Trust Fund. The Trustee shall notify the Committee of any proposed or final assessments of taxes and may assume that any such taxes are lawfully levied or assessed unless the Committee advises it in writing to the contrary within fifteen days after receiving the above notice from the Trustee. In such case, the Trustee, if requested by the Committee in writing, shall contest the validity of such taxes in any manner deemed appropriate by the Committee; the Employer may itself contest the validity of any such taxes, in which case the Committee shall so notify the Trustee and the Trustee shall have no responsibility or liability respecting such contest. If either party to this Agreement contests any such proposed levy or assessments, the other party shall provide such information and cooperation as the party conducting the contest shall reasonably request. 8 Section 4. Records and Valuation --------------------- 4.1 Records The Trustee, and any investment manager appointed pursuant to ------- Section 2.2, shall maintain accurate and detailed records and accounts of all investments, receipts, disbursements and other transactions made by it with respect to the Trust Fund, and all accounts, books and records relating thereto shall be open at all reasonable times to inspection and audit by the Committee and the Employer. 4.2 Valuation From time to time upon the request of the Committee, but at --------- least annually as of the last day of each Plan Year, the Trustee shall prepare a balance sheet of the Investment Fund in accordance with the Plan and shall deliver copies of the balance sheet to the Committee and the Employer. 4.3 Discharge of Trustee Ninety days after the filing of any balance sheet -------------------- under Section 4.2 or any accounting under Section 6, the Trustee shall be forever released and discharged from any liability or accountability other than for gross negligence or wilful misconduct on the part of the Trustee to anyone with respect to the transactions shown or reflected in such balance sheet or accounting, except with respect to any acts or transactions as to which the Committee, within such ninety-day period, files written objections with the Trustee. The written approval of the Committee of any balance sheet or accounting so filed by the Trustee, or the Committee's failure to file written objections within ninety days, shall be a settlement of such balance sheet or accounting as against all persons, and shall forever release and discharge the Trustee from any liability of accountability to anyone with respect to the transactions shown or reflected in such balance sheet or accounting other than liability arising out of the Trustee's gross negligence or wilful misconduct. If a statement of objections is filed by the Committee and the Committee is satisfied that its objections should be withdrawn or if the balance sheet or accounting is adjusted to its satisfaction, the Committee shall indicate its approval of the balance sheet or accounting in a written statement filed with the Trustee and the Trustee shall be forever released and discharged from any liability of accountability to anyone in accordance with the immediately preceding sentence. If an objection is not settled by the Committee and the Trustee, the Trustee may start a proceeding for a judicial settlement of the balance sheet or accounting in any court of competent jurisdictions; the only parties that need be joined in such a proceeding are the Trustee, the Committee, the Employer and any other parties whose participation is required by law. 4.4 Right to Judicial Settlement Nothing in this Agreement shall prevent ---------------------------- the Trustee from having its account settled by a court of competent jurisdiction at any time. The only parties that need be joined in any such proceeding are the Employer, the Committee, the Trustee and any other parties whose participation is required by law. 9 Section 5. Instructions from Committee. ---------------------------- 5.1 Certification of Members of the Committee. From time to time the Bank ------------------------------------------ shall certify to the Trustee in writing the names of the individuals comprising the Committee and shall furnish to the Trustee specimens of their signatures and the signatures of their agents, if any. The Trustee shall be entitled to presume that the identities of such individuals and their agents are unchanged until it receives a certification from the Bank notifying it of any changes. 5.2 Instructions to Trustee. ------------------------ (a) The Trustee shall pay benefits and administrative expenses under the Plan only when it receives (and in accordance with) written instructions of the Committee indicating the amount of the payment and the name and address of the recipient in accordance with the terms of the Plan. The Trustee need not inquire into whether any payment the Committee instructs the Trustee to make is consistent with the terms of the Plan or applicable law or otherwise proper. Any payment made by the Trustee in accordance with such instructions shall be a complete discharge and acquittance to the Trustee. If the Committee advises the Trustee that benefits have become payable with respect to a Participant's interest in the Trust Fund but does not instruct the Trustee as to the manner of payment, the Trustee shall hold the Participant's interest in the Trust until the Trustee receives written instructions from the Committee as to the manner of payment. The Trustee shall not pay benefits from the Trust Fund without such instructions, even though it may be informed from other sources, including, without limitation, a Participant or Beneficiary, that benefits are payable under the Plan. The Trustee shall have no responsibility to determine when, to whom or in what amount benefits and expenses are payable under the Plan. Further, the Trustee shall have no power, authority or duty to interpret the Plan or inquire into the decisions or determinations of the Committee, or to question the instructions given to it by the Committee. If the Committee so directs, the Trustee shall segregate amounts payable with respect to the interest in the Plan of any Participant and administer them separately from the rest of the Trust Fund in accordance with the Committee's instructions. (b) The Trustee may require the Committee to certify in writing that any payment of benefits or expenses it instructs the Trustee to make pursuant to Section 5.2(a) above is: (i) in accordance with the terms of the Plan and/or (ii) one which the Committee is authorized by the Plan and any other applicable instruments to direct and/or (iii) made for the exclusive purpose of providing benefits to Participants and Beneficiaries, or defraying reasonable expenses of Plan administration and/or (iv) not made to a party in interest (within the meaning of ERISA Section 3(14)), and/or (v) not a prohibited transaction (within the meaning of Code Section 4975 and ERISA Section 406). If the Trustee requests, instructions to pay benefits shall be made by the Committee on forms prepared by the Trustee to include any or all of the above representations. The Trustee shall be fully protected in relying on the truth of any such representation by the Committee and shall have no duty to investigate whether such representations are correct or to see to the application of any amounts paid to and received by the recipient. 10 5.3 Plan Change In the event of an amendment, merger, division, or ----------- termination of the Plan, the Trustee shall continue to disburse funds and to take other proper actions in accordance with the instructions of the Committee. Section 6. Change of Trustee ----------------- The Bank may at any time remove any person or entity serving as a Trustee hereunder by giving to such person or entity written notice of removal and, if applicable, the name and address of the successor trustee. Any person or entity serving as a Trustee hereunder may resign at any time by giving written notice to the Bank. Any such removal or resignation shall take effect within 30 days after notice has been given by the Trustee or by the Bank, as the case may be. Within those 30 days, the removed or resigned Trustee shall transfer, pay over and deliver any portion of the Trust Fund in its possession or control (less an appropriate reserve for any unpaid fees, expenses, and liabilities) and all pertinent records to the successor or remaining trustee; provided, however, that any assets which are invested in a collective fund or in some other manner which prevents their immediate transfer shall be transferred and delivered to the successor trustee as soon as may be practicable. Thereafter, the removed or resigned Trustee shall have no liability for the Trust Fund or for its administration by the successor or remaining trustee, but shall render an accounting to the Committee of its administration of the Trust Fund through the date on which its Trusteeship shall have been terminated. The Bank may also, upon 30 days' notice to each person currently serving as a trustee, appoint one or more persons to serve as co-Trustee hereunder. Section 7. Miscellaneous ------------- 7.1 Right to Amend This Trust Agreement may be amended from time to time -------------- by an instrument executed by the Bank; provided, however, that any amendment affecting the powers, duties or liabilities of the Trustee must be approved by the Trustee, and provided, further, that no amendment may divert any portion of the Trust Fund to purposes other than the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities for benefits. Any amendment shall apply to the Trust Fund as constituted at the time of the amendment as well as to that portion of the Trust Fund which is subsequently acquired. 7.2 Compliance with ERISA In the exercise of its powers and the --------------------- performance of its duties, the Trustee shall act in good faith and in accordance with the applicable requirements under ERISA. Except as may be otherwise required by ERISA, the Trustee shall not be required to furnish any bond in any jurisdiction for the performance of their duties and, if a bond is required despite this provision, no surety shall be required on it. 7.3 Nonresponsibility for Funding The Trustee shall be under no duty to ----------------------------- enforce the payment of any contributions and shall not be responsible for the adequacy of the Trust Fund to satisfy any obligations for benefits, expenses, and liabilities under the Plan. 11 7.4 Reports The Trustees shall file any report which they are required by ------- law to file with any governmental authority with respect to this Trust, and the Committee shall furnish to the Trustee whatever information is necessary to prepare the report. 7.5 Dealings with the Trustee Persons dealing with the Trustee, including, ------------------------- but not limited to, banks, brokers, dealers, and insurers, shall be under no obligation to inquire concerning the validity of anything which the Trustee purports to do, nor need any person see to the proper application of any money paid or any property transferred upon the order of the Trustee or to inquire into the Trustee's authority as to any transaction. 7.6 Limitation Upon Responsibilities The Trustee shall have no -------------------------------- responsibilities with respect to the Plan or Trust other than those specifically enumerated or explicitly allocated to it under this Trust Agreement or the provisions of ERISA. All other responsibilities are retained and shall be performed by one or more of the Employer, the Committee, and such advisors or agents as they choose to engage. The Trustee may execute any of the trusts or powers hereof and perform any of its duties by or through attorneys, agents, receivers or employees and shall not be answerable for the conduct of the same if chosen with reasonable care and shall be entitled to advice of counsel concerning all matters of trust hereof and the duties hereunder, and may in all cases pay such reasonable compensation to all such attorneys, agents, receivers and employees as may reasonably be employed in connection with the trusts hereof. The Trustee may act upon the opinion or advice of any attorney (who may be the attorney for the Trustee or attorney for the Committee), approved by the Trustee in the exercise of reasonable care. The Trustee shall not be responsible for any loss or damage resulting from any action or non-action in good faith in reliance upon such opinion or advice. The Trustee shall be protected in acting upon any notice, request, consent, certificate, order, affidavit, letter, telegram or other paper or document believed to be genuine and correct and to have been signed or sent by the proper person or persons, and the Trustee shall be under no duty to make any investigation or inquiry as to any statement contained in any such writing but may accept the same as conclusive evidence of the truth and accuracy of the statements therein contained. The Trustee shall not be liable for other than their gross negligence or willful misconduct. Except in the case of gross negligence or wilful misconduct on the part of the Trustee, the Trustee in its corporate capacity shall not be liable for claims of any persons in any manner regarding the Plan; such claims shall be limited to the Trust Fund. Unless the Trustee participates knowingly in, or knowingly undertakes to conceal, an act or omission of the Committee or any other fiduciary, knowing such act or omission to be a breach of fiduciary responsibility, the Trustee shall be under no liability for any loss of any kind which may result by reason of such act or omission. 12 Before taking any action hereunder at the request or direction of the Committee, the Trustee may require that indemnity in form and amount satisfactory to the Trustee be furnished for the reimbursement of any and all costs and expenses to which they may be put including, without limitation, reasonable attorneys' fees and to protect them against all liability, except liability which is adjudicated to have resulted from the gross negligence or willful misconduct of the Trustee by reason of any action so taken. No provision of this Trust Agreement shall require the Trustee to expend or risk their own funds or otherwise incur any financial liability in the performance of any of their duties hereunder, or in the exercise of any of their rights or powers, if they shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to them. 7.7 Qualification of the Plan and Trust The Trustee shall be fully ----------------------------------- protected in assuming that the Plan and Trust meet the requirements of Code Sections 401 and 501, respectively, and all the applicable provisions of ERISA, unless they are advised to the contrary in writing by the Committee or a governmental agency. 7.8 Party in Interest Information The Employer shall provide the Trustee ----------------- with such information concerning the relationship between any person or organization and the Plan as the Trustee reasonably requests in order to determine whether such person or organization is a party in interest with respect to the Plan within the meaning of ERISA Section 3(14). 7.9 Disputes If a dispute arises as to the payment of any funds or -------- delivery of any assets by the Trustee, the Trustee may withhold such payment or delivery until the dispute is determined by a court of competent jurisdiction or finally settled in writing by the parties concerned. 7.10 Successor Trustee This Trust Agreement shall apply to any person who ----------------- shall be appointed to succeed the person currently appointed as the Trustee; and any reference herein to the Trustee shall be deemed to include any one or more individuals or corporations or any combination thereof who or which have at any time acted as a co-trustee or as the sole trustee. 7.11 Governing State Law This Trust Agreement shall be interpreted in ------------------- accordance with the laws of the State of Connecticut to the extent those laws may be applicable under the provisions of ERISA. 13 IN WITNESS WHEREOF, the parties hereto have executed this Trust Agreement as of the day and year first above written. ATTEST: NAUGATUCK VALLEY SAVINGS AND LOAN By: - ---------------------------------- --------------------------------- For the Entire Board of Directors ATTEST: ______________________, as TRUSTEE __________________________________ - ---------------------------------- 14 EX-10.2 11 g89544exv10w2.txt EX-10.2 ESOP LOAN DOCUMENTS EXHIBIT 10.2 LOAN AGREEMENT THIS LOAN AGREEMENT ("Loan Agreement") is made and entered into as of the _____day of ________, 2004, by and between the NAUGATUCK VALLEY SAVINGS AND LOAN EMPLOYEE STOCK OWNERSHIP PLAN TRUST ("Borrower"), a trust forming part of the Naugatuck Valley Savings and Loan Employee Stock Ownership Plan ("ESOP"); and NAUGATUCK VALLEY FINANCIAL CORPORATION ("Lender"), a corporation organized and existing under the laws of the United States of America. W I T N E S S E T H WHEREAS, the Borrower is authorized to purchase shares of common stock of Naugatuck Valley Financial Corporation ("Common Stock"), either directly from the Company or in open market purchases in an amount not to exceed _________________ shares of Common Stock. WHEREAS, the Borrower is authorized to borrow funds from the Lender for the purpose of financing authorized purchases of Common Stock; and WHEREAS, the Lender is willing to make a loan to the Borrower for such purpose. NOW, THEREFORE, the parties agree hereto as follows: ARTICLE I DEFINITIONS The following definitions shall apply for purposes of this Loan Agreement, except to the extent that a different meaning is plainly indicated by the context: Business Day means any day other than a Saturday, Sunday or other day on which banks are authorized or required to close under federal or local law or regulation. Code means the Internal Revenue Code of 1986, as amended (including the corresponding provisions of any succeeding law). Default means an event or condition which would constitute an Event of Default. The determination as to whether an event or condition would constitute an Event of Default shall be determined without regard to any applicable requirements of notice or lapse of time. ERISA means the Employee Retirement Income Security Act of 1974, as amended (including the corresponding provisions of any succeeding law). Event of Default means an event or condition described in Article 5. Loan means the loan described in section 2.1 Loan Documents means, collectively, the Loan Agreement, the Promissory Note and the Pledge Agreement and all other documents now or hereafter executed and delivered in connection with such documents, including all amendments, modifications and supplements of or to all such documents. 1 Pledge Agreement means the agreement described in section 2.8(a). Principal Amount means the face amount of the Promissory Note, determined as set forth in section 2.1(c). Promissory Note means the promissory note described in section 2.3. Register means the register described in section 2.9. ARTICLE II THE LOAN; PRINCIPAL AMOUNT; INTEREST; SECURITY; INDEMNIFICATION Section 2.1 The Loan; Principal Amount. (a) The Lender hereby agrees to lend to the Borrower such amount, and at such time, as shall be determined under this Section 2.1; provided, however, that in no event shall the aggregate amount lent under this Loan Agreement from time to time exceed the greater of (i) $______________or (ii) the aggregate amount paid by the Borrower to purchase up to _____________shares of Common Stock. (b) Subject to the limitations of Section 2.1(a), the Borrower shall determine the amounts borrowed under this Agreement, and the time at which such borrowings are effected. Each such determination shall be evidenced in a writing which shall set forth the amount to be borrowed and the date on which the Lender shall disburse such amount, and such writing shall be furnished to the Lender by notice from the Borrower. The Lender shall disburse to the Borrower the amount specified in each such notice on the date specified therein or, if later, as promptly as practicable following the Lender's receipt of such notice; provided, however, that the Lender shall have no obligation to disburse funds pursuant to this Agreement following the occurrence of a Default or an Event of Default until such time as such Default or Event of Default shall have been cured. (c) For all purposes of this Loan Agreement, the Principal Amount on any date shall be equal to the excess, if any, of: (i) the aggregate amount disbursed by the Lender pursuant to section 2.1(b) on or before such date; over (ii) the aggregate amount of any repayments of such amounts made before such date. The Lender shall maintain on the Register a record of, and shall record in the Promissory Note, the Principal Amount, any changes in the Principal Amount and the effective date of any changes in the Principal Amount. Section 2.2 Interest. (a) The Borrower shall pay to the Lender interest on the Principal Amount, for the period commencing with the first disbursement of funds under this Loan Agreement and continuing until the Principal Amount shall be paid in full, at the rate of _____ percent (___%) per annum. Interest payable under this Agreement shall be computed on the basis of a year of 2 365 days and actual days elapsed (including the first day but excluding the last) occurring during the period to which the computation relates. (b) Accrued interest on the Principal Amount shall be payable by the Borrower on the dates set forth in Schedule I to the Promissory Note. All interest on the Principal Amount shall be paid by the Borrower in immediately available funds. (c) Anything in the Loan Agreement or the Promissory Note to the contrary notwithstanding, the obligation of the Borrower to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be made to the Lender to the extent that the Lender's receipt thereof would not be permissible under the law or laws applicable to the Lender limiting rates of interest which may be charged or collected by the Lender. Any such payment referred to in the preceding sentence shall be made by the Borrower to the Lender on the earliest interest payment date or dates on which the receipt thereof would be permissible under the laws applicable to the Lender limiting rates of interest which may be charged or collected by the Lender. Such deferred interest shall not bear interest. Section 2.3 Promissory Note. The Loan shall be evidenced by the Promissory Note of the Borrower attached hereto as an exhibit payable to the order of the lender in the Principal Amount and otherwise duly completed. Section 2.4 Payment of Trust Loan. The Principal Amount of the Loan shall be repaid in accordance with Schedule I to the Promissory Note on the dates specified therein until fully paid. Section 2.5 Prepayment. The Borrower shall be entitled to prepay the Loan in whole or in part, at any time and from time to time; provided, however, that the Borrower shall give notice to the Lender of any such prepayment; and provided, further, that any partial prepayment of the Loan shall be in an amount not less than $1,000. Any such prepayment shall be: (a) permanent and irrevocable; (b) accompanied by all accrued interest through the date of such prepayment; (c) made without premium or penalty; and (d) applied on the inverse order of the maturity of the installment thereof unless the Lender and the Borrower agree to apply such prepayments in some other order. Section 2.6 Method of Payments. (a) All payments of principal, interest, other charges (including indemnities) and other amounts payable by the Borrower hereunder shall be made in lawful money of the United States, in immediately available funds, to the Lender at the address specified in or pursuant to this Loan Agreement for notices to the Lender, on the date on which such payment shall become due. Any such payment made on such date but after such time shall, if the amount paid bears interest, and except as expressly provided to the contrary herein, be deemed to have been made on, and interest shall continue to accrue and be payable thereon until, the next succeeding Business Day. If any payment of principal or interest becomes due on a day other than a Business Day, such payment may be made on the next succeeding Business Day, and when paid, such payment shall include interest to the day on which payment is in fact made. 3 (b) Notwithstanding anything to the contrary contained in this Loan Agreement or the Promissory Note, the Borrower shall not be obligated to make any payment, repayment or prepayment on the Promissory Note if doing so would cause the ESOP to cease to be an employee stock ownership plan within the meaning of section 4975(e)(7) of the Code or qualified under section 401(a) of the Code or cause the Borrower to cease to be a tax exempt trust under section 501(a) of the Code or if such act or failure to act would cause the Borrower to engage in any "prohibited transaction" as such term is defined in the section 4975(c) of the Code and the regulations promulgated thereunder which is not exempted by section 4975(c)(2) or (d) of the Code and the regulations promulgated thereunder or in section 406 of ERISA and the regulations promulgated thereunder which is not exempted by section 408(b) of ERISA and the regulations promulgated thereunder; provided, however, that in each case, the Borrower, may act or refrain from acting pursuant to this section 2.6(b) on the basis of an opinion of counsel, and any opinion of such counsel. The Borrower may consult with counsel, and any opinion of such counsel shall be full and complete authorization and protection in respect of any action taken or suffered or omitted by it hereunder in good faith and in accordance with such opinion of counsel. Nothing contained in this section 2.6(b) shall be construed as imposing a duty on the Borrower to consult with counsel. Any obligation of the Borrower to make any payment, repayment or prepayment on the Promissory Note or refrain from taking any other act hereunder or under the Promissory Note which is excused pursuant to this section 2.6(b) shall be considered a binding obligation of the Borrower, or both, as the case may be, for the purposes of determining whether a Default or Event of Default has occurred hereunder or under the Promissory Note and nothing in this section 2.6(b) shall be construed as providing a defense to any remedies otherwise available upon a Default or an Event of Default hereunder (other than the remedy of specific performance). Section 2.7 Use of Proceeds of Loan. The entire proceeds of the Loan shall be used solely for acquiring shares of Common Stock, and for no other purpose whatsoever. Section 2.8 Security. (a) In order to secure the due payment and performance by the Borrower of all of its obligations under this Loan Agreement, simultaneously with the execution and delivery of this Loan Agreement by the Borrower, the Borrower shall: (i) pledge to the Lender as Collateral (as defined in the Pledge Agreement), and grant to the Lender a first priority lien on and security interest in, the Common Stock purchased with the Principal Amount, by the execution and delivery to the lender of the Pledge Agreement attached hereto as an exhibit; and (ii) execute and deliver, or cause to be executed and delivered, such other agreement, instruments and documents as the Lender may reasonably require in order to effect the purposes of the Pledge Agreement and this Loan Agreement. (b) The Lender shall release from encumbrance under the Pledge Agreement and transfer to the Borrower, as of the date on which any payment or repayment of the Principal Amount is made, a number of shares of Common Stock held as Collateral determined pursuant to the applicable provisions of the ESOP. 4 Section 2.9 Registration of the Promissory Note. (a) The Lender shall maintain a Register providing for the registration of the Principal Amount and any stated interest and of transfer and exchange of the Promissory Note. Transfer of the Promissory Note may be effected only by the surrender of the old instrument and either the reissuance by the Borrower of the old instrument to the new holder or the issuance by the Borrower of a new instrument to the new holder. The old Promissory Note so surrendered shall be canceled by the Lender and returned to the Borrower after such cancellation. (b) Any new Promissory Note issued pursuant to section 2.9(a) shall carry the same rights to interest (unpaid and to accrue) carried by the Promissory Note so transferred or exchanged so that there will not be any loss or gain of interest on the note surrender. Such new Promissory Note shall be subject to all of the provisions and entitled to all of the benefits of this Agreement. Prior to due presentment for registration or transfer, the Borrower may deem and treat the registered holder of any Promissory Note as the holder thereof for purposes of payment and other purposes. A notation shall be made on each new Promissory Note of the amount of all payments of principal and interest theretofore paid. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE BORROWER The Borrower hereby represents and warrants to the Lender as follows: Section 3.1 Power, Authority, Consents. The Borrower has the power to execute, deliver and perform this Loan Agreement, the Promissory Note and Pledge Agreement, all of which have been duly authorized by all necessary and proper corporate or other action. Section 3.2 Due Execution, Validity, Enforceability. Each of the Loan Documents, including, without limitation, this Loan Agreement, the Promissory Note and the Pledge Agreement, has been duly executed and delivered by the Borrower; and each constitutes the valid and legally binding obligation of the Borrower, enforceable in accordance with its terms. Section 3.3 Properties, Priority of Liens. The liens which have been created and granted by the Pledge Agreement constitute valid, first liens on the properties and assets covered by the Pledge Agreement, subject to no prior or equal lien. Section 3.4 No Defaults, Compliance with Laws. The Borrower is not in default in any material respect under any agreement, ordinance, resolution, decree, bond, note, indenture, order or judgment to which it is a party or by which it is bound, or any other agreement or other instrument by which any of the properties or assets owned by it is materially affected. 5 Section 3.5 Purchase of Common Stock. Upon consummation of any purchase of Common Stock by the Borrower with the proceeds of the Loan, the Borrower shall acquire valid, legal and marketable title to all of the Common Stock so purchased, free and clear of any liens, other than a pledge to the Lender of the Common Stock so purchased pursuant to the Pledge Agreement. Neither the execution and delivery of the Loan Documents nor the performance of any obligation thereunder violates any provisions of law or conflicts with or results in a breach of or creates (with or without the giving of notice of lapse of time, or both) a default under any agreement to which the Borrower is a party or by which it is bound or any of its properties is affected. No consent of any federal, state, or local governmental authority, agency, or other regulatory body, the absence of which could have a materially adverse effect on the Borrower or the Trustee, is or was required to be obtained in connection with the execution, delivery, or performance of the Loan Documents and the transaction contemplated therein or in connection therewith, including without limitation, with respect to the transfer of the shares of Common Stock purchased with the proceeds of the Loan pursuant thereto. Section 3.6 ESOP; Contributions. As of the effective date of the ESOP sponsor's conversion, the ESOP and the Borrower will be duly created, organized and maintained by the ESOP sponsor in compliance with all applicable laws, regulations and rulings. The ESOP will qualify as an "employee stock ownership plan" as defined in section 4975(e)(7) of the Code. The ESOP provides that the ESOP sponsor may make contributions to the ESOP in an amount necessary to enable the Trustee to amortize the Loan in accordance with the terms of the Promissory Note; provided, however, that no such contributions shall be required if they would adversely affect the qualification of the ESOP under section 401(a) of the Code. Section 3.7 Trustee. The trustee of the ESOP has been duly appointed by the ESOP sponsor. Section 3.8 Compliance with Laws; Actions. Neither the execution and delivery by the Borrower of this Loan Agreement or any instruments required thereby, nor compliance with the terms and provisions of any such documents by the lender, constitutes a violation of any provision of any law or any regulation, order, writ, injunction or decree of any court or governmental instrumentality, or an event of default under any agreement, to which the Borrower is a party, to which the Borrower is bound or to which the Borrower is subject, which violation or event of default would have a material adverse effect on the Borrower. There is no action or proceeding pending or threatened against either the ESOP or the Borrower before any court or administrative agency. 6 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE LENDER The Lender hereby represents and warrants to the Borrower as follows: Section 4.1 Power, Authority, Consents. The Lender has the power to execute, deliver and perform this Loan Agreement, the Pledge Agreement and all documents executed by the Lender in connection with the Loan, all of which have been duly authorized by all necessary and proper corporate or other action. No consent, authorization or approval or other action by any governmental authority or regulatory body, and no notice by the Lender to, or filing by the Lender with, any governmental authority or regulatory body is required for the due execution, delivery and performance of this Loan Agreement. Section 4.2 Due Execution, Validity, Enforceability. This Loan Agreement and the Pledge Agreement have been duly executed and delivered by the Lender, and each constitutes a valid and legally binding obligation of the Lender, enforceable in accordance with its terms. ARTICLE V EVENTS OF DEFAULT Section 5.1 Events of Default under Loan Agreement. Each of the following events shall constitute an "Event of Default" hereunder: (a) Failure to make any payment or mandatory prepayment of principal of the Promissory Note when due, or failure to make any payment of interest on the Promissory Note not later than five (5) Business Days after the date when due. (b) Failure by the Borrower to perform or observe any term, condition or covenant of this Loan Agreement or of any of the other Loan Documents, including, without limitation, the Promissory Note and the Pledge Agreement. (c) Any representation or warranty made in writing to the Lender in any of the Loan Documents, or any certificate, statement or report made or delivered in compliance with this Loan Agreement, shall have been false or misleading in any material respect when made or delivered. Section 5.2 Lender's Rights upon Event of Default. If an Event of Default under this Loan Agreement shall occur and be continuing, the Lender shall have no rights to assets of the Borrower other than: (a) contributions (other than contributions of Common Stock) that are made by the ESOP sponsor to enable the Borrower to meet its obligations pursuant to this Loan Agreement and earnings attributable to the investment of such contributions and (b) "Eligible Collateral" (as defined in the Pledge Agreement); provided, however, that: (i) the value of the Borrower's assets transferred to the Lender following an Event of Default in satisfaction of the due and unpaid amount of the Loan shall not exceed the amount in default (without regard to amounts owing solely as a result of any 7 acceleration of the Loan); (ii) the Borrower's assets shall be transferred to the Lender following an Event of Default only to the extent of the failure of the Borrower to meet the payment schedule of the Loan; and (iii) all rights of the Lender to the Common Stock purchased with the proceeds of the Loan covered by the Pledge Agreement following an Event of Default shall be governed by the terms of the Pledge Agreement. ARTICLE VI MISCELLANEOUS PROVISIONS Section 6.1 Payments Due to the Lender. If any amount is payable by the Borrower to the Lender pursuant to any indemnity obligation contained herein, then the Borrower shall pay, at the time or times provided therefor, any such amount and shall indemnify the Lender against and hold it harmless from any loss or damage resulting from or arising out of the nonpayment or delay in payment of any such amount. If any amounts as to which the Borrower has so indemnified the Lender hereunder shall be assessed or levied against the Lender, the Lender may notify the Borrower and make immediate payment thereof, together with interest or penalties in connection therewith, and shall thereupon be entitled to and shall receive immediate reimbursement therefor from the Borrower, together with interest on each such amount as provided for in section 2.2(c). Notwithstanding any other provision contained in this Loan Agreement, the covenants and agreements of the Borrower contained in this section 6.1 shall survive: (a) payment of the Promissory Note and (b) termination of this Loan Agreement. Section 6.2 Payments. All payments hereunder and under the Promissory Note shall be made without set-off or counterclaim and in such amounts as may be necessary in order that all such payments shall not be less than the amounts otherwise specified to be paid under this Loan Agreement and the Promissory Note, subject to any applicable tax withholding requirements. Upon payment in full of the Promissory Note, the Lender shall mark such Promissory Note "Paid" and return it to the Borrower. Section 6.3 Survival. All agreements, representations and warranties made herein shall survive the delivery of this Loan Agreement and the Promissory Note. Section 6.4 Modifications, Consents and Waivers; Entire Agreement. No modification, amendment or waiver of or with respect to any provision of this Loan Agreement, the Promissory Note, the Pledge Agreement, or any of the other Loan Documents, nor consent to any departure from any of the terms or conditions thereof, shall in any event be effective unless it shall be in writing and signed by the party against whom enforcement thereof is sought. Any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No consent to or demand on a party in any case shall, of itself, entitle it to any other or further notice or demand in similar or other circumstances. This Loan Agreement embodies the entire agreement and understanding between the Lender and the Borrower and supersedes all prior agreements and understandings relating to the subject matter hereof. 8 Section 6.5 Remedies Cumulative. Each and every right granted to the Lender hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of the Lender or the holder of the Promissory Note to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or future exercise thereof or the exercise of any other right. The due payment and performance of the obligations under the Loan Documents shall be without regard to any counterclaim, right of offset or any other claim whatsoever which the Borrower may have against the Lender and without regard to any other obligation of any nature whatsoever which the Lender may have to the Borrower, and no such counterclaim or offset shall be asserted by the Borrower in any action, suit or proceeding instituted by the Lender for payment or performance of such obligations. Section 6.6 Further Assurances; Compliance with Covenants. At any time and from time to time, upon the request of the Lender, the Borrower shall execute, deliver and acknowledge or cause to be executed, delivered and acknowledged, such further documents and instruments and do such other acts and things as the Lender may reasonably request in order to fully effect the terms of this Loan Agreement, the Promissory Note, the Pledge Agreement, the other Loan Documents and any other agreements, instruments and documents delivered pursuant hereto or in connection with the Loan. Section 6.7 Notices. Except as otherwise specifically provided for herein, all notice, requests, reports and other communications pursuant to this Loan Agreement shall be in writing, either by letter (delivered by hand or commercial messenger service or sent by registered or certified mail, return receipt requested, except for routine reports delivered in compliance with Article VI hereof which may be sent by ordinary first-class mail) or telex or telecopier addressed as follows: (a) If to the Borrower: Naugatuck Valley Savings and Loan Employee Stock Ownership Plan Trust c/o ___________________________ (b) If to the Lender: Naugatuck Valley Financial Corporation 333 Church Street Naugatuck, CT 06770-0599 Any notice, request or communication hereunder shall be deemed to have been given on the day on which it is delivered by hand or by commercial messenger service, or sent by telex or telecopier, to such party at its address specified above, or, if sent by mail, on the third Business Day after the day deposited in the mail, postage prepaid, addressed as aforesaid. Any party may change the person or address to whom or which notices are to be given hereunder, by notice duly given hereunder; provided, however, that any such notice shall be deemed to have been given only when actually received by the party to whom it is addressed. 9 Section 6.8 Counterparts. This Loan Agreement may be signed in any number of counterparts which, when taken together, shall constitute one and the same document. Section 6.9 Construction; Governing Law. The headings used in the table of contents and in this Loan Agreement are for convenience only and shall not be deemed to constitute a part hereof. All uses herein of any gender or of singular or plural terms shall be deemed to include uses of the other genders or plural or singular terms, as the context may require. All references in this Loan Agreement of an Article or section shall be to an Article or section of this Loan Agreement, unless otherwise specified. This Loan Agreement, the Promissory Note, the Pledge Agreement and the other Loan Documents shall be governed by, and construed and interpreted in accordance with, the laws of the State of Connecticut. Section 6.10 Severability. Wherever possible, each provision of this Loan Agreement shall be interpreted in such manner as to be effective and valid under applicable law; however, the provisions of this Loan Agreement are severable, and if any clause or provision hereof shall be held invalid or unenforceable in whole or in part in any jurisdiction, then such invalidity or unenforceability shall affect only such clause or provision, or part thereof, in such jurisdiction and shall not in any manner affect such clause or provision in any other jurisdiction, or any other clause or provisions in this Loan Agreement in any jurisdiction. Each of the covenants, agreements and conditions contained in this Loan Agreement are independent, and compliance by a party with any of them shall not excuse non-compliance by such party with any other. The Borrower shall not take any action the effect of which shall constitute a breach or violation of any provision of this Loan Agreement. Section 6.11 Binding Effect: No Assignment or Delegation. This Loan Agreement shall be binding upon and inure to the benefit of the Borrower and its successors and the Lender and its successors and assigns. The rights and obligations of the Borrower under this Agreement shall not be assigned or delegated without the prior written consent of the Lender, and any purported assignment or delegation without such consent shall be void. 10 IN WITNESS WHEREOF, the parties have caused this Loan Agreement to be executed as of the date first written above. NAUGATUCK VALLEY SAVINGS AND LOAN EMPLOYEE STOCK OWNERSHIP PLAN TRUST __________________________________________ Authorized Trust Officer NAUGATUCK VALLEY FINANCIAL CORPORATION By: ______________________________________ John C. Roman President and Chief Executive Officer 11 PLEDGE AGREEMENT THIS PLEDGE AGREEMENT ("Pledge Agreement") is made as of the _____ day of_________, 2004, by and between the NAUGATUCK VALLEY SAVINGS AND LOAN EMPLOYEE STOCK OWNERSHIP PLAN TRUST ("Pledgor"), and NAUGATUCK VALLEY FINANCIAL CORPORATION ("Pledgee"). W I T N E S S E T H WHEREAS, this Pledge Agreement is being executed and delivered to the Pledgee pursuant to the terms of a Loan Agreement ("Loan Agreement"), by and between the Pledgor and the Pledgee; NOW, THEREFORE, in consideration of the mutual agreements contained herein and in the Loan Agreement, the parties hereto do hereby covenant and agree as follows: Section 1. Definitions. The following definitions shall apply for purposes of this Pledge Agreement, except to the extent that a different meaning is plainly indicated by the context; all capitalized terms used but not defined herein shall have the respective meanings assigned to them in the Loan Agreement: Collateral shall mean the Pledged Shares and, subject to section 5 hereof, and to the extent permitted by applicable law, all rights with respect thereto, and all proceeds of such Pledged Shares and rights. ESOP shall mean the Naugatuck Valley Savings and Loan Employee Stock Ownership Plan. Event of Default shall mean an event so defined in the Loan Agreement. Liabilities shall mean all the obligations of the Pledgor to the Pledgee, howsoever created, arising or evidenced, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, under the Loan Agreement and the Promissory Note. Pledged Shares shall mean all the Shares of Common Stock of the Pledgee purchased by the Pledgor with the proceeds of the loan made by the Pledgee to the Pledgor pursuant to the Loan Agreement, but excluding any such shares previously released pursuant to section 4. Section 2. Pledge. To secure the payment of and performance of all the Liabilities, the Pledgor hereby pledges to the Pledgee, and grants to the Pledgee, a security interest in, and lien upon, the Collateral. Section 3. Representations and Warranties of the Pledgor. The Pledgor represents, warrants, and covenants to the Pledgee as follows: (a) the execution, delivery and performance of this Pledge Agreement and the pledging of the Collateral hereunder do not and will not conflict with, result in a violation of, or constitute a default under, any agreement binding upon the Pledgor; 1 (b) the Pledged Shares are and will continue to be owned by the Pledgor free and clear of any liens or rights of any other person except the lien hereunder and under the Loan Agreement in favor of the Pledgee, and the security interest of the Pledgee in the Pledged Shares and the proceeds thereof is and will continue to be prior to and senior to the rights of all others; (c) this Pledge Agreement is the legal, valid, binding and enforceable obligation of the Pledgor in accordance with its terms; (d) the Pledgor shall, from time to time, upon request of the Pledgee, promptly deliver to the Pledgee such stock powers, proxies, and similar documents, satisfactory in form and substance to the Pledgee, with respect to the Collateral as the Pledgee may reasonably request; and (e) subject to the first sentence of section 4(b), the Pledgor shall not, so long as any Liabilities are outstanding, sell, assign, exchange, pledge or otherwise transfer or encumber any of its rights in and to any of the Collateral. Section 4. Eligible Collateral. (a) As used herein the term "Eligible Collateral" shall mean the amount of Collateral which has an aggregate fair market value equal to the amount by which the Pledgor is in default (without regard to any amounts owing solely as the result of an acceleration of the Loan Agreement) or such lesser amount of Collateral as may be required pursuant to section 13 of this Pledge Agreement. (b) The Pledged Shares shall be released from this Pledge Agreement in a manner conforming to the requirements of Treasury Regulations Section 54.4975-7(b)(8), as the same may be from time to time amended or supplemented, and the applicable provisions of the ESOP. Subject to such Regulations, the Pledgee may from time to time, after any Default or Event of Default, and without prior notice to the Pledgor, transfer all or any part of the Eligible Collateral in the name of the Pledgee or its nominee, without disclosing that such Eligible Collateral is subject to any rights of the Pledgor and may from time to time, whether before or after any of the Liabilities shall become due and payable, without notice to the Pledgor, take all or any of the following actions: (i) notify the parties obligated on any of the Eligible Collateral to make payment to the Pledgee of any amounts due or due to become due thereunder, (ii) release or exchange all or any part of the Eligible Collateral, or compromise or extend or renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect thereto, and (iii) take control of any proceeds of the Eligible Collateral. Section 5. Delivery. (a) The Pledgor shall deliver to the Pledgee upon execution of this Pledge Agreement (i) either (A) certificates for the Pledged Shares, each certificate duly signed in blank by the Pledgor or accompanied by a stock transfer power duly signed in blank by the Pledgor and each such certificate accompanied by all required documentary or stock transfer tax stamps or (B) if the Trustee does not yet have possession of the Pledged Shares, an assignment by the Pledgor of all the Pledgor's rights to and interest in the Pledged Shares and (ii) an irrevocable proxy, in form and substance satisfactory to the Pledgee, signed by the Pledgor with respect to the Pledged Shares. 2 (b) So long as no Default or Event of Default shall have occurred and be continuing, (i) the Pledgor shall be entitled to exercise any and all voting and other rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of this Pledge Agreement, and (ii) the Pledgor shall be entitled to receive any and all cash dividends or other distributions paid in respect of the Collateral. Section 6. Events of Default. (a) If a Default or Event Default shall be existing, in addition to the rights it may have under the Loan Agreement, the Promissory Note, and this Pledge Agreement, or by virtue of any other instrument, (i) the Pledgee may exercise, with respect to the Eligible Collateral, from time to time, any rights and remedies available to it under the Uniform Commercial Code as in effect from time to time in the State of Connecticut or otherwise available to it and (ii) the Pledgee shall have the right, for and in the name, place and stead of the Pledgor, to execute endorsement, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Eligible Collateral. Written notification of intended disposition of any of the Eligible Collateral shall be given by the Pledgee to the Pledgor at least three (3) Business Days before such disposition. Subject to section 13 below, any proceeds of any disposition of Eligible Collateral may be applied by the Pledgee to the payment of expenses in connection with the Eligible Collateral, including, without limitation, reasonable attorneys' fees and legal expenses, and any balance of such proceeds may be applied by the Pledgee toward the payment of such of the Liabilities as are in Default, and in such order of application, as the Pledgee may from time to time elect. No action of the Pledgee permitted hereunder shall impair or affect its rights in and to the Eligible Collateral. All rights and remedies of the Pledgee expressed hereunder are in addition to all other rights and remedies possessed by it, including, without limitation, those contained in the documents referred to in the definition of Liabilities in section 1 hereof. (b) In any sale of any of the Eligible Collateral after a Default or an Event of Default shall have occurred, the Pledgee is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel if necessary in order to avoid violation of applicable law (including, without limitation, compliance with such procedures as may restrict the number of prospective bidders and purchasers or further restrict such prospective bidders or purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Eligible Collateral), or in order to obtain such required approval of the sale or of the purchase by any governmental regulatory authority or official, and the Pledgor further agrees that such compliance shall not result in such sale's being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Pledgee be liable or accountable to the Pledgor for any discount allowed by reason of the fact that such Eligible Collateral is sold in compliance with any such limitation or restriction. Section 7. Payment in Full. Upon the payment in full of all outstanding Liabilities, this Pledge Agreement shall terminate and the Pledgee shall forthwith assign, transfer and deliver to the Pledgor, against receipt and without recourse to the Pledgee, all Collateral then held by the Pledgee pursuant to the Pledge Agreement. Section 8. No Waiver. No failure or delay in the part of the Pledgee in exercising any right or remedy hereunder or under any other document which confers or grants any rights to the Pledgee in respect of the Liabilities shall operate as a waiver thereof nor shall any single or 3 partial exercise of any such rights or remedy preclude any other or further exercise thereof or the exercise of any other right or remedy of the Pledgee. Section 9. Binding Effect; No Assignment or Delegation. This Pledge Agreement shall be binding upon and inure to the benefit of the Pledgor, the Pledgee and their respective successors and assigns, except that the Pledgor may not assign or transfer its rights hereunder without the prior written consent of the Pledgee (which consent shall not unreasonably be withheld). Each duty or obligation of the Pledgor to the Pledgee pursuant to the provisions of this Pledge Agreement shall be performed in favor of any person or entity designated by the Pledgee, and any duty or obligation of the Pledgee to the Pledgor may be performed by any other person or entity designated by the Pledgee. Section 10. Governing Law. This Pledge Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut applicable to agreements to be performed wholly within the State of Connecticut. Section 11. Notices. All notices, requests, instructions or documents hereunder shall be in writing and delivered personally or sent by United States mail, registered or certified, return receipt requested, with proper postage prepaid as follows: (a) If to the Pledgee: Naugatuck Valley Financial Corporation 333 Church Street Naugatuck, CT 06770-0599 (b) If to the Pledgor: Naugatuck Valley Savings and Loan Employee Stock Ownership Plan Trust c/o or at such other address as either of the parties may designate by written notice to the other party. If delivered personally, the date on which a notice, request, instruction or document is delivered shall be the date on which such delivery is made, and, if delivered by mail, the date on which such notice, request, instruction, or document is deposited in the mail shall be the date of delivery. Each notice, request, instruction or document shall bear the date on which it is delivered. Section 12. Interpretation. Wherever possible each provision of this Pledge Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision herein shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions hereof. Section 13. Construction. All provisions hereof shall be construed so as to maintain (a) the ESOP as a qualified leveraged employee stock ownership plan under section 401(a) and 4975(e)(7) of the Internal Revenue Code of 1986 (the "Code"), (b) the Trust as exempt from taxation under section 501(a) of the Code and (c) the Trust Loan as an exempt loan under section 54.4975-7(b) of the Treasury Regulations and as described in Department of Labor Regulation section 2550.408b-3. 4 IN WITNESS WHEREOF, this Pledge Agreement has been duly executed by the parties hereto as of the day and year first above written. NAUGATUCK VALLEY SAVINGS AND LOAN EMPLOYEE STOCK OWNERSHIP PLAN TRUST ___________________________________________ Authorized Trust Officer NAUGATUCK VALLEY FINANCIAL CORPORATION By: _______________________________________ John C. Roman President and Chief Executive Officer 5 PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned, NAUGATUCK VALLEY SAVINGS AND LOAN EMPLOYEE STOCK OWNERSHIP PLAN TRUST (the "Borrower"), hereby promises to pay to the order of NAUGATUCK VALLEY FINANCIAL CORPORATION, (the "Lender") up to $___________ payable in accordance with the Loan Agreement made and entered into between the Borrower and the Lender of even date herewith ("Loan Agreement") pursuant to which this Promissory Note is issued. The Principal Amount of this Promissory Note shall be payable in accordance with the schedule attached hereto ("Schedule I"). This Promissory Note shall bear interest at the rate per annum set forth or established under the Loan Agreement, such interest to be payable in accordance with Schedule I. Anything herein to the contrary notwithstanding, the obligation of the Borrower to make payments of interest shall be subject to the limitation that payments of interest shall not be required to be made to the Lender to the extent that the Lender's receipt thereof would not be permissible under the law or laws applicable to the Lender limiting rates on interest which may be charged or collected by the Lender. Any such payments on interest which are not made as a result of the limitation referred to in the preceding sentence shall be made by the Borrower to the Lender on the earliest interest payment date or dates on which the receipt thereof would be permissible under the laws applicable to the Lender limiting rates of interest which may be charged or collected by the Lender. Such deferred interest shall not bear interest. Payments of both principal and interest on this Promissory Note are to be made at the principal office of the Lender or such other place as the holder hereof shall designate to the Borrower in writing, in lawful money of the United States of America in immediately available funds. Failure to make any payments of principal on this Promissory Note when due, or failure to make any payment of interest on this Promissory Note not later than five (5) Business Days after the date when due, shall constitute a default hereunder, whereupon the principal amount of accrued interest on this Promissory Note shall immediately become due and payable in accordance with the terms of the Loan Agreement. This Promissory Note is secured by a Pledge Agreement between the Borrower and the Lender of even date herewith and is entitled to the benefits thereof. NAUGATUCK VALLEY SAVINGS AND LOAN EMPLOYEE STOCK OWNERSHIP PLAN TRUST _____________________________ Authorized Trust Officer EX-10.3 12 g89544exv10w3.txt EX-10.3 EMPLOYMENT AGREEMENT EXHIBIT 10.3 FORM OF EMPLOYMENT AGREEMENT THIS AGREEMENT (the "Agreement"), made this _____ day of _________, 2004, by and between NAUGATUCK VALLEY FINANCIAL CORPORATION, a federally chartered corporation (the "Company"), NAUGATUCK VALLEY SAVINGS AND LOAN, a federally chartered savings bank (the "Bank"), and __________________ (the "Executive"). WHEREAS, Executive serves in a position of substantial responsibility; WHEREAS, the Company and the Bank wish to assure the services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to serve in the employ of the Bank on a full-time basis for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. EMPLOYMENT. Executive is employed as the______________________ of the Company and the Bank. Executive shall perform all duties and shall have all powers which are commonly incident to the offices of _______________________ or which, consistent with those offices, are delegated to him by ________________________. During the term of this Agreement, Executive also agrees to serve, if elected, as an officer and/or director of any subsidiary of the Company and the Bank and in such capacity will carry out such duties and responsibilities reasonably appropriate to that office. 2. LOCATION AND FACILITIES. Executive will be furnished with the working facilities and staff customary for executive officers with the title and duties set forth in Section 1 and as are necessary for him to perform his duties. The location of such facilities and staff shall be at the principal administrative offices of the Company and the Bank, or at such other site or sites customary for such offices. 3. TERM. a. The term of this Agreement shall be (i) the initial term, consisting of the period commencing on the date of this Agreement (the "Effective Date") and ending on the _______ anniversary of the Effective Date, plus (ii) any and all extensions of the initial term made pursuant to this Section 3. b. Commencing on the first year anniversary date of this Agreement, and continuing on each anniversary thereafter, the disinterested members of the boards of directors of the Bank and the Company may extend the Agreement an additional year such that the remaining term of the Agreement shall be ________ (____) months, unless Executive elects not to extend the term of this Agreement by giving written notice in accordance with Section 19 of this Agreement. The Board of Directors of the Bank (the "Board") will review the Agreement and Executive's performance annually for purposes of determining whether to extend the Agreement and the rationale and results thereof shall be included in the minutes of the Board's meeting. The Board of Directors of the Bank shall give notice to Executive as soon as possible after such review as to whether the Agreement is to be extended. 4. BASE COMPENSATION. a. The Company and the Bank agree to pay Executive during the term of this Agreement a base salary at the rate of $__________ per year, payable in accordance with customary payroll practices. b. The Board shall review annually the rate of Executive's base salary based upon factors they deem relevant, and may maintain or increase his salary, provided that no such action shall reduce the rate of salary below the rate in effect on the Effective Date. c. In the absence of action by the Board, Executive shall continue to receive salary at the annual rate specified on the Effective Date or, if another rate has been established under the provisions of this Section 4, the rate last properly established by action of the Board under the provisions of this Section 4. 5. BONUSES. Executive shall be entitled to participate in discretionary bonuses or other incentive compensation programs that the Company and the Bank may award from time to time to senior management employees pursuant to bonus plans or otherwise. 6. BENEFIT PLANS. Executive shall be entitled to participate in such life insurance, medical, dental, pension, profit sharing, retirement and stock-based compensation plans and other programs and arrangements as may be approved from time to time by the Company and the Bank for the benefit of their employees. 7. VACATION AND LEAVE. a. Executive shall be entitled to vacations and other leave in accordance with policy for senior executives, or otherwise as approved by the Board. b. In addition to paid vacations and other leave, Executive shall be entitled, without loss of pay, to absent himself voluntarily from the performance of his employment for 2 such additional periods of time and for such valid and legitimate reasons as the Board may, in its discretion, determine. Further, the Board may grant to Executive a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as the Board in its discretion may determine. 8. EXPENSE PAYMENTS AND REIMBURSEMENTS. Executive shall be reimbursed for all reasonable out-of-pocket business expenses that he shall incur in connection with his services under this Agreement upon substantiation of such expenses in accordance with applicable policies of the Company and the Bank. 9. AUTOMOBILE ALLOWANCE. During the term of this Agreement, Executive shall be entitled to an automobile allowance on terms no less favorable that those in effect immediately prior to the execution of this Agreement. Executive shall comply with reasonable reporting and expense limitations on the use of such automobile as may be established by the Company or the Bank from time to time, and the Company or the Bank shall annually include on Executive's Form W-2 any amount of income attributable to Executive's personal use of such automobile. 10. LOYALTY AND CONFIDENTIALITY. a. During the term of this Agreement Executive: (i) shall devote all his time, attention, skill, and efforts to the faithful performance of his duties hereunder; provided, however, that from time to time, Executive may serve on the boards of directors of, and hold any other offices or positions in, companies or organizations which will not present any conflict of interest with the Company and the Bank or any of their subsidiaries or affiliates, unfavorably affect the performance of Executive's duties pursuant to this Agreement, or violate any applicable statute or regulation and (ii) shall not engage in any business or activity contrary to the business affairs or interests of the Company and the Bank. b. Nothing contained in this Agreement shall prevent or limit Executive's right to invest in the capital stock or other securities of any business dissimilar from that of the Company and the Bank, or, solely as a passive, minority investor, in any business. c. Executive agrees to maintain the confidentiality of any and all information concerning the operation or financial status of the Company and the Bank; the names or addresses of any of its borrowers, depositors and other customers; any information concerning or obtained from such customers; and any other information concerning the Company and the Bank to which he may be exposed during the course of his employment. Executive further agrees that, unless required by law or specifically permitted by the Board in writing, he will not disclose to any person or entity, either during or subsequent to his employment, any of the above-mentioned information which is not generally known to the public, nor shall he employ such information in any way other than for the benefit of the Company and the Bank. 3 11. TERMINATION AND TERMINATION PAY. Subject to Section 12 of this Agreement, Executive's employment under this Agreement may be terminated in the following circumstances: a. Death. Executive's employment under this Agreement shall terminate upon his death during the term of this Agreement, in which event Executive's estate shall be entitled to receive the compensation due to Executive through the last day of the calendar month in which his death occurred. b. Retirement. This Agreement shall be terminated upon Executive's retirement under the retirement benefit plan or plans in which he participates pursuant to Section 6 of this Agreement or otherwise. c. Disability. i. The Board or Executive may terminate Executive's employment after having determined Executive has a Disability. For purposes of this Agreement, "Disability" means a physical or mental infirmity that impairs Executive's ability to substantially perform his duties under this Agreement and that results in Executive becoming eligible for long-term disability benefits under any long-term disability plans of the Company and the Bank (or, if there are no such plans in effect, that impairs Executive's ability to substantially perform his duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Board shall determine whether or not Executive is and continues to be permanently disabled for purposes of this Agreement in good faith, based upon competent medical advice and other factors that they reasonably believe to be relevant. As a condition to any benefits, the Board may require Executive to submit to such physical or mental evaluations and tests as it deems reasonably appropriate. ii. In the event of such Disability, Executive's obligation to perform services under this Agreement will terminate. The Bank will pay Executive, as Disability pay, an amount equal to one hundred percent (100%) of Executive's bi-weekly rate of base salary in effect as of the date of his termination of employment due to Disability. Disability payments will be made on a monthly basis and will commence on the first day of the month following the effective date of Executive's termination of employment for Disability and end on the earlier of: (A) the date he returns to full-time employment at the Bank in the same capacity as he was employed prior to his termination for Disability; (B) his death; or (C) upon his attainment of age 65. Such payments shall be reduced by the amount of any short- or long-term disability benefits payable to Executive under any other disability programs sponsored by the Company and the Bank. In addition, during any period of Executive's Disability, Executive and his dependents shall, to the greatest extent possible, continue to be covered under all benefit plans (including, without limitation, retirement plans and medical, dental and life insurance 4 plans) of the Company and the Bank, in which Executive participated prior to his Disability on the same terms as if Executive were actively employed by the Company and the Bank. d. Termination for Cause. i. The Board may, by written notice to Executive in the form and manner specified in this paragraph, immediately terminate his employment at any time, for "Cause." Executive shall have no right to receive compensation or other benefits for any period after termination for Cause except for vested benefits. Termination for Cause shall mean termination because of, in the good faith determination of the Board, Executive's: (1) Personal dishonesty; (2) Incompetence; (3) Willful misconduct; (4) Breach of fiduciary duty involving personal profit; (5) Intentional failure to perform stated duties under this Agreement; (6) Willful violation of any law, rule or regulation (other than traffic violations or similar offenses) that reflects adversely on the reputation of the Company and the Bank, any felony conviction, any violation of law involving moral turpitude, or any violation of a final cease-and-desist order; or (7) Material breach by Executive of any provision of this Agreement. ii. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause by the Company and the Bank unless there shall have been delivered to Executive a copy of a resolution duly adopted by the affirmative vote of a majority of the entire membership of the Board at a meeting of such Board called and held for the purpose (after reasonable notice to Executive and an opportunity for Executive to be heard before the Board with counsel), of finding that, in the good faith opinion of the Board, Executive was guilty of the conduct described above and specifying the particulars thereof. e. Voluntary Termination by Executive. In addition to his other rights to terminate under this Agreement, Executive may voluntarily terminate employment during the term of this Agreement upon at least sixty (60) days prior written notice to the Board, 5 in which case Executive shall receive only his compensation, vested rights and employee benefits up to the date of his termination. f. Without Cause or With Good Reason. i. In addition to termination pursuant to Sections 11a. through 11e., the Board may, by written notice to Executive, immediately terminate his employment at any time for a reason other than Cause (a termination "Without Cause") and Executive may, by written notice to the Board, immediately terminate this Agreement at any time within ninety (90) days following an event constituting "Good Reason," as defined below (a termination "With Good Reason"). ii. Subject to Section 12 of this Agreement, in the event of termination under this Section 11(f), Executive shall be entitled to receive his base salary for the remaining term of the Agreement paid in one lump sum within ten (10) calendar days of such termination. Also, in such event, Executive shall, for the remaining term of the Agreement, receive the benefits he would have received during the remaining term of the Agreement under any retirement programs (whether tax-qualified or non-qualified) in which Executive participated prior to his termination (with the amount of the benefits determined by reference to the benefits received by Executive or accrued on his behalf under such programs during the twelve (12) months preceding his termination) and continue to participate in any benefit plans of the Company and the Bank that provide health (including medical and dental), life or disability insurance, or similar coverage, upon terms no less favorable than the most favorable terms provided to senior executives of the Company and the Bank during such period. In the event that the Company and the Bank are unable to provide such coverage by reason of Executive no longer being an employee, the Company and the Bank shall provide Executive with comparable coverage on an individual policy basis. iii. "Good Reason" shall exist if, without Executive's express written consent, the Company and the Bank materially breach any of their respective obligations under this Agreement. Without limitation, such a material breach shall be deemed to occur upon any of the following: (1) A material reduction in Executive's responsibilities or authority in connection with his employment with the Company or the Bank; (2) Assignment to Executive of duties of a non-executive nature or duties for which he is not reasonably equipped by his skills and experience; (3) Failure of Executive to be nominated or renominated to the Board; 6 (4) A reduction in salary or benefits contrary to the terms of this Agreement, or, following a Change in Control as defined in Section 12 of this Agreement, any reduction in salary or material reduction in benefits below the amounts to which Executive was entitled prior to the Change in Control; (5) Termination of incentive and benefit plans, programs or arrangements, or reduction of Executive's participation to such an extent as to materially reduce their aggregate value below their aggregate value as of the Effective Date; (6) A requirement that Executive relocate his principal business office or his principal place of residence outside of the area consisting of a twenty-five (25) mile radius from the current main office and any branch of the Bank, or the assignment to Executive of duties that would reasonably require such a relocation; or (7) Liquidation or dissolution of the Company or the Bank. iv. Notwithstanding the foregoing, a reduction or elimination of Executive's benefits under one or more benefit plans maintained by the Company and the Bank as part of a good faith, overall reduction or elimination of such plans or plans or benefits thereunder applicable to all participants in a manner that does not discriminate against Executive (except as such discrimination may be necessary to comply with law) shall not constitute an event of Good Reason or a material breach of this Agreement, provided that benefits of the type or to the general extent as those offered under such plans prior to such reduction or elimination are not available to other officers of the Company and the Bank or any company that controls either of them under a plan or plans in or under which Executive is not entitled to participate. g. Continuing Covenant Not to Compete or Interfere with Relationships. Regardless of anything herein to the contrary, following a termination by the Company and the Bank or Executive pursuant to Section 11f.: i. Executive's obligations under Section 10c. of this Agreement will continue in effect; and ii. During the period ending on the first anniversary of such termination, Executive shall not serve as an officer, director or employee of any bank holding company, bank, savings Bank, savings and loan holding company, or mortgage company (any of which, a "Financial Institution") which Financial Institution offers products or services competing with those offered by the Bank from any office within fifty (50) miles from the main office or any 7 branch of the Bank and shall not interfere with the relationship of the Company and the Bank and any of its employees, agents, or representatives. 12. TERMINATION IN CONNECTION WITH A CHANGE IN CONTROL. a. For purposes of this Agreement, a "Change in Control" means any of the following events: i. Merger: The Company merges into or consolidates with another corporation, or merges another corporation into the Company, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were stockholders of the Company immediately before the merger or consolidation. ii. Acquisition of Significant Share Ownership: The Company files, or is required to file, a report on Schedule 13D or another form or schedule (other than Schedule 13G) required under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 25% or more of a class of the Company's voting securities, but this clause (b) shall not apply to beneficial ownership of Company voting shares held in a fiduciary capacity by an entity of which the Company directly or indirectly beneficially owns 50% or more of its outstanding voting securities. iii. Change in Board Composition: During any period of two consecutive years, individuals who constitute the Company's Board of Directors at the beginning of the two-year period cease for any reason to constitute at least a majority of the Company's Board of Directors; provided, however, that for purposes of this clause (iii), each director who is first elected by the board (or first nominated by the board for election by the stockholders) by a vote of at least two-thirds (2/3) of the directors who were directors at the beginning of the two-year period shall be deemed to have also been a director at the beginning of such period; or iv. Sale of Assets: The Company sells to a third party all or substantially all of its assets. Notwithstanding anything in this Agreement to the contrary, in no event shall the conversion of the Bank from mutual to stock form (including without limitation, through the formation of a stock holding company) or the reorganization of the Bank into the mutual holding company form of organization constitute a "Change in Control" for purposes of this Agreement. 8 b. Termination. If within the period ending _____years after a Change in Control, (i) the Company and the Bank shall terminate Executive's employment Without Cause, or (ii) Executive voluntarily terminates his employment With Good Reason, the Company and the Bank shall, within ten calendar days of the termination of Executive's employment, make a lump-sum cash payment to him equal to ___________ times Executive's average Annual Compensation over the five (5) most recently completed calendar years ending with the year immediately preceding the effective date of the Change in Control. In determining Executive's average Annual Compensation, Annual Compensation shall include base salary and any other taxable income, including, but not limited to, amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions, bonuses (whether paid or accrued for the applicable period), as well as, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive's benefit during any such year, profit sharing, employee stock ownership plan and other retirement contributions or benefits, including to any tax-qualified plan or arrangement (whether or not taxable) made or accrued on behalf of Executive of such year. The cash payment made under this Section 12b. shall be made in lieu of any payment also required under Section 11f. of this Agreement because of a termination in such period. Executive's rights under Section 11f. are not otherwise affected by this Section 12. Also, in such event, Executive shall, for a ______ (____) month period following his termination of employment, receive the benefits he would have received over such period under any retirement programs (whether tax-qualified or nonqualified) in which Executive participated prior to his termination (with the amount of the benefits determined by reference to the benefits received by Executive or accrued on his behalf under such programs during the twelve (12) months preceding the Change in Control) and continue to participate in any benefit plans of the Company and the Bank that provide health (including medical and dental), life or disability insurance, or similar coverage upon terms no less favorable than the most favorable terms provided to senior executives during such period. In the event that the Company and the Bank are unable to provide such coverage by reason of Executive no longer being an employee, the Company and the Bank shall provide Executive with comparable coverage on an individual policy. c. The provisions of Section 12 and Sections 14 through 25, including the defined terms used in such sections, shall continue in effect until the later of the expiration of this Agreement or two years following a Change in Control. 13. INDEMNIFICATION AND LIABILITY INSURANCE. a. Indemnification. The Company and the Bank agree to indemnify Executive (and his heirs, executors, and administrators), and to advance expenses related thereto, to the fullest extent permitted under applicable law and regulations against any and all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit, or proceeding in which he may be involved by reason of his having been a director or Executive of the Company, the Bank or any of their 9 subsidiaries (whether or not he continues to be a director or Executive at the time of incurring any such expenses or liabilities) such expenses and liabilities to include, but not be limited to, judgments, court cost, and attorney's fees and the costs of reasonable settlements, such settlements to be approved by the Board, if such action is brought against Executive in his capacity as an Executive or director of the Company and the Bank or any of their subsidiaries. Indemnification for expenses shall not extend to matters for which Executive has been terminated for Cause. Nothing contained herein shall be deemed to provide indemnification prohibited by applicable law or regulation. Notwithstanding anything herein to the contrary, the obligations of this Section 13 shall survive the term of this Agreement by a period of six (6) years. b. Insurance. During the period in which indemnification of Executive is required under this Section, the Company and the Bank shall provide Executive (and his heirs, executors, and administrators) with coverage under a directors' and officers' liability policy at the expense of the Company and the Bank, at least equivalent to such coverage provided to directors and senior executives of the Company and the Bank. 14. REIMBURSEMENT OF EXECUTIVE'S EXPENSES TO ENFORCE THIS AGREEMENT. The Company and the Bank shall reimburse Executive for all out-of-pocket expenses, including, without limitation, reasonable attorney's fees, incurred by Executive in connection with successful enforcement by Executive of the obligations of the Company and the Bank to Executive under this Agreement. Successful enforcement shall mean the grant of an award of money or the requirement that the Company and the Bank take some action specified by this Agreement: (i) as a result of court order; or (ii) otherwise by the Company and the Bank following an initial failure of the Company and the Bank to pay such money or take such action promptly after written demand therefor from Executive stating the reason that such money or action was due under this Agreement at or prior to the time of such demand. 15. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and benefits pursuant to Section 12 of this Agreement, either alone or together with other payments and benefits which Executive has the right to receive from the Company and the Bank, would constitute a a "parachute payment" under Section 280G of the Code, the payments and benefits pursuant to Section 12 shall be reduced or revised, in the manner determined by Executive, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits under Section 12 being non-deductible to the Company and the Bank pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The determination of any reduction in the payments and benefits to be made pursuant to Section 12 shall be based upon the opinion of the Company and the Bank's independent public accountants and paid for by the Company and the Bank. In the event that the Company, the Bank and/or Executive do not agree with the opinion of such counsel, (i) the Company and the Bank shall pay to Executive the maximum amount of payments and benefits pursuant to Section 12, as selected by Executive, which such opinion indicates there is a high probability do not result in any of such payments and benefits being non-deductible to the Company and the Bank and subject to the imposition of the excise tax imposed under Section 4999 of the Code and (ii) the Company and the Bank may request, and Executive shall have the right 10 to demand that they request, a ruling from the IRS as to whether the disputed payments and benefits pursuant to Section 12 have such consequences. Any such request for a ruling from the IRS shall be promptly prepared and filed by the Company and the Bank, but in no event later than thirty (30) days from the date of the opinion of counsel referred to above, and shall be subject to Executive's approval prior to filing, which shall not be unreasonably withheld. The Company, the Bank and Executive agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any such rulings, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained herein shall result in a reduction of any payments or benefits to which Executive may be entitled upon termination of employment other than pursuant to Section 12 hereof, or a reduction in the payments and benefits specified in Section 12 below zero. 16. INJUNCTIVE RELIEF. If there is a breach or threatened breach of Section 11g. of this Agreement or the prohibitions upon disclosure contained in Section 10c. of this Agreement, the parties agree that there is no adequate remedy at law for such breach, and that the Company and the Bank shall be entitled to injunctive relief restraining Executive from such breach or threatened breach, but such relief shall not be the exclusive remedy hereunder for such breach. The parties hereto likewise agree that Executive, without limitation, shall be entitled to injunctive relief to enforce the obligations of the Company and the Bank under this Agreement. 17. SUCCESSORS AND ASSIGNS. a. This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company and the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets or stock of the Company and the Bank. b. Since the Company and the Bank are contracting for the unique and personal skills of Executive, Executive shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Company and the Bank. 18. NO MITIGATION. Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to Executive in any subsequent employment. 19. NOTICES. All notices, requests, demands and other communications in connection with this Agreement shall be made in writing and shall be deemed to have been given when delivered by hand or 48 hours after mailing at any general or branch United States Post Office, by registered or certified mail, postage prepaid, addressed to the Company and/or the Bank at their principal business offices and to Executive at his home address as maintained in the records of the Company and the Bank. 20. NO PLAN CREATED BY THIS AGREEMENT. Executive, the Company and the Bank expressly declare and agree that this Agreement was negotiated among them and that no provision or 11 provisions of this Agreement are intended to, or shall be deemed to, create any plan for purposes of the Employee Retirement Income Security Act or any other law or regulation, and each party expressly waives any right to assert the contrary. Any assertion in any judicial or administrative filing, hearing, or process that such a plan was so created by this Agreement shall be deemed a material breach of this Agreement by the party making such an assertion. 21. AMENDMENTS. No amendments or additions to this Agreement shall be binding unless made in writing and signed by all of the parties, except as herein otherwise specifically provided. 22. APPLICABLE LAW. Except to the extent preempted by Federal law, the laws of the State of Connecticut shall govern this Agreement in all respects, whether as to its validity, construction, capacity, performance or otherwise. 23. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 24. HEADINGS. Headings contained herein are for convenience of reference only. 25. ENTIRE AGREEMENT. This Agreement, together with any understanding or modifications thereof as agreed to in writing by the parties, shall constitute the entire agreement among the parties hereto with respect to the subject matter hereof, other than written agreements with respect to specific plans, programs or arrangements described in Sections 5 and 6. 26. REQUIRED PROVISIONS. In the event any of the foregoing provisions of this Section 26 are in conflict with the terms of this Agreement, this Section 26 shall prevail. a. The Bank may terminate Executive's employment at any time, but any termination by the Bank, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 7 hereinabove. b. If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e)(3) or (g)(1); the Bank's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may, in its discretion: (i) pay Executive all or part of the compensation withheld while their contract obligations were suspended; and (ii) reinstate (in whole or in part) any of the obligations which were suspended. c. If Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e)(4) or (g)(1), all 12 obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. d. If the Bank is in default as defined in Section 3(x)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1813(x)(1) all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. e. All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution: (i) by the Director of the OTS (or his designee), the FDIC or the Resolution Trust Corporation, at the time the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1823(c); or (ii) by the Director of the OTS (or his designee) at the time the Director (or his designee) approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the Director to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. f. Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R. Section 545.121 and any rules and regulations promulgated thereunder. 13 IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first set forth above. ATTEST: NAUGATUCK VALLEY FINANCIAL CORPORATION ________________________ By:___________________________________ Corporate Secretary For the Entire Board of Directors ATTEST: NAUGATUCK VALLEY SAVINGS AND LOAN ________________________ By:___________________________________ Corporate Secretary For the Entire Board of Directors WITNESS: EXECUTIVE ________________________ By:___________________________________ Corporate Secretary 14 EX-10.4 13 g89544exv10w4.txt EX-10.4 CHANGE IN CONTROL AGREEMENT EXHIBIT 10.4 FORM OF CHANGE IN CONTROL AGREEMENT This AGREEMENT ("Agreement") is hereby entered into as of ______________, 2004, by and between NAUGATUCK VALLEY SAVINGS AND LOAN (the "Bank"), a federally chartered savings bank, with its principal offices at 333 Church Street, Naugatuck, Connecticut 06770, _________________ ("Executive"), and NAUGATUCK VALLEY FINANCIAL CORPORATION (the "Company"), a federally chartered corporation and the holding company of the Bank, as guarantor. WHEREAS, the Bank recognizes the importance of Executive to the Bank's operations and wishes to protect his position with the Bank in the event of a change in control of the Bank or the Company for the period provided for in this Agreement; and WHEREAS, Executive and the Board of Directors of the Bank desire to enter into an agreement setting forth the terms and conditions of payments due to Executive in the event of a change in control and the related rights and obligations of each of the parties. NOW, THEREFORE, in consideration of the promises and mutual covenants herein contained, it is hereby agreed as follows: 1. TERM OF AGREEMENT. a. The term of this Agreement shall be (i) the initial term, consisting of the period commencing on the date of this Agreement (the "Effective Date") and ending on the _____________anniversary of the Effective Date, plus (ii) any and all extensions of the initial term made pursuant to this Section 1. b. Commencing on the first anniversary of the Effective Date and continuing each anniversary date thereafter, the Board of Directors of the Bank (the "Board of Directors") may extend the term of this Agreement for an additional one (1) year period beyond the then effective expiration date, provided that Executive shall not have given at least sixty (60) days' written notice of his desire that the term not be extended. c. Notwithstanding anything in this Section to the contrary, this Agreement shall terminate if Executive or the Bank terminates Executive's employment prior to a Change in Control. 2. CHANGE IN CONTROL. a. Upon the occurrence of a Change in Control of the Bank or the Company followed at any time during the term of this Agreement by the termination of Executive's employment in accordance with the terms of this Agreement, other than for Cause, as defined in Section 2(c.) of this Agreement, the provisions of Section 3 of this Agreement shall apply. Upon the occurrence of a Change in Control, Executive shall have the right to elect to voluntarily terminate his employment at any time during the term of this Agreement following an event constituting "Good Reason." "Good Reason" means, unless Executive has consented in writing thereto, the occurrence following a Change in Control, of any of the following: i. the assignment to Executive of any duties materially inconsistent with Executive's position, including any material diminution in status, title, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and that is remedied by the Bank or Executive's employer reasonably promptly after receipt of notice from Executive; ii. a reduction by the Bank or Executive's employer of Executive's base salary in effect immediately prior to the Change in Control; iii. the relocation of Executive's office to a location more than ________ miles from its location as of the date of this Agreement; iv. the taking of any action by the Bank or any of its affiliates or successors that would materially adversely affect Executive's overall compensation and benefits package, unless such changes to the compensation and benefits package are made on a non-discriminatory basis and affect substantially all employees; or v. the failure of the Bank or the affiliate of the Bank by which Executive is employed, or any affiliate that directly or indirectly owns or controls any affiliate by which Executive is employed, to obtain the assumption in writing of the Bank's obligation to perform this Agreement by any successor to all or substantially all of the assets of the Bank or such affiliate within thirty (30) days after a reorganization, merger, consolidation, sale or other disposition of assets of the Bank or such affiliate. b. For purposes of this Agreement, a "Change in Control" shall be deemed to occur on the earliest of any of the following events: i. Merger: The Company merges into or consolidates with another corporation, or merges another corporation into the Company, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were stockholders of the Company immediately before the merger or consolidation. ii. Acquisition of Significant Share Ownership: The Company files, or is required to file, a report on Schedule 13D or another form or schedule (other than Schedule 13G) required under Sections 13(d) or 14(d) of the Securities Exchange 2 Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 25% or more of a class of the Company's voting securities, but this clause (b) shall not apply to beneficial ownership of Company voting shares held in a fiduciary capacity by an entity of which the Company directly or indirectly beneficially owns 50% or more of its outstanding voting securities. iii. Change in Board Composition: During any period of two consecutive years, individuals who constitute the Company's Board of Directors at the beginning of the two-year period cease for any reason to constitute at least a majority of the Company's Board of Directors; provided, however, that for purposes of this clause (iii), each director who is first elected by the board (or first nominated by the board for election by the stockholders) by a vote of at least two-thirds (2/3) of the directors who were directors at the beginning of the two-year period shall be deemed to have also been a director at the beginning of such period; or iv. Sale of Assets: The Company sells to a third party all or substantially all of its assets. Notwithstanding anything in this Agreement to the contrary, in no event shall the conversion of the Bank from mutual to stock form (including without limitation, through the formation of a stock holding company) or the reorganization of the Bank into the mutual holding company form of organization constitute a "Change in Control" for purposes of this Agreement. c. Executive shall not have the right to receive termination benefits pursuant to Section 3 hereof upon termination for "Cause". Termination for Cause shall mean termination of employment because of Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, regulation (other than traffic violations or similar offenses), final cease and desist order, or any material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of a majority of the entire membership of the Board of Directors at a meeting of the Board of Directors called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board of Directors), finding that in the good faith opinion of the Board of Directors, Executive was guilty of conduct justifying termination for Cause and specifying the particulars thereof in detail. Executive shall not have the right to receive compensation or other benefits for any period after termination for Cause. During the period beginning on the date of the Notice of Termination for Cause pursuant to Section 4 hereof through the Date of Termination, stock options granted to Executive under any stock option plan shall not be exercisable nor shall any unvested stock awards granted to Executive under any stock benefit plan of the Bank, the Company or any 3 subsidiary or affiliate thereof, vest. At the Date of Termination, such stock options and any such unvested stock awards shall become null and void and shall not be exercisable by or delivered to Executive at any time subsequent to such termination for Cause. 3. TERMINATION BENEFITS. a. If Executive's employment is voluntarily (in accordance with Section 2(a.) of this Agreement) or involuntarily terminated within ___________ years of a Change in Control, Executive shall receive: i. a lump sum cash payment equal to ______ (__) times the Executive's "base amount," within the meaning of Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code"). Such payment shall be made not later than five (5) days following Executive's termination of employment under this Section 3. ii. Continued benefit coverage under all Bank health and welfare plans which Executive participated in as of the date of the Change in Control (collectively, the "Employee Benefit Plans") for a period of ______ (___) months following Executive's termination of employment. Said coverage shall be provided under the same terms and conditions in effect on the date of Executive's termination of employment. Solely for purposes of benefits continuation under the Employee Benefit Plans, Executive shall be deemed to be an active employee. To the extent that benefits required under this Section 3(a) cannot be provided under the terms of any Employee Benefit Plan, the Bank shall enter into alternative arrangements that will provide Executive with comparable benefits. b. Notwithstanding the preceding provisions of this Section 3, in no event shall the aggregate payments or benefits to be made or afforded to Executive under said paragraphs (the "Termination Benefits") constitute an "excess parachute payment" under Section 280G of the Code or any successor thereto, and to avoid such a result, Termination Benefits will be reduced, if necessary, to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to three (3) times Executive's "base amount," as determined in accordance with said Section 280G. The allocation of the reduction required hereby among the Termination Benefits provided by this Section 3 shall be determined by Executive. 4. NOTICE OF TERMINATION. a. Any purported termination by the Bank or by Executive shall be communicated by Notice of Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. 4 b. "Date of Termination" shall mean the date specified in the Notice of Termination (which, in the case of a termination for Cause, shall not be less than thirty (30) days from the date such Notice of Termination is given). 5. SOURCE OF PAYMENTS. All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, unconditionally guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company. 6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior agreement between the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. Nothing in this Agreement shall confer upon Executive the right to continue in the employ of the Bank or shall impose on the Bank any obligation to employ or retain Executive in its employ for any period. 7. NO ATTACHMENT. a. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void and of no effect. b. This Agreement shall be binding upon, and inure to the benefit of, Executive, the Bank and their respective successors and assigns. 8. MODIFICATION AND WAIVER. a. This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. b. No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future or as to any act other than that specifically waived. 5 9. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 10. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. In addition, references herein to the masculine shall apply to both the masculine and the feminine. 11. GOVERNING LAW. Except to the extent preempted by federal law, the validity, interpretation, performance, and enforcement of this Agreement shall be governed by the laws of the State of Connecticut, without regard to principles of conflicts of law of that State. 12. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Bank, in accordance with the rules of the American Arbitration Bank then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 13. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, only if Executive is successful pursuant to a legal judgment, arbitration or settlement. 14. INDEMNIFICATION. The Company or the Bank shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under applicable law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Company or the Bank 6 (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs, attorneys' fees and the cost of reasonable settlements. 15. SUCCESSORS TO THE BANK AND THE COMPANY. The Bank and the Company shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all of the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's and the Company's obligations under this Agreement, in the same manner and to the same extent that the Bank and the Company would be required to perform if no such succession or assignment had taken place. 7 SIGNATURES IN WITNESS WHEREOF, Naugatuck Valley Savings and Loan and Naugatuck Valley Financial Corporation have caused this Agreement to be executed and their seals to be affixed hereunto by their duly authorized officers, and Executive has signed this Agreement, on the ____ day of _________________, 200__. ATTEST: NAUGATUCK VALLEY SAVINGS AND LOAN ______________________________ By: _______________________________________ Corporate Secretary For the Entire Board of Directors ATTEST: NAUGATUCK VALLEY FINANCIAL CORPORATION (GUARANTOR) ______________________________ By: _______________________________________ Corporate Secretary For the Entire Board of Directors [SEAL] WITNESS: EXECUTIVE ______________________________ ____________________________________________ Corporate Secretary 8 EX-10.5 14 g89544exv10w5.txt EX-10.5 DIRECTORS' RETIREMENT PLAN EXHIBIT 10.5 NAUGATUCK VALLEY SAVINGS & LOAN, S.B. ================================================================================ Organizational Function Area: Administration Policy: Directors Compensation Policy Last Board Approval: July 15, 2003 Revision or Reaffirmation Date: June 15, 2004 Individuals Responsible for John C. Roman Maintaining/Updating Policy: ================================================================================ TABLE OF CONTENTS Table of Contents ............................................... 1 Purpose ......................................................... 2 Policy Statement ................................................ 2 Job Description ................................................. 2 Compensation .................................................... 3 Privacy Policy .................................................. 4 Compulsory Retirement and Benefits Payable to Directors ......... 4 Annual Policy Review ............................................ 5

PURPOSE: The purpose of this policy is to document the policy for compensation of Directors and Directors Emeritus of Naugatuck Valley savings and Loan, S.B. POLICY STATEMENT: Outside members of the Board of Directors for the Naugatuck Valley Savings and Loan Association, Inc. are selected for their business acumen, personal expertise, civic and fraternal involvement, personal reputation and integrity, and perceived value to the Association. The Association will maintain a compensation plan conducive to attracting and retaining individuals meeting these criteria that is competitive and appropriate. Compensation will be in the form of an annual retainer plus Board and Committee meeting fees. Levels of compensation are to be based on the expectation that each Director will promote and market the Association and regularly attend of Board and Committee meetings. This policy will be managed and monitored by the Human Resources Committee. JOB DESCRIPTION The job description for the Board of Directors is as follows: Members of the Board of Directors - - Participates in meetings of the full Board of Directors and also as members of one or more Committees of the Board of Directors, which meet on a weekly basis or less frequently as needed. - - Serves according to the Bank's Bylaws as a member of the policy-making and governing body of Naugatuck Valley Savings & Loan, S.B., with responsibility for the management and administration of various functions of the Bank through delegation of authority and assignments to the President and other officers. - - Specifically, the Board is responsible for operating the Bank in a safe and sound manner and: 1. Complies with applicable laws and regulations and banking practices. 2. Initiates, receives, reviews, makes determinations and takes actions on all matters affecting the Association based upon personal knowledge and/or recommendations referred by the President and/or Board Committees. 3. Reviews the periodic operating results of the Bank, paying diligent attention to such results in order to determine courses of action in the short or long term. 2 4. Analyzes a variety of material and reports for informational purposes and preliminary to taking necessary action. 5. Establishes policy for interest rates to be charged on loans and to be paid to customers. 6. Authorizes the maintenance of correspondent bank accounts. 7. Ensures that all Bank's policies and procedures are developed, implemented and maintained. 8. Appoints officers of the Bank. Reviews the performance of the President and determines appropriate compensation and bonuses. Approve salary adjustments for other officers. COMPENSATION The Board of the Bank is compensated in the form of an annual retainer plus meeting fees. The amount of the annual retainer and meeting fees are reviewed periodically by the Board. Any changes in the amount of the retainer and/or fees requires Board approval. - Each Director shall be paid an annual retainer. The retainer is paid at the Association's Annual Meeting. - Each Director shall be compensated for each monthly Board meeting attended. - Each Director shall be compensated for each Quarterly Policy Review meeting attended. - Each Director shall be compensated for attendance at each Board Committee meeting that the director is responsible to attend. - Each Director shall be compensated for attendance at special meetings of the Board called by the Chairman of the Board or the President. - The Director appointed as Liaison to ALCO shall be compensated an annual amount payable in 12 monthly installments. - The Director appointed as Liaison to the PIC shall be compensated an annual amount payable in 12 monthly installments. - The Chairman of the Board in his capacity as an ex-officio member of each committee shall be compensated for each meeting attended. - Each Director shall be compensated for attendance at meetings of the Bank's Corporators. 3 PRIVACY POLICY As part of our efforts to meet the financial needs of customers, it is necessary to collect and save information regarding our customers' financial and personal lives. This information is of a highly personal nature and will only be shared, with discretion, for purposes of conducting our business, providing quality service and offering our customers products and services. Directors' access to personal non-public information is restricted to information needed to carry out the policy making and governance functions for which they are responsible. COMPULSORY RETIREMENT AND BENEFITS PAYABLE TO DIRECTORS Any Director of the Bank who attains the age of seventy (70) on or before December 31 in any year while serving as a Director, and any Director of the Bank on the date this Policy is adopted who has already attained the age of seventy (70) or more, shall retire from the Board of Directors effective on January 1 of the year following the year in which such triggering event occurs (the "Retirement Date"). Any Director of the Bank, on or after the date this Policy is adopted, shall qualify for, and be entitled to, the annual retirement benefit provided below upon the occurrence of the last of the following events ("Qualifying Events"): (a) the attainment of age seventy (70); and (b) the completion of ten years of consecutive service as a director. Both of the Qualifying Events must occur during the same term of service as a Director but, in the case of a Director of the Bank on the date this Policy is adopted, either or both of these events may occur prior to the date this Policy is adopted. Such Director may, at the option of the Board of Directors, also be appointed a Director Emeritus. Any such appointment shall be made at the regular Board of Directors meeting in December preceding the Director's Retirement Date and shall be limited to one five-year non renewable term. The annual retirement benefit provided by this Policy shall, subject to reduction as provided below, also be available to any person who is a Director of the Bank on January 1, 2000 who has attained the age of sixty-eight (68) on or by that date and who has then completed or thereafter completes ten years of service as a Director by the time such Director attains the age of seventy (70). The annual retirement benefit of such Director, as computed in the following paragraph, shall be reduced by 10% for each year, or portion thereof greater than three (3) months, remaining until such Director would attain the age of seventy (70) unless such Director continues to serve and attains the age of seventy (70). The annual retirement benefit provided to a qualifying Director under this Policy shall be computed by taking the sum of all amounts paid to non-employee Directors 4 during the calendar year preceding the Director's Retirement Date, dividing that sum by the number of non-employee Directors to whom such amounts were paid, and multiplying the result by 60%. Once computed, the annual retirement benefit provided to a qualifying Director is not subject to change. The annual retirement benefit provided under this Policy to a qualifying Director shall be paid in semi-annual installments on the first business day of January and July with the first semi-annual installment being paid on the first business day that follows that Director's Retirement Date. The annual retirement benefit provided to a qualifying Director under this Policy will end with the payment of the tenth (10th) semi-annual installment to that Director. For non-employee Directors serving on the Board of Directors at the time this Policy is adopted who are at the time, or subsequently become, entitled to the annual retirement benefit provided under this Policy, the percentage listed above shall be increased from 60% to 100%. The non-employee Directors serving on the Board of Directors at the time this policy was adopted are: Frederick E. Hennick Lawrence J. Mambrino Robert E. Ruccio Gerald Labriola, M.D. Michael J. Magas, Jr. Frank Rodrigues James A. Mengacci In the event of the death of any Director who is entitled to the annual retirement benefit under this Policy at the time of his or her death, any semi-annual installment(s) that would have been paid to that Director, had that Director remained alive, shall be paid to the person or persons, and in such percentages, designated by the Director on a Designation of Beneficiary Form supplied by the Association and delivered to the Association prior to the Director's death. In the event that a Director does not complete and deliver to the Association a Designation of Beneficiary Form prior to his or her death, any semi-annual installment(s) that would have been paid to that Director, had that Director remained alive, shall be paid to his or her surviving spouse, and if there is no surviving spouse or such spouse subsequently dies, such installments shall be paid to such Director's estate in a lump sum. Any semi-annual payment provided for under this paragraph shall be paid on the first business day of January and July with the first annual installment being paid on the first business day of the first January or July that follows the Director's death in the case of any Director who dies prior to his or her Retirement Date. ANNUAL POLICY REVIEW: The Board of Directors will review and approve this policy annually. 5 EX-10.6 15 g89544exv10w6.txt EX-10.6 EMPLOYEE SAVINGS PLAN EXHIBIT 10.6 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN ADOPTION AGREEMENT FOR NON-STANDARDIZED 401(K) PROFIT SHARING PLAN AND TRUST The undersigned Employer adopts Prototype Non-Standardized 401(k) Profit Sharing Plan and Trust and elects the following provisions: CAUTION: Failure to properly fill out this Adoption Agreement may result in disqualification of the Plan. EMPLOYER INFORMATION (An amendment to the Adoption Agreement is not needed solely to reflect a change in the information in this Employer Information Section.) 1. EMPLOYER'S NAME, ADDRESS AND TELEPHONE NUMBER Name: Naugatuck Valley Savings and Loan, S.B. _______________________________________________________________ Address: 333 Church Street _______________________________________________________________ Street Naugatuck Connecticut 06770 _______________________________________________________________ City State Zip Telephone: (203) 720-5000 2. EMPLOYER'S TAXPAYER IDENTIFICATION NUMBER 06-0465350 3. TYPE OF ENTITY a. [X] Corporation (including Tax-exempt or Non-profit Corporation) b. [ ] Professional Service Corporation c. [ ] S Corporation d. [ ] Limited Liability Company that is taxed as: 1. [ ] a partnership or sole proprietorship 2. [ ] a Corporation 3. [ ] an S Corporation e. [ ] Sole Proprietorship f. [ ] Partnership (including Limited Liability) g. [ ] Other:_____________________________________________________________ AND, the Employer is a member of (select all that apply): h. [ ] a controlled group i. [X] an affiliated service group 4. EMPLOYER FISCAL YEAR means the 12 consecutive month period: Beginning on January 1st (e.g., January 1st) _____________________________ month day and ending on December 31st _____________________________ month day PLAN INFORMATION (An amendment to the Adoption Agreement is not needed solely to reflect a change in the information in Questions 9. through 11.) 5. PLAN NAME: Naugatuck Valley Savings and Loan, S.B. Employee Savings Plan _____________________________________________________________ 1 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN 6. EFFECTIVE DATE a. [ ] This is a new Plan effective as of_________(hereinafter called the "Effective Date"). b. [ ] This is an amendment and restatement of a previously established qualified plan of the Employer which was originally effective______ (hereinafter called the "Effective Date"). The effective date of this amendment and restatement is______________. c. [X] FOR GUST RESTATEMENTS: This is an amendment and restatement of a previously established qualified plan of the Employer to bring the Plan into compliance with GUST (GATT, USERRA, SBJPA and TRA '97). The original Plan effective date was May 1, 1997 (hereinafter ----------- called the "Effective Date"). Except as specifically provided in the Plan, the effective date of this amendment and restatement is January 1, 2002. (May enter a restatement date that is the first --------------- day of the current Plan Year. The Plan contains appropriate retroactive effective dates with respect to provisions for the appropriate laws.) 7. PLAN YEAR means the 12 consecutive month period: Beginning on January 1st (e.g., January 1st) _____________________________ month day and ending on December 31st _____________________________ month day EXCEPT that there will be a Short Plan Year: a. [X] N/A b. [ ] beginning on ________________________________(e.g., July 1, 2000) month day, year and ending on ________________________________ month day, year 8. VALUATION DATE means: a. [X] Every day that the Trustee, any transfer agent appointed by the Trustee or the Employer, and any stock exchange used by such agent are open for business (daily valuation). b. [ ] The last day of each Plan Year. c. [ ] The last day of each Plan Year half (semi-annual). d. [ ] The last day of each Plan Year quarter. e. [ ] Other (specify day or dates): ______________________ (must be at least once each Plan Year). 9. PLAN NUMBER assigned by the Employer a. [ ] 001 b. [X] 002 c. [ ] 003 d. [ ] Other:_______________________ 10. TRUSTEES: a. [X] Individual Trustee(s) who serve as discretionary Trustee(s) over assets not subject to control by a corporate Trustee. Name(s) Title(s) John C. Roman ________________________________ Dominic J. Alegi, Jr. ________________________________ Kathleen A. McPadden ________________________________ Address and Telephone number 1. [X] Use Employer address and telephone number. 2. [ ] Use address and telephone number below: Address: ________________________________________________________ Street __________________ ______________ _____________ City State Zip Telephone: ________________________________________________________ (C) 2002 2 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN b. [ ] Corporate Trustee Name: ________________________________________________________ Address: ________________________________________________________ Street __________________ ______________ _____________ City State Zip Telephone: ________________________________________________________ AND, the corporate Trustee shall serve as: 1. [ ] a directed (nondiscretionary) Trustee over all Plan assets except for the following: ____________________________________________________________ 2. [ ] a discretionary Trustee over all Plan assets except for the following: ____________________________________________________________ AND, shall a separate trust agreement be used with this Plan? c. [ ] Yes d. [X] No NOTE: If Yes is selected, an executed copy of the trust agreement between the Trustee and the Employer must be attached to this Plan. The Plan and trust agreement will be read and construed together. The responsibilities, rights and powers of the Trustee shall be those specified in the trust agreement. 11. PLAN ADMINISTRATOR'S NAME, ADDRESS AND TELEPHONE NUMBER: (If none is named, the Employer will become the Administrator.) a. [X] Employer (Use Employer address and telephone number). b. [ ] Use name, address and telephone number below: Name: ________________________________________________________ Address: ________________________________________________________ Street __________________ ______________ _____________ City State Zip Telephone: ________________________________________________________ 12. CONSTRUCTION OF PLAN This Plan shall be governed by the laws of the state or commonwealth where the Employer's (or, in the case of a corporate Trustee, such Trustee's) principal place of business is located unless another state or commonwealth is specified: ______________________________________ ELIGIBILITY REQUIREMENTS 13. ELIGIBLE EMPLOYEES (Plan Section 1.18) FOR ALL PURPOSES OF THE PLAN (EXCEPT AS ELECTED IN d. or e. BELOW FOR EMPLOYER CONTRIBUTIONS) means all Employees (including Leased Employees) EXCEPT: NOTE: If different exclusions apply to Elective Deferrals than to other Employer contributions, complete this part a.-b. for the Elective Deferral component of the Plan. a. [X] N/A. No exclusions. b. [ ] The following are excluded, except that if b.3. is selected, such Employees will be included (select all that apply): 1. [ ] Union Employees (as defined in Plan Section 1.18). 2. [ ] Non-resident aliens (as defined in Plan Section 1.18). 3. [ ] Employees who became Employees as the result of a "Code Section 410(b)(6)(C) transaction" (as defined in Plan Section 1.18). 4. [ ] Salaried Employees 5. [ ] Highly Compensated Employees 6. [ ] Leased Employees 7. [ ] Other:________ HOWEVER, different exclusions will apply (select c. OR d. and/or e.): c. [X] N/A. The options elected in a.-b. above apply for all purposes of the Plan. d. [ ] For purposes of all Employer contributions (other than Elective Deferrals and matching contributions)... e. [ ] For purposes of Employer matching contributions... (C) 2002 3 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN IF d. OR e. IS SELECTED, the following exclusions apply for such purposes (select f. or g.): f. [ ] N/A. No exclusions. g. [ ] The following are excluded, except that if g.3. is selected, such Employees will be included (select all that apply): 1. [ ] Union Employees (as defined in Plan Section 1.18). 2. [ ] Non-resident aliens (as defined in Plan Section 1.18). 3. [ ] Employees who became Employees as the result of a "Code Section 410(b)(6)(C) transaction" (as defined in Plan Section 1.18). 4. [ ] Salaried Employees 5. [ ] Highly Compensated Employees 6. [ ] Leased Employees 7. [ ] Other:________ 14. THE FOLLOWING AFFILIATED EMPLOYER (Plan Section 1.6) will adopt this Plan as a Participating Employer (if there is more than one, or if Affiliated Employers adopt this Plan after the date the Adoption Agreement is executed, attach a list to this Adoption Agreement of such Affiliated Employers including their names, addresses, taxpayer identification numbers and types of entities): NOTE: Employees of an Affiliated Employer that does not adopt this Adoption Agreement as a Participating Employer shall not be Eligible Employees. This Plan could violate the Code Section 410(b) coverage rules if all Affiliated Employers do not adopt the Plan. a. [ ] N/A b. [X] Name of First Affiliated Employer: Naugatuck Valley Mortgage Servicing Corporation Address: 333 Church Street ________________________________________________________ Street Naugatuck Connecticut 06770 ________________________________________________________ City State Zip Telephone: (203) 720-5000 Taxpayer Identification Number: 06-1556590 AND, the Affiliated Employer is: c. [X] Corporation (including Tax-exempt, Non-profit or Professional Service Corporation) d. [ ] S Corporation e. [ ] Limited Liability Company that is taxed as: 1. [ ] a partnership or sole proprietorship 2. [ ] a Corporation 3. [ ] an S Corporation f. [ ] Sole Proprietorship g. [ ] Partnership (including Limited Liability) h. [ ] Other:_____________________________________________________________ 15. CONDITIONS OF ELIGIBILITY (Plan Section 3.1) Any Eligible Employee will be eligible to participate in the Plan upon satisfaction of the following: NOTE: If the Year(s) of Service selected is or includes a fractional year, an Employee will not be required to complete any specified number of Hours of Service to receive credit for such fractional year. If expressed in months of service, an Employee will not be required to complete any specified number of Hours of Service in a particular month, unless elected in b.4. or i.4. below. ELIGIBILITY FOR ALL PURPOSES OF THE PLAN (EXCEPT AS ELECTED IN e.-k. BELOW FOR EMPLOYER CONTRIBUTIONS) (select a. or all that apply of b., c., and d.): NOTE: If different conditions apply to Elective Deferrals than to other Employer contributions, complete this part a.-d. for the Elective Deferral component of the Plan. a. [ ] No age or service required. (Go to e.-g. below) b. [X] Completion of the following service requirement which is based on Years of Service (or Periods of Service if the Elapsed Time Method is elected): 1. [ ] No service requirement 2. [ ] 1/2 Year of Service or Period of Service 3. [ ] 1 Year of Service or Period of Service 4. [ ] ________(not to exceed 1,000) Hours of Service within_______ (not to exceed 12) months from the Eligible Employee's employment commencement date. If an Employee does not complete the stated Hours of Service during the specified time period, the Employee is subject to the Year of Service requirement in b.3. above. 5. [X] Other: 6 Months (C) 2002 4 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN (may not exceed one (1) Year of Service or Period of Service) c. [X] Attainment of age: 1. [ ] No age requirement 2. [ ] 20 1/2 3. [X] 21 4. [ ] Other: ____________________(may not exceed 21) d. [ ] The service and/or age requirements specified above shall be waived with respect to any Eligible Employee who was employed on__________ and such Eligible Employee shall enter the Plan as of such date. The requirements to be waived are (select one or both): 1. [ ] service requirement (will let part-time Eligible Employees in Plan) 2. [ ] age requirement HOWEVER, DIFFERENT ELIGIBILITY CONDITIONS WILL APPLY (select e. OR f. and/or g.): e. [X] N/A. The options elected in a.-d. above apply for all purposes of the Plan. f. [ ] For purposes of all Employer contributions (other than Elective Deferrals and matching contributions)... g. [ ] For purposes of Employer matching contributions... If f. OR g. IS SELECTED, the following eligibility conditions apply for such purposes: h. [ ] No age or service requirements i. [ ] Completion of the following service requirement which is based on Years of Service (or Periods of Service if the Elapsed Time Method is elected): 1. [ ] No service requirement 2. [ ] 1/2 Year of Service or Period of Service 3. [ ] 1 Year of Service or Period of Service 4. [ ] ________(not to exceed 1,000) Hours of Service within_______ (not to exceed 12) months from the Eligible Employee's employment commencement date. If an Employee does not complete the stated Hours of Service during the specified time period, the Employee is subject to the Year of Service requirement in i.3. above. 5. [ ] 1 1/2 Years of Service or Periods of Service 6. [ ] 2 Years of Service or Periods of Service 7. [ ] Other: _____________________________________________________ (may not exceed two (2) Years of Service or Periods of Service) NOTE: If more than one (1) Year of Service is elected 100% immediate vesting is required. j. [ ] Attainment of age: 1. [ ] No age requirement 2. [ ] 20 1/2 3. [ ] 21 4. [ ] Other: __________________(may not exceed 21) k. [ ] The service and/or age requirements specified above shall be waived with respect to any Eligible Employee who was employed on _________ and such Eligible Employee shall enter the Plan as of such date. The requirements to be waived are (select one or both): 1. [ ] service requirement (will let part-time Eligible Employees in Plan) 2. [ ] age requirement 16. EFFECTIVE DATE OF PARTICIPATION (Plan Section 3.2) An Eligible Employee who has satisfied the eligibility requirements will become a Participant for all purposes of the Plan (except as elected in g.-p. below for Employer contributions): NOTE: If different entry dates apply to Elective Deferrals than to other Employer contributions, complete this part a.-f. for the Elective Deferral component of the Plan. a. [ ] the day on which such requirements are satisfied. b. [ ] the first day of the month coinciding with or next following the date on which such requirements are satisfied. c. [ ] the first day of the Plan Year quarter coinciding with or next following the date on which such requirements are satisfied. d. [X] the earlier of the first day of the seventh month or the first day of the Plan Year coinciding with or next following the date on which such requirements are satisfied. e. [ ] the first day of the Plan Year next following the date on which such requirements are satisfied. (Eligibility must be 1/2 Year of Service (or Period of Service) or less and age must be 20 1/2 or less.) f. [ ] other:____________________________________________________________, provided that an Eligible Employee who has satisfied the maximum age (21) and service requirements (one (1) Year or Period of Service) and who is otherwise entitled to participate, shall commence participation no later than the earlier of (a) 6 months after such requirements are satisfied, or (b) the first day of the first Plan Year after such requirements are satisfied, unless the Employee separates from service before such participation date. (C) 2002 5 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN HOWEVER, different entry dates will apply (select g. OR h. and/or i.): g. [X] N/A. The options elected in a.-f. above apply for all purposes of the Plan. h. [ ] For purposes of all Employer contributions (other than Elective Deferrals and matching contributions)... i. [ ] For purposes of Employer matching contributions... IF h. OR i. IS SELECTED, the following entry dates apply for such purposes (select one): j. [ ] the first day of the month coinciding with or next following the date on which such requirements are satisfied. k. [ ] the first day of the Plan Year quarter coinciding with or next following the date on which such requirements are satisfied. l. [ ] the first day of the Plan Year in which such requirements are satisfied. m. [ ] the first day of the Plan Year in which such requirements are satisfied, if such requirements are satisfied in the first 6 months of the Plan Year, or as of the first day of the next succeeding Plan Year if such requirements are satisfied in the last 6 months of the Plan Year. n. [ ] the earlier of the first day of the seventh month or the first day of the Plan Year coinciding with or next following the date on which such requirements are satisfied. o. [ ] the first day of the Plan Year next following the date on which such requirements are satisfied. (Eligibility must be 1/2 (or 1 1/2 if 100% immediate Vesting is selected) Year of Service (or Period of Service) or less and age must be 20 1/2 or less.) p. [ ] other:____________________________________________________________, provided that an Eligible Employee who has satisfied the maximum age (21) and service requirements (one (1) Year or Period of Service (or more than one (1) year if full and immediate vesting)) and who is otherwise entitled to participate, shall commence participation no later than the earlier of (a) 6 months after such requirements are satisfied, or (b) the first day of the first Plan Year after such requirements are satisfied, unless the Employee separates from service before such participation date. SERVICE 17. RECOGNITION OF SERVICE WITH PREDECESSOR EMPLOYER (Plan Sections 1.57 and 1.85) a. [ ] No service with a predecessor Employer shall be recognized. b. [X] Service with Naugatack Valley Mortgage Servicing Corporation will be recognized except as follows (select 1. or all that apply of 2. through 4.): 1. [X] N/A, no limitations. 2. [ ] service will only be recognized for vesting purposes. 3. [ ] service will only be recognized for eligibility purposes. 4. [ ] service prior to________ will not be recognized. NOTE: If the predecessor Employer maintained this qualified Plan, then Years of Service (and/or Periods of Service) with such predecessor Employer shall be recognized pursuant to Plan Sections 1.57 and 1.85 and b.1. will apply. 18. SERVICE CREDITING METHOD (Plan Sections 1.57 and 1.85) NOTE: If no elections are made in this Section, then the Hours of Service Method will be used and the provisions set forth in the definition of Year of Service in Plan Section 1.85 will apply. ELAPSED TIME METHOD shall be used for the following purposes (select all that apply): a. [X] N/A. Plan only uses the Hours of Service Method. b. [ ] all purposes. (If selected, skip to Question 19.) c. [ ] eligibility to participate. d. [ ] vesting. e. [ ] sharing in allocations or contributions. HOURS OF SERVICE METHOD shall be used for the following purposes (select all that apply): f. [ ] N/A. Plan only uses the Elapsed Time Method. g. [X] eligibility to participate in the Plan. The eligibility computation period after the initial eligibility computation period shall... 1. [X] shift to the Plan Year after the initial computation period. 2. [ ] be based on the date an Employee first performs an Hour of Service (initial computation period) and subsequent computation periods shall be based on each anniversary date thereof. h. [X] vesting. The vesting computation period shall be... 1. [X] the Plan Year. 2. [ ] the date an Employee first performs an Hour of Service and each anniversary thereof. i. [X] sharing in allocations or contributions (the computation period shall be the Plan Year). (C) 2002 6 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN AND, IF THE HOURS OF SERVICE METHOD IS BEING USED, the Hours of Service will be determined on the basis of the method selected below. Only one method may be selected. The method selected below will be applied to (select j. or k.): j. [X] all Employees. k. [ ] salaried Employees only (for hourly Employees, actual Hours of Service will be used). ON THE BASIS OF: l. [X] actual hours for which an Employee is paid or entitled to payment. m. [ ] days worked. An Employee will be credited with ten (10) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the day. n. [ ] weeks worked. An Employee will be credited with forty-five (45) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the week. o. [ ] semi-monthly payroll periods worked. An Employee will be credited with ninety-five (95) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the semi-monthly payroll period. p. [ ] months worked. An Employee will be credited with one hundred ninety (190) Hours of Service if under the Plan such Employee would be credited with at least one (1) Hour of Service during the month. AND, a Year of Service means the applicable computation period during which an Employee has completed at least: q. [X] 1000 (may not be more than 1,000) Hours of Service (if left blank, the Plan will use 1,000 Hours of Service). VESTING 19. VESTING OF PARTICIPANT'S INTEREST (Plan Section 6.4(b)) Vesting for Employer Contributions (except as otherwise elected in j. - q. below for matching contributions). The vesting schedule, based on a Participant's Years of Service (or Periods of Service if the Elapsed Time Method is elected), shall be as follows: a. [ ] 100% upon entering Plan. (Required if eligibility requirement is greater than one (1) Year of Service or Period of Service.) b. [ ] 3 Year Cliff: c. [ ] 5 Year Cliff: 0-2 years 0% 0-4 years 0% 3 years 100% 5 years 100% d. [X] 6 Year Graded: e. [ ] 4 Year Graded: 0-1 year 0% 1 year 25% 2 years 20% 2 years 50% 3 years 40% 3 years 75% 4 years 60% 4 years 100% 5 years 80% 6 years 100% f. [ ] 5 Year Graded: g. [ ] 7 Year Graded: 1 year 20% 0-2 years 0% 2 years 40% 3 years 20% 3 years 60% 4 years 40% 4 years 80% 5 years 60% 5 years 100% 6 years 80% 7 years 100% h. [ ] Other - Must be at least as liberal as either c. or g. above. Service Percentage ____ _____ ____ _____ ____ _____ ____ _____ ____ _____ ____ _____ ____ _____ (C) 2002 7 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN VESTING FOR EMPLOYER MATCHING CONTRIBUTIONS The vesting schedule for Employer matching contributions, based on a Participant's Years of Service (or Periods of Service if the Elapsed Time Method is elected) shall be as follows: i. [X] N/A. There are no matching contributions subject to a vesting schedule OR the schedule in a.-h. above shall also apply to matching contributions. j. [ ] 100% upon entering Plan. (Required if eligibility requirement is greater than one (1) Year of Service or Period of Service.) k. [ ] 3 Year Cliff l. [ ] 5 Year Cliff m. [ ] 6 Year Graded n. [ ] 4 Year Graded o. [ ] 5 Year Graded p. [ ] 7 Year Graded q. [ ] Other - Must be at least as liberal as either l. or p. above. Service Percentage ____ _____ ____ _____ ____ _____ ____ _____ ____ _____ ____ _____ ____ _____ (C) 2002 8 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN 20. FOR AMENDED PLANS (Plan Section 5.9(g)) If the vesting schedule has been amended to a less favorable schedule, enter the pre-amended schedule below: a. [ ] Vesting schedule has not been amended, amended schedule is more favorable in all years or prior schedule was immediate 100% vesting. b. [X] Pre-amended schedule: Service Percentage 5 100% % 21. TOP HEAVY VESTING (Plan Section 6.4(c)) If this Plan becomes a Top Heavy Plan, the following vesting schedule, based on number of Years of Service (or Periods of Service if the Elapsed Time Method is elected), shall apply and shall be treated as a Plan amendment pursuant to this Plan. Once effective, this schedule shall also apply to any contributions made before the Plan became a Top Heavy Plan and shall continue to apply if the Plan ceases to be a Top Heavy Plan unless an amendment is made to change the vesting schedule. a. [X] N/A (the regular vesting schedule already satisfies one of the minimum top heavy schedules). b. [ ] 6 Year Graded: 0-1 year 0% 2 years 20% 3 years 40% 4 years 60% 5 years 80% 6 years 100% c. [ ] 3 Year Cliff: 0-2 years 0 % 3 years 100 % d. [ ] Other - Must be at least as liberal as either b. or c. above. Service Percentage _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ _______ NOTE: This Section does not apply to the account balances of any Participant who does not have an Hour of Service after the Plan has initially become top heavy. Such Participant's Account balance attributable to Employer contributions and Forfeitures will be determined without regard to this Section. 22. EXCLUDED VESTING SERVICE a. [ ] No exclusions. b. [X] Service prior to the Effective Date of the Plan or a predecessor plan. c. [ ] Service prior to the time an Employee has attained age 18. 23. VESTING FOR DEATH AND TOTAL AND PERMANENT DISABILITY Regardless of the vesting schedule, Participants shall become fully Vested upon (select a. or all that apply of b. and c.) a. [ ] N/A. Apply vesting schedule, or all contributions to the Plan are fully Vested. b. [X] Death. c. [X] Total and Permanent Disability. 24. NORMAL RETIREMENT AGE ("NRA") (Plan Section 1.45) means the: a. [ ] date of a Participant's ________ birthday (not to exceed 65th). b. [X] later of a Participant's 65th birthday (not to exceed 65th) or the 5th (not to exceed 5th) anniversary of the first day of the Plan Year in which participation in the Plan commenced. (C) 2002 9 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN 25. NORMAL RETIREMENT DATE (Plan Section 1.46) means the: a. [X] Participant's "NRA". OR (select one) b. [ ] first day of the month coinciding with or next following the Participant's "NRA". c. [ ] first day of the month nearest the Participant's "NRA". d. [ ] Anniversary Date coinciding with or next following the Participant's "NRA". e. [ ] Anniversary Date nearest the Participant's "NRA". 26. EARLY RETIREMENT DATE (Plan Section 1.15) means the: a. [ ] No Early Retirement provision provided. b. [X] date on which a Participant... c. [ ] first day of the month coinciding with or next following the date on which a Participant... d. [ ] Anniversary Date coinciding with or next following the date on which a Participant... AND, if b., c., or d. is selected... e. [ ] attains age ______. f. [X] attains age 55 and completes at least 5 Years of Service (or Periods of Service) for vesting purposes. AND, if b., c. or d. is selected, shall a Participant become fully Vested upon attainment of the Early Retirement Date? g. [X] Yes h. [ ] No COMPENSATION 27. COMPENSATION (Plan Section 1.11) with respect to any Participant means: a. [X] Wages, tips and other compensation on Form W-2. b. [ ] Section 3401(a) wages (wages for withholding purposes). c. [ ] 415 safe-harbor compensation. COMPENSATION shall be based on the following determination period: d. [X] the Plan Year. e. [ ] the Fiscal Year coinciding with or ending within the Plan Year. f. [ ] the calendar year coinciding with or ending within the Plan Year. NOTE: The Limitation Year for Code Section 415 purposes shall be the same as the determination period for Compensation unless an alternative period is specified: ___________(must be a consecutive twelve month period). ADJUSTMENTS TO COMPENSATION g. [ ] N/A. No adjustments. h. [X] Compensation shall be adjusted by: (select all that apply) 1. [X] including compensation which is not currently includible in the Participant's gross income by reason of the application of Code Sections 125 (cafeteria plan), 132(f)(4) (qualified transportation fringe), 402(e)(3) (401(k) plan), 402(h)(1)(B) (simplified employee pension plan), 414(h) (employer pickup contributions under a governmental plan), 403(b) (tax sheltered annuity) or 457(b) (eligible deferred compensation plan). 2. [ ] excluding reimbursements or other expense allowances, fringe benefits (cash or non-cash), moving expenses, deferred compensation (other than deferrals specified in 1. above) and welfare benefits. 3. [X] excluding Compensation paid during the determination period while not a Participant in the component of the Plan for which the definition is being used. 4. [ ] excluding overtime. 5. [ ] excluding bonuses. 6. [ ] excluding commissions. 7. [ ] other: ____________________________________________________. NOTE: Options 4., 5., 6. or 7. may not be selected if an integrated allocation formula is selected (i.e., if 33.f. is selected). In addition, if 4., 5., 6., or 7. is selected, the definition of Compensation could violate the nondiscrimination rules. (C) 2002 10 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN HOWEVER, FOR SALARY DEFERRAL AND MATCHING PURPOSES Compensation shall be adjusted by (for such purposes, the Plan automatically includes Elective Deferrals and other amounts in h.1. above): i. [X] N/A. No adjustments or same adjustments as in above. j. [ ] Compensation shall be adjusted by: (select all that apply) 1. [ ] excluding reimbursements or other expense allowances, fringe benefits (cash or non-cash), moving expenses, deferred compensation (other than deferrals specified in h.1. above) and welfare benefits. 2. [ ] excluding Compensation paid during the determination period while not a Participant in the component of the Plan for which the definition is being used. 3. [ ] excluding overtime 4. [ ] excluding bonuses 5. [ ] excluding commissions 6. [ ] other:______________________________________________________ CONTRIBUTIONS AND ALLOCATIONS 28. SALARY REDUCTION ARRANGEMENT - ELECTIVE DEFERRALS (Plan Section 12.2) Each Participant may elect to have Compensation deferred by: a. [ ] _______%. b. [ ] up to ______%. c. [ ] from ______% to ______%. d. [X] up to the maximum percentage allowable not to exceed the limits of Code Sections 401(k), 402(g), 404 and 415. AND, Participants who are Highly Compensated Employees determined as of the beginning of a Plan Year may only elect to defer Compensation by: e. [X] Same limits as specified above. f. [ ] The percentage equal to the deferral limit in effect under Code Section 402(g)(3) for the calendar year that begins with or within the Plan Year divided by the annual compensation limit in effect for the Plan Year under Code Section 401(a)(17). MAY PARTICIPANTS make a special salary deferral election with respect to bonuses? g. [X] No. h. [ ] Yes, a Participant may elect to defer up to______% of any bonus. PARTICIPANTS MAY commence salary deferrals on the effective date of participation and on ____ (must be at least once each calendar year). Participants may modify salary deferral elections: 1. [ ] As of each payroll period 2. [ ] On the first day of the month 3. [ ] On the first day of each Plan Year quarter 4. [X] On the first day of the Plan Year or the first day of the 7th month of the Plan Year 5. [ ] Other:_______ (must be at least once each calendar year) AUTOMATIC ELECTION: Shall Participants who do not affirmatively elect to receive cash or have a specified amount contributed to the Plan automatically have Compensation deferred? i. [X] No. j. [ ] Yes, by _____% of Compensation. SHALL THERE BE a special effective date for the salary deferral component of the Plan? k. [X] No. l. [ ] Yes, the effective date of the salary deferral component of the Plan is______(enter month day, year). 29. SIMPLE 401(k) PLAN ELECTION (Plan Section 13.1) Shall the simple 401(k) provisions of Article XIII apply? a. [X] No. The simple 401(k) provisions will not apply. b. [ ] Yes. The simple 401(k) provisions will apply. 30. 401(k) SAFE HARBOR PROVISIONS (Plan Section 12.8) Will the ADP and/or ACP test safe harbor provisions be used? (select a., b. or c.) a. [X] No. (If selected, skip to Question 31.) b. [ ] Yes, but only the ADP (and NOT the ACP) Test Safe Harbor provisions will be used. c. [ ] Yes, both the ADP and ACP Test Safe Harbor provisions will be used. (C) 2002 11 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN IF c. is selected, does the Plan permit matching contributions in addition to any safe harbor contributions elected in d. or e. below? 1. [ ] No or N/A. Any matching contributions, other than any Safe Harbor Matching Contributions elected in d. below, will be suspended in any Plan Year in which the safe harbor provisions are used. 2. [ ] Yes, the Employer may make matching contributions in addition to any Safe Harbor Matching contributions elected in d. below. (If elected, complete the provisions of the Adoption Agreement relating to matching contributions (i.e., Questions 31. and 32.) that will apply in addition to any elections made in d. below. NOTE: Regardless of any election made in Question 31., the Plan automatically provides that only Elective Deferrals up to 6% of Compensation are taken into account in applying the match set forth in that Question and that the maximum discretionary matching contribution that may be made on behalf of any Participant is 4% of Compensation.) THE EMPLOYER WILL MAKE THE FOLLOWING ADP TEST SAFE HARBOR CONTRIBUTION FOR THE PLAN YEAR: NOTE: The ACP Test Safe Harbor is automatically satisfied if the only matching contribution made to the Plan is either (1) a Basic Matching Contribution or (2) an Enhanced Matching Contribution that does not provide a match on Elective Deferrals in excess of 6% of Compensation. d. [ ] Safe Harbor Matching Contribution (select 1. or 2. AND 3.) 1. [ ] BASIC MATCHING CONTRIBUTION. The Employer will make Matching Contributions to the account of each "Eligible Participant" in an amount equal to the sum of 100% of the amount of the Participant's Elective Deferrals that do not exceed 3% of the Participant's Compensation, plus 50% of the amount of the Participant's Elective Deferrals that exceed 3% of the Participant's Compensation but do not exceed 5% of the Participant's Compensation. 2. [ ] ENHANCED MATCHING CONTRIBUTION. The Employer will make Matching Contributions to the account of each "Eligible Participant" in an amount equal to the sum of: a. [ ] _____% (may not be less than 100%) of the Participant's Elective Deferrals that do not exceed _____% (if over 6% or if left blank, the ACP test will still apply) of the Participant's Compensation, plus b. [ ] _____% of the Participant's Elective Deferrals that exceed _____% of the Participant's Compensation but do not exceed _____% (if over 6% or if left blank, the ACP test will still apply) of the Participant's Compensation. NOTE: a. and b. must be completed so that, at any rate of Elective Deferrals, the matching contribution is at least equal to the matching contribution receivable if the Employer were making Basic Matching Contributions, but the rate of match cannot increase as deferrals increase. For example, if a. is completed to provide a match equal to 100% of deferrals up to 4% of Compensation, then b. need not be completed. 3. [ ] The safe harbor matching contribution will be determined on the following basis (and Compensation for such purpose will be based on the applicable period): a. [ ] the entire Plan Year. b. [ ] each payroll period. c. [ ] all payroll periods ending with or within each month. d. [ ] all payroll periods ending with or within the Plan Year quarter. e. [ ] Nonelective Safe Harbor Contributions (select one) 1. [ ] The Employer will make a Safe Harbor Nonelective Contribution to the account of each "Eligible Participant" in an amount equal to ____% (may not be less than 3%) of the Employee's Compensation for the Plan Year. 2. [ ] The Employer will make a Safe Harbor Nonelective Contribution to another defined contribution plan maintained by the Employer (specify the name of the other plan):_______. FOR PURPOSES OF THE ADP Test Safe Harbor contribution, the term "Eligible Participant" means any Participant who is eligible to make Elective Deferrals with the following exclusions: f. [ ] Highly Compensated Employees. g. [ ] Employees who have not satisfied the greatest minimum age and service conditions permitted under Code Section 410(a). h. [ ] Other:___________________________________________________________________ (must be a category that could be excluded under the permissive or mandatory disaggregation rules of Regulations 1.401(k)-1(b)(3) and 1.401(m)-1(b)(3)). (C) 2002 12 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN SPECIAL EFFECTIVE DATE OF ADP AND ACP TEST SAFE HARBOR PROVISIONS i. [ ] N/A. The safe harbor provisions are effective as of the later of the Effective Date of this Plan or, if this is an amendment or restatement, the effective date of the amendment or restatement. j. [ ] The ADP and ACP Test Safe Harbor provisions are effective for the Plan Year beginning: _______________________________________ (enter the first day of the Plan Year for which the provisions are (or, for GUST updates, were) effective and, if necessary, enter any other special effective dates that apply with respect to the provisions). 31. FORMULA FOR DETERMINING EMPLOYER MATCHING CONTRIBUTIONS (Plan Section 12.1(a)(2)) NOTE: Regardless of any election below, if the ACP test safe harbor is being used (i.e., Question 30.c. is selected), then the Plan automatically provides that only Elective Deferrals up to 6% of Compensation are taken into account in applying the match set forth below and that the maximum discretionary matching contribution that may be made on behalf of any Participant is 4% of Compensation. a. [ ] N/A. There will not be any matching contributions (Skip to Question 33). b. [X] The Employer...(select 1. or 2.) 1. [X] may make matching contributions equal to a discretionary percentage, to be determined by the Employer, of the Participant's Elective Deferrals. 2. [ ] will make matching contributions equal to______% (e.g., 50) of the Participant's Elective Deferrals, plus: a. [ ] N/A. b. [ ] an additional discretionary percentage, to be determined by the Employer. AND, in determining the matching contribution above, only Elective Deferrals up to the percentage or dollar amount specified below will be matched: (select 3. and/or 4. OR 5.) 3. [ ] ______% of a Participant's Compensation. 4. [ ] $______. 5. [ ] a discretionary percentage of a Participant's Compensation or a discretionary dollar amount, the percentage or dollar amount to be determined by the Employer on a uniform basis to all Participants. c. [ ] The Employer may make matching contributions equal to a discretionary percentage, to be determined by the Employer, of each tier, to be determined by the Employer, of the Participant's Elective Deferrals. d. [ ] The Employer will make matching contributions equal to the sum of _____% of the portion of the Participant's Elective Deferrals which do not exceed _____% of the Participant's Compensation or $_____ plus _____% of the portion of the Participant's Elective Deferrals which exceed ______% of the Participant's Compensation or $_____, but does not exceed _____% of the Participant's Compensation or $_____. NOTE: If c. or d. above is elected, the Plan may violate the Code Section 401(a)(4) nondiscrimination requirements if the rate of matching contributions increases as a Participant's Elective Deferrals or Years of Service (or Periods of Service) increase. PERIOD OF DETERMINING MATCHING CONTRIBUTIONS Matching contributions will be determined on the following basis (and any Compensation or dollar limitation used in determining the match will be based on the applicable period): e. [ ] the entire Plan Year. f. [X] each payroll period. g. [ ] all payroll periods ending within each month. h. [ ] all payroll periods ending with or within the Plan Year quarter. THE MATCHING CONTRIBUTION MADE ON BEHALF OF ANY PARTICIPANT for any Plan Year will not exceed: i. [X] N/A. j. [ ] $______. MATCHING CONTRIBUTIONS WILL BE MADE ON BEHALF OF: k. [X] all Participants. l. [ ] only Non-Highly Compensated Employees. SHALL THE MATCHING CONTRIBUTIONS BE QUALIFIED MATCHING CONTRIBUTIONS? m. [ ] Yes. If elected, ALL matching contributions will be fully Vested and will be subject to restrictions on withdrawals. In addition, Qualified Matching Contributions may be used in either the ADP or ACP test. n. [X] No. (C) 2002 13 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN 32. ONLY PARTICIPANTS WHO SATISFY THE FOLLOWING CONDITIONS WILL BE ELIGIBLE TO SHARE IN THE ALLOCATION OF MATCHING CONTRIBUTIONS: REQUIREMENTS FOR PARTICIPANTS WHO ARE ACTIVELY EMPLOYED AT THE END OF THE PLAN YEAR. a. [ ] N/A. b. [X] No service requirement. c. [ ] A Participant must complete a Year of Service (or Period of Service if the Elapsed Time Method is elected). (Could cause Plan to violate coverage requirements under Code Section 410(b).) d. [ ] A Participant must complete at least _____ (may not be more than 1,000) Hours of Service during the Plan Year. (Could cause the Plan to violate coverage requirements under Code Section 410(b).) REQUIREMENTS FOR PARTICIPANTS WHO ARE NOT ACTIVELY EMPLOYED AT THE END OF THE PLAN YEAR (except as otherwise provided in i. through k. below). e. [ ] A Participant must complete more than ____ Hours of Service (not more than 500) (or _____ months of service (not more than three (3)) if the Elapsed Time Method is elected). f. [ ] A Participant must complete a Year of Service (or Period of Service if the Elapsed Time Method is elected). (Could cause the Plan to violate coverage requirements under Code Section 410(b).) g. [ ] Participants will NOT share in such allocations, regardless of service. (Could cause the Plan to violate coverage requirements under Code Section 410(b).) h. [X] Participants will share in such allocations, regardless of service. PARTICIPANTS WHO ARE NOT ACTIVELY EMPLOYED AT THE END OF THE PLAN YEAR due to the following shall be eligible to share in the allocation of matching contributions regardless of the above conditions (select all that apply): i. [X] Death. j. [X] Total and Permanent Disability. k. [X] Early or Normal Retirement. AND, if 32.c., d., f., or g. is selected, shall the 410(b) ratio percentage fail safe provisions apply (Plan Section 12.3(f))? l. [ ] No or N/A. m. [ ] Yes (If selected, the Plan must satisfy the ratio percentage test of Code Section 410(b).) 33. FORMULA FOR DETERMINING EMPLOYER'S PROFIT SHARING CONTRIBUTION (Plan Section 12.1(a)(3)) (d. may be selected in addition to b. or c.) a. [ ] N/A. No Employer Profit Sharing Contributions may be made (other than top heavy minimum contributions) (Skip to Question 34.) b. [X] Discretionary, to be determined by the Employer, not limited to current or accumulated Net Profits. c. [ ] Discretionary, to be determined by the Employer, out of current or accumulated Net Profits. d. [ ] Prevailing Wage Contribution. The Employer will make a Prevailing Wage Contribution on behalf of each Participant who performs services subject to the Service Contract Act, Davis-Bacon Act or similar Federal, State, or Municipal Prevailing Wage statutes. The Prevailing Wage Contribution shall be an amount equal to the balance of the fringe benefit payment for health and welfare for each Participant (after deducting the cost of cash differential payments for the Participant) based on the hourly contribution rate for the Participant's employment classification, as designated on Schedule A as attached to this Adoption Agreement. Notwithstanding anything in the Plan to the contrary, the Prevailing Wage Contribution shall be fully Vested. Furthermore, the Prevailing Wage Contribution shall not be subject to any age or service requirements set forth in Question 15. nor to any service or employment conditions set forth in Question 35. AND, if d. is selected, is the Prevailing Wage Contribution considered a Qualified Non-Elective Contribution? 1. [ ] Yes. 2. [ ] No. AND, if d. is selected, shall the amounts allocated on behalf of a Participant for a Plan Year pursuant to e. or f. below be reduced (offset) by the Prevailing Wage Contribution made on behalf of such Participant for the Plan Year under this Plan? 3. [ ] No (If selected, then the Prevailing Wage Contribution will be added to amounts allocated pursuant to e. or f. below.) 4. [ ] Yes. (C) 2002 14 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN CONTRIBUTION ALLOCATIONS If b. or c. above is selected, the Employer's discretionary profit sharing contribution for a Plan Year will be allocated as follows: e. [ ] NON-INTEGRATED ALLOCATION 1. [ ] In the same ratio as each Participant's Compensation bears to the total of such Compensation of all Participants. 2. [ ] In the same dollar amount to all Participants (per capita). 3. [ ] In the same dollar amount per Hour of Service completed by each Participant. 4. [ ] In the same proportion that each Participant's points bears to the total of such points of all Participants. A Participant's points with respect to any Plan Year shall be computed as follows (select all that apply): a. [ ] _____ point(s) shall be allocated for each Year of Service (or Period of Service if the Elapsed Time Method is elected). However, the maximum Years of Service (or Periods of Service) taken into account shall not exceed ______ (leave blank if no limit on service applies). b. [ ] ______ point(s) shall be allocated for each full $_____ (may not exceed $200) of Compensation. c. [ ] _____ point(s) shall be allocated for each year of age as of the end of the Plan Year. f. [X] INTEGRATED ALLOCATION In accordance with Plan Section 4.3(b)(2) based on a Participant's Compensation in excess of: 1. [X] The Taxable Wage Base. 2. [ ] ______ % (not to exceed 100%) of the Taxable Wage Base. (See Note below) 3. [ ] 80% of the Taxable Wage Base plus $1.00. 4. [ ] $______ (not greater than the Taxable Wage Base). (See Note below) NOTE: The integration percentage of 5.7% shall be reduced to: 1. 4.3% if 2. or 4. above is more than 20% and less than or equal to 80% of the Taxable Wage Base. 2. 5.4% if 3. is elected or if 2. or 4. above is more than 80% of the Taxable Wage Base. 34. QUALIFIED NON-ELECTIVE CONTRIBUTIONS (Plan Section 12.1(a)(4)) NOTE: Regardless of any election made in this Question, the Plan automatically permits Qualified Non-Elective Contributions to correct a failed ADP or ACP test. a. [ ] N/A. There will be no additional Qualified Non-Elective Contributions except as otherwise provided in the Plan. b. [ ] The Employer will make a Qualified Non-Elective Contribution equal to_____ % of the total Compensation of those Participants eligible to share in the allocations. c. [X] The Employer may make a Qualified Non-Elective Contribution in an amount to be determined by the Employer, to be allocated in proportion to the Compensation of those Participants eligible to share in the allocations. d. [ ] The Employer may make a Qualified Non-Elective Contribution in an amount to be determined by the Employer, to be allocated equally to all Participants eligible to share in the allocations (per capita). AND, if b., c., or d. is selected, the Qualified Non-Elective Contributions above will be made on behalf of: e. [ ] all Participants. f. [X] only Non-Highly Compensated Employees. 35. REQUIREMENTS TO SHARE IN ALLOCATIONS OF EMPLOYER DISCRETIONARY PROFIT SHARING CONTRIBUTION, QUALIFIED NON-ELECTIVE CONTRIBUTIONS (other than Qualified Non-Elective Contributions under Plan Sections 12.5(c) and 12.7(g)) AND FORFEITURES a. [ ] N/A. Plan does not permit such contributions. b. [X] Requirements for Participants who are actively employed at the end of the Plan Year. 1. [ ] No service requirement. 2. [X] A Participant must complete a Year of Service (or Period of Service if the Elapsed Time Method is elected). (Could cause Plan to violate coverage requirements under Code Section 410(b).) 3. [ ] A Participant must complete at least ____(may not be more than 1,000) Hours of Service during the Plan Year. (Could cause the Plan to violate coverage requirements under Code Section 410(b).) (C) 2002 15 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN REQUIREMENTS FOR PARTICIPANTS WHO ARE NOT ACTIVELY EMPLOYED AT THE END OF THE PLAN YEAR (except as otherwise provided in g. through i. below). c. [ ] A Participant must complete more than _____ Hours of Service (not more than 500) (or _____ months of service (not more than three (3)) if the Elapsed Time Method is elected). d. [ ] A Participant must complete a Year of Service (or Period of Service if the Elapsed Time Method is elected). (Could cause Plan to violate coverage requirements under Code Section 410(b).) e. [X] Participants will NOT share in such allocations, regardless of service. (Could cause Plan to violate coverage requirements under Code Section 410(b).) f. [ ] Participants will share in such allocations, regardless of service. PARTICIPANTS WHO ARE NOT ACTIVELY EMPLOYED AT THE END OF THE PLAN YEAR due to the following will be eligible to share in the allocations regardless of the above conditions (select all that apply): g. [X] Death. h. [X] Total and Permanent Disability. i. [X] Early or Normal Retirement. AND, if 35.b.2, b.3, d. or e. is selected, shall the 410(b) ratio percentage fail safe provisions apply (Plan Section 12.3(f))? j. [ ] No or N/A. k. [X] Yes (If selected, the Plan must satisfy the ratio percentage test of Code Section 410(b)). 36. FORFEITURES (Plan Sections 1.27 and 4.3(e)) Except as provided in Plan Section 1.27, a Forfeiture will occur (if no election is made, a. will apply): a. [X] as of the earlier of (1) the last day of the Plan Year in which the Former Participant incurs five (5) consecutive 1-Year Breaks in Service, or (2) the distribution of the entire Vested portion of the Participant's Account. b. [ ] as of the last day of the Plan Year in which the Former Participant incurs five (5) consecutive 1-Year Breaks in Service. Will Forfeitures first be used to pay any administrative expenses? c. [X] Yes. d. [ ] No. AND, EXCEPT as otherwise provided below with respect to Forfeitures attributable to matching contributions, any remaining Forfeitures will be... e. [X] added to any Employer discretionary contribution. f. [ ] used to reduce any Employer contribution. g. [ ] added to any Employer matching contribution and allocated as an additional matching contribution. h. [ ] allocated to all Participants eligible to share in the allocations in the same proportion that each Participant's Compensation for the Plan Year bears to the Compensation of all Participants for such year. FORFEITURES OF MATCHING CONTRIBUTIONS WILL BE... i. [ ] N/A. Same as above or no matching contributions. j. [X] used to reduce the Employer's matching contribution. k. [ ] added to any Employer matching contribution and allocated as an additional matching contribution. l. [ ] added to any Employer discretionary profit sharing contribution. m. [ ] allocated to all Participants eligible to share in the matching allocations (regardless of whether a Participant elected any salary reductions) in proportion to each such Participant's Compensation for the year. n. [ ] allocated to all Non-Highly Compensated Employees eligible to share in the matching allocations (regardless of whether a Participant elected any salary reductions) in proportion to each such Participant's Compensation for the year. 37. ALLOCATIONS OF EARNINGS (Plan Section 4.3(c)) Allocations of earnings with respect to amounts which are not subject to Participant directed investments and which are contributed to the Plan after the previous Valuation Date will be determined... a. [X] N/A. All assets in the Plan are subject to Participant investment direction. b. [ ] by using a weighted average based on the amount of time that has passed between the date a contribution or distribution was made and the date of the prior Valuation Date. c. [ ] by treating one-half of all such contributions as being a part of the Participant's nonsegregated account balance as of the previous Valuation Date. d. [ ] by using the method specified in Plan Section 4.3(c) (balance forward method). e. [ ] other: ___________________________________________________________ (must be a definite predetermined formula that is not based on Compensation and that satisfies the nondiscrimination requirements of Regulation 1.401(a)(4)-4 and is applied uniformly to all Participants). (C) 2002 16 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN 38. LIMITATIONS ON ALLOCATIONS (Plan Section 4.4) If any Participant is covered under another qualified defined contribution plan maintained by the Employer, other than a Master or Prototype Plan, or if the Employer maintains a welfare benefit fund, as defined in Code Section 419(e), or an individual medical account, as defined in Code Section 415(1)(2), under which amounts are treated as Annual Additions with respect to any Participant in this Plan: a. [X] N/A. The Employer does not maintain another qualified defined contribution plan. b. [ ] The provisions of Plan Section 4.4(b) will apply as if the other plan were a Master or Prototype Plan. c. [ ] Specify the method under which the plans will limit total Annual Additions to the Maximum Permissible Amount, and will properly reduce any Excess Amounts, in a manner that precludes Employer discretion: ______________________________________________________ DISTRIBUTIONS 39. FORM OF DISTRIBUTIONS (Plan Sections 6.5 and 6.6) Distributions under the Plan may be made in (select all that apply)... a. [X] lump-sums. b. [ ] substantially equal installments. c. [ ] partial withdrawals provided the minimum withdrawal is $________. AND, pursuant to Plan Section 6.12, d. [ ] no annuities are allowed (Plan Section 6.12(b) will apply and the joint and survivor rules of Code Sections 401(a)(11) and 417 will not apply to the Plan). AND, if this is an amendment that is eliminating annuities, then an annuity form of payment is not available with respect to distributions that have an Annuity Starting Date beginning on or after: 1. [ ] N/A 2. [ ] ______ (may not be a retroactive date), except that regardless of the date entered, the amendment will not be effective prior to the time set forth in Plan Section 8.1(e). e. [X] annuities are allowed as the normal form of distribution (Plan Section 6.12 will not apply and the joint and survivor rules of Code Sections 401(a)(11) and 417 will automatically apply). If elected, the Pre-Retirement Survivor Annuity (minimum spouse's death benefit) will be equal to: 1. [ ] 100% of Participant's interest in the Plan. 2. [ ] 50% of Participant's interest in the Plan. 3. [ ] ___% (may not be less than 50%) of a Participant's interest in the Plan. AND, the normal form of the Qualified Joint and Survivor Annuity will be a joint and 50% survivor annuity unless otherwise elected below: 4. [X] N/A. 5. [ ] Joint and 100% survivor annuity. 6. [ ] Joint and 75% survivor annuity. 7. [ ] Joint and 66 2/3% survivor annuity. NOTE: If only a portion of the Plan assets may be distributed in an annuity form of payment, then select d. AND e. and the assets subject to the joint and survivor annuity provisions will be those assets attributable to (specify): ______ (e.g., the money purchase pension plan that was merged into this Plan). AND, distributions may be made in... f. [X] cash only (except for insurance or annuity contracts). g. [ ] cash or property. (C) 2002 17 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN 40. CONDITIONS FOR DISTRIBUTIONS UPON TERMINATION OF EMPLOYMENT Distributions upon termination of employment pursuant to Plan Section 6.4(a) of the Plan will not be made unless the following conditions have been satisfied: a. [ ] No distributions may be made until a Participant has reached Early or Normal Retirement Date. b. [X] Distributions may be made as soon as administratively feasible at the Participant's election. c. [ ] The Participant has incurred ______ 1-Year Break(s) in Service (or Period(s) of Severance if the Elapsed Time Method is elected). d. [ ] Distributions may be made at the Participant's election as soon as administratively feasible after the Plan Year coincident with or next following termination of employment. e. [ ] Distributions may be made at the Participant's election as soon as administratively feasible after the Plan Year quarter coincident with or next following termination of employment. f. [ ] Distributions may be made at the Participant's election as soon as administratively feasible after the Valuation Date coincident with or next following termination of employment. g. [ ] Distributions may be made at the Participant's election as soon as administratively feasible ________ months following termination of employment. h. [ ] Other: ___________________________________________________________ (must be objective conditions which are ascertainable and are not subject to Employer discretion except as otherwise permitted in Regulation 1.411(d)-4 and may not exceed the limits of Code Section 401(a)(14) as set forth in Plan Section 6.7). 41. INVOLUNTARY DISTRIBUTIONS Will involuntary distributions of amounts less than $5,000 be made in accordance with the provisions of Sections 6.4, 6.5 and 6.6? a. [X] Yes b. [ ] No 42. MINIMUM DISTRIBUTION TRANSITIONAL RULES (Plan Section 6.5(e)) NOTE: This Section does not apply to (1) a new Plan or (2) an amendment or restatement of an existing Plan that never contained the provisions of Code Section 401(a)(9) as in effect prior to the amendments made by the Small Business Job Protection Act of 1996 (SBJPA). The "required beginning date" for a Participant who is not a "five percent (5%) owner" is: a. [X] N/A. (This is a new Plan or this Plan has never included the pre-SBJPA provisions.) b. [ ] April 1st of the calendar year following the year in which the Participant attains age 70 1/2. (The pre-SBJPA rules will continue to apply.) c. [ ] April 1st of the calendar year following the later of the year in which the Participant attains age 70 1/2 or retires (the post-SBJPA rules), with the following exceptions (select one or both and if no election is made, both will apply effective as of January 1, 1996): 1. [ ] A Participant who was already receiving required minimum distributions under the pre-SBJPA rules as of ______ (not earlier than January 1, 1996) may elect to stop receiving distributions and have them recommence in accordance with the post-SBJPA rules. Upon the recommencement of distributions, if the Plan permits annuities as a form of distribution then the following will apply: a. [ ] N/A. Annuity distributions are not permitted. b. [ ] Upon the recommencement of distributions, the original Annuity Starting Date will be retained. c. [ ] Upon the recommencement of distributions, a new Annuity Starting Date is created. 2. [ ] A Participant who had not begun receiving required minimum distributions as of _________ (not earlier than January 1, 1996) may elect to defer commencement of distributions until retirement. The option to defer the commencement of distributions (i.e., to elect to receive in-service distributions upon attainment of age 70 1/2) will apply to all such Participants unless the option below is elected: a. [ ] N/A. b. [ ] The in-service distribution option is eliminated with respect to Participants who attain age 70 1/2 in or after the calendar year that begins after the later of (1) December 31, 1998, or (2) the adoption date of the amendment and restatement to bring the Plan into compliance with SBJPA. (This option may only be elected if the amendment to eliminate the in-service distribution is adopted no later than the last day of the remedial amendment period that applies to the Plan for changes under SBJPA.) (C) 2002 18 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN 43. DISTRIBUTIONS UPON DEATH (Plan Section 6.6(h)) Distributions upon the death of a Participant prior to receiving any benefits shall... a. [X] be made pursuant to the election of the Participant or beneficiary. b. [ ] begin within 1 year of death for a designated beneficiary and be payable over the life (or over a period not exceeding the life expectancy) of such beneficiary, except that if the beneficiary is the Participant's spouse, begin prior to December 31st of the year in which the Participant would have attained age 70 1/2. c. [ ] be made within 5 (or if lesser ______) years of death for all beneficiaries. d. [ ] be made within 5 (or if lesser ______) years of death for all beneficiaries, except that if the beneficiary is the Participant's spouse, begin prior to December 31st of the year in which the Participant would have attained age 70 1/2 and be payable over the life (or over a period not exceeding the life expectancy) of such surviving spouse. 44. HARDSHIP DISTRIBUTIONS (Plan Sections 6.11 and/or 12.9) a. [ ] No hardship distributions are permitted. b. [X] Hardship distributions are permitted from the following accounts (select all that apply): 1. [ ] All accounts. 2. [X] Participant's Elective Deferral Account. 3. [ ] Participant's Account attributable to Employer matching contributions. 4. [ ] Participant's Account attributable to Employer profit sharing contributions. 5. [ ] Participant's Rollover Account. 6. [ ] Participant's Transfer Account. 7. [ ] Participant's Voluntary Contribution Account. NOTE: Distributions from a Participant's Elective Deferral Account are limited to the portion of such account attributable to such Participant's Elective Deferrals (and earnings attributable thereto up to December 31, 1988). Hardship distributions are not permitted from a Participant's Qualified Non-Elective Account (including any 401(k) Safe Harbor Contributions) or Qualified Matching Contribution Account. AND, shall the safe harbor hardship rules of Plan Section 12.9 apply to distributions made from all accounts? (Note: The safe harbor hardship rules automatically apply to hardship distributions of Elective Deferrals.) c. [ ] No or N/A. The provisions of Plan Section 6.11 apply to hardship distributions from all accounts other than a Participant's Elective Deferral Account. d. [ ] Yes. The provisions of Plan Section 12.9 apply to all hardship distributions. AND, are distributions restricted to those accounts in which a Participant is fully Vested? e. [ ] Yes, distributions may only be made from accounts which are fully Vested. f. [ ] No. (If elected, the fraction at Plan Section 6.5(h) shall apply in determining vesting of the portion of the account balance not withdrawn). AND, the minimum hardship distribution shall be... g. [X] N/A. There is no minimum. h. [ ] $______ (may not exceed $1,000). 45. IN-SERVICE DISTRIBUTIONS (Plan Section 6.10) a. [ ] In-service distributions may not be made (except as otherwise elected for Hardship Distributions). b. [X] In-service distributions may be made to a Participant who has not separated from service provided any of the following conditions have been satisfied (select all that apply): 1. [X] the Participant has attained age 59 1/2 . 2. [ ] the Participant has reached Normal Retirement Age. 3. [ ] the Participant has been a Participant in the Plan for at least ________ years (may not be less than five (5)). 4. [ ] the amounts being distributed have accumulated in the Plan for at least two (2) years. AND, in-service distributions are permitted from the following accounts (select all that apply): c. [X] All accounts. d. [ ] Participant's Elective Deferral Account. e. [ ] Qualified Matching Contribution Account and portion of Participant's Account attributable to Employer matching contributions. f. [ ] Participant's Account attributable to Employer profit sharing contributions. g. [ ] Qualified Non-Elective Contribution Account. h. [ ] Participant's Rollover Account. i. [ ] Participant's Transfer Account. j. [ ] Participant's Voluntary Contribution Account. NOTE: Distributions from a Participant's Elective Deferral Account, Qualified Matching Contribution Account and Qualified Non-Elective Account (including 401(k) Safe Harbor Contributions) are subject to restrictions and generally may not be distributed prior to age 59 1/2. (C) 2002 19 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN AND, are distributions restricted to those accounts in which a Participant is fully Vested? k. [X] Yes, distributions may only be made from accounts which are fully Vested. l. [ ] No. (If elected, the fraction at Plan Section 6.5(h) will apply in determining vesting of the portion of the account balance not withdrawn.) AND, the minimum distribution shall be... m. [X] N/A. There is no minimum. n. [ ] $______ (may not exceed $1,000). NONDISCRIMINATION TESTING 46. HIGHLY COMPENSATED EMPLOYEE (Plan Section 1.31) NOTE: If this is a GUST restatement, complete the questions in this Section retroactively to the first Plan Year beginning after 1996. TOP-PAID GROUP ELECTION. Will the top-paid group election be made? (The election made below for the latest year will continue to apply to subsequent Plan Years unless a different election is made.) a. [ ] Yes, for the Plan Year beginning in:________. b. [X] No, for the Plan Year beginning in: 2002 . CALENDAR YEAR DATA ELECTION. Will the calendar year data election be used? (The election made below for the latest year will continue to apply to subsequent Plan Years unless a different election is made.) c. [X] Yes, for the Plan Year beginning in: 2002. d. [ ] No, for the Plan Year beginning in: ________. 47. ADP AND ACP TESTS (Plan Sections 12.4 and 12.6). The ADP ratio and ACP ratio for Non-Highly Compensated Employees will be based on the following. The election made below for the latest year will continue to apply to subsequent Plan Years unless the Plan is amended to a different election. a. [ ] N/A. This Plan satisfies the ADP Test Safe Harbor rules and there are no contributions subject to an ACP test or for all Plan Years beginning in or after the Effective Date of the Plan or, in the case of an amendment and restatement, for all Plan Years to which the amendment and restatement relates. b. [ ] PRIOR YEAR TESTING: The prior year ratio will be used for the Plan Year beginning in _______. (Note: If this election is made for the first year the Code Section 401(k) or 401(m) feature is added to this Plan (unless this Plan is a successor plan), the amount taken into account as the ADP and ACP of Non-Highly Compensated Employees for the preceding Plan Year will be 3%.) c. [X] CURRENT YEAR TESTING: The current year ratio will be used for the Plan Year beginning in 2002. NOTE: In any Plan Year where the ADP Test Safe Harbor is being used but not the ACP Test Safe Harbor, then c. above must be used if an ACP test applies for such Plan Year. TOP HEAVY REQUIREMENTS 48. TOP HEAVY DUPLICATIONS (Plan Section 4.3(i)): When a Non-Key Employee is a Participant in this Plan and a Defined Benefit Plan maintained by the Employer, indicate which method shall be utilized to avoid duplication of top heavy minimum benefits: (If b., c., d. or e. is elected, f. must be completed.) a. [ ] N/A. The Employer does not maintain a Defined Benefit Plan. (Go to next Question) b. [ ] The full top heavy minimum will be provided in each plan (if selected, Plan Section 4.3(i) shall not apply). c. [ ] 5% defined contribution minimum. d. [X] 2% defined benefit minimum. e. [ ] Specify the method under which the Plans will provide top heavy minimum benefits for Non-Key Employees that will preclude Employer discretion and avoid inadvertent omissions: __________________________________________________________________ NOTE: If c., d., or e. is selected and the Defined Benefit Plan and this Plan do not benefit the same Participants, the uniformity requirement of the Section 401(a)(4) Regulations may be violated. AND, the "Present Value of Accrued Benefit" (Plan Section 9.2) for Top Heavy purposes shall be based on... f. [X] Interest Rate: 8.0 Mortality Table: 1983 GAM (C) 2002 20 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN 49. TOP HEAVY DUPLICATIONS (Plan Section 4.3(f)): When a Non-Key Employee is a Participant in this Plan and another defined contribution plan maintained by the Employer, indicate which method shall be utilized to avoid duplication of top heavy minimum benefits: a. [X] N/A. The Employer does not maintain another qualified defined contribution plan. b. [ ] The full top heavy minimum will be provided in each plan. c. [ ] A minimum, non-integrated contribution of 3% of each Non-Key Employee's 415 Compensation shall be provided in the Money Purchase Plan (or other plan subject to Code Section 412). d. [ ] Specify the method under which the Plans will provide top heavy minimum benefits for Non-Key Employees that will preclude Employer discretion and avoid inadvertent omissions, including any adjustments required under Code Section 415: __________________________________________________________________ NOTE: If c. or d. is selected and both plans do not benefit the same Participants, the uniformity requirement of the Section 401(a)(4) Regulations may be violated. MISCELLANEOUS 50. LOANS TO PARTICIPANTS (Plan Section 7.6) a. [ ] Loans are not permitted. b. [X] Loans are permitted. IF loans are permitted (select all that apply)... c. [X] loans will be treated as a Participant directed investment. d. [ ] loans will only be made for hardship or financial necessity. e. [X] the minimum loan will be $ $1000 (may not exceed $1,000). f. [X] a Participant may only have 2 (e.g., one (1)) loan(s) outstanding at any time. g. [X] all outstanding loan balances will become due and payable in their entirety upon the occurrence of a distributable event (other than satisfaction of the conditions for an in-service distribution). h. [X] loans will only be permitted from the following accounts (select all that apply): 1. [X] All accounts. 2. [ ] Participant's Elective Deferral Account. 3. [ ] Qualified Matching Contribution Account and/or portion of Participant's Account attributable to Employer matching contributions. 4. [ ] Participant's Account attributable to Employer profit sharing contributions. 5. [ ] Qualified Non-Elective Contribution Account. 6. [ ] Participant's Rollover Account. 7. [ ] Participant's Transfer Account. 8. [ ] Participant's Voluntary Contribution Account. NOTE: Department of Labor Regulations require the adoption of a separate written loan program setting forth the requirements outlined in Plan Section 7.6. 51. DIRECTED INVESTMENT ACCOUNTS (Plan Section 4.10) a. [ ] Participant directed investments are not permitted. b. [X] Participant directed investments are permitted for the following accounts (select all that apply): 1. [X] All accounts. 2. [ ] Participant's Elective Deferral Account. 3. [ ] Qualified Matching Contribution Account and/or portion of Participant's Account attributable to Employer matching contributions. 4. [ ] Participant's Profit Sharing Account. 5. [ ] Qualified Non-Elective Contribution Account. 6. [ ] Participant's Rollover Account. 7. [ ] Participant's Transfer Account. 8. [ ] Participant's Voluntary Contribution Account. 9. [ ] Other:_____________________________________________________ AND, is it intended that the Plan comply with Act Section 404(c) with respect to the accounts subject to Participant investment direction? c. [ ] No. d. [X] Yes AND, will voting rights on directed investments be passed through to Participants? e. [X] No. Employer stock is not an alternative OR Plan is not intended to comply with Act Section 404(c). f. [ ] Yes, for Employer stock only. g. [ ] Yes, for all investments. (C) 2002 21 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN 52. ROLLOVERS (Plan Section 4.6) a. [ ] Rollovers will not be accepted by this Plan. b. [X] Rollovers will be accepted by this Plan. AND, if b. is elected, rollovers may be accepted... c. [X] from any Eligible Employee, even if not a Participant. d. [ ] from Participants only. AND, distributions from a Participant's Rollover Account may be made... e. [ ] at any time. f. [X] only when the Participant is otherwise entitled to a distribution under the Plan. 53. AFTER-TAX VOLUNTARY EMPLOYEE CONTRIBUTIONS (Plan Section 4.8) a. [X] After-tax voluntary Employee contributions will not be allowed. b. [ ] After-tax voluntary Employee contributions will be allowed. 54. LIFE INSURANCE (Plan Section 7.5) a. [X] Life insurance may not be purchased. b. [ ] Life insurance may be purchased at the option of the Administrator. c. [ ] Life insurance may be purchased at the option of the Participant. AND, if b. or c. is elected, the purchase of initial or additional life insurance will be subject to the following limitations (select all that apply): d. [ ] N/A, no limitations. e. [ ] each initial Contract will have a minimum face amount of $_______. f. [ ] each additional Contract will have a minimum face amount of $_______. g. [ ] the Participant has completed ________ Years of Service (or Periods of Service). h. [ ] the Participant has completed _______ Years of Service (or Periods of Service) while a Participant in the Plan. i. [ ] the Participant is under age _______ on the Contract issue date. j. [ ] the maximum amount of all Contracts on behalf of a Participant may not exceed $__________. k. [ ] the maximum face amount of any life insurance Contract will be $ __________. GUST TRANSITION RULES The following questions only apply if this is a GUST restatement (i.e., Question 6.c. is selected). If this is not a GUST restatement, then this Plan will not be considered an individually designed plan merely because the following questions are deleted from the Adoption Agreement. 55. COMPENSATION The family aggregation rules of Code Section 401(a)(17) as in effect under Code Section 414(q)(6) prior to the enactment of SBJPA do not apply to this Plan effective as of: a. [X] The first day of the first Plan Year beginning after 1996. b. [ ] _______ (may not be prior to the first day of the first Plan Year beginning in 1997 and may not be later than the first day of the Plan Year following the Plan Year in which this GUST restatement is adopted). NOTE: If family aggregation continued to apply after 1996, the Plan is not a safe harbor plan for Code Section 401(a)(4) purposes and the Employer may not rely on the opinion letter issued by the Internal Revenue Service that this Plan is qualified under Code Section 401. 56. LIMITATION ON ALLOCATIONS AND TOP HEAVY RULES If any Participant is a Participant in this Plan and a qualified defined benefit plan maintained by the Employer, then the limitations of Code Section 415(e) as in effect under Code Section 414(q)(6) prior to the enactment of SBJPA do not apply to this Plan effective with respect to Limitation Years beginning on or after: a. [ ] N/A. The Employer does not maintain, and has never maintained, a qualified defined benefit plan OR the provisions of Code Section 415(e) have already been removed from this Plan. b. [X] January 1, 2000 (may not be prior to the first Limitation Year beginning in 2000 and may not be later than the first Limitation Year beginning after the Limitation Year in which this GUST restatement is adopted). NOTE: If the Code Section 415(e) limits continued to apply to Limitation Years beginning after 1999, the Plan is not a safe harbor plan for Code Section 401(a)(4) purposes and the Employer may not rely on the opinion letter issued by the Internal Revenue Service that this Plan is qualified under Code Section 401. (C) 2002 22 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN AND, if b. is selected with a date that is later than the effective date of this GUST restatement, then with respect to the Limitation Year in which this restatement is adopted, if any Participant is a Participant in this Plan and a qualified defined benefit plan maintained by the Employer, specify the method under which the plans involved will provide top heavy minimum benefits for Non-Key Employees and will satisfy the limitations of Code Section 415(e) in a manner that precludes Employer discretion: c. [ ] N/A. The effective date of the GUST restatement is the date the provisions of Code Section 415(e) no longer apply to this Plan. d. [ ] __________________________________________________________________ NOTE: If the top heavy minimum benefit is only provided in one plan and the Defined Benefit Plan and this Plan do not benefit the same Participants, the uniformity requirement of the Section 401(a)(4) Regulations may be violated. 57. INVOLUNTARY DISTRIBUTIONS If the Plan provides for involuntary distributions (i.e., 41.a. is elected) then the increase in the involuntary amount threshold from $3,500 to $5,000 became effective with respect to distributions made on or after: a. [ ] N/A. The plan doesn't provide for involuntary distributions less than $5,000. b. [X] August 6, 1997, or if later _____ (leave blank if not applicable). 58. MINIMUM DISTRIBUTIONS The proposed Code Section 401(a)(9) Regulations issued in January 2001 apply with respect to distributions under the Plan made on or after January 1, 2001, unless a later date is specified below: a. [X] N/A. b. [ ] ___ (may be any date in 2001 or the first day of any calendar year after 2001). AND, if b. is selected, for years prior to the date specified above, life expectancies for minimum distributions required pursuant to Code Section 401(a)(9) shall... c. [ ] be recalculated at the Participant's election. d. [ ] be recalculated. e. [ ] not be recalculated. 59. ADP AND ACP TESTS. For Plan Years beginning in and prior to the Plan Year in which the restatement is adopted, the following will apply: ADP TEST: a. [ ] PRIOR YEAR TESTING: The prior year ratio will be used for the Plan Year beginning in the year specified below. (If this election is made for the first year the Code Section 401(k) feature is added to this Plan (unless this Plan is a successor plan), the amount taken into account as the ADP of Non-Highly Compensated Employees for the preceding Plan Year will be 3%.) 1. [ ] 1997 2. [ ] 1998 3. [ ] 1999 4. [ ] 2000 5. [ ] ____ b. [X] CURRENT YEAR TESTING: The current year ratio will be used for the Plan Year beginning in: 1. [X] 1997 2. [X] 1998 3. [X] 1999 4. [X] 2000 5. [X] 2001 ACP TEST: c. [ ] N/A. d. [ ] PRIOR YEAR TESTING: The prior year ratio will be used for the Plan Year beginning in the year specified below. (If this election is made for the first year the Code Section 401(m) feature is added to this Plan (unless this Plan is a successor plan), the amount taken into account as the ACP of Non-Highly Compensated Employees for the preceding Plan Year will be 3%.) 1. [ ] 1997 2. [ ] 1998 3. [ ] 1999 4. [ ] 2000 5. [ ] ____ e. [X] CURRENT YEAR TESTING: The current year ratio will be used for the Plan Year beginning in: 1. [X] 1997 2. [X] 1998 3. [X] 1999 4. [X] 2000 5. [X] 2001 (C) 2002 23 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN The adopting Employer may rely on an opinion letter issued by the Internal Revenue Service as evidence that the plan is qualified under Code Section 401 only to the extent provided in Announcement 2001-77, 2001-30 I.R.B. The Employer may not rely on the opinion letter in certain other circumstances or with respect to certain qualification requirements, which are specified in the opinion letter issued with respect to the plan and in Announcement 2001-77. In order to have reliance in such circumstances or with respect to such qualification requirements, application for a determination letter must be made to Employee Plans Determinations of the Internal Revenue Service. This Adoption Agreement may be used only in conjunction with basic Plan document 01. This Adoption Agreement and the basic Plan document shall together be known as Prototype Non-Standardized 401(k) Profit Sharing Plan and Trust 01-001. The adoption of this Plan, its qualification by the IRS, and the related tax consequences are the responsibility of the Employer and its independent tax and legal advisors. will notify the Employer of any amendments made to the Plan or of the discontinuance or abandonment of the Plan. Furthermore, in order to be eligible to receive such notification, we agree to notify of any change in address. This Plan may not be used, and shall not be deemed to be a Prototype Plan, unless an authorized representative of has acknowledged the use of the Plan. Such acknowledgment is for administerial purposes only. It acknowledges that the Employer is using the Plan but does not represent that this Plan, including the choices selected on the Adoption Agreement, has been reviewed by a representative of the sponsor or constitutes a qualified retirement plan. By:__________________________________ With regard to any questions regarding the provisions of the Plan, adoption of the Plan, or the effect of an opinion letter from the IRS, call or write (this information must be completed by the sponsor of this Plan or its designated representative): Name: The Robinson Company-Pension Division Address: 43 Field Street Waterbury Connecticut 06702 Telephone: (203) 759-5020 (C) 2002 24 NON-STANDARDIZED 401(k) PROFIT SHARING PLAN The Employer and Trustee hereby cause this Plan to be executed on______________. Furthermore, this Plan may not be used unless acknowledged by or its authorized representative. EMPLOYER: Naugatuck Valley Savings and Loan, S.B. By:__________________________________ [ ] The signature of the Trustee appears on a separate trust agreement attached to the Plan, OR _____________________________________ TRUSTEE _____________________________________ TRUSTEE _____________________________________ TRUSTEE PARTICIPATING EMPLOYER By:__________________________________ PARTICIPATING EMPLOYER (attach additional signature pages as necessary): By:__________________________________ (C) 2002 25 EMPLOYEE BENEFIT COMPLIANCE SERVICES, INC. DEFINED CONTRIBUTION PROTOTYPE PLAN AND TRUST DEFINED CONTRIBUTION PROTOTYPE PLAN TABLE OF CONTENTS ARTICLE I DEFINITIONS ARTICLE II ADMINISTRATION 2.1 POWERS AND RESPONSIBILITIES OF THE EMPLOYER ................... 12 2.2 DESIGNATION OF ADMINISTRATIVE AUTHORITY ....................... 13 2.3 ALLOCATION AND DELEGATION OF RESPONSIBILITIES ................. 13 2.4 POWERS AND DUTIES OF THE ADMINISTRATOR ........................ 13 2.5 RECORDS AND REPORTS ........................................... 14 2.6 APPOINTMENT OF ADVISERS ....................................... 14 2.7 INFORMATION FROM EMPLOYER ..................................... 14 2.8 PAYMENT OF EXPENSES ........................................... 14 2.9 MAJORITY ACTIONS .............................................. 14 2.10 CLAIMS PROCEDURE .............................................. 14 2.11 CLAIMS REVIEW PROCEDURE ....................................... 15 ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY ..................................... 15 3.2 EFFECTIVE DATE OF PARTICIPATION ............................... 15 3.3 DETERMINATION OF ELIGIBILITY .................................. 15 3.4 TERMINATION OF ELIGIBILITY .................................... 16 3.5 REHIRED EMPLOYEES AND BREAKS IN SERVICE ....................... 16 3.6 ELECTION NOT TO PARTICIPATE ................................... 16 3.7 CONTROL OF ENTITIES BY OWNER-EMPLOYEE ......................... 17 ARTICLE IV CONTRIBUTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION ............... 17 4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION .................... 17 4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS .......... 17 4.4 MAXIMUM ANNUAL ADDITIONS ...................................... 22 4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS ..................... 25 4.6 ROLLOVERS ..................................................... 26 4.7 PLAN TO PLAN TRANSFERS FROM QUALIFIED PLANS ................... 27 4.8 VOLUNTARY EMPLOYEE CONTRIBUTIONS .............................. 27 4.9 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS .................... 28 4.10 DIRECTED INVESTMENT ACCOUNT ................................... 28 4.11 INTEGRATION IN MORE THAN ONE PLAN ............................. 29 4.12 QUALIFIED MILITARY SERVICE .................................... 30

(C) Copyright 2001 Employee Benefit Compliance Services, Inc. i DEFINED CONTRIBUTION PROTOTYPE PLAN ARTICLE V VALUATIONS 5.1 VALUATION OF THE TRUST FUND ................................... 30 5.2 METHOD OF VALUATION ........................................... 30 ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS 6.1 DETERMINATION OF BENEFITS UPON RETIREMENT ..................... 30 6.2 DETERMINATION OF BENEFITS UPON DEATH .......................... 30 6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY .............. 31 6.4 DETERMINATION OF BENEFITS UPON TERMINATION .................... 31 6.5 DISTRIBUTION OF BENEFITS ...................................... 33 6.6 DISTRIBUTION OF BENEFITS UPON DEATH ........................... 37 6.7 TIME OF DISTRIBUTION .......................................... 40 6.8 DISTRIBUTION FOR MINOR OR INCOMPETENT BENEFICIARY ............. 40 6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN ................ 40 6.10 IN-SERVICE DISTRIBUTION ....................................... 40 6.11 ADVANCE DISTRIBUTION FOR HARDSHIP ............................. 40 6.12 SPECIAL RULE FOR CERTAIN PROFIT SHARING PLANS ................. 41 6.13 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION ............... 41 6.14 DIRECT ROLLOVERS .............................................. 41 6.15 TRANSFER OF ASSETS FROM A MONEY PURCHASE PLAN ................. 42 6.16 ELECTIVE TRANSFERS OF BENEFITS TO OTHER PLANS ................. 42 ARTICLE VII TRUSTEE AND CUSTODIAN 7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE ......................... 43 7.2 INVESTMENT POWERS AND DUTIES OF DISCRETIONARY TRUSTEE ......... 44 7.3 INVESTMENT POWERS AND DUTIES OF NONDISCRETIONARY TRUSTEE ...... 46 7.4 POWERS AND DUTIES OF CUSTODIAN ................................ 47 7.5 LIFE INSURANCE ................................................ 47 7.6 LOANS TO PARTICIPANTS ......................................... 48 7.7 MAJORITY ACTIONS .............................................. 49 7.8 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES ................. 49 7.9 ANNUAL REPORT OF THE TRUSTEE .................................. 49 7.10 AUDIT ......................................................... 50 7.11 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE ................ 50 7.12 TRANSFER OF INTEREST .......................................... 50 7.13 TRUSTEE INDEMNIFICATION ....................................... 51 7.14 EMPLOYER SECURITIES AND REAL PROPERTY ......................... 51 ARTICLE VIII AMENDMENT, TERMINATION AND MERGERS 8.1 AMENDMENT ..................................................... 51

(C) Copyright 2001 Employee Benefit Compliance Services, Inc. ii DEFINED CONTRIBUTION PROTOTYPE PLAN 8.2 TERMINATION ................................................... 52 8.3 MERGER, CONSOLIDATION OR TRANSFER OF ASSETS ................... 52 ARTICLE IX TOP HEAVY PROVISIONS 9.1 TOP HEAVY PLAN REQUIREMENTS ................................... 52 9.2 DETERMINATION OF TOP HEAVY STATUS ............................. 52 ARTICLE X MISCELLANEOUS 10.1 EMPLOYER ADOPTIONS ............................................ 54 10.2 PARTICIPANT'S RIGHTS .......................................... 54 10.3 ALIENATION .................................................... 54 10.4 CONSTRUCTION OF PLAN .......................................... 54 10.5 GENDER AND NUMBER ............................................. 54 10.6 LEGAL ACTION .................................................. 55 10.7 PROHIBITION AGAINST DIVERSION OF FUNDS ........................ 55 10.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE .................... 55 10.9 INSURER'S PROTECTIVE CLAUSE ................................... 55 10.10 RECEIPT AND RELEASE FOR PAYMENTS .............................. 55 10.11 ACTION BY THE EMPLOYER ........................................ 55 10.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY ............ 55 10.13 HEADINGS ...................................................... 56 10.14 APPROVAL BY INTERNAL REVENUE SERVICE .......................... 56 10.15 UNIFORMITY .................................................... 56 10.16 PAYMENT OF BENEFITS ........................................... 56 ARTICLE XI PARTICIPATING EMPLOYERS 11.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER ................... 56 11.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS ....................... 56 11.3 DESIGNATION OF AGENT .......................................... 57 11.4 EMPLOYEE TRANSFERS ............................................ 57 11.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES ......... 57 11.6 AMENDMENT ..................................................... 57 11.7 DISCONTINUANCE OF PARTICIPATION ............................... 57 11.8 ADMINISTRATOR'S AUTHORITY ..................................... 57 11.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE ............. 57 ARTICLE XII CASH OR DEFERRED PROVISIONS 12.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION ............... 58 12.2 PARTICIPANT'S SALARY REDUCTION ELECTION ....................... 58 12.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS .......... 60

(C) Copyright 2001 Employee Benefit Compliance Services, Inc. iii DEFINED CONTRIBUTION PROTOTYPE PLAN 12.4 ACTUAL DEFERRAL PERCENTAGE TESTS .............................. 61 12.5 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS ................ 63 12.6 ACTUAL CONTRIBUTION PERCENTAGE TESTS .......................... 66 12.7 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS ............ 68 12.8 SAFE HARBOR PROVISIONS ........................................ 70 12.9 ADVANCE DISTRIBUTION FOR HARDSHIP ............................. 72 ARTICLE XIII SIMPLE 401(K) PROVISIONS 13.1 SIMPLE 401(k) PROVISIONS ...................................... 73 13.2 DEFINITIONS ................................................... 73 13.3 CONTRIBUTIONS ................................................. 73 13.4 ELECTION AND NOTICE REQUIREMENTS .............................. 74 13.5 VESTING REQUIREMENTS .......................................... 74 13.6 TOP-HEAVY RULES ............................................... 74 13.7 NONDISCRIMINATION TESTS ....................................... 74

(C) Copyright 2001 Employee Benefit Compliance Services, Inc. iv DEFINED CONTRIBUTION PROTOTYPE PLAN ARTICLE I DEFINITIONS As used in this Plan, the following words and phrases shall have the meanings set forth herein unless a different meaning is clearly required by the context: 1.1 "ACP" means the "Actual Contribution Percentage" determined pursuant to Section 12.6(e). 1.2 "ACT" means the Employee Retirement Income Security Act of 1974, as it may be amended from time to time. 1.3 "ADP" means the "Actual Deferral Percentage" determined pursuant to Section 12.4(e). 1.4 "ADMINISTRATOR" means the Employer unless another person or entity has been designated by the Employer pursuant to Section 2.2 to administer the Plan on behalf of the Employer. 1.5 "ADOPTION AGREEMENT" means the separate agreement which is executed by the Employer and sets forth the elective provisions of this Plan and Trust as specified by the Employer. 1.6 "AFFILIATED EMPLOYER" means any corporation which is a member of a controlled group of corporations (as defined in Code Section 414(b)) which includes the Employer; any trade or business (whether or not incorporated) which is under common control (as defined in Code Section 414(c)) with the Employer; any organization (whether or not incorporated) which is a member of an affiliated service group (as defined in Code Section 414(m)) which includes the Employer; and any other entity required to be aggregated with the Employer pursuant to Regulations under Code Section 414(o). 1.7 "ANNIVERSARY DATE" means the last day of the Plan Year. 1.8 "ANNUITY STARTING DATE" means, with respect to any Participant, the first day of the first period for which an amount is paid as an annuity, or, in the case of a benefit not payable in the form of an annuity, the first day on which all events have occurred which entitles the Participant to such benefit. 1.9 "BENEFICIARY" means the person (or entity) to whom all or a portion of a deceased Participant's interest in the Plan is payable, subject to the restrictions of Sections 6.2 and 6.6. 1.10 "CODE" means the Internal Revenue Code of 1986, as amended. 1.11 "COMPENSATION" with respect to any Participant means one of the following as elected in the Adoption Agreement: (a) Information required to be reported under Code Sections 6041, 6051 and 6052 (Wages, tips and other compensation as reported on Form W-2). Compensation means wages, within the meaning of Code Section 3401(a), and all other payments of compensation to an Employee by the Employer (in the course of the Employer's trade or business) for which the Employer is required to furnish the Employee a written statement under Code Sections 6041(d), 6051(a)(3) and 6052. Compensation must be determined without regard to any rules under Code Section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). (b) Code Section 3401(a) Wages. Compensation means an Employee's wages within the meaning of Code Section 3401(a) for the purposes of income tax withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor in Code Section 3401(a)(2)). (c) 415 Safe-Harbor Compensation. Compensation means wages, salaries, and fees for professional services and other amounts received (without regard to whether or not an amount is paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan to the extent that the amounts are includible in gross income (including, but not limited to, commissions paid salespersons, compensation for services on the basis of a percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements, or other expense allowances under a nonaccountable plan (as described in Regulation 1.62-2(c))), and excluding the following: (1) Employer contributions to a plan of deferred compensation which are not includible in the Employee's gross income for the taxable year in which contributed, or Employer contributions under a simplified employee pension plan to the extent such contributions are excludable from the Employee's gross income, or any distributions from a plan of deferred compensation; (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 1 DEFINED CONTRIBUTION PROTOTYPE PLAN (2) Amounts realized from the exercise of a nonqualified stock option, or when restricted stock (or property) held by the Employee either becomes freely transferable or is no longer subject to a substantial risk of forfeiture; (3) Amounts realized from the sale, exchange or other disposition of stock acquired under a qualified stock option; and (4) Other amounts which receive special tax benefits, or contributions made by the Employer (whether or not under a salary reduction agreement) towards the purchase of an annuity contract described in Code Section 403(b) (whether or not the contributions are actually excludable from the gross income of the Employee). However, Compensation for any Self-Employed Individual shall be equal to Earned Income. Compensation shall include only that Compensation which is actually paid to the Participant during the determination period. Except as otherwise provided in this Plan, the determination period shall be the period elected by the Employer in the Adoption Agreement. If the Employer makes no election, the determination period shall be the Plan Year. Notwithstanding the above, if elected in the Adoption Agreement, Compensation shall include all of the following types of elective contributions and all of the following types of deferred compensation: (a) Elective contributions that are made by the Employer on behalf of a Participant that are not includible in gross income under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b), and for Plan Years beginning on or after January 1, 2001 (or as of a date, no earlier than January 1, 1998, as specified in an addendum to the Adoption Agreement), 132(f)(4); (b) Compensation deferred under an eligible deferred compensation plan within the meaning of Code Section 457(b); and (c) Employee contributions (under governmental plans) described in Code Section 414(h)(2) that are picked up by the employing unit and thus are treated as Employer contributions. For Plan Years beginning on or after January 1, 1989, and before January 1, 1994, the annual Compensation of each Participant taken into account for determining all benefits provided under the Plan for any Plan Year shall not exceed $200,000. This limitation shall be adjusted by the Secretary at the same time and in the same manner as under Code Section 415(d), except that the dollar increase in effect on January 1 of any calendar year is effective for Plan Years beginning in such calendar year and the first adjustment to the $200,000 limitation is effective on January 1, 1990. For Plan Years beginning on or after January 1, 1994, Compensation in excess of $150,000 (or such other amount provided in the Code) shall be disregarded for all purposes other than for purposes of salary deferral elections. Such amount shall be adjusted by the Commissioner for increases in the cost-of-living in accordance with Code Section 401(a)(17)(B). The cost-of-living adjustment in effect for a calendar year applies to any determination period beginning in such calendar year. If a determination period consists of fewer than twelve (12) months, the $150,000 annual Compensation limit will be multiplied by a fraction, the numerator of which is the number of months in the determination period, and the denominator of which is twelve (12). If Compensation for any prior determination period is taken into account in determining a Participant's allocations for the current Plan Year, the Compensation for such prior determination period is subject to the applicable annual Compensation limit in effect for that prior period. For this purpose, in determining allocations in Plan Years beginning on or after January 1, 1989, the annual compensation limit in effect for determination periods beginning before that date is $200,000. In addition, in determining allocations in Plan Years beginning on or after January 1, 1994, the annual Compensation limit in effect for determination periods beginning before that date is $150,000. Notwithstanding the foregoing, except as otherwise elected in a non-standardized Adoption Agreement, the family member aggregation rules of Code Sections 401(a)(17) and 414(q)(6) as in effect prior to the enactment of the Small Business Job Protection Act of 1996 shall not apply to this Plan effective with respect to Plan Years beginning after December 31, 1996. If, in the Adoption Agreement, the Employer elects to exclude a class of Employees from the Plan, then Compensation for any Employee who becomes eligible or ceases to be eligible to participate during a determination period shall only include Compensation while the Employee is an Eligible Employee. If, in connection with the adoption of any amendment, the definition of Compensation has been modified, then, except as otherwise provided herein, for Plan Years prior to the Plan Year which includes the adoption date of such amendment, Compensation means compensation determined pursuant to the terms of the Plan then in effect. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 2 DEFINED CONTRIBUTION PROTOTYPE PLAN 1.12 "CONTRACT" OR "POLICY" means any life insurance policy, retirement income policy, or annuity contract (group or individual) issued by the Insurer. In the event of any conflict between the terms of this Plan and the terms of any contract purchased hereunder, the Plan provisions shall control. 1.13 "DESIGNATED INVESTMENT ALTERNATIVE" means a specific investment identified by name by the Employer (or such other Fiduciary who has been given the authority to select investment options) as an available investment under the Plan to which Plan assets may be invested by the Trustee pursuant to the investment direction of a Participant. 1.14 "DIRECTED INVESTMENT OPTION" means a Designated Investment Alternative and any other investment permitted by the Plan and the Participant Direction Procedures to which Plan assets may be invested pursuant to the investment direction of a Participant. 1.15 "EARLY RETIREMENT DATE" means the date specified in the Adoption Agreement on which a Participant or Former Participant has satisfied the requirements specified in the Adoption Agreement (Early Retirement Age). If elected in the Adoption Agreement, a Participant shall become fully Vested upon satisfying such requirements if the Participant is still employed at the Early Retirement Age. A Former Participant who separates from service after satisfying any service requirement but before satisfying the age requirement for Early Retirement Age and who thereafter reaches the age requirement contained herein shall be entitled to receive benefits under this Plan (other than any accelerated vesting and allocations of Employer Contributions) as though the requirements for Early Retirement Age had been satisfied. 1.16 "EARNED INCOME" means the net earnings from self-employment in the trade or business with respect to which the Plan is established, for which the personal services of the individual are a material income-producing factor. Net earnings will be determined without regard to items not included in gross income and the deductions allocable to such items. Net earnings are reduced by contributions made by the Employer to a qualified plan to the extent deductible under Code Section 404. In addition, net earnings shall be determined with regard to the deduction allowed to the taxpayer by Code Section 164(f), for taxable years beginning after December 31, 1989. 1.17 "ELECTIVE DEFERRALS" means the Employer's contributions to the Plan that are made pursuant to a Participant's deferral election pursuant to Section 12.2, excluding any such amounts distributed as "excess annual additions" pursuant to Section 4.5. Elective Deferrals shall be subject to the requirements of Sections 12.2(b) and 12.2(c) and shall, except as otherwise provided herein, be required to satisfy the nondiscrimination requirements of Regulation 1.401(k)-1(b)(2), the provisions of which are specifically incorporated herein by reference. 1.18 "ELIGIBLE EMPLOYEE" means any Eligible Employee as elected in the Adoption Agreement and as provided herein. With respect to a non-standardized Adoption Agreement, an individual shall not be an "Eligible Employee" if such individual is not reported on the payroll records of the Employer as a common law employee. In particular, it is expressly intended that individuals not treated as common law employees by the Employer on its payroll records are not "Eligible Employees" and are excluded from Plan participation even if a court or administrative agency determines that such individuals are common law employees and not independent contractors. Furthermore, with respect to a non-standardized Adoption Agreement, Employees of an Affiliated Employer will not be treated as "Eligible Employees" prior to the date the Affiliated Employer adopts the Plan as a Participating Employer. Except as otherwise provided in this paragraph, if the Employer does not elect in the Adoption Agreement to include Employees who became Employees as the result of a "Code Section 410(b)(6)(C) transaction," then such Employees will only be "Eligible Employees" after the expiration of the transition period beginning on the date of the transaction and ending on the last day of the first Plan Year beginning after the date of the transaction. A "Code Section 410(b)(6)(C) transaction" is an asset or stock acquisition, merger, or similar transaction involving a change in the Employer of the Employees of a trade or business that is subject to the special rules set forth in Code Section 410(b)(6)(C). However, regardless of any election made in the Adoption Agreement, if a separate entity becomes an Affiliate Employer as the result of a "Code Section 410(b)(6)(C) transaction," then Employees of such separate entity will not be treated as "Eligible Employees" prior to the date the entity adopts the Plan as a Participating Employer or, with respect to a standardized Adoption Agreement, if earlier, the expiration of the transition period set forth above. If, in the Adoption Agreement, the Employer elects to exclude union employees, then Employees whose employment is governed by a collective bargaining agreement between the Employer and "employee representatives" under which retirement benefits were the subject of good faith bargaining and if two percent (2%) or less of the Employees covered pursuant to that agreement are professionals as defined in Regulation 1.410(b)-9, shall not be eligible to participate in this Plan. For this purpose, the term "employee representatives" does not include any organization more than half of whose members are employees who are owners, officers, or executives of the Employer. If, in the Adoption Agreement, the Employer elects to exclude non-resident aliens, then Employees who are non-resident aliens (within the meaning of Code Section 7701(b)(1)(B)) who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer which constitutes income from sources within the United States (within the meaning of Code Section 861(a)(3)) shall not be eligible to participate in this Plan. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 3 DEFINED CONTRIBUTION PROTOTYPE PLAN 1.19 "EMPLOYEE" means any person who is employed by the Employer. The term "Employee" shall also include any person who is an employee of an Affiliated Employer and any Leased Employee deemed to be an Employee as provided in Code Section 414(n) or (o). 1.20 "EMPLOYER" means the entity specified in the Adoption Agreement, any successor which shall maintain this Plan and any predecessor which has maintained this Plan. In addition, unless the context means otherwise, the term "Employer" shall include any Participating Employer (as defined in Section 11.1) which shall adopt this Plan. 1.21 "EXCESS AGGREGATE CONTRIBUTIONS" means, with respect to any Plan Year, the excess of: (a) The aggregate "Contribution Percentage Amounts" (as defined in Section 12.6) actually made on behalf of Highly Compensated Participants for such Plan Year and taken into account in computing the numerator of the ACP, over (b) The maximum "Contribution Percentage Amounts" permitted by the ACP test in Section 12.6 (determined by reducing contributions made on behalf of Highly Compensated Participants in order of their "Contribution Percentages" beginning with the highest of such percentages). Such determination shall be made after first taking into account corrections of any Excess Deferrals pursuant to Section 12.2 and then taking into account adjustments of any Excess Contributions pursuant to Section 12.5. 1.22 "EXCESS COMPENSATION" means, with respect to a Plan that is integrated with Social Security (permitted disparity), a Participant's Compensation which is in excess of the integration level elected in the Adoption Agreement. However, if Compensation is based on less than a twelve (12) month determination period, Excess Compensation shall be determined by reducing the integration level by a fraction, the numerator of which is the number of full months in the short period and the denominator of which is twelve (12). 1.23 "EXCESS CONTRIBUTIONS" means, with respect to any Plan Year, the excess of: (a) The aggregate amount of Employer contributions actually made on behalf of Highly Compensated Participants for such Plan Year and taken into account in computing the numerator of the ADP, over (b) The maximum amount of such contributions permitted by the ADP test in Section 12.4 (determined by hypothetically reducing contributions made on behalf of Highly Compensated Participants in order of the actual deferral ratios, beginning with the highest of such ratios). In determining the amount of Excess Contributions to be distributed and/or recharacterized with respect to an affected Highly Compensated Participant as determined herein, such amount shall be reduced by any Excess Deferrals previously distributed to such affected Highly Compensated Participant for the Participant's taxable year ending with or within such Plan Year. 1.24 "EXCESS DEFERRALS" means, with respect to any taxable year of a Participant, those elective deferrals (within the meaning of Code Section 402(g)) that are includible in the Participant's gross income under Code Section 402(g) to the extent such Participant's elective deferrals for the taxable year exceed the dollar limitation under such Code Section. Excess Deferrals shall be treated as an "Annual Addition" pursuant to Section 4.4 when contributed to the Plan unless distributed to the affected Participant not later than the first April 15th following the close of the Participant's taxable year in which the Excess Deferral was made. Additionally, for purposes of Sections 4.3(f) and 9.2, Excess Deferrals shall continue to be treated as Employer contributions even if distributed pursuant to Section 12.2(e). However, Excess Deferrals of Non-Highly Compensated Participants are not taken into account for purposes of Section 12.4. 1.25 "FIDUCIARY" means any person who (a) exercises any discretionary authority or discretionary control respecting management of the Plan or exercises any authority or control respecting management or disposition of its assets, (b) renders investment advice for a fee or other compensation, direct or indirect, with respect to any monies or other property of the Plan or has any authority or responsibility to do so, or (c) has any discretionary authority or discretionary responsibility in the administration of the Plan. 1.26 "FISCAL YEAR" means the Employer's accounting year. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 4 DEFINED CONTRIBUTION PROTOTYPE PLAN 1.27 "FORFEITURE" means, with respect to a Former Participant who has severed employment, that portion of the Participant's Account that is not Vested. Unless otherwise elected in the Adoption Agreement, Forfeitures occur pursuant to (a) below. (a) A Forfeiture will occur on the earlier of: (1) The last day of the Plan Year in which a Former Participant who has severed employment with the Employer incurs five (5) consecutive 1-Year Breaks in Service, or (2) The distribution of the entire Vested portion of the Participant's Account of a Former Participant who has severed employment with the Employer. For purposes of this provision, if the Former Participant has a Vested benefit of zero, then such Former Participant shall be deemed to have received a distribution of such Vested benefit as of the year in which the severance of employment occurs. (b) If elected in the Adoption Agreement, a Forfeiture will occur as of the last day of the Plan Year in which the Former Participant incurs five (5) 1-Year Breaks in Service. Regardless of the preceding provisions, if a Former Participant is eligible to share in the allocation of Employer contributions or Forfeitures in the year in which the Forfeiture would otherwise occur, then the Forfeiture will not occur until the end of the first Plan Year for which the Former Participant is not eligible to share in the allocation of Employer contributions or Forfeitures. Furthermore, the term "Forfeiture" shall also include amounts deemed to be Forfeitures pursuant to any other provision of this Plan. 1.28 "FORMER PARTICIPANT" means a person who has been a Participant, but who has ceased to be a Participant for any reason. 1.29 "414(s) COMPENSATION" means any definition of compensation that satisfies the nondiscrimination requirements of Code Section 414(s) and the Regulations thereunder. The period for determining 414(s) Compensation must be either the Plan Year or the calendar year ending with or within the Plan Year. An Employer may further limit the period taken into account to that part of the Plan Year or calendar year in which an Employee was a Participant in the component of the Plan being tested. The period used to determine 414(s) Compensation must be applied uniformly to all Participants for the Plan Year. 1.30 "415 COMPENSATION" means, with respect to any Participant, such Participant's (a) Wages, tips and other compensation on Form W-2, (b) Section 3401(a) wages or (c) 415 safe-harbor compensation as elected in the Adoption Agreement for purposes of Compensation. 415 Compensation shall be based on the full Limitation Year regardless of when participation in the Plan commences. Furthermore, regardless of any election made in the Adoption Agreement, with respect to Limitation Years beginning after December 31, 1997, 415 Compensation shall include any elective deferral (as defined in Code Section 402(g)(3)) and any amount which is contributed or deferred by the Employer at the election of the Participant and which is not includible in the gross income of the Participant by reason of Code Section 125, 457, and, for Limitation Years beginning on or after January 1, 2001 (or as of a date, no earlier than January 1, 1998, as specified in an addendum to the Adoption Agreement), 132(f)(4). For Limitation Years beginning prior to January 1, 1998, 415 Compensation shall exclude such amounts. Except as otherwise provided herein, if, in connection with the adoption of any amendment, the definition of 415 Compensation has been modified, then for Plan Years prior to the Plan Year which includes the adoption date of such amendment, 415 Compensation means compensation determined pursuant to the terms of the Plan then in effect. 1.31 "HIGHLY COMPENSATED EMPLOYEE" means, effective for Plan Years beginning after December 31, 1996, an Employee described in Code Section 414(q) and the Regulations thereunder, and generally means any Employee who: (a) was a "five percent (5%) owner" as defined in Section 1.37(c) at any time during the "determination year" or the "look-back year"; or (b) for the "look-back year" had 415 Compensation from the Employer in excess of $80,000 and, if elected in the Adoption Agreement, was in the Top-Paid Group for the "look-back year." The $80,000 amount is adjusted at the same time and in the same manner as under Code Section 415(d), except that the base period is the calendar quarter ending September 30, 1996. The "determination year" means the Plan Year for which testing is being performed and the "look-back year" means the immediately preceding twelve (12) month period. However, if the calendar year data election is made in the Adoption Agreement, for purposes of (b) above, the "look-back year" shall be the calendar year beginning within the twelve (12) month period immediately preceding the "determination year." Notwithstanding the preceding sentence, if the calendar year data election is effective with respect to a Plan Year beginning in 1997, then for such Plan Year the "look-back year" shall be the calendar year ending with or within the Plan Year for which testing is being performed, and the "determination year" shall be the period of time, if any, which extends beyond the "look-back year" and ends on the last day of the Plan Year for which testing is being performed. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 5 DEFINED CONTRIBUTION PROTOTYPE PLAN A highly compensated former employee is based on the rules applicable to determining highly compensated employee status as in effect for that "determination year," in accordance with Regulation 1.414(q)-1T, A-4 and IRS Notice 97-45 (or any superseding guidance). In determining whether an employee is a Highly Compensated Employee for a Plan Year beginning in 1997, the amendments to Code Section 414(q) stated above are treated as having been in effect for years beginning in 1996. For purposes of this Section, for Plan Years beginning prior to January 1, 1998, the determination of 415 Compensation shall be made by including amounts that would otherwise be excluded from a Participant's gross income by reason of the application of Code Sections 125, 402(e)(3), 402(h)(1)(B) and, for Plan Years beginning on or after January 1, 2001 (or as of a date, no earlier than January 1, 1998, as specified in an addendum to the Adoption Agreement), 132(f)(4), and, in the case of Employer contributions made pursuant to a salary reduction agreement, Code Section 403(b). In determining who is a Highly Compensated Employee, Employees who are non-resident aliens and who received no earned income (within the meaning of Code Section 911(d)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Additionally, all Affiliated Employers shall be taken into account as a single employer and Leased Employees within the meaning of Code Sections 414(n)(2) and 414(o)(2) shall be considered Employees unless such Leased Employees are covered by a plan described in Code Section 414(n)(5) and are not covered in any qualified plan maintained by the Employer. The exclusion of Leased Employees for this purpose shall be applied on a uniform and consistent basis for all of the Employer's retirement plans. 1.32 "HIGHLY COMPENSATED PARTICIPANT" means any Highly Compensated Employee who is eligible to participate in the component of the Plan being tested. 1.33 "HOUR OF SERVICE" means (1) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer for the performance of duties during the applicable computation period (these hours will be credited to the Employee for the computation period in which the duties are performed); (2) each hour for which an Employee is directly or indirectly compensated or entitled to compensation by the Employer (irrespective of whether the employment relationship has terminated) for reasons other than performance of duties (such as vacation, holidays, sickness, incapacity (including disability), jury duty, lay-off, military duty or leave of absence) during the applicable computation period (these hours will be calculated and credited pursuant to Department of Labor regulation 2530.200b-2 which is incorporated herein by reference); (3) each hour for which back pay is awarded or agreed to by the Employer without regard to mitigation of damages (these hours will be credited to the Employee for the computation period or periods to which the award or agreement pertains rather than the computation period in which the award, agreement or payment is made). The same Hours of Service shall not be credited both under (1) or (2), as the case may be, and under (3). Notwithstanding (2) above, (i) no more than 501 Hours of Service are required to be credited to an Employee on account of any single continuous period during which the Employee performs no duties (whether or not such period occurs in a single computation period); (ii) an hour for which an Employee is directly or indirectly paid, or entitled to payment, on account of a period during which no duties are performed is not required to be credited to the Employee if such payment is made or due under a plan maintained solely for the purpose of complying with applicable workers' compensation, or unemployment compensation or disability insurance laws; and (iii) Hours of Service are not required to be credited for a payment which solely reimburses an Employee for medical or medically related expenses incurred by the Employee. Furthermore, for purposes of (2) above, a payment shall be deemed to be made by or due from the Employer regardless of whether such payment is made by or due from the Employer directly, or indirectly through, among others, a trust fund, or insurer, to which the Employer contributes or pays premiums and regardless of whether contributions made or due to the trust fund, insurer, or other entity are for the benefit of particular Employees or are on behalf of a group of Employees in the aggregate. Hours of Service will be credited for employment with all Affiliated Employers and for any individual considered to be a Leased Employee pursuant to Code Section 414(n) or 414(o) and the Regulations thereunder. Furthermore, the provisions of Department of Labor regulations 2530.200b-2(b) and (c) are incorporated herein by reference. Hours of Service will be determined on the basis of the method elected in the Adoption Agreement. 1.34 "INSURER" means any legal reserve insurance company which has issued or shall issue one or more Contracts or Policies under the Plan. 1.35 "INVESTMENT MANAGER" means a Fiduciary as described in Act Section 3(38). 1.36 "JOINT AND SURVIVOR ANNUITY" means an annuity for the life of a Participant with a survivor annuity for the life of the Participant's spouse which is not less than fifty percent (50%), nor more than one-hundred percent (100%) of the amount of the annuity payable during the joint lives of the Participant and the Participant's spouse which can be purchased with the Participant's Vested interest in the Plan reduced by any outstanding loan balances pursuant to Section 7.6. 1.37 "KEY EMPLOYEE" means an Employee as defined in Code Section 416(i) and the Regulations thereunder. Generally, any Employee or former Employee (as well as each of such Employee's or former Employee's Beneficiaries) is (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 6 DEFINED CONTRIBUTION PROTOTYPE PLAN considered a Key Employee if, the individual at any time during the Plan Year that contains the "Determination Date" (as defined in Section 9.2(c)) or any of the preceding four (4) Plan Years, has been included in one of the following categories: (a) an officer of the Employer (as that term is defined within the meaning of the Regulations under Code Section 416) having annual 415 Compensation greater than fifty percent (50%) of the amount in effect under Code Section 415(b)(1)(A) for any such Plan Year; (b) one of the ten Employees having annual 415 Compensation from the Employer for a Plan Year greater than the dollar limitation in effect under Code Section 415(c)(1)(A) for the calendar year in which such Plan Year ends and owning (or considered as owning within the meaning of Code Section 318) both more than one-half percent (1/2%) interest and the largest interests in the Employer; (c) a "five percent (5%) owner" of the Employer. "Five percent (5%) owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than five percent (5%) of the value of the outstanding stock of the Employer or stock possessing more than five percent (5%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than five percent (5%) of the capital or profits interest in the Employer; and (d) a "one percent (1%) owner" of the Employer having annual 415 Compensation from the Employer of more than $150,000. "One percent (1%) owner" means any person who owns (or is considered as owning within the meaning of Code Section 318) more than one percent (1%) of the value of the outstanding stock of the Employer or stock possessing more than one percent (1%) of the total combined voting power of all stock of the Employer or, in the case of an unincorporated business, any person who owns more than one percent (1%) of the capital or profits interest in the Employer. In determining percentage ownership hereunder, employers that would otherwise be aggregated under Code Sections 414(b), (c), (m) and (o) shall be treated as separate employers. In determining whether an individual has 415 Compensation of more than $150,000, 415 Compensation from each employer required to be aggregated under Code Sections 414(b), (c), (m) and (o) shall be taken into account. Furthermore, for purposes of this Section, for Plan Years beginning prior to January 1, 1998, the determination of 415 Compensation shall be made by including amounts that would otherwise be excluded from a Participant's gross income by reason of the application of Code Sections 125, 402(e)(3), 402(h)(1)(B) and, for Plan Years beginning on or after January 1, 2001 (or as of a date, no earlier than January 1, 1998, as specified in an addendum to the Adoption Agreement), 132(f)(4), and, in the case of Employer contributions made pursuant to a salary reduction agreement, Code Section 403(b). 1.38 "LATE RETIREMENT DATE" means the date of, or the first day of the month or the Anniversary Date coinciding with or next following, whichever corresponds to the election in the Adoption Agreement for the Normal Retirement Date, a Participant's actual retirement after having reached the Normal Retirement Date. 1.39 "LEASED EMPLOYEE" means, effective with respect to Plan Years beginning on or after January 1, 1997, any person (other than an Employee of the recipient Employer) who, pursuant to an agreement between the recipient Employer and any other person or entity ("leasing organization"), has performed services for the recipient (or for the recipient and related persons determined in accordance with Code Section 414(n)(6)) on a substantially full time basis for a period of at least one year, and such services are performed under primary direction or control by the recipient Employer. Contributions or benefits provided a Leased Employee by the leasing organization which are attributable to services performed for the recipient Employer shall be treated as provided by the recipient Employer. Furthermore, Compensation for a Leased Employee shall only include Compensation from the leasing organization that is attributable to services performed for the recipient Employer. A Leased Employee shall not be considered an employee of the recipient Employer if: (a) such employee is covered by a money purchase pension plan providing: (1) a nonintegrated employer contribution rate of at least ten percent (10%) of compensation, as defined in Code Section 415(c)(3), but for Plan Years beginning prior to January 1, 1998, including amounts contributed pursuant to a salary reduction agreement which are excludable from the employee's gross income under Code Sections 125, 402(e)(3), 402(h)(1)(B), 403(b), or for Plan Years beginning on or after January 1, 2001 (or as of a date, no earlier than January 1, 1998, as specified in an addendum to the Adoption Agreement), 132(f)(4), (2) immediate participation, and (3) full and immediate vesting; and (b) leased employees do not constitute more than twenty percent (20%) of the recipient Employer's nonhighly compensated workforce. 1.40 "LIMITATION YEAR" means the determination period used to determine Compensation. However, the Employer may elect a different Limitation Year in the Adoption Agreement or by adopting a written resolution to such effect. All qualified plans maintained by the Employer must use the same Limitation Year. Furthermore, unless there is a change to a new Limitation Year, the Limitation Year will be a twelve (12) consecutive month period. In the case of an initial Limitation Year, the Limitation Year will be the twelve (12) consecutive month period ending on the last day of the period specified in the Adoption Agreement (or written resolution). If the Limitation Year is amended to a different twelve (12) consecutive month period, the new "Limitation Year" must begin on a date within the "Limitation Year" in which the amendment is made. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 7 DEFINED CONTRIBUTION PROTOTYPE PLAN 1.41 "NET PROFIT" means, with respect to any Fiscal Year, the Employer's net income or profit for such Fiscal Year determined upon the basis of the Employer's books of account in accordance with generally accepted accounting principles, without any reduction for taxes based upon income, or for contributions made by the Employer to this Plan and any other qualified plan. 1.42 "NON-ELECTIVE CONTRIBUTION" means the Employer's contributions to the Plan other than Elective Deferrals, any Qualified Non-Elective Contributions and any Qualified Matching Contributions. Employer matching contributions which are not Qualified Matching Contributions shall be considered a Non-Elective Contribution for purposes of the Plan. 1.43 "NON-HIGHLY COMPENSATED PARTICIPANT" means any Participant who is not a Highly Compensated Employee. However, if pursuant to Sections 12.4 or 12.6 the prior year testing method is used to calculate the ADP or the ACP, a Non-Highly Compensated Participant shall be determined using the definition of Highly Compensated Employee in effect for the preceding Plan Year. 1.44 "NON-KEY EMPLOYEE" means any Employee or former Employee (and such Employee's or former Employee's Beneficiaries) who is not, and has never been, a Key Employee. 1.45 "NORMAL RETIREMENT AGE" means the age elected in the Adoption Agreement at which time a Participant's Account shall be nonforfeitable (if the Participant is employed by the Employer on or after that date). 1.46 "NORMAL RETIREMENT DATE" means the date elected in the Adoption Agreement. 1.47 "1-YEAR BREAK IN SERVICE" means, if the Hour of Service Method is elected in the Adoption Agreement, the applicable computation period during which an Employee or former Employee has not completed more than 500 Hours of Service. Further, solely for the purpose of determining whether an Employee has incurred a 1-Year Break in Service, Hours of Service shall be recognized for "authorized leaves of absence" and "maternity and paternity leaves of absence." For this purpose, Hours of Service shall be credited for the computation period in which the absence from work begins, only if credit therefore is necessary to prevent the Employee from incurring a 1-Year Break in Service, or, in any other case, in the immediately following computation period. The Hours of Service credited for a "maternity or paternity leave of absence" shall be those which would normally have been credited but for such absence, or, in any case in which the Administrator is unable to determine such hours normally credited, eight (8) Hours of Service per day. The total Hours of Service required to be credited for a "maternity or paternity leave of absence" shall not exceed the number of Hours of Service needed to prevent the Employee from incurring a 1-Year Break in Service. "Authorized leave of absence" means an unpaid, temporary cessation from active employment with the Employer pursuant to an established nondiscriminatory policy, whether occasioned by illness, military service, or any other reason. A "maternity or paternity leave of absence" means an absence from work for any period by reason of the Employee's pregnancy, birth of the Employee's child, placement of a child with the Employee in connection with the adoption of such child, or any absence for the purpose of caring for such child for a period immediately following such birth or placement. If the Elapsed Time Method is elected in the Adoption Agreement, a "1-Year Break in Service" means a twelve (12) consecutive month period beginning on the severance from service date or any anniversary thereof and ending on the next succeeding anniversary of such date; provided, however, that the Employee or former Employee does not perform an Hour of Service for the Employer during such twelve (12) consecutive month period. 1.48 "OWNER-EMPLOYEE" means a sole proprietor who owns the entire interest in the Employer or a partner (or member in the case of a limited liability company treated as a partnership or sole proprietorship for federal income tax purposes) who owns more than ten percent (10%) of either the capital interest or the profits interest in the Employer and who receives income for personal services from the Employer. 1.49 "PARTICIPANT" means any Eligible Employee who has satisfied the requirements of Section 3.2 and has not for any reason become ineligible to participate further in the Plan. 1.50 "PARTICIPANT DIRECTED ACCOUNT" means that portion of a Participant's interest in the Plan with respect to which the Participant has directed the investment in accordance with the Participant Direction Procedures. 1.51 "PARTICIPANT DIRECTION PROCEDURES" means such instructions, guidelines or policies, the terms of which are incorporated herein, as shall be established pursuant to Section 4.10 and observed by the Administrator and applied and provided to Participants who have Participant Directed Accounts. 1.52 "PARTICIPANT'S ACCOUNT" means the account established and maintained by the Administrator for each Participant with respect to such Participant's total interest under the Plan resulting from (a) the Employer's contributions in the case of a Profit Sharing Plan or Money Purchase Plan, and (b) the Employer's Non-Elective Contributions in the case of a 401(k) (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 8 DEFINED CONTRIBUTION PROTOTYPE PLAN Profit Sharing Plan. Separate accountings shall be maintained with respect to that portion of a Participant's Account attributable to Employer matching contributions and to Employer discretionary contributions made pursuant to Section 12.1(a)(3). 1.53 "PARTICIPANT'S COMBINED ACCOUNT" means the total aggregate amount of a Participant's interest under the Plan resulting from Employer contributions (including Elective Deferrals). 1.54 "PARTICIPANT'S ELECTIVE DEFERRAL ACCOUNT" means the account established and maintained by the Administrator for each Participant with respect to such Participant's total interest in the Plan resulting from Elective Deferrals. Amounts in the Participant's Elective Deferral Account are nonforfeitable when made and are subject to the distribution restrictions of Section 12.2(c). 1.55 "PARTICIPANT'S ROLLOVER ACCOUNT" means the account established and maintained by the Administrator for each Participant with respect to such Participant's interest in the Plan resulting from amounts transferred from another qualified plan or "conduit" Individual Retirement Account in accordance with Section 4.6. 1.56 "PARTICIPANT'S TRANSFER ACCOUNT" means the account established and maintained by the Administrator for each Participant with respect to the total interest in the Plan resulting from amounts transferred to this Plan from a direct plan-to-plan transfer in accordance with Section 4.7. 1.57 "PERIOD OF SERVICE" means the aggregate of all periods commencing with an Employee's first day of employment or reemployment with the Employer or an Affiliated Employer and ending on the first day of a Period of Severance. The first day of employment or reemployment is the first day the Employee performs an Hour of Service. An Employee will also receive partial credit for any Period of Severance of less than twelve (12) consecutive months. Fractional periods of a year will be expressed in terms of days. Periods of Service with any Affiliated Employer shall be recognized. Furthermore, Periods of Service with any predecessor employer that maintained this Plan shall be recognized. Periods of Service with any other predecessor employer shall be recognized as elected in the Adoption Agreement. In determining Periods of Service for purposes of vesting under the Plan, Periods of Service will be excluded as elected in the Adoption Agreement and as specified in Section 3.5. In the event the method of crediting service is amended from the Hour of Service Method to the Elapsed Time Method, an Employee will receive credit for a Period of Service consisting of: (a) A number of years equal to the number of Years of Service credited to the Employee before the computation period during which the amendment occurs; and (b) The greater of (1) the Periods of Service that would be credited to the Employee under the Elapsed Time Method for service during the entire computation period in which the transfer occurs or (2) the service taken into account under the Hour of Service Method as of the date of the amendment. In addition, the Employee will receive credit for service subsequent to the amendment commencing on the day after the last day of the computation period in which the transfer occurs. 1.58 "PERIOD OF SEVERANCE" means a continuous period of time during which an Employee is not employed by the Employer. Such period begins on the date the Employee retires, quits or is discharged, or if earlier, the twelve (12) month anniversary of the date on which the Employee was otherwise first absent from service. In the case of an individual who is absent from work for "maternity or paternity" reasons, the twelve (12) consecutive month period beginning on the first anniversary of the first day of such absence shall not constitute a one year Period of Severance. For purposes of this paragraph, an absence from work for "maternity or paternity" reasons means an absence (a) by reason of the pregnancy of the individual, (b) by reason of the birth of a child of the individual, (c) by reason of the placement of a child with the individual in connection with the adoption of such child by such individual, or (d) for purposes of caring for such child for a period beginning immediately following such birth or placement. 1.59 "PLAN" means this instrument (hereinafter referred to as Employee Benefit Compliance Services, Inc. Defined Contribution Prototype Plan and Trust Basic Plan Document #01) and the Adoption Agreement as adopted by the Employer, including all amendments thereto and any addendum which is specifically permitted pursuant to the terms of the Plan. 1.60 "PLAN YEAR" means the Plan's accounting year as specified in the Adoption Agreement. Unless there is a Short Plan Year, the Plan Year will be a twelve-consecutive month period. 1.61 "PRE-RETIREMENT SURVIVOR ANNUITY" means an immediate annuity for the life of a Participant's spouse, the payments under which must be equal to the benefit which can be provided with the percentage, as specified in the Adoption Agreement, of the Participant's Vested interest in the Plan as of the date of death. If no election is made in the Adoption (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 9 DEFINED CONTRIBUTION PROTOTYPE PLAN Agreement, the percentage shall be equal to fifty percent (50%). Furthermore, if less than one hundred percent (100%) of the Participant's Vested interest in the Plan is used to provide the Pre-Retirement Survivor Annuity, a proportionate share of each of the Participant's accounts shall be used to provide the Pre-Retirement Survivor Annuity. 1.62 "QUALIFIED MATCHING CONTRIBUTION" means any Employer matching contributions that are made pursuant to Sections 12.1(a)(2) if elected in the Adoption Agreement, 12.5 and 12.7. 1.63 "QUALIFIED MATCHING CONTRIBUTION ACCOUNT" means the account established hereunder to which Qualified Matching Contributions are allocated. Amounts in the Qualified Matching Contribution Account are nonforfeitable when made and are subject to the distribution restrictions of Section 12.2(c). 1.64 "QUALIFIED NON-ELECTIVE CONTRIBUTION" means the Employer's contributions to the Plan that are made pursuant to Sections 12.1(a)(4) if elected in the Adoption Agreement, 12.5 and 12.7. 1.65 "QUALIFIED NON-ELECTIVE CONTRIBUTION ACCOUNT" means the account established hereunder to which Qualified Non-Elective Contributions are allocated. Amounts in the Qualified Non-Elective Contribution Account are nonforfeitable when made and are subject to the distribution restrictions of Section 12.2(c). 1.66 "QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTION ACCOUNT" means the account established hereunder to which a Participant's tax deductible qualified voluntary employee contributions made pursuant to Section 4.9 are allocated. 1.67 "REGULATION" means the Income Tax Regulations as promulgated by the Secretary of the Treasury or a delegate of the Secretary of the Treasury, and as amended from time to time. 1.68 "RETIRED PARTICIPANT" means a person who has been a Participant, but who has become entitled to retirement benefits under the Plan. 1.69 "RETIREMENT DATE" means the date as of which a Participant retires for reasons other than Total and Permanent Disability, regardless of whether such retirement occurs on a Participant's Normal Retirement Date, Early Retirement Date or Late Retirement Date (see Section 6.1). 1.70 "SELF-EMPLOYED INDIVIDUAL" means an individual who has Earned Income for the taxable year from the trade or business for which the Plan is established, and, also, an individual who would have had Earned Income but for the fact that the trade or business had no net profits for the taxable year. A Self-Employed Individual shall be treated as an Employee. 1.71 "SHAREHOLDER-EMPLOYEE" means a Participant who owns (or is deemed to own pursuant to Code Section 318(a)(1)) more than five percent (5%) of the Employer's outstanding capital stock during any year in which the Employer elected to be taxed as a Small Business Corporation (S Corporation) under the applicable Code sections relating to Small Business Corporations. 1.72 "SHORT PLAN YEAR" means, if specified in the Adoption Agreement, a Plan Year of less than a twelve (12) month period. If there is a Short Plan Year, the following rules shall apply in the administration of this Plan. In determining whether an Employee has completed a Year of Service (or Period of Service if the Elapsed Time Method is used) for benefit accrual purposes in the Short Plan Year, the number of the Hours of Service (or months of service if the Elapsed Time Method is used) required shall be proportionately reduced based on the number of days (or months) in the Short Plan Year. The determination of whether an Employee has completed a Year of Service (or Period of Service) for vesting and eligibility purposes shall be made in accordance with Department of Labor regulation 2530.203-2(c). In addition, if this Plan is integrated with Social Security, then the integration level shall be proportionately reduced based on the number of months in the Short Plan Year. 1.73 "SUPER TOP HEAVY PLAN" means a plan which would be a Top Heavy Plan if sixty percent (60%) is replaced with ninety percent (90%) in Section 9.2(a). However, effective as of the first Plan Year beginning after December 31, 1999, no Plan shall be considered a Super Top Heavy Plan. 1.74 "TAXABLE WAGE BASE" means, with respect to any Plan Year, the contribution and benefit base under Section 230 of the Social Security Act at the beginning of such Plan Year. 1.75 "TERMINATED PARTICIPANT" means a person who has been a Participant, but whose employment has been terminated other than by death, Total and Permanent Disability or retirement. 1.76 "TOP HEAVY PLAN" means a plan described in Section 9.2(a). 1.77 "TOP HEAVY PLAN YEAR" means a Plan Year commencing after December 31, 1983, during which the Plan is a Top Heavy Plan. 1.78 "TOP-PAID GROUP" shall be determined pursuant to Code Section 414(q) and the Regulations thereunder and generally means the top twenty percent (20%) of Employees who performed services for the Employer during the applicable (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 10 DEFINED CONTRIBUTION PROTOTYPE PLAN year, ranked according to the amount of 415 Compensation received from the Employer during such year. All Affiliated Employers shall be taken into account as a single employer, and Leased Employees shall be treated as Employees if required pursuant to Code Section 414(n) or (o). Employees who are non-resident aliens who received no earned income (within the meaning of Code Section 911(d)(2)) from the Employer constituting United States source income within the meaning of Code Section 861(a)(3) shall not be treated as Employees. Furthermore, for the purpose of determining the number of active Employees in any year, the following additional Employees may also be excluded, however, such Employees shall still be considered for the purpose of identifying the particular Employees in the Top-Paid Group: (a) Employees with less than six (6) months of service; (b) Employees who normally work less than 17 1/2 hours per week; (c) Employees who normally work less than six (6) months during a year; and (d) Employees who have not yet attained age twenty-one (21). In addition, if ninety percent (90%) or more of the Employees of the Employer are covered under agreements the Secretary of Labor finds to be collective bargaining agreements between Employee representatives and the Employer, and the Plan covers only Employees who are not covered under such agreements, then Employees covered by such agreements shall be excluded from both the total number of active Employees as well as from the identification of particular Employees in the Top-Paid Group. The foregoing exclusions set forth in this Section shall be applied on a uniform and consistent basis for all purposes for which the Code Section 414(q) definition is applicable. Furthermore, in applying such exclusions, the Employer may substitute any lesser service, hours or age. 1.79 "TOTAL AND PERMANENT DISABILITY" means the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than twelve (12) months. The disability of a Participant shall be determined by a licensed physician chosen by the Administrator. However, if the condition constitutes total disability under the federal Social Security Acts, the Administrator may rely upon such determination that the Participant is Totally and Permanently Disabled for the purposes of this Plan. The determination shall be applied uniformly to all Participants. 1.80 "TRUSTEE" means the person or entity named in the Adoption Agreement, or any successors thereto. If the sponsor of this prototype is a bank, savings and loan, trust company, credit union or similar institution, a person or entity other than the prototype sponsor (or its affiliates or subsidiaries) may not serve as Trustee without the written consent of the sponsor. 1.81 "TRUST FUND" means the assets of the Plan and Trust as the same shall exist from time to time. 1.82 "VALUATION DATE" means the date or dates specified in the Adoption Agreement. Regardless of any election to the contrary, the Valuation Date shall include the Anniversary Date and may include any other date or dates deemed necessary or appropriate by the Administrator for the valuation of Participants' Accounts during the Plan Year, which may include any day that the Trustee, any transfer agent appointed by the Trustee or the Employer, or any stock exchange used by such agent, are open for business. 1.83 "VESTED" means the nonforfeitable portion of any account maintained on behalf of a Participant. 1.84 "VOLUNTARY CONTRIBUTION ACCOUNT" means the account established and maintained by the Administrator for each Participant with respect to such Participant's total interest in the Plan resulting from the Participant's after-tax voluntary Employee contributions made pursuant to Section 4.7. Amounts recharacterized as after-tax voluntary Employee contributions pursuant to Section 12.5 shall remain subject to the limitations of Section 12.2. Therefore, a separate accounting shall be maintained with respect to that portion of the Voluntary Contribution Account attributable to after-tax voluntary Employee contributions made pursuant to Section 4.8. 1.85 "YEAR OF SERVICE" means the computation period of twelve (12) consecutive months, herein set forth, and during which an Employee has completed at least 1,000 Hours of Service (unless a lower number of Hours of Service is specified in the Adoption Agreement). For purposes of eligibility for participation, the initial computation period shall begin with the date on which the Employee first performs an Hour of Service (employment commencement date). The initial computation period beginning after a 1-Year Break in Service shall be measured from the date on which an Employee again performs an Hour of Service. Unless otherwise elected in the Adoption Agreement, the succeeding computation periods shall begin on the anniversary of the Employee's employment commencement date. However, unless otherwise elected in the Adoption Agreement, if one (1) Year of (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 11 DEFINED CONTRIBUTION PROTOTYPE PLAN Service or less is required as a condition of eligibility, then the computation period after the initial computation period shall shift to the current Plan Year which includes the anniversary of the date on which the Employee first performed an Hour of Service, and subsequent computation periods shall be the Plan Year. If there is a shift to the Plan Year, an Employee who is credited with the number of Hours of Service to be credited with a Year of Service in both the initial eligibility computation period and the first Plan Year which commences prior to the first anniversary of the Employee's initial eligibility computation period will be credited with two (2) Years of Service for purposes of eligibility to participate. If two (2) Years of Service are required as a condition of eligibility, a Participant will only have completed two (2) Years of Service for eligibility purposes upon completing two (2) consecutive Years of Service without an intervening 1-Year Break-in-Service. For vesting purposes, and all other purposes not specifically addressed in this Section, the computation period shall be the period elected in the Adoption Agreement. If no election is made in the Adoption Agreement, the computation period shall be the Plan Year. In determining Years of Service for purposes of vesting under the Plan, Years of Service will be excluded as elected in the Adoption Agreement and as specified in Section 3.5. Years of Service and 1-Year Breaks in Service for eligibility purposes will be measured on the same eligibility computation period. Years of Service and 1-Year Breaks in Service for vesting purposes will be measured on the same vesting computation period. Years of Service with any Affiliated Employer shall be recognized. Furthermore, Years of Service with any predecessor employer that maintained this Plan shall be recognized. Years of Service with any other predecessor employer shall be recognized as elected in the Adoption Agreement. In the event the method of crediting service is amended from the Elapsed Time Method to the Hour of Service Method, an Employee will receive credit for Years of Service equal to: (a) The number of Years of Service equal to the number of 1-year Periods of Service credited to the Employee as of the date of the amendment; and (b) In the computation period which includes the date of the amendment, a number of Hours of Service (using the Hours of Service equivalency method elected in the Adoption Agreement) to any fractional part of a year credited to the Employee under this Section as of the date of the amendment. ARTICLE II ADMINISTRATION 2.1 POWERS AND RESPONSIBILITIES OF THE EMPLOYER (a) In addition to the general powers and responsibilities otherwise provided for in this Plan, the Employer shall be empowered to appoint and remove the Trustee and the Administrator from time to time as it deems necessary for the proper administration of the Plan to ensure that the Plan is being operated for the exclusive benefit of the Participants and their Beneficiaries in accordance with the terms of the Plan, the Code, and the Act. The Employer may appoint counsel, specialists, advisers, agents (including any nonfiduciary agent) and other persons as the Employer deems necessary or desirable in connection with the exercise of its fiduciary duties under this Plan. The Employer may compensate such agents or advisers from the assets of the Plan as fiduciary expenses (but not including any business (settlor) expenses of the Employer), to the extent not paid by the Employer. (b) The Employer shall establish a "funding policy and method," i.e., it shall determine whether the Plan has a short run need for liquidity (e.g., to pay benefits) or whether liquidity is a long run goal and investment growth (and stability of same) is a more current need, or shall appoint a qualified person to do so. If the Trustee has discretionary authority, the Employer or its delegate shall communicate such needs and goals to the Trustee, who shall coordinate such Plan needs with its investment policy. The communication of such a "funding policy and method" shall not, however, constitute a directive to the Trustee as to the investment of the Trust Funds. Such "funding policy and method" shall be consistent with the objectives of this Plan and with the requirements of Title I of the Act. (c) The Employer may appoint, at its option, an Investment Manager, investment adviser, or other agent to provide direction to the Trustee with respect to any or all of the Plan assets. Such appointment shall be given by the Employer in writing in a form acceptable to the Trustee and shall specifically identify the Plan assets with respect to which the Investment Manager or other agent shall have the authority to direct the investment. (d) The Employer shall periodically review the performance of any Fiduciary or other person to whom duties have been delegated or allocated by it under the provisions of this Plan or pursuant to procedures established hereunder. This requirement may be satisfied by formal periodic review by the Employer or by a qualified person (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 12 DEFINED CONTRIBUTION PROTOTYPE PLAN specifically designated by the Employer, through day-to-day conduct and evaluation, or through other appropriate ways. 2.2 DESIGNATION OF ADMINISTRATIVE AUTHORITY The Employer may appoint one or more Administrators. If the Employer does not appoint an Administrator, the Employer will be the Administrator. Any person, including, but not limited to, the Employees of the Employer, shall be eligible to serve as an Administrator. Any person so appointed shall signify acceptance by filing written acceptance with the Employer. An Administrator may resign by delivering a written resignation to the Employer or be removed by the Employer by delivery of written notice of removal, to take effect at a date specified therein, or upon delivery to the Administrator if no date is specified. Upon the resignation or removal of an Administrator, the Employer may designate in writing a successor to this position. 2.3 ALLOCATION AND DELEGATION OF RESPONSIBILITIES If more than one person is appointed as Administrator, the responsibilities of each Administrator may be specified by the Employer and accepted in writing by each Administrator. In the event that no such delegation is made by the Employer, the Administrators may allocate the responsibilities among themselves, in which event the Administrators shall notify the Employer and the Trustee in writing of such action and specify the responsibilities of each Administrator. The Trustee thereafter shall accept and rely upon any documents executed by the appropriate Administrator until such time as the Employer or the Administrators file with the Trustee a written revocation of such designation. 2.4 POWERS AND DUTIES OF THE ADMINISTRATOR The primary responsibility of the Administrator is to administer the Plan for the exclusive benefit of the Participants and their Beneficiaries, subject to the specific terms of the Plan. The Administrator shall administer the Plan in accordance with its terms and shall have the power and discretion to construe the terms of the Plan and determine all questions arising in connection with the administration, interpretation, and application of the Plan. Benefits under this Plan will be paid only if the Administrator decides in its discretion that the applicant is entitled to them. Any such determination by the Administrator shall be conclusive and binding upon all persons. The Administrator may establish procedures, correct any defect, supply any information, or reconcile any inconsistency in such manner and to such extent as shall be deemed necessary or advisable to carry out the purpose of the Plan; provided, however, that any procedure, discretionary act, interpretation or construction shall be done in a nondiscriminatory manner based upon uniform principles consistently applied and shall be consistent with the intent that the Plan continue to be deemed a qualified plan under the terms of Code Section 401(a), and shall comply with the terms of the Act and all regulations issued pursuant thereto. The Administrator shall have all powers necessary or appropriate to accomplish its duties under this Plan. The Administrator shall be charged with the duties of the general administration of the Plan and the powers necessary to carry out such duties as set forth under the terms of the Plan, including, but not limited to, the following: (a) the discretion to determine all questions relating to the eligibility of an Employee to participate or remain a Participant hereunder and to receive benefits under the Plan; (b) the authority to review and settle all claims against the Plan, including claims where the settlement amount cannot be calculated or is not calculated in accordance with the Plan's benefit formula. This authority specifically permits the Administrator to settle, in compromise fashion, disputed claims for benefits and any other disputed claims made against the Plan; (c) to compute, certify, and direct the Trustee with respect to the amount and the kind of benefits to which any Participant shall be entitled hereunder; (d) to authorize and direct the Trustee with respect to all discretionary or otherwise directed disbursements from the Trust Fund; (e) to maintain all necessary records for the administration of the Plan; (f) to interpret the provisions of the Plan and to make and publish such rules for regulation of the Plan that are consistent with the terms hereof; (g) to determine the size and type of any Contract to be purchased from any Insurer, and to designate the Insurer from which such Contract shall be purchased; (h) to compute and certify to the Employer and to the Trustee from time to time the sums of money necessary or desirable to be contributed to the Plan; (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 13 DEFINED CONTRIBUTION PROTOTYPE PLAN (i) to consult with the Employer and the Trustee regarding the short and long-term liquidity needs of the Plan in order that the Trustee can exercise any investment discretion (if the Trustee has such discretion), in a manner designed to accomplish specific objectives; (j) to prepare and implement a procedure for notifying Participants and Beneficiaries of their rights to elect Joint and Survivor Annuities and Pre-Retirement Survivor Annuities if required by the Plan, Code and Regulations thereunder; (k) to assist Participants regarding their rights, benefits, or elections available under the Plan; (l) to act as the named Fiduciary responsible for communicating with Participants as needed to maintain Plan compliance with Act Section 404(c) (if the Employer intends to comply with Act Section 404(c)) including, but not limited to, the receipt and transmission of Participants' directions as to the investment of their accounts under the Plan and the formation of policies, rules, and procedures pursuant to which Participants may give investment instructions with respect to the investment of their accounts; and (m) to determine the validity of, and take appropriate action with respect to, any qualified domestic relations order received by it. 2.5 RECORDS AND REPORTS The Administrator shall keep a record of all actions taken and shall keep all other books of account, records, and other data that may be necessary for proper administration of the Plan and shall be responsible for supplying all information and reports to the Internal Revenue Service, Department of Labor, Participants, Beneficiaries and others as required by law. 2.6 APPOINTMENT OF ADVISERS The Administrator may appoint counsel, specialists, advisers, agents (including nonfiduciary agents) and other persons as the Administrator deems necessary or desirable in connection with the administration of this Plan, including but not limited to agents and advisers to assist with the administration and management of the Plan, and thereby to provide, among such other duties as the Administrator may appoint, assistance with maintaining Plan records and the providing of investment information to the Plan's investment fiduciaries and, if applicable, to Plan Participants. 2.7 INFORMATION FROM EMPLOYER The Employer shall supply full and timely information to the Administrator on all pertinent facts as the Administrator may require in order to perform its functions hereunder and the Administrator shall advise the Trustee of such of the foregoing facts as may be pertinent to the Trustee's duties under the Plan. The Administrator may rely upon such information as is supplied by the Employer and shall have no duty or responsibility to verify such information. 2.8 PAYMENT OF EXPENSES All expenses of administration may be paid out of the Trust Fund unless paid by the Employer. Such expenses shall include any expenses incident to the functioning of the Administrator, or any person or persons retained or appointed by any Named Fiduciary incident to the exercise of their duties under the Plan, including, but not limited to, fees of accountants, counsel, Investment Managers, agents (including nonfiduciary agents) appointed for the purpose of assisting the Administrator or Trustee in carrying out the instructions of Participants as to the directed investment of their accounts (if permitted) and other specialists and their agents, the costs of any bonds required pursuant to Act Section 412, and other costs of administering the Plan. Until paid, the expenses shall constitute a liability of the Trust Fund. 2.9 MAJORITY ACTIONS Except where there has been an allocation and delegation of administrative authority pursuant to Section 2.3, if there is more than one Administrator, then they shall act by a majority of their number, but may authorize one or more of them to sign all papers on their behalf. 2.10 CLAIMS PROCEDURE Claims for benefits under the Plan may be filed in writing with the Administrator. Written notice of the disposition of a claim shall be furnished to the claimant within ninety (90) days after the application is filed, or such period as is required by applicable law or Department of Labor regulation. In the event the claim is denied, the reasons for the denial shall be specifically set forth in the notice in language calculated to be understood by the claimant, pertinent provisions of the Plan shall be cited, and, where appropriate, an explanation as to how the claimant can perfect the claim will be provided. In addition, the claimant shall be furnished with an explanation of the Plan's claims review procedure. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 14 DEFINED CONTRIBUTION PROTOTYPE PLAN 2.11 CLAIMS REVIEW PROCEDURE Any Employee, former Employee, or Beneficiary of either, who has been denied a benefit by a decision of the Administrator pursuant to Section 2.10 shall be entitled to request the Administrator to give further consideration to the claim by filing with the Administrator a written request for a hearing. Such request, together with a written statement of the reasons why the claimant believes such claim should be allowed, shall be filed with the Administrator no later than sixty (60) days after receipt of the written notification provided for in Section 2.10. The Administrator shall then conduct a hearing within the next sixty (60) days, at which the claimant may be represented by an attorney or any other representative of such claimant's choosing and expense and at which the claimant shall have an opportunity to submit written and oral evidence and arguments in support of the claim. At the hearing (or prior thereto upon five (5) business days written notice to the Administrator) the claimant or the claimant's representative shall have an opportunity to review all documents in the possession of the Administrator which are pertinent to the claim at issue and its disallowance. Either the claimant or the Administrator may cause a court reporter to attend the hearing and record the proceedings. In such event, a complete written transcript of the proceedings shall be furnished to both parties by the court reporter. The full expense of any such court reporter and such transcripts shall be borne by the party causing the court reporter to attend the hearing. A final decision as to the allowance of the claim shall be made by the Administrator within sixty (60) days of receipt of the appeal (unless there has been an extension of sixty (60) days due to special circumstances, provided the delay and the special circumstances occasioning it are communicated to the claimant within the sixty (60) day period). Such communication shall be written in a manner calculated to be understood by the claimant and shall include specific reasons for the decision and specific references to the pertinent Plan provisions on which the decision is based. Notwithstanding the preceding, to the extent any of the time periods specified in this Section are amended by law or Department of Labor regulation, then the time frames specified herein shall automatically be changed in accordance with such law or regulation. If the Administrator, pursuant to the claims review procedure, makes a final written determination denying a Participant's or Beneficiary's benefit claim, then in order to preserve the claim, the Participant or Beneficiary must file an action with respect to the denied claim not later than one hundred eighty (180) days following the date of the Administrator's final determination. ARTICLE III ELIGIBILITY 3.1 CONDITIONS OF ELIGIBILITY Any Eligible Employee shall be eligible to participate hereunder on the date such Employee has satisfied the conditions of eligibility elected in the Adoption Agreement. 3.2 EFFECTIVE DATE OF PARTICIPATION An Eligible Employee who has satisfied the conditions of eligibility pursuant to Section 3.1 shall become a Participant effective as of the date elected in the Adoption Agreement. If said Employee is not employed on such date, but is reemployed before a 1-Year Break in Service has occurred, then such Employee shall become a Participant on the date of reemployment or, if later, the date that the Employee would have otherwise entered the Plan had the Employee not terminated employment. Unless specifically provided otherwise in the Adoption Agreement, an Eligible Employee who satisfies the Plan's eligibility requirement conditions by reason of recognition of service with a predecessor employer will become a Participant as of the day the Plan credits service with a predecessor employer or, if later, the date the Employee would have otherwise entered the Plan had the service with the predecessor employer been service with the Employer. If an Employee, who has satisfied the Plan's eligibility requirements and would otherwise have become a Participant, shall go from a classification of a noneligible Employee to an Eligible Employee, such Employee shall become a Participant on the date such Employee becomes an Eligible Employee or, if later, the date that the Employee would have otherwise entered the Plan had the Employee always been an Eligible Employee. If an Employee, who has satisfied the Plan's eligibility requirements and would otherwise become a Participant, shall go from a classification of an Eligible Employee to a noneligible class of Employees, such Employee shall become a Participant in the Plan on the date such Employee again becomes an Eligible Employee, or, if later, the date that the Employee would have otherwise entered the Plan had the Employee always been an Eligible Employee. However, if such Employee incurs a 1-Year Break in Service, eligibility will be determined under the Break in Service rules set forth in Section 3.5. 3.3 DETERMINATION OF ELIGIBILITY The Administrator shall determine the eligibility of each Employee for participation in the Plan based upon information furnished by the Employer. Such determination shall be conclusive and binding upon all persons, as long as the same is made pursuant to the Plan and the Act. Such determination shall be subject to review pursuant to Section 2.11. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 15 DEFINED CONTRIBUTION PROTOTYPE PLAN 3.4 TERMINATION OF ELIGIBILITY In the event a Participant shall go from a classification of an Eligible Employee to an ineligible Employee, such Former Participant shall continue to vest in the Plan for each Year of Service (or Period of Service, if the Elapsed Time Method is used) completed while an ineligible Employee, until such time as the Participant's Account is forfeited or distributed pursuant to the terms of the Plan. Additionally, the Former Participant's interest in the Plan shall continue to share in the earnings of the Trust Fund in the same manner as Participants. 3.5 REHIRED EMPLOYEES AND BREAKS IN SERVICE (a) If any Participant becomes a Former Participant due to severance from employment with the Employer and is reemployed by the Employer before a 1-Year Break in Service occurs, the Former Participant shall become a Participant as of the reemployment date. (b) If any Participant becomes a Former Participant due to severance from employment with the Employer and is reemployed after a 1-Year Break in Service has occurred, Years of Service (or Periods of Service if the Elapsed Time Method is being used) shall include Years of Service (or Periods of Service if the Elapsed Time Method is being used) prior to the 1-Year Break in Service subject to the following rules: (1) In the case of a Former Participant who under the Plan does not have a nonforfeitable right to any interest in the Plan resulting from Employer contributions, Years of Service (or Periods of Service) before a period of 1-Year Breaks in Service will not be taken into account if the number of consecutive 1-Year Breaks in Service equals or exceeds the greater of (A) five (5) or (B) the aggregate number of pre-break Years of Service (or Periods of Service). Such aggregate number of Years of Service (or Periods of Service) will not include any Years of Service (or Periods of Service) disregarded under the preceding sentence by reason of prior 1-Year Breaks in Service; (2) A Former Participant who has not had Years of Service (or Periods of Service) before a 1-Year Break in Service disregarded pursuant to (1) above, shall participate in the Plan as of the date of reemployment, or if later, as of the date the Former Participant would otherwise enter the Plan pursuant to Sections 3.1 and 3.2 taking into account all service not disregarded. (c) After a Former Participant who has severed employment with the Employer incurs five (5) consecutive 1-Year Breaks in Service, the Vested portion of such Former Participant's Account attributable to pre-break service shall not be increased as a result of post-break service. In such case, separate accounts will be maintained as follows: (1) one account for nonforfeitable benefits attributable to pre-break service; and (2) one account representing the Participant's Employer-derived account balance in the Plan attributable to post-break service. (d) If any Participant becomes a Former Participant due to severance of employment with the Employer and is reemployed by the Employer before five (5) consecutive 1-Year Breaks in Service, and such Former Participant had received a distribution of the entire Vested interest prior to reemployment, then the forfeited account shall be reinstated only if the Former Participant repays the full amount which had been distributed. Such repayment must be made before the earlier of five (5) years after the first date on which the Participant is subsequently reemployed by the Employer or the close of the first period of five (5) consecutive 1-Year Breaks in Service commencing after the distribution. If a distribution occurs for any reason other than a severance of employment, the time for repayment may not end earlier than five (5) years after the date of distribution. In the event the Former Participant does repay the full amount distributed, the undistributed forfeited portion of the Participant's Account must be restored in full, unadjusted by any gains or losses occurring subsequent to the Valuation Date preceding the distribution. The source for such reinstatement may be Forfeitures occurring during the Plan Year. If such source is insufficient, then the Employer will contribute an amount which is sufficient to restore the Participant's Account, provided, however, that if a discretionary contribution is made for such year, such contribution will first be applied to restore any such accounts and the remainder shall be allocated in accordance with the terms of the Plan. If a non-Vested Former Participant was deemed to have received a distribution and such Former Participant is reemployed by the Employer before five (5) consecutive 1-Year Breaks in Service, then such Participant will be deemed to have repaid the deemed distribution as of the date of reemployment. 3.6 ELECTION NOT TO PARTICIPATE An Employee may, subject to the approval of the Employer, elect voluntarily not to participate in the Plan. The election not to participate must be irrevocable and communicated to the Employer, in writing, within a reasonable period of time before the beginning of the first Plan Year. For standardized Plans, a Participant or an Eligible Employee may not elect not to participate. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 16 DEFINED CONTRIBUTION PROTOTYPE PLAN 3.7 CONTROL OF ENTITIES BY OWNER-EMPLOYEE Effective with respect to Plan Years beginning after December 31, 1996, if this Plan provides contributions or benefits for one or more Owner-Employees, the contributions on behalf of any Owner-Employee shall be made only with respect to the Earned Income for such Owner-Employee which is derived from the trade or business with respect to which such Plan is established. ARTICLE IV CONTRIBUTION AND ALLOCATION 4.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION (a) For a Money Purchase Plan: (1) The Employer will make contributions on the following basis. On behalf of each Participant eligible to share in allocations, for each year of such Participant's participation in this Plan, the Employer will contribute the amount elected in the Adoption Agreement. All contributions by the Employer will be made in cash. In the event a funding waiver is obtained, this Plan shall be deemed to be an individually designed plan. (2) Notwithstanding the foregoing, with respect to an Employer which is not a tax-exempt entity, the Employer's contribution for any Fiscal Year shall not exceed the maximum amount allowable as a deduction to the Employer under the provisions of Code Section 404. However, to the extent necessary to provide the top heavy minimum allocations, the Employer shall make a contribution even if it exceeds the amount that is deductible under Code Section 404. (b) For a Profit Sharing Plan: (1) For each Plan Year, the Employer may (or will in the case of a Prevailing Wage contribution) contribute to the Plan such amount as elected by the Employer in the Adoption Agreement. (2) Additionally, the Employer will contribute to the Plan the amount necessary, if any, to provide the top heavy minimum allocations, even if it exceeds current or accumulated Net Profit or the amount that is deductible under Code Section 404. 4.2 TIME OF PAYMENT OF EMPLOYER'S CONTRIBUTION Unless otherwise provided by contract or law, the Employer may make its contribution to the Plan for a particular Plan Year at such time as the Employer, in its sole discretion, determines. If the Employer makes a contribution for a particular Plan Year after the close of that Plan Year, the Employer will designate to the Administrator the Plan Year for which the Employer is making its contribution. 4.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS (a) The Administrator shall establish and maintain an account in the name of each Participant to which the Administrator shall credit as of each Anniversary Date, or other Valuation Date, all amounts allocated to each such Participant as set forth herein. (b) The Employer shall provide the Administrator with all information required by the Administrator to make a proper allocation of the Employer's contribution, if any, for each Plan Year. Within a reasonable period of time after the date of receipt by the Administrator of such information, the Administrator shall allocate any contributions as follows: (1) For a Money Purchase Plan (other than a Money Purchase Plan which is integrated by allocation): (i) The Employer's contribution shall be allocated to each Participant's Account in the manner set forth in Section 4.1 herein and as specified in the Adoption Agreement. (ii) However, regardless of the preceding, a Participant shall only be eligible to share in the allocations of the Employer's contribution for the year if the conditions set forth in the Adoption Agreement are satisfied, unless a top heavy contribution is required pursuant to Section 4.3(f). If no election is made in the Adoption Agreement, then a Participant shall be eligible to share in the allocation of the Employer's contribution for the year if the Participant completes more than five hundred (500) Hours of Service (or three (3) Months of Service if the Elapsed Time method is chosen in the Adoption Agreement) during the Plan Year or who is employed on the last day of the Plan Year. Furthermore, with respect to a non-standardized Adoption Agreement, regardless of any (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 17 DEFINED CONTRIBUTION PROTOTYPE PLAN election in the Adoption Agreement to the contrary, for the Plan Year in which this Plan terminates, a Participant shall only be eligible to share in the allocation of the Employer's contributions for the Plan Year if the Participant is employed at the end of the Plan Year and has completed a Year of Service (or Period of Service if the Elapsed Time Method is elected). (2) For an integrated Profit Sharing Plan allocation or a Money Purchase Plan which is integrated by allocation: (i) Except as provided in Section 4.3(f) for top heavy purposes and subject to the "Overall Permitted Disparity Limits," the Employer's contribution shall be allocated to each Participant's Account in a dollar amount equal to 5.7% of the sum of each Participant's Compensation plus Excess Compensation. If the Employer does not contribute such amount for all Participants, each Participant will be allocated a share of the contribution in the same proportion that each such Participant's Compensation plus Excess Compensation for the Plan Year bears to the total Compensation plus the total Excess Compensation of all Participants for that year. However, in the case of any Participant who has exceeded the "Cumulative Permitted Disparity Limit," the allocation set forth in this paragraph shall be based on such Participant's Compensation rather than Compensation plus Excess Compensation. Regardless of the preceding, 4.3% shall be substituted for 5.7% above if Excess Compensation is based on more than 20% and less than or equal to 80% of the Taxable Wage Base. If Excess Compensation is based on less than 100% and more than 80% of the Taxable Wage Base, then 5.4% shall be substituted for 5.7% above. (ii) The balance of the Employer's contribution over the amount allocated above, if any, shall be allocated to each Participant's Account in the same proportion that each such Participant's Compensation for the Year bears to the total Compensation of all Participants for such year. (iii) However, regardless of the preceding, a Participant shall only be eligible to share in the allocations of the Employer's Contribution for the year if the conditions set forth in the Adoption Agreement are satisfied, unless a contribution is required pursuant to Section 4.3(f). If no election is made in the Adoption Agreement, then a Participant shall be eligible to share in the allocation of the Employer's contribution for the year if the Participant completes more than five hundred (500) Hours of Service (or three (3) Months of Service if the Elapsed Time method is chosen in the Adoption Agreement) during the Plan Year or who is employed on the last day of the Plan Year. Furthermore, with respect to a non-standardized Adoption Agreement, regardless of any election in the Adoption Agreement to the contrary, for the Plan Year in which this Plan terminates, a Participant shall only be eligible to share in the allocation of the Employer's contributions for the Plan Year if the Participant is employed at the end of the Plan Year and has completed a Year of Service (or Period of Service if the Elapsed Time Method is elected). (3) For a Profit Sharing Plan with a non-integrated allocation formula or a Prevailing Wage contribution: (i) The Employer's contribution shall be allocated to each Participant's Account in accordance with the allocation method elected in the Adoption Agreement. (ii) However, regardless of the preceding, a Participant shall only be eligible to share in the allocations of the Employer's contribution for the year if the conditions set forth in the Adoption Agreement are satisfied, unless a top heavy contribution is required pursuant to Section 4.3(f). If no election is made in the Adoption Agreement, then a Participant shall be eligible to share in the allocation of the Employer's contribution for the year if the Participant completes more than five hundred (500) Hours of Service (or three (3) Months of Service if the Elapsed Time method is chosen in the Adoption Agreement) during the Plan Year or who is employed on the last day of the Plan Year. Furthermore, with respect to a non-standardized Adoption Agreement, regardless of any election in the Adoption Agreement to the contrary, for the Plan Year in which this Plan terminates, a Participant shall only be eligible to share in the allocation of the Employer's contributions for the Plan Year if the Participant is employed at the end of the Plan Year and has completed a Year of Service (or Period of Service if the Elapsed Time Method is elected). (4) "Overall Permitted Disparity Limits": "Annual Overall Permitted Disparity Limit": Notwithstanding the preceding paragraphs, if in any Plan Year this Plan "benefits" any Participant who "benefits" under another qualified plan or simplified employee pension, as defined in Code Section 408(k), maintained by the Employer that either provides for or imputes permitted disparity (integrates), then such plans will be considered to (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 18 DEFINED CONTRIBUTION PROTOTYPE PLAN be one plan and will be considered to comply with the permitted disparity rules if the extent of the permitted disparity of all such plans does not exceed 100%. For purposes of the preceding sentence, the extent of the permitted disparity of a plan is the ratio, expressed as a percentage, which the actual benefits, benefit rate, offset rate, or employer contribution rate, whatever is applicable under the Plan, bears to the limitation under Code Section 401(l) applicable to such Plan. Notwithstanding the foregoing, if the Employer maintains two or more standardized paired plans, only one plan may provide for permitted disparity. "Cumulative Permitted Disparity Limit": With respect to a Participant who "benefits" or "has benefited" under a defined benefit or target benefit plan of the Employer, effective for Plan Years beginning on or after January 1, 1994, the cumulative permitted disparity limit for the Participant is thirty five (35) total cumulative permitted disparity years. Total cumulative permitted disparity years means the number of years credited to the Participant for allocation or accrual purposes under the Plan, any other qualified plan or simplified employee pension plan (whether or not terminated) ever maintained by the Employer, while such plan either provides for or imputes permitted disparity. For purposes of determining the Participant's cumulative permitted disparity limit, all years ending in the same calendar year are treated as the same year. If the Participant has not "benefited" under a defined benefit or target benefit plan which neither provides for nor imputes permitted disparity for any year beginning on or after January 1, 1994, then such Participant has no cumulative disparity limit. For purposes of this Section, "benefiting" means benefiting under the Plan for any Plan Year during which a Participant received or is deemed to receive an allocation in accordance with Regulation 1.410(b)-3(a). (c) Except as otherwise elected in the Adoption Agreement or as provided in Section 4.10 with respect to Participant Directed Accounts, as of each Valuation Date, before allocation of any Employer contributions and Forfeitures, any earnings or losses (net appreciation or net depreciation) of the Trust Fund (exclusive of assets segregated for distribution) shall be allocated in the same proportion that each Participant's and Former Participant's nonsegregated accounts bear to the total of all Participants' and Former Participants' nonsegregated accounts as of such date. If any nonsegregated account of a Participant has been distributed prior to the Valuation Date subsequent to a Participant's termination of employment, no earnings or losses shall be credited to such account. (d) Participants' Accounts shall be debited for any insurance or annuity premiums paid, if any, and credited with any dividends or interest received on Contracts. (e) On or before each Anniversary Date, any amounts which became Forfeitures since the last Anniversary Date may be made available to reinstate previously forfeited account balances of Former Participants, if any, in accordance with Section 3.5(d) or used to satisfy any contribution that may be required pursuant to Section 6.9. The remaining Forfeitures, if any, shall be treated in accordance with the Adoption Agreement. If no election is made in the Adoption Agreement, any remaining Forfeitures will be used to reduce any future Employer contributions under the Plan. However, if the Plan provides for an integrated allocation, then any remaining Forfeitures will be added to the Employer's contributions under the Plan. Regardless of the preceding sentences, in the event the allocation of Forfeitures provided herein shall cause the "Annual Additions" (as defined in Section 4.4) to any Participant's Account to exceed the amount allowable by the Code, an adjustment shall be made in accordance with Section 4.5. Except, however, a Participant shall only be eligible to share in the allocations of Forfeitures for the year if the conditions set forth in the Adoption Agreement are satisfied, unless a top heavy contribution is required pursuant to Section 4.3(f). If no election is made in the Adoption Agreement, then a Participant shall be eligible to share in the allocation of the Employer's contribution for the year if the Participant completes more than five hundred (500) Hours of Service (or three (3) Months of Service if the Elapsed Time method is chosen in the Adoption Agreement) during the Plan Year or who is employed on the last day of the Plan Year. (f) Minimum Allocations Required for Top Heavy Plan Years: Notwithstanding the foregoing, for any Top Heavy Plan Year, the sum of the Employer's contributions and Forfeitures allocated to the Participant's Combined Account of each Non-Key Employee shall be equal to at least three percent (3%) of such Non-Key Employee's 415 Compensation (reduced by contributions and forfeitures, if any, allocated to each Non-Key Employee in any defined contribution plan included with this Plan in a "required aggregation group" (as defined in Section 9.2(f)). However, if (i) the sum of the Employer's contributions and Forfeitures allocated to the Participant's Combined Account of each Key Employee for such Top Heavy Plan Year is less than three percent (3%) of each Key Employee's 415 Compensation and (ii) this Plan is not required to be included in a "required aggregation group" (as defined in Section 9.2(f)) to enable a defined benefit plan to meet the requirements of Code Section 401(a)(4) or 410, the sum of the Employer's contributions and Forfeitures allocated to the Participant's Combined Account of each Non-Key Employee shall be equal to the largest percentage allocated to the Participant's Combined Account of any Key Employee. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 19 DEFINED CONTRIBUTION PROTOTYPE PLAN However, for each Non-Key Employee who is a Participant in a paired Profit Sharing Plan or 401(k) Profit Sharing Plan and a paired Money Purchase Plan, the minimum three percent (3%) allocation specified above shall be provided in the Money Purchase Plan. If this is an integrated Plan, then for any Top Heavy Plan Year the Employer's contribution shall be allocated as follows and shall still be required to satisfy the other provisions of this subsection: (1) An amount equal to three percent (3%) multiplied by each Participant's Compensation for the Plan Year shall be allocated to each Participant's Account. If the Employer does not contribute such amount for all Participants, the amount shall be allocated to each Participant's Account in the same proportion that such Participant's total Compensation for the Plan Year bears to the total Compensation of all Participants for such year. (2) The balance of the Employer's contribution over the amount allocated under subparagraph (1) hereof shall be allocated to each Participant's Account in a dollar amount equal to three percent (3%) multiplied by a Participant's Excess Compensation. If the Employer does not contribute such amount for all Participants, each Participant will be allocated a share of the contribution in the same proportion that such Participant's Excess Compensation bears to the total Excess Compensation of all Participants for that year. For purposes of this paragraph, in the case of any Participant who has exceeded the cumulative permitted disparity limit described in Section 4.3(b)(4), such Participant's total Compensation will be taken into account. (3) The balance of the Employer's contribution over the amount allocated under subparagraph (2) hereof shall be allocated to each Participant's Account in a dollar amount equal to 2.7% multiplied by the sum of each Participant's total Compensation plus Excess Compensation. If the Employer does not contribute such amount for all Participants, each Participant will be allocated a share of the contribution in the same proportion that such Participant's total Compensation plus Excess Compensation for the Plan Year bears to the total Compensation plus Excess Compensation of all Participants for that year. For purposes of this paragraph, in the case of any Participant who has exceeded the cumulative permitted disparity limit described in Section 4.3(b)(4), such Participant's total Compensation rather than Compensation plus Excess Compensation will be taken into account. Regardless of the preceding, 1.3% shall be substituted for 2.7% above if Excess Compensation is based on more than 20% and less than or equal to 80% of the Taxable Wage Base. If Excess Compensation is based on less than 100% and more than 80% of the Taxable Wage Base, then 2.4% shall be substituted for 2.7% above. (4) The balance of the Employer's contributions over the amount allocated above, if any, shall be allocated to each Participant's Account in the same proportion that such Participant's total Compensation for the Plan Year bears to the total Compensation of all Participants for such year. For each Non-Key Employee who is a Participant in this Plan and another non-paired defined contribution plan maintained by the Employer, the minimum three percent (3%) allocation specified above shall be provided as specified in the Adoption Agreement. (g) For purposes of the minimum allocations set forth above, the percentage allocated to the Participant's Combined Account of any Key Employee shall be equal to the ratio of the sum of the Employer's contributions and Forfeitures allocated on behalf of such Key Employee divided by the 415 Compensation for such Key Employee. (h) For any Top Heavy Plan Year, the minimum allocations set forth in this Section shall be allocated to the Participant's Combined Account of all Non-Key Employees who are Participants and who are employed by the Employer on the last day of the Plan Year, including Non-Key Employees who have (1) failed to complete a Year of Service; or (2) declined to make mandatory contributions (if required) or, in the case of a cash or deferred arrangement, Elective Deferrals to the Plan. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 20 DEFINED CONTRIBUTION PROTOTYPE PLAN (i) Notwithstanding anything herein to the contrary, in any Plan Year in which the Employer maintains both this Plan and a defined benefit pension plan included in a "required aggregation group" (as defined in Section 9.2(f)) which is top heavy, the Employer will not be required (unless otherwise elected in the Adoption Agreement) to provide a Non-Key Employee with both the full separate minimum defined benefit plan benefit and the full separate defined contribution plan allocations. In such case, the top heavy minimum benefits will be provided as elected in the Adoption Agreement and, if applicable, as follows: (1) If the 5% defined contribution minimum is elected in the Adoption Agreement: (i) The requirements of Section 9.1 will apply except that each Non-Key Employee who is a Participant in the Profit Sharing Plan or Money Purchase Plan and who is also a Participant in the Defined Benefit Plan will receive a minimum allocation of five percent (5%) of such Participant's 415 Compensation from the applicable defined contribution plan(s). (ii) For each Non-Key Employee who is a Participant only in the Defined Benefit Plan the Employer will provide a minimum non-integrated benefit equal to two percent (2%) of such Participant's highest five (5) consecutive year average 415 Compensation for each Year of Service while a participant in the plan, in which the Plan is top heavy, not to exceed ten (10). (iii) For each Non-Key Employee who is a Participant only in this defined contribution plan, the Employer will provide a minimum allocation equal to three percent (3%) of such Participant's 415 Compensation. (2) If the 2% defined benefit minimum is elected in the Adoption Agreement, then for each Non-Key Employee who is a Participant only in the defined benefit plan, the Employer will provide a minimum non-integrated benefit equal to two percent (2%) of such Participant's highest five (5) consecutive year average of 415 Compensation for each Year of Service while a participant in the plan, in which the Plan is top heavy, not to exceed ten (10). (j) For the purposes of this Section, 415 Compensation will be limited to the same dollar limitations set forth in Section 1.11 adjusted in such manner as permitted under Code Section 415(d). (k) Notwithstanding anything in this Section to the contrary, all information necessary to properly reflect a given transaction may not be available until after the date specified herein for processing such transaction, in which case the transaction will be reflected when such information is received and processed. Subject to express limits that may be imposed under the Code, the processing of any contribution, distribution or other transaction may be delayed for any legitimate business reason (including, but not limited to, failure of systems or computer programs, failure of the means of the transmission of data, force majeure, the failure of a service provider to timely receive values or prices, and correction for errors or omissions or the errors or omissions of any service provider). The processing date of a transaction will be binding for all purposes of the Plan. (l) Notwithstanding anything in this Section to the contrary, the provisions of this subsection apply for any Plan Year if, in the non-standardized Adoption Agreement, the Employer elected to apply the 410(b) ratio percentage failsafe provisions and the Plan fails to satisfy the "ratio percentage test" due to a last day of the Plan Year allocation condition or an Hours of Service (or months of service) allocation condition. A plan satisfies the "ratio percentage test" if, on the last day of the Plan Year, the "benefiting ratio" of the Non-Highly Compensated Employees who are "includible" is at least 70% of the "benefiting ratio" of the Highly Compensated Employees who are "includible." The "benefiting ratio" of the Non-Highly Compensated Employees is the number of "includible" Non-Highly Compensated Employees "benefiting" under the Plan divided by the number of "includible" Employees who are Non-Highly Compensated Employees. The "benefiting ratio" of the Highly Compensated Employees is the number of Highly Compensated Employees "benefiting" under the Plan divided by the number of "includible" Highly Compensated Employees. "Includible" Employees are all Employees other than: (1) those Employees excluded from participating in the plan for the entire Plan Year by reason of the collective bargaining unit exclusion or the nonresident alien exclusion described in the Code or by reason of the age and service requirements of Article III; and (2) any Employee who incurs a separation from service during the Plan Year and fails to complete at least 501 Hours of Service (or three (3) months of service if the Elapsed Time Method is being used) during such Plan Year. For purposes of this subsection, an Employee is "benefiting" under the Plan on a particular date if, under the Plan, the Employee is entitled to an Employer contribution or an allocation of Forfeitures for the Plan Year. If this subsection applies, then the Administrator will suspend the allocation conditions for the "includible" Non-Highly Compensated Employees who are Participants, beginning first with the "includible" Employees employed by the Employer on the last day of the Plan Year, then the "includible" Employees who have the latest separation from service during the Plan Year, and continuing to suspend the allocation conditions for each "includible" Employee who incurred an earlier separation from service, from the latest to the earliest separation from service date, until the Plan satisfies the "ratio percentage test" for the Plan Year. If two or more "includible" Employees (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 21 DEFINED CONTRIBUTION PROTOTYPE PLAN have a separation from service on the same day, then the Administrator will suspend the allocation conditions for all such "includible" Employees, irrespective of whether the Plan can satisfy the "ratio percentage test" by accruing benefits for fewer than all such "includible" Employees. If the Plan for any Plan Year suspends the allocation conditions for an "includible" Employee, then that Employee will share in the allocation for that Plan Year of the Employer contribution and Forfeitures, if any, without regard to whether the Employee has satisfied the other allocation conditions set forth in this Section. 4.4 MAXIMUM ANNUAL ADDITIONS (a)(1) If a Participant does not participate in, and has never participated in another qualified plan maintained by the Employer, or a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer, or an individual medical account (as defined in Code Section 415(l)(2)) maintained by the Employer, or a simplified employee pension (as defined in Code Section 408(k)) maintained by the Employer which provides "Annual Additions," the amount of "Annual Additions" which may be credited to the Participant's accounts for any Limitation Year shall not exceed the lesser of the "Maximum Permissible Amount" or any other limitation contained in this Plan. If the Employer contribution that would otherwise be contributed or allocated to the Participant's accounts would cause the "Annual Additions" for the Limitation Year to exceed the "Maximum Permissible Amount," the amount contributed or allocated will be reduced so that the "Annual Additions" for the Limitation Year will equal the "Maximum Permissible Amount," and any amount in excess of the "Maximum Permissible Amount" which would have been allocated to such Participant may be allocated to other Participants. (2) Prior to determining the Participant's actual 415 Compensation for the Limitation Year, the Employer may determine the "Maximum Permissible Amount" for a Participant on the basis of a reasonable estimation of the Participant's 415 Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. (3) As soon as is administratively feasible after the end of the Limitation Year the "Maximum Permissible Amount" for such Limitation Year shall be determined on the basis of the Participant's actual 415 Compensation for such Limitation Year. (b)(1) This subsection applies if, in addition to this Plan, a Participant is covered under another qualified defined contribution plan maintained by the Employer that is a "Master or Prototype Plan," a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer, an individual medical account (as defined in Code Section 415(l)(2)) maintained by the Employer, or a simplified employee pension (as defined in Code Section 408(k)) maintained by the Employer, which provides "Annual Additions," during any Limitation Year. The "Annual Additions" which may be credited to a Participant's accounts under this Plan for any such Limitation Year shall not exceed the "Maximum Permissible Amount" reduced by the "Annual Additions" credited to a Participant's accounts under the other plans and welfare benefit funds, individual medical accounts, and simplified employee pensions for the same Limitation Year. If the "Annual Additions" with respect to the Participant under other defined contribution plans and welfare benefit funds maintained by the Employer are less than the "Maximum Permissible Amount" and the Employer contribution that would otherwise be contributed or allocated to the Participant's accounts under this Plan would cause the "Annual Additions" for the Limitation Year to exceed this limitation, the amount contributed or allocated will be reduced so that the "Annual Additions" under all such plans and welfare benefit funds for the Limitation Year will equal the "Maximum Permissible Amount," and any amount in excess of the "Maximum Permissible Amount" which would have been allocated to such Participant may be allocated to other Participants. If the "Annual Additions" with respect to the Participant under such other defined contribution plans, welfare benefit funds, individual medical accounts and simplified employee pensions in the aggregate are equal to or greater than the "Maximum Permissible Amount," no amount will be contributed or allocated to the Participant's account under this Plan for the Limitation Year. (2) Prior to determining the Participant's actual 415 Compensation for the Limitation Year, the Employer may determine the "Maximum Permissible Amount" for a Participant on the basis of a reasonable estimation of the Participant's 415 Compensation for the Limitation Year, uniformly determined for all Participants similarly situated. (3) As soon as is administratively feasible after the end of the Limitation Year, the "Maximum Permissible Amount" for the Limitation Year will be determined on the basis of the Participant's actual 415 Compensation for the Limitation Year. (4) If, pursuant to Section 4.4(b)(2) or Section 4.5, a Participant's "Annual Additions" under this Plan and such other plans would result in an "Excess Amount" for a Limitation Year, the "Excess Amount" will be deemed to consist of the "Annual Additions" last allocated, except that "Annual Additions" attributable to a simplified employee pension will be deemed to have been allocated first, followed by "Annual Additions" to a welfare benefit fund or individual medical account, and then by "Annual Additions" to a plan subject to Code Section 412, regardless of the actual allocation date. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 22 DEFINED CONTRIBUTION PROTOTYPE PLAN (5) If an "Excess Amount" was allocated to a Participant on an allocation date of this Plan which coincides with an allocation date of another plan, the "Excess Amount" attributed to this Plan will be the product of: (i) the total "Excess Amount" allocated as of such date, times (ii) the ratio of (1) the "Annual Additions" allocated to the Participant for the Limitation Year as of such date under this Plan to (2) the total "Annual Additions" allocated to the Participant for the Limitation Year as of such date under this and all the other qualified defined contribution plans. (6) Any "Excess Amount" attributed to this Plan will be disposed of in the manner described in Section 4.5. (c) If the Participant is covered under another qualified defined contribution plan maintained by the Employer which is not a "Master or Prototype Plan," "Annual Additions" which may be credited to the Participant's Combined Account under this Plan for any Limitation Year will be limited in accordance with Section 4.4(b), unless the Employer provides other limitations in the Adoption Agreement. (d) For any Limitation Year beginning prior to the date the Code Section 415(e) limits are repealed with respect to this Plan (as specified in the Adoption Agreement for the GUST transitional rules), if the Employer maintains, or at any time maintained, a qualified defined benefit plan covering any Participant in this Plan, then the sum of the Participant's "Defined Benefit Plan Fraction" and "Defined Contribution Plan Fraction" may not exceed 1.0. In such event, the rate of accrual in the defined benefit plan will be reduced to the extent necessary so that the sum of the "Defined Contribution Fraction" and "Defined Benefit Fraction" will equal 1.0. However, in the Adoption Agreement the Employer may specify an alternative method under which the plans involved will satisfy the limitations of Code Section 415(e), including increased top heavy minimum benefits so that the combined limitation is 1.25 rather than 1.0. (e) For purposes of applying the limitations of Code Section 415, the transfer of funds from one qualified plan to another is not an "Annual Addition." In addition, the following are not Employee contributions for the purposes of Section 4.4(f)(1)(b): (1) rollover contributions (as defined in Code Sections 402(c), 403(a)(4), 403(b)(8) and 408(d)(3)); (2) repayments of loans made to a Participant from the Plan; (3) repayments of distributions received by an Employee pursuant to Code Section 411(a)(7)(B) (cash-outs); (4) repayments of distributions received by an Employee pursuant to Code Section 411(a)(3)(D) (mandatory contributions); and (5) Employee contributions to a simplified employee pension excludable from gross income under Code Section 408(k)(6). (f) For purposes of this Section, the following terms shall be defined as follows: (1) "Annual Additions" means the sum credited to a Participant's accounts for any Limitation Year of (a) Employer contributions, (b) Employee contributions (except as provided below), (c) forfeitures, (d) amounts allocated, after March 31, 1984, to an individual medical account, as defined in Code Section 415(l)(2), which is part of a pension or annuity plan maintained by the Employer, (e) amounts derived from contributions paid or accrued after December 31, 1985, in taxable years ending after such date, which are attributable to post-retirement medical benefits allocated to the separate account of a key employee (as defined in Code Section 419A(d)(3)) under a welfare benefit fund (as defined in Code Section 419(e)) maintained by the Employer and (f) allocations under a simplified employee pension. Except, however, the Compensation percentage limitation referred to in paragraph (f)(9)(ii) shall not apply to: (1) any contribution for medical benefits (within the meaning of Code Section 419A(f)(2)) after separation from service which is otherwise treated as an "Annual Addition," or (2) any amount otherwise treated as an "Annual Addition" under Code Section 415(l)(1). Notwithstanding the foregoing, for Limitation Years beginning prior to January 1, 1987, only that portion of Employee contributions equal to the lesser of Employee contributions in excess of six percent (6%) of 415 Compensation or one-half of Employee contributions shall be considered an "Annual Addition." For this purpose, any Excess Amount applied under Section 4.5 in the Limitation Year to reduce Employer contributions shall be considered "Annual Additions" for such Limitation Year. (2) "Defined Benefit Fraction" means a fraction, the numerator of which is the sum of the Participant's "Projected Annual Benefits" under all the defined benefit plans (whether or not terminated) maintained by the Employer, and the denominator of which is the lesser of one hundred twenty-five percent (125%) of the dollar limitation determined for the Limitation Year under Code Sections 415(b)(1)(A) as adjusted by Code Section 415(d) or one hundred forty percent (140%) of the "Highest Average Compensation" including any adjustments under Code Section 415(b). Notwithstanding the above, if the Participant was a Participant as of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined benefit plans maintained by the Employer which were in existence on May 6, 1986, the denominator of this fraction will not be less than (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 23 DEFINED CONTRIBUTION PROTOTYPE PLAN one hundred twenty-five percent (125%) of the sum of the annual benefits under such plans which the Participant had accrued as of the end of the close of the last Limitation Year beginning before January 1, 1987, disregarding any changes in the terms and conditions of the plan after May 5, 1986. The preceding sentence applies only if the defined benefit plans individually and in the aggregate satisfied the requirements of Code Section 415 for all Limitation Years beginning before January 1, 1987. Notwithstanding the foregoing, for any Top Heavy Plan Year, one hundred percent (100%) shall be substituted for one hundred twenty-five percent (125%) unless the extra top heavy minimum allocation or benefit is being made pursuant to the Employer's specification in the Adoption Agreement. However, for any Plan Year in which this Plan is a Super Top Heavy Plan, one hundred percent (100%) shall always be substituted for one hundred twenty-five percent (125%). (3) Defined Contribution Dollar Limitation means $30,000 as adjusted under Code Section 415(d). (4) Defined Contribution Fraction means a fraction, the numerator of which is the sum of the "Annual Additions" to the Participant's accounts under all the defined contribution plans (whether or not terminated) maintained by the Employer for the current and all prior "Limitation Years," (including the "Annual Additions" attributable to the Participant's nondeductible voluntary employee contributions to any defined benefit plans, whether or not terminated, maintained by the Employer and the "Annual Additions" attributable to all welfare benefit funds (as defined in Code Section 419(e)), individual medical accounts (as defined in Code Section 415(l)(2)), and simplified employee pensions (as defined in Code Section 408(k)) maintained by the Employer), and the denominator of which is the sum of the "Maximum Aggregate Amounts" for the current and all prior Limitation Years in which the Employee had service with the Employer (regardless of whether a defined contribution plan was maintained by the Employer). The maximum aggregate amount in any Limitation Year is the lesser of one hundred twenty-five percent (125%) of the dollar limitation determined under Code Section 415(c)(1)(A) as adjusted by Code Section 415(d) or thirty-five percent (35%) of the Participant's 415 Compensation for such year. If the Employee was a Participant as of the end of the first day of the first Limitation Year beginning after December 31, 1986, in one or more defined contribution plans maintained by the Employer which were in existence on May 5, 1986, the numerator of this fraction will be adjusted if the sum of this fraction and the "Defined Benefit Fraction" would otherwise exceed 1.0 under the terms of this Plan. Under the adjustment, an amount equal to the product of (1) the excess of the sum of the fractions over 1.0 times (2) the denominator of this fraction, will be permanently subtracted from the numerator of this fraction. The adjustment is calculated using the fractions as they would be computed as of the end of the last Limitation Year beginning before January 1, 1987, and disregarding any changes in the terms and conditions of the plan made after May 5, 1986, but using the Code Section 415 limitation applicable to the first Limitation Year beginning on or after January 1, 1987. For Limitation Years beginning prior to January 1, 1987, the "Annual Additions" shall not be recomputed to treat all Employee contributions as "Annual Additions." Notwithstanding the foregoing, for any Top Heavy Plan Year, one hundred percent (100%) shall be substituted for one hundred twenty-five percent (125%) unless the extra top heavy minimum allocation or benefit is being made pursuant to the Employer's specification in the Adoption Agreement. However, for any Plan Year in which this Plan is a Super Top Heavy Plan, one hundred percent (100%) shall always be substituted for one hundred twenty-five percent (125%). (5) "Employer" means the Employer that adopts this Plan and all Affiliated Employers, except that for purposes of this Section, the determination of whether an entity is an Affiliated Employer shall be made by applying Code Section 415(h). (6) "Excess Amount" means the excess of the Participant's "Annual Additions" for the Limitation Year over the "Maximum Permissible Amount." (7) "Highest Average Compensation" means the average Compensation for the three (3) consecutive Years of Service with the Employer while a Participant in the Plan that produces the highest average. A Year of Service with the Employer is the twelve (12) consecutive month period ending on the last day of the Limitation Year. (8) "Master or Prototype Plan" means a plan the form of which is the subject of a favorable opinion letter from the Internal Revenue Service. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 24 DEFINED CONTRIBUTION PROTOTYPE PLAN (9) "Maximum Permissible Amount" means the maximum Annual Addition that may be contributed or allocated to a Participant's accounts under the Plan for any "Limitation Year," which shall not exceed the lesser of: (i) the "Defined Contribution Dollar Limitation," or (ii) twenty-five percent (25%) of the Participant's 415 Compensation for the "Limitation Year." The Compensation Limitation referred to in (ii) shall not apply to any contribution for medical benefits (within the meaning of Code Sections 401(h) or 419A(f)(2)) which is otherwise treated as an "Annual Addition." If a short Limitation Year is created because of an amendment changing the Limitation Year to a different twelve (12) consecutive month period, the "Maximum Permissible Amount" will not exceed the "Defined Contribution Dollar Limitation multiplied by a fraction, the numerator of which is the number of months in the short Limitation Year and the denominator of which is twelve (12). (10) "Projected Annual Benefit" means the annual retirement benefit (adjusted to an actuarially equivalent "straight life annuity" if such benefit is expressed in a form other than a "straight life annuity" or qualified joint and survivor annuity) to which the Participant would be entitled under the terms of the plan assuming: (i) the Participant will continue employment until Normal Retirement Age (or current age, if later), and (ii) the Participant's 415 Compensation for the current Limitation Year and all other relevant factors used to determine benefits under the Plan will remain constant for all future Limitation Years. For purposes of this subsection, "straight life annuity" means an annuity that is payable in equal installments for the life of the Participant that terminates upon the Participant's death. (g) Notwithstanding anything contained in this Section to the contrary, the limitations, adjustments and other requirements prescribed in this Section shall at all times comply with the provisions of Code Section 415 and the Regulations thereunder. 4.5 ADJUSTMENT FOR EXCESSIVE ANNUAL ADDITIONS Allocation of "Annual Additions" (as defined in Section 4.4) to a Participant's Combined Account for a Limitation Year generally will cease once the limits of Section 4.4 have been reached for such Limitation Year. However, if as a result of the allocation of Forfeitures, a reasonable error in estimating a Participant's annual 415 Compensation, a reasonable error in determining the amount of elective deferrals (within the meaning of Code Section 402(g)(3)) that may be made with respect to any Participant under the limits of Section 4.4, or other facts and circumstances to which Regulation 1.415-6(b)(6) shall be applicable, the "Annual Additions" under this Plan would cause the maximum provided in Section 4.4 to be exceeded, the "Excess Amount" will be disposed of in one of the following manners, as uniformly determined by the Plan Administrator for all Participants similarly situated: (a) Any after-tax voluntary Employee contributions (plus attributable gains), to the extent they would reduce the Excess Amount, will be distributed to the Participant; (b) If, after the application of subparagraph (a), an "Excess Amount" still exists, any unmatched Elective Deferrals (and for Limitation Years beginning after December 31, 1995, any gains attributable to such Elective Deferrals), to the extent they would reduce the Excess Amount, will be distributed to the Participant; (c) To the extent necessary, matched Elective Deferrals and Employer matching contributions will be proportionately reduced from the Participant's Account. The Elective Deferrals (and for Limitation Years beginning after December 31, 1995, any gains attributable to such Elective Deferrals) will be distributed to the Participant and the Employer matching contributions (and for Limitation Years beginning after December 31, 1995, any gains attributable to such matching contributions) will be used to reduce the Employer's contributions in the next Limitation Year; (d) If, after the application of subparagraphs (a), (b) and (c), an "Excess Amount" still exists, and the Participant is covered by the Plan at the end of the Limitation Year, the "Excess Amount" in the Participant's Account will be used to reduce Employer contributions (including any allocation of Forfeitures) for such Participant in the next Limitation Year, and each succeeding Limitation Year if necessary; (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 25 DEFINED CONTRIBUTION PROTOTYPE PLAN (e) If, after the application of subparagraphs (a), (b) and (c), an "Excess Amount" still exists, and the Participant is not covered by the Plan at the end of a Limitation Year, the "Excess Amount" will be held unallocated in a suspense account. The suspense account will be applied to reduce future Employer contributions (including allocation of any Forfeitures) for all remaining Participants in the next Limitation Year, and each succeeding Limitation Year if necessary; and (f) If a suspense account is in existence at any time during a Limitation Year pursuant to this Section, no investment gains and losses shall be allocated to such suspense account. If a suspense account is in existence at any time during a particular Limitation Year, all amounts in the suspense account must be allocated and reallocated to Participants' Accounts before any Employer contributions or any Employee contributions may be made to the Plan for that Limitation Year. Except as provided in (a), (b) and (c) above, "Excess Amounts" may not be distributed to Participants or Former Participants. 4.6 ROLLOVERS (a) If elected in the Adoption Agreement and with the consent of the Administrator, the Plan may accept a "rollover," provided the "rollover" will not jeopardize the tax-exempt status of the Plan or create adverse tax consequences for the Employer. The amounts rolled over shall be set up in a separate account herein referred to as a "Participant's Rollover Account." Such account shall be fully Vested at all times and shall not be subject to forfeiture for any reason. For purposes of this Section, the term Participant shall include any Eligible Employee who is not yet a Participant, if, pursuant to the Adoption Agreement, "rollovers" are permitted to be accepted from Eligible Employees. In addition, for purposes of this Section the term Participant shall also include former Employees if the Employer and Administrator consent to accept "rollovers" of distributions made to former Employees from any plan of the Employer. (b) Amounts in a Participant's Rollover Account shall be held by the Trustee pursuant to the provisions of this Plan and may not be withdrawn by, or distributed to the Participant, in whole or in part, except as elected in the Adoption Agreement and subsection (c) below. The Trustee shall have no duty or responsibility to inquire as to the propriety of the amount, value or type of assets transferred, nor to conduct any due diligence with respect to such assets; provided, however, that such assets are otherwise eligible to be held by the Trustee under the terms of this Plan. (c) At Normal Retirement Date, or such other date when the Participant or Eligible Employee or such Participant's or Eligible Employee's Beneficiary shall be entitled to receive benefits, the Participant's Rollover Account shall be used to provide additional benefits to the Participant or the Participant's Beneficiary. Any distribution of amounts held in a Participant's Rollover Account shall be made in a manner which is consistent with and satisfies the provisions of Sections 6.5 and 6.6, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. Furthermore, such amounts shall be considered to be part of a Participant's benefit in determining whether an involuntary cash-out of benefits may be made without Participant consent. (d) The Administrator may direct that rollovers made after a Valuation Date be segregated into a separate account for each Participant until such time as the allocations pursuant to this Plan have been made, at which time they may remain segregated, invested as part of the general Trust Fund or, if elected in the Adoption Agreement, directed by the Participant. (e) For purposes of this Section, the term "qualified plan" shall mean any tax qualified plan under Code Section 401(a), or any other plans from which distributions are eligible to be rolled over into this Plan pursuant to the Code. The term "rollover" means: (i) amounts transferred to this Plan in a direct rollover made pursuant to Code Section 401(a)(31) from another "qualified plan"; (ii) distributions received by an Employee from other "qualified plans" which are eligible for tax-free rollover to a "qualified plan" and which are transferred by the Employee to this Plan within sixty (60) days following receipt thereof; (iii) amounts transferred to this Plan from a conduit individual retirement account provided that the conduit individual retirement account has no assets other than assets which (A) were previously distributed to the Employee by another "qualified plan" (B) were eligible for tax-free rollover to a "qualified plan" and (C) were deposited in such conduit individual retirement account within sixty (60) days of receipt thereof; (iv) amounts distributed to the Employee from a conduit individual retirement account meeting the requirements of clause (iii) above, and transferred by the Employee to this Plan within sixty (60) days of receipt thereof from such conduit individual retirement account; and (v) any other amounts which are eligible to be rolled over to this Plan pursuant to the Code. (f) Prior to accepting any "rollovers" to which this Section applies, the Administrator may require the Employee to establish (by providing opinion of counsel or otherwise) that the amounts to be rolled over to this Plan meet the requirements of this Section. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 26 DEFINED CONTRIBUTION PROTOTYPE PLAN 4.7 PLAN-TO-PLAN TRANSFERS FROM QUALIFIED PLANS (a) With the consent of the Administrator, amounts may be transferred (within the meaning of Code Section 414(l)) to this Plan from other tax qualified plans under Code Section 401(a), provided the plan from which such funds are transferred permits the transfer to be made and the transfer will not jeopardize the tax-exempt status of the Plan or Trust or create adverse tax consequences for the Employer. Prior to accepting any transfers to which this Section applies, the Administrator may require an opinion of counsel that the amounts to be transferred meet the requirements of this Section. The amounts transferred shall be set up in a separate account herein referred to as a "Participant's Transfer Account." Furthermore, for Vesting purposes, the Participant's Transfer Account shall be treated as a separate "Participant's Account." (b) Amounts in a Participant's Transfer Account shall be held by the Trustee pursuant to the provisions of this Plan and may not be withdrawn by, or distributed to the Participant, in whole or in part, except as elected in the Adoption Agreement and subsection (d) below, provided the restrictions of subsection (c) below and Section 6.15 are satisfied. The Trustee shall have no duty or responsibility to inquire as to the propriety of the amount, value or type of assets transferred, nor to conduct any due diligence with respect to such assets; provided, however, that such assets are otherwise eligible to be held by the Trustee under the terms of this Plan. (c) Except as permitted by Regulations (including Regulation 1.411(d)-4), amounts attributable to elective contributions (as defined in Regulation 1.401(k)-1(g)(3)), including amounts treated as elective contributions, which are transferred from another qualified plan in a plan-to-plan transfer (other than a direct rollover) shall be subject to the distribution limitations provided for in Regulation 1.401(k)-1(d). (d) At Normal Retirement Date, or such other date when the Participant or the Participant's Beneficiary shall be entitled to receive benefits, the Participant's Transfer Account shall be used to provide additional benefits to the Participant or the Participant's Beneficiary. Any distribution of amounts held in a Participant's Transfer Account shall be made in a manner which is consistent with and satisfies the provisions of Sections 6.5 and 6.6, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. Furthermore, such amounts shall be considered to be part of a Participant's benefit in determining whether an involuntary cash-out of benefits may be made without Participant consent. (e) The Administrator may direct that Employee transfers made after a Valuation Date be segregated into a separate account for each Participant until such time as the allocations pursuant to this Plan have been made, at which time they may remain segregated, invested as part of the general Trust Fund or, if elected in the Adoption Agreement, directed by the Participant. (f) Notwithstanding anything herein to the contrary, a transfer directly to this Plan from another qualified plan (or a transaction having the effect of such a transfer) shall only be permitted if it will not result in the elimination or reduction of any "Section 411(d)(6) protected benefit" as described in Section 8.1(e). 4.8 VOLUNTARY EMPLOYEE CONTRIBUTIONS (a) Except as provided in subsection 4.8(b) below, this Plan will not accept after-tax voluntary Employee contributions. If this is an amendment to a Plan that had previously allowed after-tax voluntary Employee contributions, then this Plan will not accept after-tax voluntary Employee contributions for Plan Years beginning after the Plan Year in which this Plan is adopted by the Employer. (b) For 401(k) Plans, if elected in the Adoption Agreement, each Participant who is eligible to make Elective Deferrals may, in accordance with nondiscriminatory procedures established by the Administrator, elect to make after-tax voluntary Employee contributions to this Plan. Such contributions must generally be paid to the Trustee within a reasonable period of time after being received by the Employer. (c) The balance in each Participant's Voluntary Contribution Account shall be fully Vested at all times and shall not be subject to Forfeiture for any reason. (d) A Participant may elect at any time to withdraw after-tax voluntary Employee contributions from such Participant's Voluntary Contribution Account and the actual earnings thereon in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. If the Administrator maintains sub-accounts with respect to after-tax voluntary Employee contributions (and earnings thereon) which were made on or before a specified date, a Participant shall be permitted to designate which sub-account shall be the source for the withdrawal. Forfeitures of Employer contributions shall not occur solely as a result of an Employee's withdrawal of after-tax voluntary Employee contributions. (C) Copyright 2001 Employee Benefit compliance Services, Inc. 27 DEFINED CONTRIBUTION PROTOTYPE PLAN In the event a Participant has received a hardship distribution pursuant to Regulation 1.401(k)-1(d)(2)(iii)(B) from any plan maintained by the Employer, then the Participant shall be barred from making any after-tax voluntary Employee contributions for a period of twelve (12) months after receipt of the hardship distribution. (e) At Normal Retirement Date, or such other date when the Participant or the Participant's Beneficiary is entitled to receive benefits, the Participant's Voluntary Contribution Account shall be used to provide additional benefits to the Participant or the Participant's Beneficiary. (f) To the extent a Participant has previously made mandatory Employee contributions under prior provisions of this Plan, such contributions will be treated as after-tax voluntary Employee contributions. 4.9 QUALIFIED VOLUNTARY EMPLOYEE CONTRIBUTIONS (a) If this is an amendment to a Plan that previously permitted deductible voluntary Employee contributions, then each Participant who made "Qualified Voluntary Employee Contributions" within the meaning of Code Section 219(e)(2) as it existed prior to the enactment of the Tax Reform Act of 1986, shall have such contributions held in a separate Qualified Voluntary Employee Contribution Account which shall be fully Vested at all times. Such contributions, however, shall not be permitted for taxable years beginning after December 31, 1986. (b) A Participant may, upon written request delivered to the Administrator, make withdrawals from such Participant's Qualified Voluntary Employee Contribution Account. Any distribution shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. (c) At Normal Retirement Date, or such other date when the Participant or the Participant's Beneficiary is entitled to receive benefits, the Qualified Voluntary Employee Contribution Account shall be used to provide additional benefits to the Participant or the Participant's Beneficiary. 4.10 DIRECTED INVESTMENT ACCOUNT (a) If elected in the Adoption Agreement, all Participants may direct the Trustee as to the investment of all or a portion of their individual account balances as set forth in the Adoption Agreement and within limits set by the Employer. Participants may direct the Trustee, in writing (or in such other form which is acceptable to the Trustee), to invest their accounts in specific assets, specific funds or other investments permitted under the Plan and the Participant Direction Procedures. That portion of the account of any Participant that is subject to investment direction of such Participant will be considered a Participant Directed Account. (b) The Administrator will establish a Participant Direction Procedure, to be applied in a uniform and nondiscriminatory manner, setting forth the permissible investment options under this Section, how often changes between investments may be made, and any other limitations and provisions that the Administrator may impose on a Participant's right to direct investments. (c) The Administrator may, in its discretion, include or exclude by amendment or other action from the Participant Direction Procedures such instructions, guidelines or policies as it deems necessary or appropriate to ensure proper administration of the Plan, and may interpret the same accordingly. (d) As of each Valuation Date, all Participant Directed Accounts shall be charged or credited with the net earnings, gains, losses and expenses as well as any appreciation or depreciation in the market value using publicly listed fair market values when available or appropriate as follows: (1) to the extent the assets in a Participant Directed Account are accounted for as pooled assets or investments, the allocation of earnings, gains and losses of each Participant's Account shall be based upon the total amount of funds so invested in a manner proportionate to the Participant's share of such pooled investment; and (2) to the extent the assets in a Participant Directed Account are accounted for as segregated assets, the allocation of earnings, gains on and losses from such assets shall be made on a separate and distinct basis. (e) Investment directions will be processed as soon as administratively practicable after proper investment directions are received from the Participant. No guarantee is made by the Plan, Employer, Administrator or Trustee that investment directions will be processed on a daily basis, and no guarantee is made in any respect regarding the processing time of an investment direction. Notwithstanding any other provision of the Plan, the Employer, Administrator or Trustee reserves the right to not value an investment option on any given Valuation Date for any reason deemed appropriate by the Employer, Administrator or Trustee. Furthermore, the processing of any investment transaction may be delayed for any legitimate business reason (including, but not limited to, failure of systems or computer programs, failure of the means of the transmission of data, force majeure, the failure of a service provider to (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 28 DEFINED CONTRIBUTION PROTOTYPE PLAN timely receive values or prices, and correction for errors or omissions or the errors or omissions of any service provider). The processing date of a transaction will be binding for all purposes of the Plan and considered the applicable Valuation Date for an investment transaction. (f) If the Employer has elected in the Adoption Agreement that it intends to operate any portion of this Plan as an Act Section 404(c) plan, the Participant Direction Procedures should provide an explanation of the circumstances under which Participants and their Beneficiaries may give investment instructions, including but not limited to, the following: (1) the conveyance of instructions by the Participants and their Beneficiaries to invest Participant Directed Accounts in a Directed Investment Option; (2) the name, address and phone number of the Fiduciary (and, if applicable, the person or persons designated by the Fiduciary to act on its behalf) responsible for providing information to the Participant or a Beneficiary upon request relating to the Directed Investment Options; (3) applicable restrictions on transfers to and from any Designated Investment Alternative; (4) any restrictions on the exercise of voting, tender and similar rights related to a Directed Investment Option by the Participants or their Beneficiaries; (5) a description of any transaction fees and expenses which affect the balances in Participant Directed Accounts in connection with the purchase or sale of a Directed Investment Option; and (6) general procedures for the dissemination of investment and other information relating to the Designated Investment Alternatives as deemed necessary or appropriate, including but not limited to a description of the following: (i) the investment vehicles available under the Plan, including specific information regarding any Designated Investment Alternative; (ii) any designated Investment Managers; and (iii) a description of the additional information that may be obtained upon request from the Fiduciary designated to provide such information. (g) With respect to those assets in a Participant's Directed Account, the Participant or Beneficiary shall direct the Trustee with regard to any voting, tender and similar rights associated with the ownership of such assets (hereinafter referred to as the "Stock Rights") as follows based on the election made in the Adoption Agreement: (1) each Participant or Beneficiary shall direct the Trustee to vote or otherwise exercise such Stock Rights in accordance with the provisions, conditions and terms of any such Stock Rights; (2) such directions shall be provided to the Trustee by the Participant or Beneficiary in accordance with the procedure as established by the Administrator and the Trustee shall vote or otherwise exercise such Stock Rights with respect to which it has received directions to do so under this Section; and (3) to the extent to which a Participant or Beneficiary does not instruct the Trustee to vote or otherwise exercise such Stock Rights, such Participants or Beneficiaries shall be deemed to have directed the Trustee that such Stock Rights remain nonvoted and unexercised. (h) Any information regarding investments available under the Plan, to the extent not required to be described in the Participant Direction Procedures, may be provided to Participants in one or more documents (or in any other form, including, but not limited to, electronic media) which are separate from the Participant Direction Procedures and are not thereby incorporated by reference into this Plan. 4.11 INTEGRATION IN MORE THAN ONE PLAN If the Employer maintains qualified retirement plans that provide for permitted disparity (integration), the provisions of Section 4.3(b)(4) will apply. Furthermore, if the Employer maintains two or more standardized paired plans, only one plan may provide for permitted disparity. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 29 DEFINED CONTRIBUTION PROTOTYPE PLAN 4.12 QUALIFIED MILITARY SERVICE Notwithstanding any provisions of this Plan to the contrary, effective as of the later of December 12, 1994, or the Effective Date of the Plan, contributions, benefits and service credit with respect to qualified military service will be provided in accordance with Code Section 414(u). Furthermore, loan repayments may be suspended under this Plan as permitted under Code Section 414(u)(4). ARTICLE V VALUATIONS 5.1 VALUATION OF THE TRUST FUND The Administrator shall direct the Trustee, as of each Valuation Date, to determine the net worth of the assets comprising the Trust Fund as it exists on the Valuation Date. In determining such net worth, the Trustee shall value the assets comprising the Trust Fund at their fair market value (or their contractual value in the case of a Contract or Policy) as of the Valuation Date and may deduct all expenses for which the Trustee has not yet been paid by the Employer or the Trust Fund. The Trustee may update the value of any shares held in a Participant Directed Account by reference to the number of shares held on behalf of the Participant, priced at the market value as of the Valuation Date. 5.2 METHOD OF VALUATION In determining the fair market value of securities held in the Trust Fund which are listed on a registered stock exchange, the Administrator shall direct the Trustee to value the same at the prices they were last traded on such exchange preceding the close of business on the Valuation Date. If such securities were not traded on the Valuation Date, or if the exchange on which they are traded was not open for business on the Valuation Date, then the securities shall be valued at the prices at which they were last traded prior to the Valuation Date. Any unlisted security held in the Trust Fund shall be valued at its bid price next preceding the close of business on the Valuation Date, which bid price shall be obtained from a registered broker or an investment banker. In determining the fair market value of assets other than securities for which trading or bid prices can be obtained, the Trustee may appraise such assets itself, or in its discretion, employ one or more appraisers for that purpose and rely on the values established by such appraiser or appraisers. ARTICLE VI DETERMINATION AND DISTRIBUTION OF BENEFITS 6.1 DETERMINATION OF BENEFITS UPON RETIREMENT Every Participant may terminate employment with the Employer and retire for purposes hereof on the Participant's Normal Retirement Date or Early Retirement Date. However, a Participant may postpone the termination of employment with the Employer to a later date, in which event the participation of such Participant in the Plan, including the right to receive allocations pursuant to Section 4.3, shall continue until such Participant's Retirement Date. Upon a Participant's Retirement Date, or if elected in the Adoption Agreement, the attainment of Normal Retirement Date without termination of employment with the Employer, or as soon thereafter as is practicable, the Administrator shall direct the distribution, at the election of the Participant, of the Participant's entire Vested interest in the Plan in accordance with Section 6.5. 6.2 DETERMINATION OF BENEFITS UPON DEATH (a) Upon the death of a Participant before the Participant's Retirement Date or other termination of employment, all amounts credited to such Participant's Combined Account shall, if elected in the Adoption Agreement, become fully Vested. The Administrator shall direct, in accordance with the provisions of Sections 6.6 and 6.7, the distribution of the deceased Participant's Vested accounts to the Participant's Beneficiary. (b) Upon the death of a Former Participant, the Administrator shall direct, in accordance with the provisions of Sections 6.6 and 6.7, the distribution of any remaining Vested amounts credited to the accounts of such deceased Former Participant to such Former Participant's Beneficiary. (c) The Administrator may require such proper proof of death and such evidence of the right of any person to receive payment of the value of the account of a deceased Participant or Former Participant as the Administrator may deem desirable. The Administrator's determination of death and of the right of any person to receive payment shall be conclusive. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 30 DEFINED CONTRIBUTION PROTOTYPE PLAN (d) Unless otherwise elected in the manner prescribed in Section 6.6, the Beneficiary of the Pre-Retirement Survivor Annuity shall be the Participant's surviving spouse. Except, however, the Participant may designate a Beneficiary other than the spouse for the Pre-Retirement Survivor Annuity if: (1) the Participant and the Participant's spouse have validly waived the Pre-Retirement Survivor Annuity in the manner prescribed in Section 6.6, and the spouse has waived the right to be the Participant's Beneficiary, (2) the Participant is legally separated or has been abandoned (within the meaning of local law) and the Participant has a court order to such effect (and there is no "qualified domestic relations order" as defined in Code Section 414(p) which provides otherwise), (3) the Participant has no spouse, or (4) the spouse cannot be located. In such event, the designation of a Beneficiary shall be made on a form satisfactory to the Administrator. A Participant may at any time revoke a designation of a Beneficiary or change a Beneficiary by filing written (or in such other form as permitted by the IRS) notice of such revocation or change with the Administrator. However, the Participant's spouse must again consent in writing (or in such other form as permitted by the IRS) to any change in Beneficiary unless the original consent acknowledged that the spouse had the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elected to relinquish such right. (e) A Participant may, at any time, designate a Beneficiary for death benefits, if any, payable under the Plan that are in excess of the Pre-Retirement Survivor Annuity without the waiver or consent of the Participant's spouse. In the event no valid designation of Beneficiary exists, or if the Beneficiary is not alive at the time of the Participant's death, the death benefit will be paid in the following order of priority, unless the Employer specifies a different order of priority in an addendum to the Adoption Agreement, to: (1) The Participant's surviving spouse; (2) The Participant's children, including adopted children, per stirpes (3) The Participant's surviving parents, in equal shares; or (4) The Participant's estate. If the Beneficiary does not predecease the Participant, but dies prior to distribution of the death benefit, the death benefit will be paid to the Beneficiary's estate. (f) Notwithstanding anything in this Section to the contrary, if a Participant has designated the spouse as a Beneficiary, then a divorce decree or a legal separation that relates to such spouse shall revoke the Participant's designation of the spouse as a Beneficiary unless the decree or a qualified domestic relations order (within the meaning of Code Section 414(p)) provides otherwise or a subsequent Beneficiary designation is made. (g) If the Plan provides an insured death benefit and a Participant dies before any insurance coverage to which the Participant is entitled under the Plan is effected, the death benefit from such insurance coverage shall be limited to the premium which was or otherwise would have been used for such purpose. (h) In the event of any conflict between the terms of this Plan and the terms of any Contract issued hereunder, the Plan provisions shall control. 6.3 DETERMINATION OF BENEFITS IN EVENT OF DISABILITY In the event of a Participant's Total and Permanent Disability prior to the Participant's Retirement Date or other termination of employment, all amounts credited to such Participant's Combined Account shall, if elected in the Adoption Agreement, become fully Vested. In the event of a Participant's Total and Permanent Disability, the Administrator, in accordance with the provisions of Sections 6.5 and 6.7, shall direct the distribution to such Participant of the entire Vested interest in the Plan. 6.4 DETERMINATION OF BENEFITS UPON TERMINATION (a) If a Participant's employment with the Employer is terminated for any reason other than death, Total and Permanent Disability, or retirement, then such Participant shall be entitled to such benefits as are provided herein. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 31 DEFINED CONTRIBUTION PROTOTYPE PLAN Distribution of the funds due to a Terminated Participant shall be made on the occurrence of an event which would result in the distribution had the Terminated Participant remained in the employ of the Employer (upon the Participant's death, Total and Permanent Disability, Early or Normal Retirement). However, at the election of the Participant, the Administrator shall direct that the entire Vested portion of the Terminated Participant's Combined Account be payable to such Terminated Participant provided the conditions, if any, set forth in the Adoption Agreement have been satisfied. Any distribution under this paragraph shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. Regardless of whether distributions in kind are permitted, in the event the amount of the Vested portion of the Terminated Participant's Combined Account equals or exceeds the fair market value of any insurance Contracts, the Trustee, when so directed by the Administrator and agreed to by the Terminated Participant, shall assign, transfer, and set over to such Terminated Participant all Contracts on such Terminated Participant's life in such form or with such endorsements, so that the settlement options and forms of payment are consistent with the provisions of Section 6.5. In the event that the Terminated Participant's Vested portion does not at least equal the fair market value of the Contracts, if any, the Terminated Participant may pay over to the Trustee the sum needed to make the distribution equal to the value of the Contracts being assigned or transferred, or the Trustee, pursuant to the Participant's election, may borrow the cash value of the Contracts from the Insurer so that the value of the Contracts is equal to the Vested portion of the Terminated Participant's Combined Account and then assign the Contracts to the Terminated Participant. Notwithstanding the above, unless otherwise elected in the Adoption Agreement, if the value of a Terminated Participant's Vested benefit derived from Employer and Employee contributions does not exceed $5,000 (or, $3,500 for distributions made prior to the later of the first day of the first Plan Year beginning on or after August 5, 1997, or the date specified in the Adoption Agreement) the Administrator shall direct that the entire Vested benefit be paid to such Participant in a single lump-sum without regard to the consent of the Participant or the Participant's spouse. A Participant's Vested benefit shall not include Qualified Voluntary Employee Contributions within the meaning of Code Section 72(o)(5)(B) for Plan Years beginning prior to January 1, 1989. Furthermore, the determination of whether the $5,000 (or, if applicable, $3,500) threshold has been exceeded is generally based on the value of the Vested benefit as of the Valuation Date preceding the date of the distribution. However, if the "lookback rule" applies, the applicable threshold is deemed to be exceeded if the Vested benefit exceeded the applicable threshold at the time of any prior distribution. The "lookback rule" generally applies to all distributions made prior to March 22, 1999. With respect to distributions made on or after March 22, 1999, the "lookback rule" applies if either (1) the provisions of Section 6.12 do not apply or (2) a Participant has begun to receive distributions pursuant to an optional form of benefit under which at least one scheduled periodic distribution has not yet been made, and if the value of the Participant's benefit, determined at the time of the first distribution under that optional form of benefit exceeded the applicable threshold. However, the Plan does not fail to satisfy the requirements of this paragraph if, prior to the adoption of this Prototype Plan, the "lookback rule" was applied to all distributions. Notwithstanding the preceding, the "lookback rule" will not apply to any distributions made on or after October 17, 2000. (b) The Vested portion of any Participant's Account shall be a percentage of such Participant's Account determined on the basis of the Participant's number of Years of Service (or Periods of Service if the Elapsed Time Method is elected) according to the vesting schedule specified in the Adoption Agreement. However, a Participant's entire interest in the Plan shall be non-forfeitable upon the Participant's Normal Retirement Age (if the Participant is employed by the Employer on or after such date). (c) For any Top Heavy Plan Year, the minimum top heavy vesting schedule elected by the Employer in the Adoption Agreement will automatically apply to the Plan. The minimum top heavy vesting schedule applies to all benefits within the meaning of Code Section 411(a)(7) except those attributable to Employee contributions, including benefits accrued before the effective date of Code Section 416 and benefits accrued before the Plan became top heavy. Further, no decrease in a Participant's Vested percentage shall occur in the event the Plan's status as top heavy changes for any Plan Year. However, this Section does not apply to the account balances of any Employee who does not have an Hour of Service after the Plan has initially become top heavy and the Vested percentage of such Employee's Participant's Account shall be determined without regard to this Section 6.4(c). If in any subsequent Plan Year the Plan ceases to be a Top Heavy Plan, then unless a specific Plan amendment is made to provide otherwise, the Administrator will continue to use the vesting schedule in effect while the Plan was a Top Heavy Plan. (d) Upon the complete discontinuance of the Employer's contributions to the Plan (if this is a profit sharing plan) or upon any full or partial termination of the Plan, all amounts then credited to the account of any affected Participant shall become 100% Vested and shall not thereafter be subject to Forfeiture. (e) If this is an amended or restated Plan, then notwithstanding the vesting schedule specified in the Adoption Agreement, the Vested percentage of a Participant's Account shall not be less than the Vested percentage attained as of the later of the effective date or adoption date of this amendment and restatement. The computation of a Participant's nonforfeitable percentage of such Participant's interest in the Plan shall not be reduced as the result of any (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 32 DEFINED CONTRIBUTION PROTOTYPE PLAN direct or indirect amendment to this Article, or due to changes in the Plan's status as a Top Heavy Plan. Furthermore, if the Plan's vesting schedule is amended, then the amended schedule will only apply to those Participants who complete an Hour of Service after the effective date of the amendment. (f) If the Plan's vesting schedule is amended, or if the Plan is amended in any way that directly or indirectly affects the computation of the Participant's nonforfeitable percentage or if the Plan is deemed amended by an automatic change to a top heavy vesting schedule, then each Participant with at least three (3) Years of Service (or Periods of Service if the Elapsed Time Method is elected) as of the expiration date of the election period may elect to have such Participant's nonforfeitable percentage computed under the Plan without regard to such amendment or change. If a Participant fails to make such election, then such Participant shall be subject to the new vesting schedule. The Participant's election period shall commence on the adoption date of the amendment and shall end sixty (60) days after the latest of: (1) the adoption date of the amendment, (2) the effective date of the amendment, or (3) the date the Participant receives written notice of the amendment from the Employer or Administrator. (g) In determining Years of Service or Periods of Service for purposes of vesting under the Plan, Years of Service or Periods of Service shall be excluded as elected in the Adoption Agreement. 6.5 DISTRIBUTION OF BENEFITS (a)(1) Unless otherwise elected as provided below, a Participant who is married on the Annuity Starting Date and who does not die before the Annuity Starting Date shall receive the value of all Plan benefits in the form of a Joint and Survivor Annuity. The Joint and Survivor Annuity is an annuity that commences immediately and shall be equal in value to a single life annuity. Such joint and survivor benefits following the Participant's death shall continue to the spouse during the spouse's lifetime at a rate equal to either fifty percent (50%), seventy-five percent (75%) (or, sixty-six and two-thirds percent (66 2/3%) if the Insurer used to provide the annuity does not offer a joint and seventy-five percent (75%) annuity), or one hundred percent (100%) of the rate at which such benefits were payable to the Participant. Unless otherwise elected in the Adoption Agreement, a joint and fifty percent (50%) survivor annuity shall be considered the designated qualified Joint and Survivor Annuity and the normal form of payment for the purposes of this Plan. However, the Participant may, without spousal consent, elect an alternative Joint and Survivor Annuity, which alternative shall be equal in value to the designated qualified Joint and Survivor Annuity. An unmarried Participant shall receive the value of such Participant's benefit in the form of a life annuity. Such unmarried Participant, however, may elect to waive the life annuity. The election must comply with the provisions of this Section as if it were an election to waive the Joint and Survivor Annuity by a married Participant, but without fulfilling the spousal consent requirement. The Participant may elect to have any annuity provided for in this Section distributed upon the attainment of the "earliest retirement age" under the Plan. The "earliest retirement age" is the earliest date on which, under the Plan, the Participant could elect to receive retirement benefits. (2) Any election to waive the Joint and Survivor Annuity must be made by the Participant in writing (or in such other form as permitted by the IRS) during the election period and be consented to in writing (or in such other form as permitted by the IRS) by the Participant's spouse. If the spouse is legally incompetent to give consent, the spouse's legal guardian, even if such guardian is the Participant, may give consent. Such election shall designate a Beneficiary (or a form of benefits) that may not be changed without spousal consent (unless the consent of the spouse expressly permits designations by the Participant without the requirement of further consent by the spouse). Such spouse's consent shall be irrevocable and must acknowledge the effect of such election and be witnessed by a Plan representative or a notary public. Such consent shall not be required if it is established to the satisfaction of the Administrator that the required consent cannot be obtained because there is no spouse, the spouse cannot be located, or other circumstances that may be prescribed by Regulations. The election made by the Participant and consented to by such Participant's spouse may be revoked by the Participant in writing (or in such other form as permitted by the IRS) without the consent of the spouse at any time during the election period. A revocation of a prior election shall cause the Participant's benefits to be distributed as a Joint and Survivor Annuity. The number of revocations shall not be limited. Any new election must comply with the requirements of this paragraph. A former spouse's waiver shall not be binding on a new spouse. (3) The election period to waive the Joint and Survivor Annuity shall be the ninety (90) day period ending on the Annuity Starting Date. (4) For purposes of this Section, spouse or surviving spouse means the spouse or surviving spouse of the Participant, provided that a former spouse will be treated as the spouse or surviving spouse and a current (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 33 DEFINED CONTRIBUTION PROTOTYPE PLAN spouse will not be treated as the spouse or surviving spouse to the extent provided under a qualified domestic relations order as described in Code Section 414(p). (5) With regard to the election, except as otherwise provided herein, the Administrator shall provide to the Participant no less than thirty (30) days and no more than ninety (90) days before the Annuity Starting Date a written (or such other form as permitted by the IRS) explanation of: (i) the terms and conditions of the Joint and Survivor Annuity, (ii) the Participant's right to make and the effect of an election to waive the Joint and Survivor Annuity, (iii) the right of the Participant's spouse to consent to any election to waive the Joint and Survivor Annuity, and (iv) the right of the Participant to revoke such election, and the effect of such revocation. (6) Any distribution provided for in this Section made on or after December 31, 1996, may commence less than thirty (30) days after the notice required by Code Section 417(a)(3) is given provided the following requirements are satisfied: (i) the Administrator clearly informs the Participant that the Participant has a right to a period of thirty (30) days after receiving the notice to consider whether to waive the Joint and Survivor Annuity and to elect (with spousal consent) a form of distribution other than a Joint and Survivor Annuity; (ii) the Participant is permitted to revoke any affirmative distribution election at least until the Annuity Starting Date or, if later, at any time prior to the expiration of the seven (7) day period that begins the day after the explanation of the Joint and Survivor Annuity is provided to the Participant; (iii) the Annuity Starting Date is after the time that the explanation of the Joint and Survivor Annuity is provided to the Participant. However, the Annuity Starting Date may be before the date that any affirmative distribution election is made by the Participant and before the date that the distribution is permitted to commence under (iv) below; and (iv) distribution in accordance with the affirmative election does not commence before the expiration of the seven (7) day period that begins the day after the explanation of the Joint and Survivor Annuity is provided to the Participant. (b) In the event a married Participant duly elects pursuant to paragraph (a)(2) above not to receive the benefit in the form of a Joint and Survivor Annuity, or if such Participant is not married, in the form of a life annuity, the Administrator, pursuant to the election of the Participant, shall direct the distribution to a Participant or Beneficiary any amount to which the Participant or Beneficiary is entitled under the Plan in one or more of the following methods which are permitted pursuant to the Adoption Agreement: (1) One lump-sum payment in cash or in property that is allocated to the accounts of the Participant at the time of the distribution; (2) Partial withdrawals; (3) Payments over a period certain in monthly, quarterly, semiannual, or annual cash installments. In order to provide such installment payments, the Administrator may (A) segregate the aggregate amount thereof in a separate, federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate or other liquid short-term security or (B) purchase a nontransferable annuity contract for a term certain (with no life contingencies) providing for such payment. The period over which such payment is to be made shall not extend beyond the Participant's life expectancy (or the life expectancy of the Participant and the Participant's designated Beneficiary); (4) Purchase of or providing an annuity. However, such annuity may not be in any form that will provide for payments over a period extending beyond either the life of the Participant (or the lives of the Participant and the Participant's designated Beneficiary) or the life expectancy of the Participant (or the life expectancy of the Participant and the Participant's designated Beneficiary). (c) Benefits may not be paid without the Participant's and the Participant's spouse's consent if the present value of the Participant's Joint and Survivor Annuity derived from Employer and Employee contributions (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 34 DEFINED CONTRIBUTION PROTOTYPE PLAN exceeds, or has ever exceeded, $5,000 (or $3,500, for distributions made prior to the later of the first day of the first Plan Year beginning after August 5, 1997, or the date specified in the Adoption Agreement) and the benefit is "immediately distributable." However, spousal consent is not required if the distribution will made in the form a Qualified Joint and Survivor Annuity and the benefit is "immediately distributable." A benefit is "immediately distributable" if any part of the benefit could be distributed to the Participant (or surviving spouse) before the Participant attains (or would have attained if not deceased) the later of the Participant's Normal Retirement Age or age 62. If the value of the Participant's benefit derived from Employer and Employee contributions does not exceed, and has never exceeded at the time of any prior distribution, $5,000 (or, if applicable, $3,500), then the Administrator will distribute such benefit in a lump-sum without such Participant's consent. No distribution may be made under the preceding sentence after the Annuity Starting Date unless the Participant and the Participant's spouse consent in writing (or in such other form as permitted by the IRS) to such distribution. Any consent required under this paragraph must be obtained not more than ninety (90) days before commencement of the distribution and shall be made in a manner consistent with Section 6.5(a)(2). Notwithstanding the preceding, the "lookback rule" (which provides that if the present value at the time of a prior distribution exceeded the applicable dollar threshold, then the present value at any subsequent time is deemed to exceed the threshold) will not apply to any distributions made on or after October 17, 2000. (d) The following rules will apply with respect to the consent requirements set forth in subsection (c): (1) No consent shall be valid unless the Participant has received a general description of the material features and an explanation of the relative values of the optional forms of benefit available under the Plan that would satisfy the notice requirements of Code Section 417; (2) The Participant must be informed of the right to defer receipt of the distribution. If a Participant fails to consent, it shall be deemed an election to defer the commencement of payment of any benefit. However, any election to defer the receipt of benefits shall not apply with respect to distributions that are required under Section 6.5(e); (3) Notice of the rights specified under this paragraph shall be provided no less than thirty (30) days and no more than ninety (90) days before the Annuity Starting Date; (4) Written (or such other form as permitted by the IRS) consent of the Participant to the distribution must not be made before the Participant receives the notice and must not be made more than ninety (90) days before the Annuity Starting Date; and (5) No consent shall be valid if a significant detriment is imposed under the Plan on any Participant who does not consent to the distribution. (e) Notwithstanding any provision in the Plan to the contrary, for Plan Years beginning after December 31, 1996, the distribution of a Participant's benefits, whether under the Plan or through the purchase of an annuity Contract, shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder (including Regulation 1.401(a)(9)-2): (1) A Participant's benefits will be distributed or must begin to be distributed not later than the Participant's "required beginning date." Alternatively, distributions to a Participant must begin no later than the Participant's "required beginning date" and must be made over the life of the Participant (or the lives of the Participant and the Participant's designated Beneficiary) or the life expectancy of the Participant (or the life expectancies of the Participant and the Participant's designated Beneficiary) in accordance with Regulations. However, if the distribution is to be in the form of a joint and survivor annuity or single life annuity, then distributions must begin no later than the "required beginning date" and must be made over the life of the Participant (or the lives of the Participant and the Participant's designated Beneficiary) in accordance with Regulations. (2) The "required beginning date" for a Participant who is a "five percent (5%) owner" with respect to the Plan Year ending in the calendar year in which such Participant attains age 70 1/2 means April 1st of the calendar year following the calendar year in which the Participant attains age 70 1/2. Once distributions have begun to a "five percent (5%) owner" under this subsection, they must continue to be distributed, even if the Participant ceases to be a "five percent (5%) owner" in a subsequent year. (3) The "required beginning date" for a Participant other than a "five percent (5%) owner" means, unless the Employer has elected to continue the pre-SBJPA rules in the Adoption Agreement, April 1st of the calendar year following the later of the calendar year in which the Participant attains age 70 1/2 or the calendar year in which the Participant retires. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 35 DEFINED CONTRIBUTION PROTOTYPE PLAN (4) If the election is made to continue the pre-SBJPA rules, then except as provided below, the "required beginning date" is April 1st of the calendar year following the calendar year in which a Participant attains age 70 1/2. (i) However, the "required beginning date" for a Participant who had attained age 70 1/2 before January 1, 1988, and was not a five percent (5%) owner (within the meaning of Code Section 416) at any time during the Plan Year ending with or within the calendar year in which the Participant attained age 66 1/2 or any subsequent Plan Year, is April 1st of the calendar year following the calendar in which the Participant retires. (ii) Notwithstanding (i) above, the "required beginning date" for a Participant who was a five percent (5%) owner (within the meaning of Code Section 416) at any time during the five (5) Plan Year period ending in the calendar year in which the Participant attained age 70 1/2 is April 1st of the calendar year in which the Participant attained age 70 1/2. In the case of a Participant who became a five percent (5%) owner during any Plan Year after the calendar year in which the Participant attained age 70 1/2, the "required beginning date" is April 1st of the calendar year following the calendar year in which such subsequent Plan Year ends. (5) If this is an amendment or restatement of a plan that contained the pre-SBJPA rules and an election is made to use the post-SBJPA rules, then the transition rules elected in the Adoption Agreement will apply. (6) Except as otherwise provided herein, "five percent (5%) owner" means, for purposes of this Section, a Participant who is a five percent (5%) owner as defined in Code Section 416 at any time during the Plan Year ending with or within the calendar year in which such owner attains age 70 1/2. (7) Distributions to a Participant and such Participant's Beneficiaries will only be made in accordance with the incidental death benefit requirements of Code Section 401(a)(9)(G) and the Regulations thereunder. (8) For purposes of this Section, the life expectancy of a Participant and/or a Participant's spouse (other than in the case of a life annuity) shall or shall not be redetermined annually as elected in the Adoption Agreement and in accordance with Regulations. If the Participant or the Participant's spouse may elect, pursuant to the Adoption Agreement, to have life expectancies recalculated, then the election, once made shall be irrevocable. If no election is made by the time distributions must commence, then the life expectancy of the Participant and the Participant's spouse shall not be subject to recalculation. Life expectancy and joint and last survivor life expectancy shall be computed using the return multiples in Tables V and VI of Regulation Section 1.72-9. (9) With respect to distributions under the Plan made for calendar years beginning on or after January 1, 2001, or if later, the date specified in the Adoption Agreement, the Plan will apply the minimum distribution requirements of Code Section 401(a)(9) in accordance with the Regulations under section 401(a)(9) that were proposed on January 17, 2001, notwithstanding any provision of the Plan to the contrary. This amendment shall continue in effect until the end of the last calendar year beginning before the effective date of final Regulations under section 401(a)(9) or such other date as may be specified in guidance published by the Internal Revenue Service. However, if the date specified in the Adoption Agreement is a date in 2001 other than January 1, 2001, then with respect to distributions under the Plan made on or after such date for calendar years beginning on or after January 1, 2001, the Plan will apply the minimum distribution requirements of Code Section 401(a)(9) in accordance with the Regulations under section 401(a)(9) that were proposed on January 17, 2001, notwithstanding any provision of the Plan to the contrary. If the total amount of required minimum distributions made to a participant for 2001 prior to the specified date are equal to or greater than the amount of required minimum distributions determined under the 2001 Proposed Regulations, then no additional distributions are required for such participant for 2001 on or after such date. If the total amount of required minimum distributions made to a participant for 2001 prior to the specified date are less than the amount determined under the 2001 Proposed Regulations, then the amount of required minimum distributions for 2001 on or after such date will be determined so that the total amount of required minimum distributions for 2001 is the amount determined under the 2001 Proposed Regulations. This amendment shall continue in effect until the end of the last calendar year beginning before the effective date of final Regulations under section 401(a)(9) or such other date as may be specified in guidance published by the Internal Revenue Service. (f) All annuity Contracts under this Plan shall be non-transferable when distributed. Furthermore, the terms of any annuity Contract purchased and distributed to a Participant or spouse shall comply with all of the requirements of this Plan. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 36 DEFINED CONTRIBUTION PROTOTYPE PLAN (g) Subject to the spouse's right of consent afforded under the Plan, the restrictions imposed by this Section shall not apply if a Participant has, prior to January 1, 1984, made a written designation to have retirement benefits paid in an alternative method acceptable under Code Section 401(a) as in effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). (h) If a distribution is made to a Participant who has not severed employment and who is not fully Vested in the Participant's Account, and the Participant may increase the Vested percentage in such account, then at any relevant time the Participant's Vested portion of the account will be equal to an amount ("X") determined by the formula: X equals P (AB plus D) - D For purposes of applying the formula: P is the Vested percentage at the relevant time, AB is the account balance at the relevant time, D is the amount of distribution, and the relevant time is the time at which, under the Plan, the Vested percentage in the account cannot increase. However, the Employer may attach an addendum to the Adoption Agreement to provide that a separate account shall be established for the Participant's interest in the Plan as of the time of the distribution, and at any relevant time the Participant's Vested portion of the separate account will be equal to an amount determined as follows: P (AB plus (R x D)) - (R x D) where R is the ratio of the account balance at the relevant time to the account balance after distribution and the other terms have the same meaning as in the preceding paragraph. Any amendment to change the formula in accordance with the preceding sentence shall not be considered an amendment which causes this Plan to become an individually designed Plan. (i) If this is a Plan amendment that eliminates or restricts the ability of a Participant to receive payment of the Participant's interest in the Plan under a particular optional form of benefit, then the amendment shall not apply to any distribution with an annuity starting date earlier than the earlier of: (i) the 90th day after the date the Participant receiving the distribution has been furnished a summary that reflects the amendment and that satisfies the Act requirements at 29 CFR 2520.104b-3 relating to a summary of material modifications or (ii) the first day of the second Plan Year following the Plan Year in which the amendment is adopted. 6.6 DISTRIBUTION OF BENEFITS UPON DEATH (a) Unless otherwise elected as provided below, a Vested Participant who dies before the Annuity Starting Date and who has a surviving spouse shall have the Pre-Retirement Survivor Annuity paid to the surviving spouse. The Participant's spouse may direct that payment of the Pre-Retirement Survivor Annuity commence within a reasonable period after the Participant's death. If the spouse does not so direct, payment of such benefit will commence at the time the Participant would have attained the later of Normal Retirement Age or age 62. However, the spouse may elect a later commencement date. Any distribution to the Participant's spouse shall be subject to the rules specified in Section 6.6(h). (b) Any election to waive the Pre-Retirement Survivor Annuity before the Participant's death must be made by the Participant in writing (or in such other form as permitted by the IRS) during the election period and shall require the spouse's irrevocable consent in the same manner provided for in Section 6.5(a)(2). Further, the spouse's consent must acknowledge the specific nonspouse Beneficiary. Notwithstanding the foregoing, the nonspouse Beneficiary need not be acknowledged, provided the consent of the spouse acknowledges that the spouse has the right to limit consent only to a specific Beneficiary and that the spouse voluntarily elects to relinquish such right. (c) The election period to waive the Pre-Retirement Survivor Annuity shall begin on the first day of the Plan Year in which the Participant attains age 35 and end on the date of the Participant's death. An earlier waiver (with spousal consent) may be made provided a written (or such other form as permitted by the IRS) explanation of the Pre-Retirement Survivor Annuity is given to the Participant and such waiver becomes invalid at the beginning of the Plan Year in which the Participant turns age 35. In the event a Participant separates from service prior to the beginning of the election period, the election period shall begin on the date of such separation from service. (d) With regard to the election, the Administrator shall provide each Participant within the applicable election period, with respect to such Participant (and consistent with Regulations), a written (or such other form as permitted by the IRS) explanation of the Pre-Retirement Survivor Annuity containing comparable information to that required pursuant to Section 6.5(a)(5). For the purposes of this paragraph, the term "applicable period" means, with respect to a Participant, whichever of the following periods ends last: (1) The period beginning with the first day of the Plan Year in which the Participant attains age 32 and ending with the close of the Plan Year preceding the Plan Year in which the Participant attains age 35; (2) A reasonable period after the individual becomes a Participant; (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 37 DEFINED CONTRIBUTION PROTOTYPE PLAN (3) A reasonable period ending after the Plan no longer fully subsidizes the cost of the Pre-Retirement Survivor Annuity with respect to the Participant; or (4) A reasonable period ending after Code Section 401(a)(11) applies to the Participant. For purposes of applying this subsection, a reasonable period ending after the enumerated events described in (2), (3) and (4) is the end of the two (2) year period beginning one (1) year prior to the date the applicable event occurs, and ending one (1) year after that date. In the case of a Participant who separates from service before the Plan Year in which age 35 is attained, notice shall be provided within the two (2) year period beginning one (1) year prior to separation and ending one (1) year after separation. If such a Participant thereafter returns to employment with the Employer, the applicable period for such Participant shall be redetermined. (e) The Pre-Retirement Survivor Annuity provided for in this Section shall apply only to Participants who are credited with an Hour of Service on or after August 23, 1984. Former Participants who are not credited with an Hour of Service on or after August 23, 1984, shall be provided with rights to the Pre-Retirement Survivor Annuity in accordance with Section 303(e)(2) of the Retirement Equity Act of 1984. (f) If the value of the Pre-Retirement Survivor Annuity derived from Employer and Employee contributions does not exceed, and has never exceeded at the time of any prior distribution, $5,000 (or, $3,500 for distributions made prior to the later of the first day of the first Plan Year beginning after August 5, 1997, or the date specified in the Adoption Agreement) the Administrator shall direct the distribution of such amount to the Participant's spouse as soon as practicable. No distribution may be made under the preceding sentence after the Annuity Starting Date unless the spouse consents in writing (or in such other form as permitted by the IRS). If the value exceeds, or has ever exceeded at the time of any prior distribution, $5,000 (or, if applicable, $3,500), an immediate distribution of the entire amount may be made to the surviving spouse, provided such surviving spouse consents in writing (or in such other form as permitted by the IRS) to such distribution. Any consent required under this paragraph must be obtained not more than ninety (90) days before commencement of the distribution and shall be made in a manner consistent with Section 6.5(a)(2). Notwithstanding the preceding, the "lookback rule" (which provides that if the present value at the time of a prior distribution exceeded the applicable dollar threshold, then the present value at any subsequent time is deemed to exceed the threshold) will not apply to any distributions made on or after October 17, 2000. (g) Death benefits may be paid to a Participant's Beneficiary in one of the following optional forms of benefits subject to the rules specified in Section 6.6(h) and the elections made in the Adoption Agreement. Such optional forms of distributions may be elected by the Participant in the event there is an election to waive the Pre-Retirement Survivor Annuity, and for any death benefits in excess of the Pre-Retirement Survivor Annuity. However, if no optional form of distribution was elected by the Participant prior to death, then the Participant's Beneficiary may elect the form of distribution: (1) One lump-sum payment in cash or in property that is allocated to the accounts of the Participant at the time of the distribution. (2) Partial withdrawals. (3) Payment in monthly, quarterly, semi-annual, or annual cash installments over a period to be determined by the Participant or the Participant's Beneficiary. In order to provide such installment payments, the Administrator may (A) segregate the aggregate amount thereof in a separate, federally insured savings account, certificate of deposit in a bank or savings and loan association, money market certificate or other liquid short-term security or (B) purchase a nontransferable annuity contract for a term certain (with no life contingencies) providing for such payment. After periodic installments commence, the Beneficiary shall have the right to reduce the period over which such periodic installments shall be made, and the cash amount of such periodic installments shall be adjusted accordingly. (4) In the form of an annuity over the life expectancy of the Beneficiary. (5) If death benefits in excess of the Pre-Retirement Survivor Annuity are to be paid to the surviving spouse, such benefits may be paid pursuant to (1), (2) or (3) above, or used to purchase an annuity so as to increase the payments made pursuant to the Pre-Retirement Survivor Annuity. (h) Notwithstanding any provision in the Plan to the contrary, distributions upon the death of a Participant shall be made in accordance with the following requirements and shall otherwise comply with Code Section 401(a)(9) and the Regulations thereunder. (1) If it is determined, pursuant to Regulations, that the distribution of a Participant's interest has begun and the Participant dies before the entire interest has been distributed, the remaining portion of such interest shall be distributed at least as rapidly as under the method of distribution elected pursuant to Section 6.5 as of the date of death. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 38 DEFINED CONTRIBUTION PROTOTYPE PLAN (2) If a Participant dies before receiving any distributions of the interest in the Plan or before distributions are deemed to have begun pursuant to Regulations, then the death benefit shall be distributed to the Participant's Beneficiaries in accordance with the following rules subject to the elections made in the Adoption Agreement and subsections 6.6(h)(3) and 6.6(i) below: (i) The entire death benefit shall be distributed to the Participant's Beneficiaries by December 31st of the calendar year in which the fifth anniversary of the Participant's death occurs; (ii) The 5-year distribution requirement of (i) above shall not apply to any portion of the deceased Participant's interest which is payable to or for the benefit of a designated Beneficiary. In such event, such portion shall be distributed over the life of such designated Beneficiary (or over a period not extending beyond the life expectancy of such designated Beneficiary) provided such distribution begins not later than December 31st of the calendar year immediately following the calendar year in which the Participant died (or such later date as may be prescribed by Regulations); (iii) However, in the event the Participant's spouse (determined as of the date of the Participant's death) is the designated Beneficiary, the provisions of (ii) above shall apply except that the requirement that distributions commence within one year of the Participant's death shall not apply. In lieu thereof, distributions must commence on or before the later of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died; or (2) December 31st of the calendar year in which the Participant would have attained age 70 1/2. If the surviving spouse dies before distributions to such spouse begin, then the 5-year distribution requirement of this Section shall apply as if the spouse was the Participant. (3) Notwithstanding subparagraph (2) above, or any elections made in the Adoption Agreement, if a Participant's death benefits are to be paid in the form of a Pre-Retirement Survivor Annuity, then distributions to the Participant's surviving spouse must commence on or before the later of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died; or (2) December 31st of the calendar year in which the Participant would have attained age 70 1/2. (i) For purposes of Section 6.6(h)(2), the election by a designated Beneficiary to be excepted from the 5-year distribution requirement (if permitted in the Adoption Agreement) must be made no later than December 31st of the calendar year following the calendar year of the Participant's death. Except, however, with respect to a designated Beneficiary who is the Participant's surviving spouse, the election must be made by the earlier of: (1) December 31st of the calendar year immediately following the calendar year in which the Participant died or, if later, December 31st of the calendar year in which the Participant would have attained age 70 1/2; or (2) December 31st of the calendar year which contains the fifth anniversary of the date of the Participant's death. An election by a designated Beneficiary must be in writing (or in such other form as permitted by the IRS) and shall be irrevocable as of the last day of the election period stated herein. In the absence of an election by the Participant or a designated Beneficiary, the 5-year distribution requirement shall apply. (j) For purposes of this Section, the life expectancy of a Participant and a Participant's spouse (other than in the case of a life annuity) shall or shall not be redetermined annually as elected in the Adoption Agreement and in accordance with Regulations. If the Participant may elect, pursuant to the Adoption Agreement, to have life expectancies recalculated, then the election, once made shall be irrevocable. If no election is made by the time distributions must commence, then the life expectancy of the Participant and the Participant's spouse shall not be subject to recalculation. Life expectancy and joint and last survivor life expectancy shall be computed using the return multiples in Tables V and VI of Regulation Section 1.72-9. (k) For purposes of this Section, any amount paid to a child of the Participant will be treated as if it had been paid to the surviving spouse if the amount becomes payable to the surviving spouse when the child reaches the age of majority. (l) In the event that less than one hundred percent (100%) of a Participant's interest in the Plan is distributed to such Participant's spouse, the portion of the distribution attributable to the Participant's Voluntary Contribution Account shall be in the same proportion that the Participant's Voluntary Contribution Account bears to the Participant's total interest in the Plan. (m) Subject to the spouse's right of consent afforded under the Plan, the restrictions imposed by this Section shall not apply if a Participant has, prior to January 1, 1984, made a written designation to have death benefits paid in an alternative method acceptable under Code Section 401(a) as in effect prior to the enactment of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 39 DEFINED CONTRIBUTION PROTOTYPE PLAN 6.7 TIME OF DISTRIBUTION Except as limited by Sections 6.5 and 6.6, whenever a distribution is to be made, or a series of payments are to commence, the distribution or series of payments may be made or begun on such date or as soon thereafter as is practicable. However, unless a Former Participant elects in writing to defer the receipt of benefits (such election may not result in a death benefit that is more than incidental), the payment of benefits shall begin not later than the sixtieth (60th) day after the close of the Plan Year in which the latest of the following events occurs: (a) the date on which the Participant attains the earlier of age 65 or the Normal Retirement Age specified herein; (b) the tenth (10th) anniversary of the year in which the Participant commenced participation in the Plan; or (c) the date the Participant terminates service with the Employer. Notwithstanding the foregoing, the failure of a Participant and, if applicable, the Participant's spouse, to consent to a distribution that is "immediately distributable" (within the meaning of Section 6.5(d)), shall be deemed to be an election to defer the commencement of payment of any benefit sufficient to satisfy this Section. 6.8 DISTRIBUTION FOR MINOR OR INCOMPETENT BENEFICIARY In the event a distribution is to be made to a minor or incompetent Beneficiary, then the Administrator may direct that such distribution be paid to the legal guardian, or if none in the case of a minor Beneficiary, to a parent of such Beneficiary, or to the custodian for such Beneficiary under the Uniform Gift to Minors Act or Gift to Minors Act, if such is permitted by the laws of the state in which said Beneficiary resides. Such a payment to the legal guardian, custodian or parent of a minor or incompetent Beneficiary shall fully discharge the Trustee, Employer, and Plan from further liability on account thereof. 6.9 LOCATION OF PARTICIPANT OR BENEFICIARY UNKNOWN In the event that all, or any portion, of the distribution payable to a Participant or Beneficiary hereunder shall, at the later of the Participant's attainment of age 62 or Normal Retirement Age, remain unpaid solely by reason of the inability of the Administrator, after sending a registered letter, return receipt requested, to the last known address, and after further diligent effort, to ascertain the whereabouts of such Participant or Beneficiary, the amount so distributable shall be treated as a Forfeiture pursuant to the Plan. Notwithstanding the foregoing, if the value of a Participant's Vested benefit derived from Employer and Employee contributions does not exceed $5,000, then the amount distributable may be treated as a Forfeiture at the time it is determined that the whereabouts of the Participant or the Participant's Beneficiary can not be ascertained. In the event a Participant or Beneficiary is located subsequent to the Forfeiture, such benefit shall be restored, first from Forfeitures, if any, and then from an additional Employer contribution, if necessary. Upon Plan termination, the portion of the distributable amount that is an "eligible rollover distribution" as defined in Plan Section 6.14(b)(1) may be paid directly to an individual retirement account described in Code Section 408(a) or an individual retirement annuity described in Code Section 408(b). However, regardless of the preceding, a benefit that is lost by reason of escheat under applicable state law is not treated as a Forfeiture for purposes of this Section nor as an impermissible forfeiture under the Code. 6.10 IN-SERVICE DISTRIBUTION For Profit Sharing Plans and 401(k) Profit Sharing Plans, if elected in the Adoption Agreement, at such time as the conditions set forth in the Adoption Agreement have been satisfied, then the Administrator, at the election of a Participant who has not severed employment with the Employer, shall direct the distribution of up to the entire Vested amount then credited to the accounts as elected in the Adoption Agreement maintained on behalf of such Participant. In the event that the Administrator makes such a distribution, the Participant shall continue to be eligible to participate in the Plan on the same basis as any other Employee. Any distribution made pursuant to this Section shall be made in a manner consistent with Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. Furthermore, if an in-service distribution is permitted from more than one account type, the Administrator may determine any ordering of a Participant's in-service distribution from such accounts. 6.11 ADVANCE DISTRIBUTION FOR HARDSHIP (a) For Profit Sharing Plans and 401(k) Plans (except to the extent Section 12.9 applies), if elected in the Adoption Agreement, the Administrator, at the election of the Participant, shall direct the distribution to any Participant in any one Plan Year up to the lesser of 100% of the Vested interest of the Participant's Combined Account valued as of the last Valuation Date or the amount necessary to satisfy the immediate and heavy financial need of the Participant. Any distribution made pursuant to this Section shall be deemed to be made as of the first day of the Plan Year or, if later, the Valuation Date immediately preceding the date of distribution, and the account from which the distribution is made shall be reduced accordingly. Withdrawal under this Section shall be authorized only if the distribution is for an immediate and heavy financial need. The Administrator will determine whether there is an immediate and heavy financial need based on the facts and circumstances. An immediate and heavy financial need includes, but is not limited to, a distribution for one of the following: (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 40 DEFINED CONTRIBUTION PROTOTYPE PLAN (1) Medical expenses described in Code Section 213(d) incurred by the Participant, the Participant's spouse, or any of the Participant's dependents (as defined in Code Section 152) or necessary for these persons to obtain medical care as described in Code Section 213(d); (2) Costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Participant; (3) Funeral expenses for a member of the Participant's family; (4) Payment of tuition, related educational fees, and room and board expenses, for the next twelve (12) months of post-secondary education for the Participant, the Participant's spouse, children, or dependents (as defined in Code Section 152); or (5) Payments necessary to prevent the eviction of the Participant from the Participant's principal residence or foreclosure on the mortgage on that residence. (b) If elected in the Adoption Agreement, no distribution shall be made pursuant to this Section from the Participant's Account until such Account has become fully Vested. Furthermore, if a hardship distribution is permitted from more than one account type, the Administrator may determine any ordering of a Participant's hardship distribution from such accounts. (c) Any distribution made pursuant to this Section shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. 6.12 SPECIAL RULE FOR CERTAIN PROFIT SHARING PLANS (a) The provisions of this Section apply to a Participant in a Profit Sharing Plan or 401(k) Profit Sharing Plan to the extent elected in the Adoption Agreement. (b) If an election is made to not offer life annuities as a form of distribution, then a Participant shall be prohibited from electing benefits in the form of a life annuity and the Joint and Survivor Annuity provisions of Section 6.5 shall not apply. (c) Notwithstanding anything in Sections 6.2 and 6.6 to the contrary, upon the death of a Participant, the automatic form of distribution will be a lump-sum rather than a Qualified Pre-Retirement Survivor Annuity. Furthermore, the Participant's spouse will be the Beneficiary of the Participant's entire Vested interest in the Plan unless an election is made to waive the spouse as Beneficiary. The other provisions in Section 6.2 shall be applied by treating the death benefit in this subsection as though it is a Qualified Pre-Retirement Survivor Annuity. (d) Except to the extent otherwise provided in this Section, the provisions of Sections 6.2, 6.5 and 6.6 regarding spousal consent shall be inoperative with respect to this Plan. (e) If a distribution is one to which Code Sections 401(a)(11) and 417 do not apply, such distribution may commence less than thirty (30) days after the notice required under Regulation 1.411(a)-11(c) is given, provided that: (1) the Plan Administrator clearly informs the Participant that the Participant has a right to a period of at least thirty (30) days after the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular distribution option), and (2) the Participant, after receiving the notice, affirmatively elects a distribution. 6.13 QUALIFIED DOMESTIC RELATIONS ORDER DISTRIBUTION All rights and benefits, including elections, provided to a Participant in this Plan shall be subject to the rights afforded to any "alternate payee" under a "qualified domestic relations order." Furthermore, a distribution to an "alternate payee" shall be permitted if such distribution is authorized by a "qualified domestic relations order," even if the affected Participant has not reached the "earliest retirement age" under the Plan. For the purposes of this Section, "alternate payee," "qualified domestic relations order" and "earliest retirement age" shall have the meanings set forth under Code Section 414(p). 6.14 DIRECT ROLLOVERS (a) Notwithstanding any provision of the Plan to the contrary that would otherwise limit a "distributee's" election under this Section, a "distributee" may elect, at the time and in the manner prescribed by the (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 41 DEFINED CONTRIBUTION PROTOTYPE PLAN Administrator, to have any portion of an "eligible rollover distribution" that is equal to at least $500 paid directly to an "eligible retirement plan" specified by the "distributee" in a "direct rollover." (b) For purposes of this Section, the following definitions shall apply: (1) An "eligible rollover distribution" means any distribution described in Code Section 402(c)(4) and generally includes any distribution of all or any portion of the balance to the credit of the distributee, except that an "eligible rollover distribution" does not include: any distribution that is one of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the "distributee" or the joint lives (or joint life expectancies) of the "distributee" and the "distributee's" designated beneficiary, or for a specified period of ten (10) years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); the portion of any other distribution(s) that is not includible in gross income (determined without regard to the exclusion for net unrealized appreciation with respect to employer securities); for distributions made after December 31, 1998, any hardship distribution described in Code Section 401(k)(2)(B)(i)(IV); and any other distribution reasonably expected to total less than $200 during a year. (2) An "eligible retirement plan" is an individual retirement account described in Code Section 408(a), an individual retirement annuity described in Code Section 408(b), an annuity plan described in Code Section 403(a), or a qualified plan described in Code Section 401(a), that accepts the "distributee's" "eligible rollover distribution." However, in the case of an "eligible rollover distribution" to the surviving spouse, an "eligible retirement plan" is an individual retirement account or individual retirement annuity. (3) A "distributee" includes an Employee or former Employee. In addition, the Employee's or former Employee's surviving spouse and the Employee's or former Employee's spouse or former spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), are distributees with regard to the interest of the spouse or former spouse. (4) A "direct rollover" is a payment by the Plan to the "eligible retirement plan" specified by the "distributee." 6.15 TRANSFER OF ASSETS FROM A MONEY PURCHASE PLAN (a) This Section shall be effective as of the following date: (1) for Plans not entitled to extended reliance as described in Revenue Ruling 94-76, the first day of the first Plan Year beginning on or after December 12, 1994, or if later, 90 days after December 12, 1994; or (2) for Plans entitled to extended reliance as described in Revenue Ruling 94-76, as of the first day of the first Plan Year following the Plan Year in which the extended reliance period applicable to the Plan ends. However, in the event of a transfer of assets to the Plan from a money purchase plan that occurs after the date of the most recent determination letter, the effective date of the amendment shall be the date immediately preceding the date of such transfer of assets. (b) Notwithstanding any provision of this Plan to the contrary, to the extent that any optional form of benefit under this Plan permits a distribution prior to the Employee's retirement, death, disability, or severance from employment, and prior to Plan termination, the optional form of benefit is not available with respect to benefits attributable to assets (including the post-transfer earnings thereon) and liabilities that are transferred, within the meaning of Code Section 414(l), to this Plan from a money purchase pension plan qualified under Code Section 401(a) (other than any portion of those assets and liabilities attributable to after-tax voluntary Employee contributions or to a direct or indirect rollover contribution). 6.16 ELECTIVE TRANSFERS OF BENEFITS TO OTHER PLANS (a) If a voluntary, fully-informed election is made by a Participant, then if the conditions set forth herein are satisfied, a Participant's entire benefit may be transferred between qualified plans (other than any direct rollover described in Q&A-3 of Regulation 1.401(a)(31)-1). As an alternative to the transfer, the Participant may elect to retain the Participant's "Section 411(d)(6) protected benefits" under the Plan (or, if the plan is terminating, to receive any optional form of benefit for which the Participant is eligible under the plan as required by Code Section 411(d)(6)). A transfer between qualified plans may only be made pursuant to this subsection if the following additional requirements are met: (i) The transfer occurs at a time at which the participant's benefits are distributable. A Participant's benefits are distributable on a particular date if, on that date, the Participant is eligible, under the terms of the Plan, to receive an immediate distribution of these benefits (e.g., in the form (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 42 DEFINED CONTRIBUTION PROTOTYPE PLAN of an immediately commencing annuity) from that plan under provisions of the plan not inconsistent with Code Section 401(a); (ii) For transfers that occur on or after January 1, 2002, the transfer occurs at a time at which the Participant is not eligible to receive an immediate distribution of the participant's entire nonforfeitable accrued benefit in a single-sum distribution that would consist entirely of an eligible rollover distribution within the meaning of Code Section 401(a)(31)(C); (iii) The participant is fully Vested in the transferred benefit in the transferee plan; (iv) In the case of a transfer from a defined contribution plan to a defined benefit plan, the defined benefit plan provides a minimum benefit, for each Participant whose benefits are transferred, equal to the benefit, expressed as an annuity payable at normal retirement age, that is derived solely on the basis of the amount transferred with respect to such Participant; and (v) The amount of the benefit transferred, together with the amount of any contemporaneous Code Section 401(a)(31) direct rollover to the transferee plan, equals the Participant's entire nonforfeitable accrued benefit under the Plan. (b) If a voluntary, fully-informed election is made by a Participant, then if the conditions set forth herein are satisfied, a Participant's entire benefit may be transferred between qualified defined contribution plans (other than any direct rollover described in Q&A-3 of Regulation 1.401(a)(31)-1). As an alternative to the transfer, the Participant may elect to retain the Participant's "Section 411(d)(6) protected benefits" under the Plan (or, if the plan is terminating, to receive any optional form of benefit for which the Participant is eligible under the plan as required by Code Section 411(d)(6)). A transfer between qualified plans may only be made pursuant to this subsection if the following additional requirements are met: (i) To the extent the benefits are transferred from a money purchase pension plan, the transferee plan must be a money purchase pension plan. To the extent the benefits being transferred are part of a qualified cash or deferred arrangement under Code Section 401(k), the benefits must be transferred to a qualified cash or deferred arrangement under Code Section 401(k). Benefits transferred from a profit-sharing plan other than from a qualified cash or deferred arrangement, or from a stock bonus plan other than an employee stock ownership plan, may be transferred to any type of defined contribution plan; and (ii) The transfer must be made either in connection with an asset or stock acquisition, merger, or other similar transaction involving a change in employer of the employees of a trade or business (i.e., an acquisition or disposition within the meaning of Regulation 1.410(b)-2(f)) or in connection with the Participant's change in employment status to an employment status with respect to which the Participant is not entitled to additional allocations under the Plan. ARTICLE VII TRUSTEE AND CUSTODIAN 7.1 BASIC RESPONSIBILITIES OF THE TRUSTEE (a) The provisions of this Article, other than Section 7.6, shall not apply to this Plan if a separate trust agreement is being used as specified in the Adoption Agreement. (b) The Trustee is accountable to the Employer for the funds contributed to the Plan by the Employer, but the Trustee does not have any duty to see that the contributions received comply with the provisions of the Plan. The Trustee is not obligated to collect any contributions from the Employer, nor is it under a duty to see that funds deposited with it are deposited in accordance with the provisions of the Plan. (c) The Trustee will credit and distribute the Trust Fund as directed by the Administrator. The Trustee is not obligated to inquire as to whether any payee or distributee is entitled to any payment or whether the distribution is proper or within the terms of the Plan, or whether the manner of making any payment or distribution is proper. The Trustee is accountable only to the Administrator for any payment or distribution made by it in good faith on the order or direction of the Administrator. (d) In the event that the Trustee shall be directed by a Participant (pursuant to the Participant Direction Procedures if the Plan permits Participant directed investments), the Employer, or an Investment Manager or other agent appointed by the Employer with respect to the investment of any or all Plan assets, the Trustee shall have no liability with respect to the investment of such assets, but shall be responsible only to execute such investment instructions as so directed. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 43 DEFINED CONTRIBUTION PROTOTYPE PLAN (1) The Trustee shall be entitled to rely fully on the written (or other form acceptable to the Administrator and the Trustee, including but not limited to, voice recorded) instructions of a Participant (pursuant to the Participant Direction Procedures), the Employer, or any Fiduciary or nonfiduciary agent of the Employer, in the discharge of such duties, and shall not be liable for any loss or other liability resulting from such direction (or lack of direction) of the investment of any part of the Plan assets. (2) The Trustee may delegate the duty of executing such instructions to any nonfiduciary agent, which may be an affiliate of the Trustee or any Plan representative. (3) The Trustee may refuse to comply with any direction from the Participant in the event the Trustee, in its sole and absolute discretion, deems such direction improper by virtue of applicable law. The Trustee shall not be responsible or liable for any loss or expense that may result from the Trustee's refusal or failure to comply with any direction from the Participant. (4) Any costs and expenses related to compliance with the Participant's directions shall be borne by the Participant's Directed Account, unless paid by the Employer. (5) Notwithstanding anything herein above to the contrary, the Trustee shall not invest any portion of a Participant's Directed Account in "collectibles" within the meaning of Code Section 408(m). (e) The Trustee will maintain records of receipts and disbursements and furnish to the Employer and/or Administrator for each Plan Year a written annual report pursuant to Section 7.9. (f) The Trustee may employ a bank or trust company pursuant to the terms of its usual and customary bank agency agreement, under which the duties of such bank or trust company shall be of a custodial, clerical and record-keeping nature. (g) The Trustee may employ and pay from the Trust Fund reasonable compensation to agents, attorneys, accountants and other persons to advise the Trustee as in its opinion may be necessary. The Trustee may delegate to any agent, attorney, accountant or other person selected by it any non-Trustee power or duty vested in it by the Plan, and the Trustee may act or refrain from acting on the advice or opinion of any such person. 7.2 INVESTMENT POWERS AND DUTIES OF DISCRETIONARY TRUSTEE (a) This Section applies if the Employer, in the Adoption Agreement or as otherwise agreed upon by the Employer and the Trustee, designates the Trustee to administer all or a portion of the trust as a discretionary Trustee. If so designated, then the Trustee has the discretion and authority to invest, manage, and control those Plan assets except, however, with respect to those assets which are subject to the investment direction of a Participant (if Participant directed investments are permitted), or an Investment Manager, the Administrator, or other agent appointed by the Employer. The exercise of any investment discretion hereunder shall be consistent with the "funding policy and method" determined by the Employer. (b) The Trustee shall, except as otherwise provided in this Plan, invest and reinvest the Trust Fund to keep the Trust Fund invested without distinction between principal and income and in such securities or property, real or personal, wherever situated, as the Trustee shall deem advisable, including, but not limited to, common or preferred stocks, open-end or closed-end mutual funds, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein. The Trustee shall at all times in making investments of the Trust Fund consider, among other factors, the short and long-term financial needs of the Plan on the basis of information furnished by the Employer. In making such investments, the Trustee shall not be restricted to securities or other property of the character expressly authorized by the applicable law for trust investments; however, the Trustee shall give due regard to any limitations imposed by the Code or the Act so that at all times this Plan may qualify as a qualified Plan and Trust. (c) The Trustee, in addition to all powers and authorities under common law, statutory authority, including the Act, and other provisions of this Plan, shall have the following powers and authorities to be exercised in the Trustee's sole discretion: (1) To purchase, or subscribe for, any securities or other property and to retain the same. In conjunction with the purchase of securities, margin accounts may be opened and maintained; (2) To sell, exchange, convey, transfer, grant options to purchase, or otherwise dispose of any securities or other property held by the Trustee, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency, or propriety of any such sale or other disposition, with or without advertisement; (3) To vote upon any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 44 DEFINED CONTRIBUTION PROTOTYPE PLAN other options, and to make any payments incidental thereto; to oppose, or to consent to, or otherwise participate in, corporate reorganizations or other changes affecting corporate securities, and to delegate discretionary powers, and to pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property. However, the Trustee shall not vote proxies relating to securities for which it has not been assigned full investment management responsibilities. In those cases where another party has such investment authority or discretion, the Trustee will deliver all proxies to said party who will then have full responsibility for voting those proxies; (4) To cause any securities or other property to be registered in the Trustee's own name, in the name of one or more of the Trustee's nominees, in a clearing corporation, in a depository, or in book entry form or in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund; (5) To invest in a common, collective, or pooled trust fund (the provisions of which are incorporated herein by reference) maintained by any Trustee (or any affiliate of such Trustee) hereunder pursuant to Revenue Ruling 81-100, all or such part of the Trust Fund as the Trustee may deem advisable, and the part of the Trust Fund so transferred shall be subject to all the terms and provisions of the common, collective, or pooled trust fund which contemplate the commingling for investment purposes of such trust assets with trust assets of other trusts. The name of the trust fund may be specified in an addendum to the Adoption Agreement. The Trustee may withdraw from such common, collective, or pooled trust fund all or such part of the Trust Fund as the Trustee may deem advisable; (6) To borrow or raise money for the purposes of the Plan in such amount, and upon such terms and conditions, as the Trustee shall deem advisable; and for any sum so borrowed, to issue a promissory note as Trustee, and to secure the repayment thereof by pledging all, or any part, of the Trust Fund; and no person lending money to the Trustee shall be bound to see to the application of the money lent or to inquire into the validity, expediency, or propriety of any borrowing; (7) To accept and retain for such time as it may deem advisable any securities or other property received or acquired by it as Trustee hereunder, whether or not such securities or other property would normally be purchased as investments hereunder; (8) To make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted; (9) To settle, compromise, or submit to arbitration any claims, debts, or damages due or owing to or from the Plan, to commence or defend suits or legal or administrative proceedings, and to represent the Plan in all suits and legal and administrative proceedings; (10) To employ suitable agents and counsel and to pay their reasonable expenses and compensation, and such agents or counsel may or may not be an agent or counsel for the Employer; (11) To apply for and procure from the Insurer as an investment of the Trust Fund any annuity or other Contracts (on the life of any Participant, or in the case of a Profit Sharing Plan (including a 401(k) plan), on the life of any person in whom a Participant has an insurable interest, or on the joint lives of a Participant and any person in whom the Participant has an insurable interest) as the Administrator shall deem proper; to exercise, at any time or from time to time, whatever rights and privileges may be granted under such annuity, or other Contracts; to collect, receive, and settle for the proceeds of all such annuity, or other Contracts as and when entitled to do so under the provisions thereof; (12) To invest funds of the Trust in time deposits or savings accounts bearing a reasonable rate of interest or in cash or cash balances without liability for interest thereon, including the specific authority to invest in any type of deposit of the Trustee (or of a financial institution related to the Trustee); (13) To invest in Treasury Bills and other forms of United States government obligations; (14) To sell, purchase and acquire put or call options if the options are traded on and purchased through a national securities exchange registered under the Securities Exchange Act of 1934, as amended, or, if the options are not traded on a national securities exchange, are guaranteed by a member firm of the New York Stock Exchange regardless of whether such options are covered; (15) To deposit monies in federally insured savings accounts or certificates of deposit in banks or savings and loan associations including the specific authority to make deposit into any savings accounts or certificates of deposit of the Trustee (or a financial institution related to the Trustee); (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 45 DEFINED CONTRIBUTION PROTOTYPE PLAN (16) To pool all or any of the Trust Fund, from time to time, with assets belonging to any other qualified employee pension benefit trust created by the Employer or any Affiliated Employer, and to commingle such assets and make joint or common investments and carry joint accounts on behalf of this Plan and Trust and such other trust or trusts, allocating undivided shares or interests in such investments or accounts or any pooled assets of the two or more trusts in accordance with their respective interests; and (17) To do all such acts and exercise all such rights and privileges, although not specifically mentioned herein, as the Trustee may deem necessary to carry out the purposes of the Plan. 7.3 INVESTMENT POWERS AND DUTIES OF NONDISCRETIONARY TRUSTEE (a) This Section applies if the Employer, in the Adoption Agreement or as otherwise agreed upon by the Employer and the Trustee, designates the Trustee to administer all or a portion of the trust as a nondiscretionary Trustee. If so designated, then the Trustee shall have no discretionary authority to invest, manage, or control those Plan assets, but must act solely as a directed Trustee of those Plan assets. A nondiscretionary Trustee, as directed Trustee of the Plan funds it holds, is authorized and empowered, by way of limitation, with the powers, rights and duties set forth herein and in Section 7.14, each of which the nondiscretionary Trustee exercises solely as directed Trustee in accordance with the direction of the party which has the authority to manage and control the investment of the Plan assets. If no directions are provided to the Trustee, the Employer will provide necessary direction. Furthermore, the Employer and the nondiscretionary Trustee may, in writing, limit the powers of the nondiscretionary Trustee to any combination of powers listed within this Section. (b) The Trustee, in addition to all powers and authorities under common law, statutory authority, including the Act, and other provisions of this Plan, shall have the following powers and authorities: (1) To invest the assets, without distinction between principal and income, in securities or property, real or personal, wherever situated, including, but not limited to, common or preferred stocks, open-end or closed-end mutual funds, bonds and other evidences of indebtedness or ownership, and real estate or any interest therein. In making such investments, the Trustee shall not be restricted to securities or other property of the character expressly authorized by the applicable law for trust investments; however, the Trustee shall give due regard to any limitations imposed by the Code or the Act so that at all times this Plan may qualify as a qualified Plan and Trust. (2) To purchase, or subscribe for, any securities or other property and to retain the same. In conjunction with the purchase of securities, margin accounts may be opened and maintained; (3) To sell, exchange, convey, transfer, grant options to purchase, or otherwise dispose of any securities or other property held by the Trustee, by private contract or at public auction. No person dealing with the Trustee shall be bound to see to the application of the purchase money or to inquire into the validity, expediency, or propriety of any such sale or other disposition, with or without advertisement; (4) At the direction of the party which has the authority or discretion, to vote upon any stocks, bonds, or other securities; to give general or special proxies or powers of attorney with or without power of substitution; to exercise any conversion privileges, subscription rights or other options, and to make any payments incidental thereto; to oppose, or to consent to, or otherwise participate in, corporate reorganizations or other changes affecting corporate securities, and to delegate powers, and pay any assessments or charges in connection therewith; and generally to exercise any of the powers of an owner with respect to stocks, bonds, securities, or other property; (5) To cause any securities or other property to be registered in the Trustee's own name, in the name of one or more of the Trustee's nominees, in a clearing corporation, in a depository, or in book entry form or in bearer form, but the books and records of the Trustee shall at all times show that all such investments are part of the Trust Fund; (6) To invest in a common, collective, or pooled trust fund (the provisions of which are incorporated herein by reference) maintained by any Trustee (or any affiliate of such Trustee) hereunder pursuant to Revenue Ruling 81-100, all or such part of the Trust Fund as the party which has the authority to manage and control the investment of the assets shall deem advisable, and the part of the Trust Fund so transferred shall be subject to all the terms and provisions of the common, collective, or pooled trust fund which contemplate the commingling for investment purposes of such trust assets with trust assets of other trusts. The name of the trust fund may be specified in an addendum to the Adoption Agreement; (7) To borrow or raise money for the purposes of the Plan in such amount, and upon such terms and conditions, as the Trustee shall deem advisable; and for any sum so borrowed, to issue a promissory note as Trustee, and to secure the repayment thereof by pledging all, or any part, of the Trust Fund; and no person (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 46 DEFINED CONTRIBUTION PROTOTYPE PLAN lending money to the Trustee shall be bound to see to the application of the money lent or to inquire into the validity, expediency, or propriety of any borrowing; (8) To make, execute, acknowledge, and deliver any and all documents of transfer and conveyance and any and all other instruments that may be necessary or appropriate to carry out the powers herein granted; (9) To settle, compromise, or submit to arbitration any claims, debts, or damages due or owing to or from the Plan, to commence or defend suits or legal or administrative proceedings, and to represent the Plan in all suits and legal and administrative proceedings; (10) To employ suitable agents and counsel and to pay their reasonable expenses and compensation, and such agent or counsel may or may not be an agent or counsel for the Employer; (11) To apply for and procure from the Insurer as an investment of the Trust Fund any annuity or other Contracts (on the life of any Participant, or in the case of a Profit Sharing Plan (including a 401(k) plan), on the life of any person in whom a Participant has an insurable interest, or on the joint lives of a Participant and any person in whom the Participant has an insurable interest) as the Administrator shall deem proper; to exercise, at the direction of the person with the authority to do so, whatever rights and privileges may be granted under such annuity or other Contracts; to collect, receive, and settle for the proceeds of all such annuity or other Contracts as and when entitled to do so under the provisions thereof; (12) To invest funds of the Trust in time deposits or savings accounts bearing a reasonable rate of interest or in cash or cash balances without liability for interest thereon, including the specific authority to invest in any type of deposit of the Trustee (or of a financial institution related to the Trustee); (13) To invest in Treasury Bills and other forms of United States government obligations; (14) To sell, purchase and acquire put or call options if the options are traded on and purchased through a national securities exchange registered under the Securities Exchange Act of 1934, as amended, or, if the options are not traded on a national securities exchange, are guaranteed by a member firm of the New York Stock Exchange regardless of whether such options are covered; (15) To deposit monies in federally insured savings accounts or certificates of deposit in banks or savings and loan associations including the specific authority to make deposit into any savings accounts or certificates of deposit of the Trustee (or a financial institution related to the Trustee); and (16) To pool all or any of the Trust Fund, from time to time, with assets belonging to any other qualified employee pension benefit trust created by the Employer or any Affiliated Employer, and to commingle such assets and make joint or common investments and carry joint accounts on behalf of this Plan and such other trust or trusts, allocating undivided shares or interests in such investments or accounts or any pooled assets of the two or more trusts in accordance with their respective interests. 7.4 POWERS AND DUTIES OF CUSTODIAN If there is a discretionary Trustee, the Employer may appoint a custodian. A custodian has the same powers, rights and duties as a nondiscretionary Trustee. Any reference in the Plan to a Trustee also is a reference to a custodian unless the context of the Plan indicates otherwise. A limitation of the Trustee's liability by Plan provision also acts as a limitation of the custodian's liability. Any action taken by the custodian at the discretionary Trustee's direction satisfies any provision in the Plan referring to the Trustee taking that action. The resignation or removal of the custodian shall be made in accordance with Section 7.11 as though the custodian were a Trustee. 7.5 LIFE INSURANCE (a) The Trustee, at the direction of the Administrator and pursuant to instructions from the individual designated in the Adoption Agreement for such purpose and subject to the conditions set forth in the Adoption Agreement, shall ratably apply for, own, and pay all premiums on Contracts on the lives of the Participants or, in the case of Profit Sharing Plan (including a 401(k) plan), on the life of any person in whom the Participant has an insurable interest or on the joint lives of a Participant and any person in whom the Participant has an insurable interest. Any initial or additional Contract purchased on behalf of a Participant shall have a face amount of not less than $1,000, the amount set forth in the Adoption Agreement, or the limitation of the Insurer, whichever is greater. If a life insurance Contract is to be purchased for a Participant or Former Participant, then the aggregate premium for ordinary life insurance for each Participant or Former Participant must be less than 50% of the aggregate contributions and Forfeitures allocated to the Participant's or Former Participant's Combined Account. For purposes of this limitation, ordinary life insurance Contracts are Contracts with both non-decreasing death benefits and non-increasing premiums. If term insurance or universal life insurance is purchased, then the aggregate premium must be 25% or less of the aggregate contributions and Forfeitures allocated to the Participant's or Former Participant's Combined Account. If both (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 47 DEFINED CONTRIBUTION PROTOTYPE PLAN term insurance and ordinary life insurance are purchased, then the premium for term insurance plus one-half of the premium for ordinary life insurance may not in the aggregate exceed 25% of the aggregate Employer contributions and Forfeitures allocated to the Participant's or Former Participant's Combined Account. Notwithstanding the preceding, the limitations imposed herein with respect to the purchase of life insurance shall not apply, in the case of a Profit Sharing Plan (including a 401(k) plan), to the portion of the Participant's Account that has accumulated for at least two (2) Plan Years or to the entire Participant's Account if the Participant has been a Participant in the Plan for at least five (5) years. Amounts transferred to this Plan in accordance with Section 4.6(e)(ii), (iii) or (v) and a Participant's or Former Participant's Voluntary Contribution Account may be used to purchase Contracts without limitation. (b) The Trustee must distribute the Contracts to the Participant or Former Participant or convert the entire value of the Contracts at or before retirement into cash or provide for a periodic income so that no portion of such value may be used to continue life insurance protection beyond commencement of benefits. Furthermore, if a Contract is purchased on the joint lives of the Participant and another person and such other person predeceases the Participant, then the Contract may not be maintained under this Plan. (c) Notwithstanding anything herein above to the contrary, amounts credited to a Participant's Qualified Voluntary Employee Contribution Account pursuant to Section 4.9, shall not be applied to the purchase of life insurance Contracts. Furthermore, no life insurance Contracts shall be required to be obtained on an individual's life if, for any reason (other than the nonpayment of premiums) the Insurer will not issue a Contract on such individual's life. (d) The Trustee will be the owner of any life insurance Contract purchased under the terms of this Plan. The Contract must provide that the proceeds will be payable to the Trustee; however, the Trustee shall be required to pay over all proceeds of the Contract to the Participant's designated Beneficiary in accordance with the distribution provisions of Article VI. A Participant's spouse will be the designated Beneficiary pursuant to Section 6.2, unless a qualified election has been made in accordance with Sections 6.5 and 6.6 of the Plan, if applicable. Under no circumstances shall the Trust retain any part of the proceeds that are in excess of the cash surrender value immediately prior to death. However, the Trustee shall not pay the proceeds in a method that would violate the requirements of the Retirement Equity Act of 1984, as stated in Article VI of the Plan, or Code Section 401(a)(9) and the Regulations thereunder. In the event of any conflict between the terms of this Plan and the terms of any insurance Contract purchased hereunder, the Plan provisions shall control. 7.6 LOANS TO PARTICIPANTS (a) If specified in the Adoption Agreement, the Trustee (or the Administrator if the Trustee is a nondiscretionary Trustee or if loans are treated as Participant directed investments pursuant to the Adoption Agreement) may, in the Trustee's (or, if applicable, the Administrator's) sole discretion, make loans to Participants or Beneficiaries under the following circumstances: (1) loans shall be made available to all Participants and Beneficiaries on a reasonably equivalent basis; (2) loans shall not be made available to Highly Compensated Employees in an amount greater than the amount made available to other Participants; (3) loans shall bear a reasonable rate of interest; (4) loans shall be adequately secured; and (5) loans shall provide for periodic repayment over a reasonable period of time. Furthermore, no Participant loan shall exceed the Participant's Vested interest in the Plan. (b) Loans shall not be made to any Shareholder-Employee or Owner-Employee (including an Owner-Employee's family members as defined in Code Section 267(c)(4)) unless an exemption for such loan is obtained pursuant to Act Section 408 or such loan would otherwise not be a prohibited transaction pursuant to Code Section 4975 and Act Section 408. (c) An assignment or pledge of any portion of a Participant's interest in the Plan and a loan, pledge, or assignment with respect to any insurance Contract purchased under the Plan, shall be treated as a loan under this Section. (d) If the Vested interest of a Participant is used to secure any loan made pursuant to this Section, then the written (or such other form as permitted by the IRS) consent of the Participant's spouse shall be required in a manner consistent with Section 6.5(a), provided the spousal consent requirements of such Section apply to the Plan. Such consent must be obtained within the 90-day period prior to the date the loan is made. Any security interest held by the Plan by reason of an outstanding loan to the Participant or Former Participant shall be taken into account in determining the amount of the death benefit or Pre-Retirement Survivor Annuity. However, unless the loan program established pursuant to this Section provides otherwise, no spousal consent shall be required under this paragraph if the total interest subject to the security is not in excess of $5,000 (or, $3,500 effective for loans made prior to the later of the first day of the first Plan Year beginning after August 5, 1997, or the date specified in the Adoption Agreement). (e) The Administrator shall be authorized to establish a participant loan program to provide for loans under the Plan. The loan program shall be established in accordance with Department of Labor Regulation Section 2550.408(b)-1(d)(2) providing for loans by the Plan to parties-in-interest under said Plan, such as Participants or (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 48 DEFINED CONTRIBUTION PROTOTYPE PLAN Beneficiaries. In order for the Administrator to implement such loan program, a separate written document forming a part of this Plan must be adopted, which document shall specifically include, but need not be limited to, the following: (1) the identity of the person or positions authorized to administer the Participant loan program; (2) a procedure for applying for loans; (3) the basis on which loans will be approved or denied; (4) limitations, if any, on the types and amounts of loans offered; (5) the procedure under the program for determining a reasonable rate of interest; (6) the types of collateral which may secure a Participant loan; and (7) the events constituting default and the steps that will be taken to preserve Plan assets in the event such default. (f) Notwithstanding anything in this Plan to the contrary, if a Participant or Beneficiary defaults on a loan made pursuant to this Section that is secured by the Participant's interest in the Plan, then a Participant's interest may be offset by the amount subject to the security to the extent there is a distributable event permitted by the Code or Regulations. (g) Notwithstanding anything in this Section to the contrary, if this is an amendment and restatement of an existing Plan, any loans made prior to the date this amendment and restatement is adopted shall be subject to the terms of the Plan in effect at the time such loan was made. 7.7 MAJORITY ACTIONS Except where there has been an allocation and delegation of powers, if there shall be more than one Trustee, they shall act by a majority of their number, but may authorize one or more of them to sign papers on their behalf. 7.8 TRUSTEE'S COMPENSATION AND EXPENSES AND TAXES The Trustee shall be paid such reasonable compensation as set forth in the Trustee's fee schedule (if the Trustee has such a schedule) or as agreed upon in writing by the Employer and the Trustee. However, an individual serving as Trustee who already receives full-time compensation from the Employer shall not receive compensation from this Plan. In addition, the Trustee shall be reimbursed for any reasonable expenses, including reasonable counsel fees incurred by it as Trustee. Such compensation and expenses shall be paid from the Trust Fund unless paid or advanced by the Employer. All taxes of any kind whatsoever that may be levied or assessed under existing or future laws upon, or in respect of, the Trust Fund or the income thereof, shall be paid from the Trust Fund. 7.9 ANNUAL REPORT OF THE TRUSTEE (a) Within a reasonable period of time after the later of the Anniversary Date or receipt of the Employer's contribution for each Plan Year, the Trustee, or its agent, shall furnish to the Employer and Administrator a written statement of account with respect to the Plan Year for which such contribution was made setting forth: (1) the net income, or loss, of the Trust Fund; (2) the gains, or losses, realized by the Trust Fund upon sales or other disposition of the assets; (3) the increase, or decrease, in the value of the Trust Fund; (4) all payments and distributions made from the Trust Fund; and (5) such further information as the Trustee and/or Administrator deems appropriate. (b) The Employer, promptly upon its receipt of each such statement of account, shall acknowledge receipt thereof in writing and advise the Trustee and/or Administrator of its approval or disapproval thereof. Failure by the Employer to disapprove any such statement of account within thirty (30) days after its receipt thereof shall be deemed an approval thereof. The approval by the Employer of any statement of account shall be binding on the Employer and the Trustee as to all matters contained in the statement to the same extent as if the account of the Trustee had been settled by judgment or decree in an action for a judicial settlement of its account in a court of competent jurisdiction in which the Trustee, the Employer and all persons having or claiming an interest in the Plan were parties. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 49 DEFINED CONTRIBUTION PROTOTYPE PLAN However, nothing contained in this Section shall deprive the Trustee of its right to have its accounts judicially settled if the Trustee so desires. 7.10 AUDIT (a) If an audit of the Plan's records shall be required by the Act and the regulations thereunder for any Plan Year, the Administrator shall engage on behalf of all Participants an independent qualified public accountant for that purpose. Such accountant shall, after an audit of the books and records of the Plan in accordance with generally accepted auditing standards, within a reasonable period after the close of the Plan Year, furnish to the Administrator and the Trustee a report of the audit setting forth the accountant's opinion as to whether any statements, schedules or lists, that are required by Act Section 103 or the Secretary of Labor to be filed with the Plan's annual report, are presented fairly in conformity with generally accepted accounting principles applied consistently. (b) All auditing and accounting fees shall be an expense of and may, at the election of the Employer, be paid from the Trust Fund. (c) If some or all of the information necessary to enable the Administrator to comply with Act Section 103 is maintained by a bank, insurance company, or similar institution, regulated, supervised, and subject to periodic examination by a state or federal agency, then it shall transmit and certify the accuracy of that information to the Administrator as provided in Act Section 103(b) within one hundred twenty (120) days after the end of the Plan Year or such other date as may be prescribed under regulations of the Secretary of Labor. 7.11 RESIGNATION, REMOVAL AND SUCCESSION OF TRUSTEE (a) Unless otherwise agreed to by both the Trustee and the Employer, a Trustee may resign at any time by delivering to the Employer, at least thirty (30) days before its effective date, a written notice of resignation. (b) Unless otherwise agreed to by both the Trustee and the Employer, the Employer may remove a Trustee at any time by delivering to the Trustee, at least thirty (30) days before its effective date, a written notice of such Trustee's removal. (c) Upon the death, resignation, incapacity, or removal of any Trustee, a successor may be appointed by the Employer; and such successor, upon accepting such appointment in writing and delivering same to the Employer, shall, without further act, become vested with all the powers and responsibilities of the predecessor as if such successor had been originally named as a Trustee herein. Until such a successor is appointed, any remaining Trustee or Trustees shall have full authority to act under the terms of the Plan. (d) The Employer may designate one or more successors prior to the death, resignation, incapacity, or removal of a Trustee. In the event a successor is so designated by the Employer and accepts such designation, the successor shall, without further act, become vested with all the powers and responsibilities of the predecessor as if such successor had been originally named as Trustee herein immediately upon the death, resignation, incapacity, or removal of the predecessor. (e) Whenever any Trustee hereunder ceases to serve as such, the Trustee shall furnish to the Employer and Administrator a written statement of account with respect to the portion of the Plan Year during which the individual or entity served as Trustee. This statement shall be either (i) included as part of the annual statement of account for the Plan Year required under Section 7.9 or (ii) set forth in a special statement. Any such special statement of account should be rendered to the Employer no later than the due date of the annual statement of account for the Plan Year. The procedures set forth in Section 7.9 for the approval by the Employer of annual statements of account shall apply to any special statement of account rendered hereunder and approval by the Employer of any such special statement in the manner provided in Section 7.9 shall have the same effect upon the statement as the Employer's approval of an annual statement of account. No successor to the Trustee shall have any duty or responsibility to investigate the acts or transactions of any predecessor who has rendered all statements of account required by Section 7.9 and this subparagraph. 7.12 TRANSFER OF INTEREST Notwithstanding any other provision contained in this Plan, the Trustee at the direction of the Administrator shall transfer the interest, if any, of a Participant to another trust forming part of a pension, profit sharing, or stock bonus plan that meets the requirements of Code Section 401(a), provided that the trust to which such transfers are made permits the transfer to be made. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 50 DEFINED CONTRIBUTION PROTOTYPE PLAN 7.13 TRUSTEE INDEMNIFICATION The Employer agrees to indemnify and hold harmless the Trustee against any and all claims, losses, damages, expenses and liabilities the Trustee may incur in the exercise and performance of the Trustee's powers and duties hereunder, unless the same are determined to be due to gross negligence or willful misconduct. 7.14 EMPLOYER SECURITIES AND REAL PROPERTY The Trustee shall be empowered to acquire and hold "qualifying Employer securities" and "qualifying Employer real property," as those terms are defined in the Act. However, no more than one hundred percent (100%), in the case of a Profit Sharing Plan or 401(k) Plan, or ten percent (10%), in the case of a Money Purchase Plan, of the fair market value of all the assets in the Trust Fund may be invested in "qualifying Employer securities" and "qualifying Employer real property." Notwithstanding the preceding, for Plan Years beginning after December 31, 1998, if the Plan does not permit Participants to direct the investment of their Participants' Elective Deferral Accounts, then the Trustee shall only be permitted to acquire or hold "qualifying Employer securities" and "qualifying Employer real property" to the extent permitted under Act Section 407. ARTICLE VIII AMENDMENT, TERMINATION AND MERGERS 8.1 AMENDMENT (a) The Employer shall have the right at any time to amend this Plan subject to the limitations of this Section. However, any amendment that affects the rights, duties or responsibilities of the Trustee or Administrator may only be made with the Trustee's or Administrator's written consent. Any such amendment shall become effective as provided therein upon its execution. The Trustee shall not be required to execute any such amendment unless the amendment affects the duties of the Trustee hereunder. (b) The Employer may (1) change the choice of options in the Adoption Agreement, (2) add any addendum to the Adoption Agreement that is specifically permitted pursuant to the terms of the Plan; (3) add overriding language to the Adoption Agreement when such language is necessary to satisfy Code Sections 415 or 416 because of the required aggregation of multiple plans, and (4) add certain model amendments published by the Internal Revenue Service which specifically provide that their adoption will not cause the Plan to be treated as an individually designed plan. An Employer that amends the Plan for any other reason, including a waiver of the minimum funding requirement under Code Section 412(d), will no longer participate in this Prototype Plan and this Plan will be considered to be an individually designed plan. Notwithstanding the preceding, the attachment to the Adoption Agreement of any addendum specifically authorized by the Plan or a list of any "Section 411(d)(6) protected benefits" which must be preserved shall not be considered an amendment to the Plan. (c) The Employer expressly delegates authority to the sponsor of this Prototype Plan, the right to amend each Employer's Plan by submitting a copy of the amendment to each Employer who has adopted this Prototype Plan, after first having received a ruling or favorable determination from the Internal Revenue Service that the Prototype Plan as amended qualifies under Code Section 401(a) and the Act (unless a ruling or determination is not required by the IRS). For purposes of this Section, the mass submitter shall be recognized as the agent of the sponsor. If the sponsor does not adopt any amendment made by the mass submitter, it will no longer be identical to, or a minor modifier of, the mass submitter plan. (d) No amendment to the Plan shall be effective if it authorizes or permits any part of the Trust Fund (other than such part as is required to pay taxes and administration expenses) to be used for or diverted to any purpose other than for the exclusive benefit of the Participants or their Beneficiaries or estates; or causes any reduction in the amount credited to the account of any Participant; or causes or permits any portion of the Trust Fund to revert to or become property of the Employer. (e) Except as permitted by Regulations (including Regulation 1.411(d)-4) or other IRS guidance, no Plan amendment or transaction having the effect of a Plan amendment (such as a merger, plan transfer or similar transaction) shall be effective if it eliminates or reduces any "Section 411(d)(6) protected benefit" or adds or modifies conditions relating to "Section 411(d)(6) protected benefits" which results in a further restriction on such benefits unless such "Section 411(d)(6) protected benefits" are preserved with respect to benefits accrued as of the later of the adoption date or effective date of the amendment. "Section 411(d)(6) protected benefits" are benefits described in Code Section 411(d)(6)(A), early retirement benefits and retirement-type subsidies, and optional forms of benefit. A Plan amendment that eliminates or restricts the ability of a Participant to receive payment of the Participant's interest in the Plan under a particular optional form of benefit will be permissible if the amendment satisfies the conditions in (1) and (2) below: (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 51 DEFINED CONTRIBUTION PROTOTYPE PLAN (1) The amendment provides a single-sum distribution form that is otherwise identical to the optional form of benefit eliminated or restricted. For purposes of this condition (1), a single-sum distribution form is otherwise identical only if it is identical in all respects to the eliminated or restricted optional form of benefit (or would be identical except that it provides greater rights to the Participant) except with respect to the timing of payments after commencement. (2) The amendment is not effective unless the amendment provides that the amendment shall not apply to any distribution with an Annuity Starting Date earlier than the earlier of: (i) the ninetieth (90th) day after the date the Participant receiving the distribution has been furnished a summary that reflects the amendment and that satisfies the Act requirements at 29 CFR 2520.104b-3 (relating to a summary of material modifications) or (ii) the first day of the second Plan Year following the Plan Year in which the amendment is adopted. 8.2 TERMINATION (a) The Employer shall have the right at any time to terminate the Plan by delivering to the Trustee and Administrator written notice of such termination. Upon any full or partial termination, all amounts credited to the affected Participants' Combined Accounts shall become 100% Vested and shall not thereafter be subject to forfeiture, and all unallocated amounts, including Forfeitures, shall be allocated to the accounts of all Participants in accordance with the provisions hereof. (b) Upon the full termination of the Plan, the Employer shall direct the distribution of the assets to Participants in a manner that is consistent with and satisfies the provisions of Section 6.5. Distributions to a Participant shall be made in cash (or in property if permitted in the Adoption Agreement) or through the purchase of irrevocable nontransferable deferred commitments from the Insurer. Except as permitted by Regulations, the termination of the Plan shall not result in the reduction of "Section 411(d)(6) protected benefits" as described in Section 8.1(e). 8.3 MERGER, CONSOLIDATION OR TRANSFER OF ASSETS This Plan may be merged or consolidated with, or its assets and/or liabilities may be transferred to any other plan only if the benefits which would be received by a Participant of this Plan, in the event of a termination of the plan immediately after such transfer, merger or consolidation, are at least equal to the benefits the Participant would have received if the Plan had terminated immediately before the transfer, merger or consolidation and such transfer, merger or consolidation does not otherwise result in the elimination or reduction of any "Section 411(d)(6) protected benefits" as described in Section 8.1(e). ARTICLE IX TOP HEAVY PROVISIONS 9.1 TOP HEAVY PLAN REQUIREMENTS Notwithstanding anything in this Plan to the contrary, for any Top Heavy Plan Year, the Plan shall provide the special vesting requirements of Code Section 416(b) pursuant to Section 6.4 of the Plan and the special minimum allocation requirements of Code Section 416(c) pursuant to Section 4.3(f) of the Plan. Except as otherwise provided in the Plan, the minimum allocation shall be an Employer Non-Elective Contribution and, if no vesting schedule has been selected in the Adoption Agreement, shall be subject to the 6 Year Graded vesting schedule described in the Adoption Agreement. 9.2 DETERMINATION OF TOP HEAVY STATUS (a) This Plan shall be a Top Heavy Plan for any plan year beginning after December 31, 1983, if any of the following conditions exists: (1) if the "top heavy ratio" for this Plan exceeds sixty percent (60%) and this Plan is not part of any "required aggregation group" or "permissive aggregation group"; (2) if this Plan is a part of a "required aggregation group" but not part of a "permissive aggregation group" and the "top heavy ratio" for the group of plans exceeds sixty percent (60%); or (3) if this Plan is a part of a "required aggregation group" and part of a "permissive aggregation group" and the "top heavy ratio" for the "permissive aggregation group" exceeds sixty percent (60%). (b) "Top heavy ratio" means, with respect to a "determination date": (1) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan (as defined in Code Section 408(k))) and the Employer has not maintained any defined benefit plan which during the 5-year period ending on the "determination date" has or has had accrued benefits, the top heavy ratio for this plan alone or for the "required aggregation group" or "permissive (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 52 DEFINED CONTRIBUTION PROTOTYPE PLAN aggregation group" as appropriate is a fraction, the numerator of which is the sum of the account balances of all Key Employees as of the "determination date" (including any part of any account balance distributed in the 5-year period ending on the "determination date"), and the denominator of which is the sum of all account balances (including any part of any account balance distributed in the 5-year period ending on the "determination date"), both computed in accordance with Code Section 416 and the Regulations thereunder. Both the numerator and denominator of the top heavy ratio are increased to reflect any contribution not actually made as of the "determination date," but which is required to be taken into account on that date under Code Section 416 and the Regulations thereunder. (2) If the Employer maintains one or more defined contribution plans (including any simplified employee pension plan) and the Employer maintains or has maintained one or more defined benefit plans which during the 5-year period ending on the "determination date" has or has had any accrued benefits, the top heavy ratio for any "required aggregation group" or "permissive aggregation group" as appropriate is a fraction, the numerator of which is the sum of account balances under the aggregated defined contribution plan or plans for all Key Employees, determined in accordance with (1) above, and the present value of accrued benefits under the aggregated defined benefit plan or plans for all Key Employees as of the "determination date," and the denominator of which is the sum of the account balances under the aggregated defined contribution plan or plans for all participants, determined in accordance with (1) above, and the "present value" of accrued benefits under the defined benefit plan or plans for all participants as of the "determination date," all determined in accordance with Code Section 416 and the Regulations thereunder. The accrued benefits under a defined benefit plan in both the numerator and denominator of the top heavy ratio are increased for any distribution of an accrued benefit made in the five-year period ending on the determination date. (3) For purposes of (1) and (2) above, the value of account balances and the present value of accrued benefits will be determined as of the most recent "valuation date" that falls within or ends with the 12-month period ending on the "determination date," except as provided in Code Section 416 and the Regulations thereunder for the first and second plan years of a defined benefit plan. The account balances and accrued benefits of a participant (i) who is not a Key Employee but who was a Key Employee in a prior year, or (ii) who has not been credited with at least one Hour of Service with any Employer maintaining the plan at any time during the 5-year period ending on the "determination date" will be disregarded. The calculation of the top heavy ratio, and the extent to which distributions, rollovers, and transfers are taken into account will be made in accordance with Code Section 416 and the Regulations thereunder. Deductible Employee contributions will not be taken into account for purposes of computing the top heavy ratio. When aggregating plans the value of account balances and accrued benefits will be calculated with reference to the "determination dates" that fall within the same calendar year. The accrued benefit of a participant other than a Key Employee shall be determined under (i) the method, if any, that uniformly applies for accrual purposes under all defined benefit plans maintained by the employer, or (ii) if there is no such method, as if such benefit accrued not more rapidly than the slowest accrual rate permitted under the fractional rule of Code Section 411(b)(1)(C). (c) "Determination date" means, for any Plan Year subsequent to the first Plan Year, the last day of the preceding Plan Year. For the first Plan Year of the Plan, "determination date" means the last day of that Plan Year. (d) "Permissive aggregation group" means the "required aggregation group" of plans plus any other plan or plans of the Employer which, when considered as a group with the required aggregation group, would continue to satisfy the requirements of Code Sections 401(a)(4) and 410. (e) "Present value" means the present value based only on the interest and mortality rates specified in the Adoption Agreement. (f) "Required aggregation group" means: (1) each qualified plan of the Employer in which at least one Key Employee participates or participated at any time during the determination period (regardless of whether the plan has terminated), and (2) any other qualified plan of the Employer which enables a plan described in (l) to meet the requirements of Code Sections 401(a)(4) or 410. (g) "Valuation date" means the date elected by the Employer in the Adoption Agreement as of which account balances or accrued benefits are valued for purposes of calculating the "top heavy ratio." (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 53 DEFINED CONTRIBUTION PROTOTYPE PLAN ARTICLE X MISCELLANEOUS 10.1 EMPLOYER ADOPTIONS (a) Any organization may become the Employer hereunder by executing the Adoption Agreement in a form satisfactory to the Trustee, and it shall provide such additional information as the Trustee may require. The consent of the Trustee to act as such shall be signified by its execution of the Adoption Agreement or a separate agreement (including, if elected in the Adoption Agreement, a separate trust agreement). (b) Except as otherwise provided in this Plan, the affiliation of the Employer and the participation of its Participants shall be separate and apart from that of any other employer and its participants hereunder. 10.2 PARTICIPANT'S RIGHTS This Plan shall not be deemed to constitute a contract between the Employer and any Participant or to be a consideration or an inducement for the employment of any Participant or Employee. Nothing contained in this Plan shall be deemed to give any Participant or Employee the right to be retained in the service of the Employer or to interfere with the right of the Employer to discharge any Participant or Employee at any time regardless of the effect which such discharge shall have upon the Employee as a Participant of this Plan. 10.3 ALIENATION (a) Subject to the exceptions provided below and as otherwise permitted by the Code and the Act, no benefit which shall be payable to any person (including a Participant or the Participant's Beneficiary) shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, or charge the same shall be void; and no such benefit shall in any manner be liable for, or subject to, the debts, contracts, liabilities, engagements, or torts of any such person, nor shall it be subject to attachment or legal process for or against such person, and the same shall not be recognized except to such extent as may be required by law. (b) Subsection (a) shall not apply to the extent a Participant or Beneficiary is indebted to the Plan by reason of a loan made pursuant to Section 7.6. At the time a distribution is to be made to or for a Participant's or Beneficiary's benefit, such portion of the amount to be distributed as shall equal such indebtedness shall be paid to the Plan, to apply against or discharge such indebtedness. Prior to making a payment, however, the Participant or Beneficiary must be given notice by the Administrator that such indebtedness is to be so paid in whole or part from the Participant's interest in the Plan. If the Participant or Beneficiary does not agree that the indebtedness is a valid claim against the Participant's interest in the Plan, the Participant or Beneficiary shall be entitled to a review of the validity of the claim in accordance with procedures provided in Sections 2.10 and 2.11. (c) Subsection (a) shall not apply to a "qualified domestic relations order" defined in Code Section 414(p), and those other domestic relations orders permitted to be so treated by the Administrator under the provisions of the Retirement Equity Act of 1984. The Administrator shall establish a written procedure to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders. Further, to the extent provided under a "qualified domestic relations order," a former spouse of a Participant shall be treated as the spouse or surviving spouse for all purposes under the Plan. (d) Notwithstanding any provision of this Section to the contrary, an offset to a Participant's accrued benefit against an amount that the Participant is ordered or required to pay the Plan with respect to a judgment, order, or decree issued, or a settlement entered into, on or after August 5, 1997, shall be permitted in accordance with Code Sections 401(a)(13)(C) and (D). 10.4 CONSTRUCTION OF PLAN This Plan and Trust shall be construed and enforced according to the Code, the Act and the laws of the state or commonwealth in which the Employer's (or if there is a corporate Trustee, the Trustee's) principal office is located (unless otherwise designated in the Adoption Agreement), other than its laws respecting choice of law, to the extent not pre-empted by the Act. 10.5 GENDER AND NUMBER Wherever any words are used herein in the masculine, feminine or neuter gender, they shall be construed as though they were also used in another gender in all cases where they would so apply, and whenever any words are used herein in the singular or plural form, they shall be construed as though they were also used in the other form in all cases where they would so apply. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 54 DEFINED CONTRIBUTION PROTOTYPE PLAN 10.6 LEGAL ACTION In the event any claim, suit, or proceeding is brought regarding the Trust and/or Plan established hereunder to which the Trustee, the Employer or the Administrator may be a party, and such claim, suit, or proceeding is resolved in favor of the Trustee, the Employer or the Administrator, they shall be entitled to be reimbursed from the Trust Fund for any and all costs, attorney's fees, and other expenses pertaining thereto incurred by them for which they shall have become liable. 10.7 PROHIBITION AGAINST DIVERSION OF FUNDS (a) Except as provided below and otherwise specifically permitted by law, it shall be impossible by operation of the Plan or of the Trust, by termination of either, by power of revocation or amendment, by the happening of any contingency, by collateral arrangement or by any other means, for any part of the corpus or income of any Trust Fund maintained pursuant to the Plan or any funds contributed thereto to be used for, or diverted to, purposes other than the exclusive benefit of Participants, Former Participants, or their Beneficiaries. (b) In the event the Employer shall make a contribution under a mistake of fact pursuant to Act Section 403(c)(2)(A), the Employer may demand repayment of such contribution at any time within one (1) year following the time of payment and the Trustee shall return such amount to the Employer within the one (1) year period. Earnings of the Plan attributable to the contributions may not be returned to the Employer but any losses attributable thereto must reduce the amount so returned. (c) Except as specifically stated in the Plan, any contribution made by the Employer to the Plan (if the Employer is not tax-exempt) is conditioned upon the deductibility of the contribution by the Employer under the Code and, to the extent any such deduction is disallowed, the Employer may, within one (1) year following a final determination of the disallowance, whether by agreement with the Internal Revenue Service or by final decision of a court of competent jurisdiction, demand repayment of such disallowed contribution and the Trustee shall return such contribution within one (1) year following the disallowance. Earnings of the Plan attributable to the contribution may not be returned to the Employer, but any losses attributable thereto must reduce the amount so returned. 10.8 EMPLOYER'S AND TRUSTEE'S PROTECTIVE CLAUSE The Employer, Administrator and Trustee, and their successors, shall not be responsible for the validity of any Contract issued hereunder or for the failure on the part of the Insurer to make payments provided by any such Contract, or for the action of any person which may delay payment or render a Contract null and void or unenforceable in whole or in part. 10.9 INSURER'S PROTECTIVE CLAUSE Except as otherwise agreed upon in writing between the Employer and the Insurer, an Insurer which issues any Contracts hereunder shall not have any responsibility for the validity of this Plan or for the tax or legal aspects of this Plan. The Insurer shall be protected and held harmless in acting in accordance with any written direction of the Administrator or Trustee, and shall have no duty to see to the application of any funds paid to the Trustee, nor be required to question any actions directed by the Administrator or Trustee. Regardless of any provision of this Plan, the Insurer shall not be required to take or permit any action or allow any benefit or privilege contrary to the terms of any Contract which it issues hereunder, or the rules of the Insurer. 10.10 RECEIPT AND RELEASE FOR PAYMENTS Any payment to any Participant, the Participant's legal representative, Beneficiary, or to any guardian or committee appointed for such Participant or Beneficiary in accordance with the provisions of this Plan, shall, to the extent thereof, be in full satisfaction of all claims hereunder against the Trustee and the Employer. 10.11 ACTION BY THE EMPLOYER Whenever the Employer under the terms of the Plan is permitted or required to do or perform any act or matter or thing, it shall be done and performed by a person duly authorized by its legally constituted authority. 10.12 NAMED FIDUCIARIES AND ALLOCATION OF RESPONSIBILITY The "named Fiduciaries" of this Plan are (1) the Employer, (2) the Administrator, (3) the Trustee (if the Trustee has discretionary authority as elected in the Adoption Agreement or as otherwise agreed upon by the Employer and the Trustee), and (4) any Investment Manager appointed hereunder. The named Fiduciaries shall have only those specific powers, duties, responsibilities, and obligations as are specifically given them under the Plan including, but not limited to, any agreement allocating or delegating their responsibilities, the terms of which are incorporated herein by reference. In general, the Employer shall have the sole responsibility for making the contributions provided for under the Plan; and shall have the sole authority to appoint and remove the Trustee and the Administrator; to formulate the Plan's "funding policy and method"; and to amend the elective provisions of the Adoption Agreement or terminate, in whole or in part, the Plan. The Administrator shall have the sole (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 55 DEFINED CONTRIBUTION PROTOTYPE PLAN responsibility for the administration of the Plan, which responsibility is specifically described in the Plan. If the Trustee has discretionary authority, it shall have the sole responsibility of management of the assets held under the Trust, except those assets, the management of which has been assigned to an Investment Manager or Administrator, who shall be solely responsible for the management of the assets assigned to it, all as specifically provided in the Plan. Each named Fiduciary warrants that any directions given, information furnished, or action taken by it shall be in accordance with the provisions of the Plan, authorizing or providing for such direction, information or action. Furthermore, each named Fiduciary may rely upon any such direction, information or action of another named Fiduciary as being proper under the Plan, and is not required under the Plan to inquire into the propriety of any such direction, information or action. It is intended under the Plan that each named Fiduciary shall be responsible for the proper exercise of its own powers, duties, responsibilities and obligations under the Plan. No named Fiduciary shall guarantee the Trust Fund in any manner against investment loss or depreciation in asset value. Any person or group may serve in more than one Fiduciary capacity. 10.13 HEADINGS The headings and subheadings of this Plan have been inserted for convenience of reference and are to be ignored in any construction of the provisions hereof. 10.14 APPROVAL BY INTERNAL REVENUE SERVICE Notwithstanding anything herein to the contrary, if, pursuant to a timely application filed by or on behalf of the Plan, the Commissioner of the Internal Revenue Service or the Commissioner's delegate should determine that the Plan does not initially qualify as a tax-exempt plan under Code Sections 401 and 501, and such determination is not contested, or if contested, is finally upheld, then if the Plan is a new plan, it shall be void ab initio and all amounts contributed to the Plan, by the Employer, less expenses paid, shall be returned within one (1) year and the Plan shall terminate, and the Trustee shall be discharged from all further obligations. If the disqualification relates to a Plan amendment, then the Plan shall operate as if it had not been amended. If the Employer's Plan fails to attain or retain qualification, such Plan will no longer participate in this prototype plan and will be considered an individually designed plan. 10.15 UNIFORMITY All provisions of this Plan shall be interpreted and applied in a uniform, nondiscriminatory manner. 10.16 PAYMENT OF BENEFITS Except as otherwise provided in the Plan, benefits under this Plan shall be paid, subject to Sections 6.10, 6.11 and 12.9, only upon death, Total and Permanent Disability, normal or early retirement, termination of employment, or termination of the Plan. ARTICLE XI PARTICIPATING EMPLOYERS 11.1 ELECTION TO BECOME A PARTICIPATING EMPLOYER Notwithstanding anything herein to the contrary, with the consent of the Employer and Trustee, any Affiliated Employer may adopt the Employer's Plan and all of the provisions hereof, and participate herein and be known as a Participating Employer, by a properly executed document evidencing said intent and will of such Participating Employer. Regardless of the preceding, an entity that ceases to be an Affiliated Employer may continue to be a Participating Employer through the end of the transition period for certain dispositions set forth in Code Section 410(b)(6)(C). In the event a Participating Employer is not an Affiliated Employer and the transition period in the preceding sentence, if applicable, has expired, then this Plan will be considered an individually designed plan. 11.2 REQUIREMENTS OF PARTICIPATING EMPLOYERS (a) Each Participating Employer shall be required to select the same Adoption Agreement provisions as those selected by the Employer other than the Plan Year, the Fiscal Year, and such other items that must, by necessity, vary among employers. (b) The Trustee may, but shall not be required to, commingle, hold and invest as one Trust Fund all contributions made by Participating Employers, as well as all increments thereof. However, the assets of the Plan shall, on an ongoing basis, be available to pay benefits to all Participants and Beneficiaries under the Plan without regard to the Employer or Participating Employer who contributed such assets. (c) Unless the Employer otherwise directs, any expenses of the Plan which are to be paid by the Employer or borne by the Trust Fund shall be paid by each Participating Employer in the same proportion that the total amount standing to the credit of all Participants employed by such Employer bears to the total standing to the credit of all Participants. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 56 DEFINED CONTRIBUTION PROTOTYPE PLAN 11.3 DESIGNATION OF AGENT Each Participating Employer shall be deemed to be a part of this Plan; provided, however, that with respect to all of its relations with the Trustee and Administrator for purposes of this Plan, each Participating Employer shall be deemed to have designated irrevocably the Employer as its agent. Unless the context of the Plan clearly indicates otherwise, the word "Employer" shall be deemed to include each Participating Employer as related to its adoption of the Plan. 11.4 EMPLOYEE TRANSFERS In the event an Employee is transferred between Participating Employers, accumulated service and eligibility shall be carried with the Employee involved. No such transfer shall effect a termination of employment hereunder, and the Participating Employer to which the Employee is transferred shall thereupon become obligated hereunder with respect to such Employee in the same manner as was the Participating Employer from whom the Employee was transferred. 11.5 PARTICIPATING EMPLOYER'S CONTRIBUTION AND FORFEITURES Any contribution or Forfeiture subject to allocation during each Plan Year shall be allocated among all Participants of all Participating Employers in accordance with the provisions of this Plan. However, if a Participating Employer is not an Affiliated Employer (due to the transition rule for certain dispositions set forth in Code Section 410(b)(6)(C)) then any contributions made by such Participating Employer will only be allocated among the Participants eligible to share of the Participating Employer. On the basis of the information furnished by the Administrator, the Trustee may keep separate books and records concerning the affairs of each Participating Employer hereunder and as to the accounts and credits of the Employees of each Participating Employer. The Trustee may, but need not, register Contracts so as to evidence that a particular Participating Employer is the interested Employer hereunder, but in the event of an Employee transfer from one Participating Employer to another, the employing Participating Employer shall immediately notify the Trustee thereof. 11.6 AMENDMENT Amendment of this Plan by the Employer at any time when there shall be a Participating Employer that is an Affiliated Employer hereunder shall only be by the written action of each and every Participating Employer and with the consent of the Trustee where such consent is necessary in accordance with the terms of this Plan. 11.7 DISCONTINUANCE OF PARTICIPATION Except in the case of a standardized Plan, any Participating Employer that is an Affiliated Employer shall be permitted to discontinue or revoke its participation in the Plan at any time. At the time of any such discontinuance or revocation, satisfactory evidence thereof and of any applicable conditions imposed shall be delivered to the Trustee. The Trustee shall thereafter transfer, deliver and assign Contracts and other Trust Fund assets allocable to the Participants of such Participating Employer to such new trustee or custodian as shall have been designated by such Participating Employer, in the event that it has established a separate qualified retirement plan for its employees provided, however, that no such transfer shall be made if the result is the elimination or reduction of any "Section 411(d)(6) protected benefits" as described in Section 8.1(e). If no successor is designated, the Trustee shall retain such assets for the Employees of said Participating Employer pursuant to the provisions of Article VII hereof. In no such event shall any part of the corpus or income of the Trust Fund as it relates to such Participating Employer be used for or diverted to purposes other than for the exclusive benefit of the employees of such Participating Employer. 11.8 ADMINISTRATOR'S AUTHORITY The Administrator shall have authority to make any and all necessary rules or regulations, binding upon all Participating Employers and all Participants, to effectuate the purpose of this Article. 11.9 PARTICIPATING EMPLOYER CONTRIBUTION FOR AFFILIATE If any Participating Employer is prevented in whole or in part from making a contribution which it would otherwise have made under the Plan by reason of having no current or accumulated earnings or profits, or because such earnings or profits are less than the contribution which it would otherwise have made, then, pursuant to Code Section 404(a)(3)(B), so much of the contribution which such Participating Employer was so prevented from making may be made, for the benefit of the participating employees of such Participating Employer, by other Participating Employers who are members of the same affiliated group within the meaning of Code Section 1504 to the extent of their current or accumulated earnings or profits, except that such contribution by each such other Participating Employer shall be limited to the proportion of its total current and accumulated earnings or profits remaining after adjustment for its contribution to the Plan made without regard to this paragraph which the total prevented contribution bears to the total current and accumulated earnings or profits of all the Participating Employers remaining after adjustment for all contributions made to the Plan without regard to this paragraph. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 57 DEFINED CONTRIBUTION PROTOTYPE PLAN A Participating Employer on behalf of whose employees a contribution is made under this paragraph shall not be required to reimburse the contributing Participating Employers. ARTICLE XII CASH OR DEFERRED PROVISIONS Except as specifically provided elsewhere in this Plan, the provisions of this Article shall apply with respect to any 401(k) Profit Sharing Plan regardless of any provisions in the Plan to the contrary. 12.1 FORMULA FOR DETERMINING EMPLOYER'S CONTRIBUTION (a) For each Plan Year, the Employer will (or may with respect to any discretionary contributions) contribute to the Plan: (1) The amount of the total salary reduction elections of all Participants made pursuant to Section 12.2(a), which amount shall be deemed Elective Deferrals, plus (2) If elected in the Adoption Agreement, a matching contribution equal to the percentage, if any, specified in the Adoption Agreement of the Elective Deferrals of each Participant eligible to share in the allocations of the matching contribution, which amount shall be deemed an Employer's matching contribution or Qualified Matching Contribution as elected in the Adoption Agreement, plus (3) If elected in the Adoption Agreement, a Prevailing Wage Contribution or a discretionary amount determined each year by the Employer, which amount if any, shall be deemed an Employer's Non-Elective Contribution, plus (4) If elected in the Adoption Agreement, a Qualified Non-Elective Contribution. (b) Notwithstanding the foregoing, if the Employer is not a tax-exempt entity, then the Employer's contributions for any Fiscal Year may generally not exceed the maximum amount allowable as a deduction to the Employer under the provisions of Code Section 404. However, to the extent necessary to provide the top heavy minimum allocations, the Employer shall make a contribution even if it exceeds current or accumulated Net Profit or the amount that is deductible under Code Section 404. All contributions by the Employer shall be made in cash or in such property as is acceptable to the Trustee. 12.2 PARTICIPANT'S SALARY REDUCTION ELECTION (a) Each Participant may elect to defer a portion of Compensation which would have been received in the Plan Year, but for the salary reduction election, subject to the limitations of this Section and the Adoption Agreement. A salary reduction election (or modification of an earlier election) may not be made with respect to Compensation which is currently available on or before the date the Participant executed such election, or if later, the later of the date the Employer adopts this cash or deferred arrangement or the date such arrangement first became effective. Any elections made pursuant to this Section shall become effective as soon as is administratively feasible. If the automatic election option is elected in the Adoption Agreement, then in the event a Participant fails to make a deferral election and does not affirmatively elect to receive cash, such Participant shall be deemed to have made a deferral election equal to the percentage of Compensation set forth in the Adoption Agreement. The automatic election may, in accordance with procedures established by the Administrator, be applied to all Participants or to Eligible Employees who become Participants after a certain date. For purposes of this Section, the annual dollar limitation of Code Section 401(a)(17) ($150,000 as adjusted) shall not apply. Additionally, if elected in the Adoption Agreement, each Participant may elect to defer a different percentage or amount of any cash bonus to be paid by the Employer during the Plan Year. A deferral election may not be made with respect to cash bonuses which are currently available on or before the date the Participant executes such election. The amount by which Compensation and/or cash bonuses are reduced shall be that Participant's Elective Deferrals and shall be treated as an Employer contribution and allocated to that Participant's Elective Deferral Account. Once made, a Participant's election to reduce Compensation shall remain in effect until modified or terminated. Modifications may be made as specified in the Adoption Agreement, and terminations may be made at any time. Any modification or termination of an election will become effective as soon as is administratively feasible. (b) The balance in each Participant's Elective Deferral Account, Qualified Matching Contribution Account and Qualified Non-Elective Contribution Account shall be fully Vested at all times and, except as otherwise provided herein, shall not be subject to Forfeiture for any reason. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 58 DEFINED CONTRIBUTION PROTOTYPE PLAN (c) Amounts held in a Participant's Elective Deferral Account, Qualified Matching Contribution Account and Qualified Non-Elective Account may only be distributable as provided in (4), (5) or (6) below or as provided under the other provisions of this Plan, but in no event prior to the earlier of the following events or any other events permitted by the Code or Regulations: (1) the Participant's separation from service, Total and Permanent Disability, or death; (2) the Participant's attainment of age 59 1/2; (3) the proven financial hardship of the Participant, subject to the limitations of Section 12.9; (4) the termination of the Plan without the existence at the time of Plan termination of another defined contribution plan or the establishment of a successor defined contribution plan by the Employer or an Affiliated Employer within the period ending twelve months after distribution of all assets from the Plan maintained by the Employer. For this purpose, a defined contribution does not include an employee stock ownership plan (as defined in Code Section 4975(e)(7) or 409), a simplified employee pension plan (as defined in Code Section 408(k)), or a SIMPLE individual retirement account plan (as defined in Code Section 408(p)); (5) the date of the sale by the Employer to an entity that is not an Affiliated Employer of substantially all of the assets (within the meaning of Code Section 409(d)(2)) with respect to a Participant who continues employment with the corporation acquiring such assets; or (6) the date of the sale by the Employer or an Affiliated Employer of its interest in a subsidiary (within the meaning of Code Section 409(d)(3)) to an entity that is not an Affiliated Employer with respect to a Participant who continues employment with such subsidiary. Distributions that are made because of (4), (5), or (6) above must be made in a lump-sum. (d) A Participant's "elective deferrals" made under this Plan and all other plans, contracts or arrangements of the Employer maintaining this Plan during any calendar year shall not exceed the dollar limitation imposed by Code Section 402(g), as in effect at the beginning of such calendar year. This dollar limitation shall be adjusted annually pursuant to the method provided in Code Section 415(d) in accordance with Regulations. For this purpose, "elective deferrals" means, with respect to a calendar year, the sum of all employer contributions made on behalf of such Participant pursuant to an election to defer under any qualified cash or deferred arrangement as described in Code Section 401(k), any salary reduction simplified employee pension (as defined in Code Section 408(k)(6)), any SIMPLE IRA plan described in Code Section 408(p), any eligible deferred compensation plan under Code Section 457, any plans described under Code Section 501(c)(18), and any Employer contributions made on the behalf of a Participant for the purchase of an annuity contract under Code Section 403(b) pursuant to a salary reduction agreement. "Elective deferrals" shall not include any deferrals properly distributed as excess "Annual Additions" pursuant to Section 4.5. (e) If a Participant has Excess Deferrals for a taxable year, the Participant may, not later than March 1st following the close of such taxable year, notify the Administrator in writing of such excess and request that the Participant's Elective Deferrals under this Plan be reduced by an amount specified by the Participant. In such event, the Administrator shall direct the distribution of such excess amount (and any "Income" allocable to such excess amount) to the Participant not later than the first April 15th following the close of the Participant's taxable year. Any distribution of less than the entire amount of Excess Deferrals and "Income" shall be treated as a pro rata distribution of Excess Deferrals and "Income." The amount distributed shall not exceed the Participant's Elective Deferrals under the Plan for the taxable year. Any distribution on or before the last day of the Participant's taxable year must satisfy each of the following conditions: (1) the Participant shall designate the distribution as Excess Deferrals; (2) the distribution must be made after the date on which the Plan received the Excess Deferrals; and (3) the Plan must designate the distribution as a distribution of Excess Deferrals. Regardless of the preceding, if a Participant has Excess Deferrals solely from elective deferrals made under this Plan or any other plan maintained by the Employer, a Participant will be deemed to have notified the Administrator of such excess amount and the Administrator shall direct the distribution of such Excess Deferrals in a manner consistent with the provisions of this subsection. Any distribution made pursuant to this subsection shall be made first from unmatched Elective Deferrals and, thereafter, from Elective Deferrals which are matched. Matching contributions which relate to Excess (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 59 DEFINED CONTRIBUTION PROTOTYPE PLAN Deferrals that are distributed pursuant to this Section 12.2(e) shall be treated as a Forfeiture to the extent required pursuant to Code Section 401(a)(4) and the Regulations thereunder. For the purpose of this subsection, "Income" means the amount of income or loss allocable to a Participant's Excess Deferrals, which amount shall be allocated in the same manner as income or losses are allocated pursuant to Section 4.3(c). However, "Income" for the period between the end of the taxable year of the Participant and the date of the distribution (the "gap period") is not required to be distributed. (f) Notwithstanding the preceding, a Participant's Excess Deferrals shall be reduced, but not below zero, by any distribution and/or recharacterization of Excess Deferrals pursuant to Section 12.5(a) for the Plan Year beginning with or within the taxable year of the Participant. (g) In the event a Participant has received a hardship distribution pursuant to Regulation 1.401(k)-1(d)(2)(iii)(B) from any other plan maintained by the Employer or from the Participant's Elective Deferral Account pursuant to Section 12.9, then such Participant shall not be permitted to elect to have Elective Deferrals contributed to the Plan for a period of twelve (12) months following the receipt of the distribution. Furthermore, the dollar limitation under Code Section 402(g) shall be reduced, with respect to the Participant's taxable year following the taxable year in which the hardship distribution was made, by the amount of such Participant's Elective Deferrals, if any, made pursuant to this Plan (and any other plan maintained by the Employer) for the taxable year of the hardship distribution. (h) At Normal Retirement Date, or such other date when the Participant shall be entitled to receive benefits, the fair market value of the Participant's Elective Deferral Account shall be used to provide benefits to the Participant or the Participant's Beneficiary. (i) If during a Plan Year, it is projected that the aggregate amount of Elective Deferrals to be allocated to all Highly Compensated Participants under this Plan would cause the Plan to fail the tests set forth in Section 12.4, then the Administrator may automatically reduce the deferral amount of affected Highly Compensated Participants, beginning with the Highly Compensated Participant who has the highest actual deferral ratio until it is anticipated the Plan will pass the tests or until the actual deferral ratio equals the actual deferral ratio of the Highly Compensated Participant having the next highest actual deferral ratio. This process may continue until it is anticipated that the Plan will satisfy one of the tests set forth in Section 12.4. Alternatively, the Employer may specify a maximum percentage of Compensation that may be deferred by Highly Compensated Participants. (j) The Employer and the Administrator shall establish procedures necessary to implement the salary reduction elections provided for herein. Such procedures may contain limits on salary deferral elections such as limiting elections to whole percentages of Compensation or to equal dollar amounts per pay period that an election is in effect. 12.3 ALLOCATION OF CONTRIBUTION, FORFEITURES AND EARNINGS (a) The Administrator shall establish and maintain an account in the name of each Participant to which the Administrator shall credit as of each Anniversary Date, or other Valuation Date, all amounts allocated to each such Participant as set forth herein. (b) The Employer shall provide the Administrator with all information required by the Administrator to make a proper allocation of Employer contributions for each Plan Year. Within a reasonable period of time after the date of receipt by the Administrator of such information, the Administrator shall allocate contributions as follows: (1) With respect to Elective Deferrals made pursuant to Section 12.1(a)(1), to each Participant's Elective Deferral Account in an amount equal to each such Participant's Elective Deferrals for the year. (2) With respect to the Employer's matching contribution made pursuant to Section 12.1(a)(2), to each Participant's Account, or Participant's Qualified Matching Contribution Account, as elected in the Adoption Agreement, in accordance with Section 12.1(a)(2). Except, however, in order to be entitled to receive any Employer matching contribution, a Participant must satisfy the conditions for sharing in the Employer matching contribution as set forth in the Adoption Agreement. Furthermore, regardless of any election in the Adoption Agreement to the contrary, for the Plan Year in which this Plan terminates, a Participant shall only be eligible to share in the allocation of the Employer's contributions for the Plan Year if the Participant is employed at the end of the Plan Year and has completed a Year of Service (or Period of Service if the Elapsed Time Method is elected). (3) With respect to the Employer's Non-Elective Contribution made pursuant to Section 12.1(a)(3), to each Participant's Account in accordance with the provisions of Section 4.3(b)(2) or (3) whichever is applicable. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 60 DEFINED CONTRIBUTION PROTOTYPE PLAN (4) With respect to the Employer's Qualified Non-Elective Contribution made pursuant to Section 12.1(a)(4), to each Participant's (excluding Highly Compensated Employees, if elected in the Adoption Agreement) Qualified Non-Elective Contribution Account in accordance with the Adoption Agreement. (c) Notwithstanding anything in the Plan to the contrary, in determining whether a Non-Key Employee has received the required minimum allocation pursuant to Section 4.3(f) such Non-Key Employee's Elective Deferrals and matching contributions used to satisfy the ADP tests in Section 12.4 or the ACP tests in Section 12.6 shall not be taken into account. (d) Notwithstanding anything herein to the contrary, Participants who terminated employment during the Plan Year shall share in the salary deferral contributions made by the Employer for the year of termination without regard to the Hours of Service credited. (e) Notwithstanding anything herein to the contrary (other than Sections 4.3(f) and 12.3(f)), Participants shall only share in the allocations of the Employer's matching contribution made pursuant to Section 12.1(a)(2), the Employer's Non-Elective Contributions made pursuant to Section 12.1(a)(3), the Employer's Qualified Non-Elective Contribution made pursuant to Section 12.1(a)(4), and Forfeitures as provided in the Adoption Agreement. If no election is made in the Adoption Agreement, then a Participant shall be eligible to share in the allocation of the Employer's contribution for the year if the Participant completes more than 500 Hours of Service (or three (3) Months of Service if the Elapsed Time method is chosen in the Adoption Agreement) during the Plan Year or who is employed on the last day of the Plan Year. Furthermore, regardless of any election in the Adoption Agreement to the contrary, for the Plan Year in which this Plan terminates, a Participant shall only be eligible to share in the allocation of the Employer's contributions for the Plan Year if the Participant is employed at the end of the Plan Year and has completed a Year of Service (or Period of Service if the Elapsed Time Method is elected). (f) Notwithstanding anything in this Section to the contrary, the provisions of this subsection apply for any Plan Year if, in the non-standardized Adoption Agreement, the Employer elected to apply the 410(b) ratio percentage failsafe provisions and the Plan fails to satisfy the "ratio percentage test" due to a last day of the Plan Year allocation condition or an Hours of Service (or months of service) allocation condition. A plan satisfies the "ratio percentage test" if, on the last day of the Plan Year, the "benefiting ratio" of the Non-Highly Compensated Employees who are "includible" is at least 70% of the "benefiting ratio" of the Highly Compensated Employees who are "includible." The "benefiting ratio" of the Non-Highly Compensated Employees is the number of "includible" Non-Highly Compensated Employees "benefiting" under the Plan divided by the number of "includible" Employees who are Non-Highly Compensated Employees. The "benefiting ratio" of the Highly Compensated Employees is the number of Highly Compensated Employees "benefiting" under the Plan divided by the number of "includible" Highly Compensated Employees. "Includible" Employees are all Employees other than: (1) those Employees excluded from participating in the plan for the entire Plan Year by reason of the collective bargaining unit exclusion or the nonresident alien exclusion described in the Code or by reason of the age and service requirements of Article III; and (2) any Employee who incurs a separation from service during the Plan Year and fails to complete at least 501 Hours of Service (or three (3) months of service if the Elapsed Time Method is being used) during such Plan Year. For purposes of this subsection, an Employee is "benefiting" under the Plan on a particular date if, under the Plan, the Employee is entitled to an Employer contribution or an allocation of Forfeitures for the Plan Year. If this subsection applies, then the Administrator will suspend the allocation conditions for the "includible" Non-Highly Compensated Employees who are Participants, beginning first with the "includible" Employees employed by the Employer on the last day of the Plan Year, then the "includible" Employees who have the latest separation from service during the Plan Year, and continuing to suspend the allocation conditions for each "includible" Employee who incurred an earlier separation from service, from the latest to the earliest separation from service date, until the Plan satisfies the "ratio percentage test" for the Plan Year. If two or more "includible" Employees have a separation from service on the same day, then the Administrator will suspend the allocation conditions for all such "includible" Employees, irrespective of whether the Plan can satisfy the "ratio percentage test" by accruing benefits for fewer than all such "includible" Employees. If the Plan for any Plan Year suspends the allocation conditions for an "includible" Employee, then that Employee will share in the allocation for that Plan Year of the Employer contribution and Forfeitures, if any, without regard to whether the Employee has satisfied the other allocation conditions set forth in this Section. If the Plan includes Employer matching contributions subject to ACP testing, this subsection applies separately to the Code Section 401(m) portion of the Plan. 12.4 ACTUAL DEFERRAL PERCENTAGE TESTS (a) Except as otherwise provided herein, this subsection applies if the Prior Year Testing method is elected in the Adoption Agreement. The "Actual Deferral Percentage" (hereinafter "ADP") for a Plan Year for Participants who are Highly Compensated Employees (hereinafter "HCEs") for each Plan Year and the prior year's (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 61 DEFINED CONTRIBUTION PROTOTYPE PLAN ADP for Participants who were Non-Highly Compensated Employees (hereinafter "NHCEs") for the prior Plan Year must satisfy one of the following tests: (1) The ADP for a Plan Year for Participants who are HCEs for the Plan Year shall not exceed the prior year's ADP for Participants who were NHCEs for the prior Plan Year multiplied by 1.25; or (2) The ADP for a Plan Year for Participants who are HCEs for the Plan Year shall not exceed the prior year's ADP for Participants who were NHCEs for the prior Plan Year multiplied by 2.0, provided that the ADP for Participants who are HCEs does not exceed the prior year's ADP for Participants who were NHCEs in the prior Plan Year by more than two (2) percentage points. Notwithstanding the above, for purposes of applying the foregoing tests with respect to the first Plan Year in which the Plan permits any Participant to make Elective Deferrals, the ADP for the prior year's NHCEs shall be deemed to be three percent (3%) unless the Employer has elected in the Adoption Agreement to use the current Plan Year's ADP for these Participants. However, the provisions of this paragraph may not be used if the Plan is a successor plan or is otherwise prohibited from using such provisions pursuant to IRS Notice 98-1 (or superseding guidance). (b) Notwithstanding the foregoing, if the Current Year Testing method is elected in the Adoption Agreement, the ADP tests in (a)(1) and (a)(2), above shall be applied by comparing the current Plan Year's ADP for Participants who are HCEs with the current Plan Year's ADP (rather than the prior Plan Year's ADP) for Participants who are NHCEs for the current Plan Year. Once made, this election can only be changed if the Plan meets the requirements for changing to the Prior Year Testing method set forth in IRS Notice 98-1 (or superseding guidance). Furthermore, this Plan must use the same testing method for both the ADP and ACP tests for Plan Years beginning on or after the date the Employer adopts its GUST restated plan. (c) This subsection applies to prevent the multiple use of the test set forth in subsection (a)(2) above. Any HCE eligible to make Elective Deferrals pursuant to Section 12.2 and to make after-tax voluntary Employee contributions or to receive matching contributions under this Plan or under any other plan maintained by the Employer or an Affiliated Employer, shall have either the actual deferral ratio adjusted in the manner described in Section 12.5 or the actual contribution ratio adjusted in the manner described in Section 12.7 so that the "Aggregate Limit" is not exceeded pursuant to Regulation 1.401(m)-2. The amounts in excess of the "Aggregate Limit" shall be treated as either an Excess Contribution or an Excess Aggregate Contribution. The ADP and ACP of the HCEs are determined after any corrections required to meet the ADP and ACP tests and are deemed to be the maximum permitted under such tests for the Plan Year. Multiple use does not occur if either the ADP or ACP of the HCEs does not exceed 1.25 multiplied by the ADP and ACP of the NHCEs. "Aggregate Limit" means the sum of (i) 125 percent of the greater of the ADP of the NHCEs for the prior Plan Year or the ACP of such NHCEs under the plan subject to Code Section 401(m) for the Plan Year beginning with or within the prior Plan Year of the cash or deferred arrangement and (ii) the lesser of 200% or two (2) plus the lesser of such ADP or ACP. "Lesser" is substituted for "greater" in (i) above, and "greater" is substituted for "lesser" after "two (2) plus the" in (ii) above if it would result in a larger Aggregate Limit. If the Employer has elected in the Adoption Agreement to use the Current Year Testing method, then in calculating the "Aggregate Limit" for a particular Plan Year, the NHCEs ADP and ACP for that Plan Year, instead of the prior Plan Year, is used. (d) A Participant is an HCE for a particular Plan Year if the Participant meets the definition of an HCE in effect for that Plan Year. Similarly, a Participant is an NHCE for a particular Plan Year if the Participant does not meet the definition of an HCE in effect for that Plan Year. (e) For the purposes of this Section and Section 12.5, ADP means, for a specific group of Participants for a Plan Year, the average of the ratios (calculated separately for each Participant in such group) of (1) the amount of Employer contributions actually paid over to the Plan on behalf of such Participant for the Plan Year to (2) the Participant's 414(s) Compensation for such Plan Year. Employer contributions on behalf of any participant shall include: (1) any Elective Deferrals made pursuant to the Participant's deferral election (including Excess Deferrals of HCEs), but excluding (i) Excess Deferrals of NHCEs that arise solely from Elective Deferrals made under the plan or plans of this Employer and (ii) Elective Deferrals that are taken into account in the ACP tests set forth in Section 12.6 (provided the ADP test is satisfied both with and without exclusion of these Elective Deferrals); and (2) at the election of the Employer, Qualified Non-Elective Contributions and Qualified Matching Contributions to the extent such contributions are not used to satisfy the ACP test. The actual deferral ratio for each Participant and the ADP for each group shall be calculated to the nearest one-hundredth of one percent. Elective Deferrals allocated to each Highly Compensated Participant's Elective Deferral Account shall not be reduced by Excess Deferrals to the extent such excess amounts are made under this Plan or any other plan maintained by the Employer. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 62 DEFINED CONTRIBUTION PROTOTYPE PLAN (f) For purposes of this Section and Section 12.5, a Highly Compensated Participant and a Non-Highly Compensated Participant shall include any Employee eligible to make salary deferrals pursuant to Section 12.2 for the Plan Year. Such Participants who fail to make Elective Deferrals shall be treated for ADP purposes as Participants on whose behalf no Elective Deferrals are made. (g) In the event this Plan satisfies the requirements of Code Sections 401(a)(4), 401(k), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the ADP of Employees as if all such plans were a single plan. Any adjustments to the NHCE ADP for the prior year will be made in accordance with IRS Notice 98-1 and any superseding guidance, unless the Employer has elected in the Adoption Agreement to use the Current Year Testing method. Plans may be aggregated in order to satisfy Code Section 401(k) only if they have the same Plan Year and use the same ADP testing method. (h) The ADP for any Participant who is an HCE for the Plan Year and who is eligible to have Elective Deferrals (and Qualified Non-Elective Contributions or Qualified Matching Contributions, or both, if treated as Elective Deferrals for purposes of the ADP test) allocated to such Participant's accounts under two (2) or more arrangements described in Code Section 401(k), that are maintained by the Employer, shall be determined as if such Elective Deferrals (and, if applicable, such Qualified Non-Elective Contributions or Qualified Matching Contributions, or both) were made under a single arrangement for purposes of determining such HCE's actual deferral ratio. However, if the cash or deferred arrangements have different Plan Years, this paragraph shall be applied by treating all cash or deferred arrangements ending with or within the same calendar year as a single arrangement. Notwithstanding the foregoing, certain plans shall be treated as separate if mandatorily disaggregated under Regulations under Code Section 401. (i) For purposes of determining the ADP and the amount of Excess Contributions pursuant to Section 12.5, only Elective Deferrals, Qualified Non-Elective Contributions and Qualified Matching Contributions contributed to the Plan prior to the end of the twelve (12) month period immediately following the Plan Year to which the contributions relate shall be considered. (j) Notwithstanding anything in this Section to the contrary, the provisions of this Section and Section 12.5 may be applied separately (or will be applied separately to the extent required by Regulations) to each "plan" within the meaning of Regulation 1.401(k)-1(g)(11). Furthermore, for Plan Years beginning after December 31, 1998, the provisions of Code Section 401(k)(3)(F) may be used to exclude from consideration all Non-Highly Compensated Employees who have not satisfied the minimum age and service requirements of Code Section 410(a)(1)(A). 12.5 ADJUSTMENT TO ACTUAL DEFERRAL PERCENTAGE TESTS (a) In the event (or, with respect to subsection (c) when the Prior Year Testing method is being used, if it is anticipated) that for Plan Years beginning after December 31, 1996, the Plan does not satisfy one of the tests set forth in Section 12.4, the Administrator shall adjust Excess Contributions or the Employer shall make contributions pursuant to the options set forth below or any combination thereof. However, if the Prior Year testing method is being used and it is anticipated that the Plan might not satisfy one of such tests, then the Employer may make contributions pursuant to the options set forth in subsection (c) below. (b) On or before the fifteenth day of the third month following the end of each Plan Year, but in no event later than the close of the following Plan Year, the Highly Compensated Participant allocated the largest amount of Elective Deferrals shall have a portion of such Elective Deferrals (and "Income" allocable to such amounts) distributed (and/or, at the Participant's election, recharacterized as a after-tax voluntary Employee contribution pursuant to Section 4.8) until the total amount of Excess Contributions has been distributed, or until the amount of the Participant's Elective Deferrals equals the Elective Deferrals of the Highly Compensated Participant having the next largest amount of Elective Deferrals allocated. This process shall continue until the total amount of Excess Contributions has been distributed. Any distribution and/or recharacterization of Excess Contributions shall be made in the following order: (1) With respect to the distribution of Excess Contributions, such distribution: (i) may be postponed but not later than the close of the Plan Year following the Plan Year to which they are allocable; (ii) shall be made first from unmatched Elective Deferrals and, thereafter, simultaneously from Elective Deferrals which are matched and matching contributions which relate to such Elective Deferrals. Matching contributions which relate to Excess Contributions shall be forfeited unless the related matching contribution is distributed as an Excess Aggregate Contribution pursuant to Section 12.7; (iii) shall be adjusted for "Income"; and (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 63 DEFINED CONTRIBUTION PROTOTYPE PLAN (iv) shall be designated by the Employer as a distribution of Excess Contributions (and "Income"). (2) With respect to the recharacterization of Excess Contributions pursuant to (a) above, such recharacterized amounts: (i) shall be deemed to have occurred on the date on which the last of those Highly Compensated Participants with Excess Contributions to be recharacterized is notified of the recharacterization and the tax consequences of such recharacterization; (ii) shall not exceed the amount of Elective Deferrals on behalf of any Highly Compensated Participant for any Plan Year; (iii) shall be treated as after-tax voluntary Employee contributions for purposes of Code Section 401(a)(4) and Regulation 1.401(k)-1(b). However, for purposes of Sections 4.3(f) and 9.2 (top heavy rules), recharacterized Excess Contributions continue to be treated as Employer contributions that are Elective Deferrals. Excess Contributions (and "Income" attributable to such amounts) recharacterized as after-tax voluntary Employee contributions shall continue to be nonforfeitable and subject to the same distribution rules provided for in Section 12.2(c); and (iv) are not permitted if the amount recharacterized plus after-tax voluntary Employee contributions actually made by such Highly Compensated Participant, exceed the maximum amount of after-tax voluntary Employee contributions (determined prior to application of Section 12.6) that such Highly Compensated Participant is permitted to make under the Plan in the absence of recharacterization. (3) Any distribution and/or recharacterization of less than the entire amount of Excess Contributions shall be treated as a pro rata distribution and/or recharacterization of Excess Contributions and "Income." (4) For the purpose of this Section, "Income" means the income or losses allocable to Excess Contributions, which amount shall be allocated at the same time and in the same manner as income or losses are allocated pursuant to Section 4.3(c). However, "Income" for the period between the end of the Plan Year and the date of the distribution (the "gap period") is not required to be distributed. (5) Excess Contributions shall be treated as Employer contributions for purposes of Code Sections 404 and 415 even if distributed from the Plan. (c) Notwithstanding the above, within twelve (12) months after the end of the Plan Year (or, if the Prior Year Testing method is used, within twelve (12) months after the end of the prior Plan Year), the Employer may make a special Qualified Non-Elective Contribution or Qualified Matching Contribution in accordance with one of the following provisions which contribution shall be allocated to the Qualified Non-Elective Contribution Account or Qualified Matching Contribution Account of each Non-Highly Compensated Participant eligible to share in the allocation in accordance with such provision. The Employer shall provide the Administrator with written notification of the amount of the contribution being made and to which provision it relates. (1) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated in the same proportion that each Non-Highly Compensated Participant's 414(s) Compensation for the year (or prior year if the Prior Year Testing method is being used) bears to the total 414(s) Compensation of all Non-Highly Compensated Participants for such year. (2) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated in the same proportion that each Non-Highly Compensated Participant's 414(s) Compensation for the year (or prior year if the Prior Year Testing method is being used) bears to the total 414(s) Compensation of all Non-Highly Compensated Participants for such year. However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 64 DEFINED CONTRIBUTION PROTOTYPE PLAN (3) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated in equal amounts (per capita). (4) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated in equal amounts (per capita). However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded. (5) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated to the Qualified Non-Elective Contribution Account of the Non-Highly Compensated Participant having the lowest 414(s) Compensation, until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied). (6) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated to the Qualified Non-Elective Contribution Account of the Non-Highly Compensated Participant having the lowest 414(s) Compensation, until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied). However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded. (7) A Qualified Matching Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated to the Qualified Matching Contribution Account of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Elective Deferrals for the year bears to the total Elective Deferrals of all Non-Highly Compensated Participants. (8) A Qualified Matching Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated to the Qualified Matching Contribution Account of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Elective Deferrals for the year bears to the total Elective Deferrals of all Non-Highly Compensated Participants. However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded. (9) A Qualified Matching Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated to the Qualified Matching Contribution Account of the Non-Highly Compensated Participant having the lowest Elective Deferrals until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied). (10) A Qualified Matching Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated to the Qualified Matching Contribution Account of the Non-Highly Compensated Participant having the lowest Elective Deferrals until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 65 DEFINED CONTRIBUTION PROTOTYPE PLAN has received the maximum "Annual Addition" pursuant to Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied). However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded. (d) Any Excess Contributions (and "Income") which are distributed on or after 2 1/2 months after the end of the Plan Year shall be subject to the ten percent (10%) Employer excise tax imposed by Code Section 4979. 12.6 ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) Except as otherwise provided herein, this subsection applies if the Prior Year Testing method is elected in the Adoption Agreement. The "Actual Contribution Percentage" (hereinafter "ACP") for Participants who are Highly Compensated Employees (hereinafter "HCEs") for each Plan Year and the prior year's ACP for Participants who were Non-Highly Compensated Employees (hereinafter "NHCEs") for the prior Plan Year must satisfy one of the following tests: (1) The ACP for a Plan Year for Participants who are HCEs for the Plan Year shall not exceed the prior year's ACP for Participants who were NHCEs for the prior Plan Year multiplied by 1.25; or (2) The ACP for a Plan Year for Participants who are HCEs for the Plan Year shall not exceed the prior year's ACP for Participants who were NHCEs for the prior Plan Year multiplied by 2.0, provided that the ACP for Participants who are HCEs does not exceed the prior year's ACP for Participants who were NHCEs in the prior Plan Year by more than two (2) percentage points. Notwithstanding the above, for purposes of applying the foregoing tests with respect to the first Plan Year in which the Plan permits any Participant to make Employee contributions, provides for matching contributions, or both, the ACP for the prior year's NHCEs shall be deemed to be three percent (3%) unless the Employer has elected in the Adoption Agreement to use the current Plan Year's ACP for these Participants. However, the provisions of this paragraph may not be used if the Plan is a successor plan or is otherwise prohibited from using such provisions pursuant to IRS Notice 98-1 (or superseding guidance). (b) Notwithstanding the preceding, if the Current Year Testing method is elected in the Adoption Agreement, the ACP tests in (a)(1) and (a)(2), above shall be applied by comparing the current Plan Year's ACP for Participants who are HCEs with the current Plan Year's ACP (rather than the prior Plan Year's ACP) for Participants who are NHCEs for the current Plan Year. Once made, this election can only be changed if the Plan meets the requirements for changing to the Prior Year Testing method set forth in IRS Notice 98-1 (or superseding guidance). Furthermore, this Plan must use the same testing method for both the ADP and ACP tests for Plan Years beginning on or after the date the Employer adopts its GUST restated plan. (c) This subsection applies to prevent the multiple use of the test set forth in subsection (a)(2) above. Any HCE eligible to make Elective Deferrals pursuant to Section 12.2 and to make after-tax voluntary Employee contributions or to receive matching contributions under this Plan or under any other plan maintained by the Employer or an Affiliated Employer, shall have either the actual deferral ratio adjusted in the manner described in Section 12.5 or the actual contribution ratio reduced in the manner described in Section 12.7 so that the "Aggregate Limit" is not exceeded pursuant to Regulation 1.401(m)-2. The amounts in excess of the "Aggregate Limit" shall be treated as either an Excess Contribution or an Excess Aggregate Contribution. The ADP and ACP of the HCEs are determined after any corrections required to meet the ADP and ACP tests and are deemed to be the maximum permitted under such test for the Plan Year. Multiple use does not occur if either the ADP or ACP of the HCEs does not exceed 1.25 multiplied by the ADP and ACP of the NHCEs. "Aggregate Limit" means the sum of (i) 125 percent of the greater of the ADP of the NHCEs for the Plan Year or the ACP of such NHCEs under the plan subject to Code Section 401(m) for the Plan Year beginning with or within the prior Plan Year of the cash or deferred arrangement and (ii) the lesser of 200% or two plus the lesser of such ADP or ACP. "Lesser" is substituted for "greater" in (i) above, and "greater" is substituted for "lesser" after "two plus the" in (ii) above if it would result in a larger Aggregate Limit. If the Employer has elected in the Adoption Agreement to use the Current Year Testing method, then in calculating the "Aggregate Limit" for a particular Plan Year, the NHCEs ADP and ACP for that Plan Year, instead of the prior Plan Year, is used. (d) A Participant is a Highly Compensated Employee for a particular Plan Year if the Participant meets the definition of a Highly Compensated Employee in effect for that Plan Year. Similarly, a Participant is a Non-highly Compensated Employee for a particular Plan Year if the Participant does not meet the definition of a Highly Compensated Employee in effect for that Plan Year. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 66 DEFINED CONTRIBUTION PROTOTYPE PLAN (e) For the purposes of this Section and Section 12.7, ACP for a specific group of Participants for a Plan Year means the average of the "Contribution Percentages" (calculated separately for each Participant in such group). For this purpose, "Contribution Percentage" means the ratio (expressed as a percentage) of the Participant's "Contribution Percentage Amounts" to the Participant's 414(s) Compensation. The actual contribution ratio for each Participant and the ACP for each group, shall be calculated to the nearest one-hundredth of one percent of the Participant's 414(s) Compensation. (f) "Contribution Percentage Amounts" means the sum of (i) after-tax voluntary Employee contributions, (ii) Employer "Matching Contributions" made pursuant to Section 12.1(a)(2) (including Qualified Matching Contributions to the extent such Qualified Matching Contributions are not used to satisfy the tests set forth in Section 12.4), (iii) Excess Contributions recharacterized as nondeductible voluntary Employee contributions pursuant to Section 12.5, and (iv) Qualified Non-Elective Contributions (to the extent not used to satisfy the tests set forth in Section 12.4). However, "Contribution Percentage Amounts" shall not include "Matching Contributions" that are forfeited either to correct Excess Aggregate Contributions or due to Code Section 401(a)(4) and the Regulations thereunder because the contributions to which they relate are Excess Deferrals, Excess Contributions, or Excess Aggregate Contributions. In addition, "Contribution Percentage Amounts" may include Elective Deferrals provided the ADP test in Section 12.4 is met before the Elective Deferrals are used in the ACP test and continues to be met following the exclusion of those Elective Deferrals that are used to meet the ACP test. (g) For purposes of determining the ACP and the amount of Excess Aggregate Contributions pursuant to Section 12.7, only Employer "Matching Contributions" (excluding "Matching Contributions" forfeited or distributed pursuant to Section 12.2(e), 12.5(b), or 12.7(b)) contributed to the Plan prior to the end of the succeeding Plan Year shall be considered. In addition, the Administrator may elect to take into account, with respect to Employees eligible to have Employer "Matching Contributions" made pursuant to Section 12.1(a)(2) or after-tax voluntary Employee contributions made pursuant to Section 4.7 allocated to their accounts, elective deferrals (as defined in Regulation 1.402(g)-1(b)) and qualified non-elective contributions (as defined in Code Section 401(m)(4)(C)) contributed to any plan maintained by the Employer. Such elective deferrals and qualified non-elective contributions shall be treated as Employer matching contributions subject to Regulation 1.401(m)-1(b)(2) which is incorporated herein by reference. The Plan Year must be the same as the plan year of the plan to which the elective deferrals and the qualified non-elective contributions are made. (h) In the event that this Plan satisfies the requirements of Code Sections 401(a)(4), 401(m), or 410(b) only if aggregated with one or more other plans, or if one or more other plans satisfy the requirements of such sections of the Code only if aggregated with this Plan, then this Section shall be applied by determining the ACP of Employees as if all such plans were a single plan. Plans may be aggregated in order to satisfy Code section 401(m) only if they have the same Plan Year. Any adjustments to the NHCE ACP for the prior year will be made in accordance with IRS Notice 98-1 and any superseding guidance, unless the Employer has elected in the Adoption Agreement to use the Current Year Testing method. Plans may be aggregated in order to satisfy Code Section 401(k) only if they have the same Plan Year and use the same ACP testing method. (i) For the purposes of this Section, if an HCE is a Participant under two (2) or more plans (other than an employee stock ownership plan as defined in Code Section 4975(e)(7)) which are maintained by the Employer or an Affiliated Employer to which "Matching Contributions," nondeductible voluntary Employee contributions, or both, are made, all such contributions on behalf of such HCE shall be aggregated for purposes of determining such HCP's actual contribution ratio. However, if the plans have different plan years, this paragraph shall be applied by treating all plans ending with or within the same calendar year as a single plan. (j) For purposes of this Section and Section 12.7, a Highly Compensated Participant and a Non-Highly Compensated Participant shall include any Employee eligible to have "Matching Contributions" made pursuant to Section 12.1(a)(2) (whether or not a deferral election was made or suspended pursuant to Section 12.2(g)) allocated to such Participant's account for the Plan Year or to make salary deferrals pursuant to Section 12.2 (if the Employer uses salary deferrals to satisfy the provisions of this Section) or after-tax voluntary Employee contributions pursuant to Section 4.7 (whether or not nondeductible voluntary Employee contributions are made) allocated to the Participant's account for the Plan Year. (k) For purposes of this Section and Section 12.7, "Matching Contribution" means an Employer contribution made to the Plan, or to a contract described in Code Section 403(b), on behalf of a Participant on account of a nondeductible voluntary Employee contribution made by such Participant, or on account of a Participant's elective deferrals under a plan maintained by the Employer. (l) For purposes of determining the ACP and the amount of Excess Aggregate Contributions pursuant to Section 12.7, only Elective Deferrals, Qualified Non-Elective Contributions, "Matching Contributions" and Qualified Matching Contributions contributed to the Plan prior to the end of the twelve (12) month period immediately following the Plan Year to which the contributions relate shall be considered. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 67 DEFINED CONTRIBUTION PROTOTYPE PLAN (m) Notwithstanding anything in this Section to the contrary, the provisions of this Section and Section 12.7 may be applied separately (or will be applied separately to the extent required by Regulations) to each "plan" within the meaning of Regulation 1.401(k)-1(g)(11). Furthermore, for Plan Years beginning after December 31, 1998, the provisions of Code Section 401(k)(3)(F) may be used to exclude from consideration all Non-Highly Compensated Employees who have not satisfied the minimum age and service requirements of Code Section 410(a)(1)(A). 12.7 ADJUSTMENT TO ACTUAL CONTRIBUTION PERCENTAGE TESTS (a) In the event (or, with respect to subsection (g) below when the Prior Year Testing method is being used, if it is anticipated) that for Plan Years beginning after December 31, 1996, the Plan does not satisfy one of the tests set forth in Section 12.6, the Administrator shall adjust Excess Aggregate Contributions or the Employer shall make contributions pursuant to the options set forth below or any combination thereof. However, if the Prior Year testing method is being used and it is anticipated that the Plan might not satisfy one of such tests, then the Employer may make contributions pursuant to the options set forth in subsection (c) below. (b) On or before the fifteenth day of the third month following the end of the Plan Year, but in no event later than the close of the following Plan Year the Highly Compensated Participant having the largest allocation of "Contribution Percentage Amounts" shall have a portion of such "Contribution Percentage Amounts" (and "Income" allocable to such amounts) distributed or, if non-Vested, Forfeited (including "Income" allocable to such Forfeitures) until the total amount of Excess Aggregate Contributions has been distributed, or until the amount of the Participant's "Contribution Percentage Amounts" equals the "Contribution Percentage Amounts" of the Highly Compensated Participant having the next largest amount of "Contribution Percentage Amounts." This process shall continue until the total amount of Excess Aggregate Contributions has been distributed or forfeited. Any distribution and/or Forfeiture of "Contribution Percentage Amounts" shall be made in the following order: (1) Employer matching contributions distributed and/or forfeited pursuant to Section 12.5(b)(1); (2) After-tax voluntary Employee contributions including Excess Contributions recharacterized as after-tax voluntary Employee contributions pursuant to Section 12.5(b)(2); (3) Remaining Employer matching contributions. (c) Any distribution or Forfeiture of less than the entire amount of Excess Aggregate Contributions (and "Income") shall be treated as a pro rata distribution of Excess Aggregate Contributions and "Income." Distribution of Excess Aggregate Contributions shall be designated by the Employer as a distribution of Excess Aggregate Contributions (and "Income"). Forfeitures of Excess Aggregate Contributions shall be treated in accordance with Section 4.3. However, no such Forfeiture may be allocated to a Highly Compensated Participant whose contributions are reduced pursuant to this Section. (d) For the purpose of this Section, "Income" means the income or losses allocable to Excess Aggregate Contributions, which amount shall be allocated at the same time and in the same manner as income or losses are allocated pursuant to Section 4.3(c). However, "Income" for the period between the end of the Plan Year and the date of the distribution (the "gap period") is not required to be distributed. (e) Excess Aggregate Contributions attributable to amounts other than nondeductible voluntary Employee contributions, including forfeited matching contributions, shall be treated as Employer contributions for purposes of Code Sections 404 and 415 even if distributed from the Plan. (f) The determination of the amount of Excess Aggregate Contributions with respect to any Plan Year shall be made after first determining the Excess Contributions, if any, to be treated as nondeductible voluntary Employee contributions due to recharacterization for the plan year of any other qualified cash or deferred arrangement (as defined in Code Section 401(k)) maintained by the Employer that ends with or within the Plan Year or which are treated as after-tax voluntary Employee contributions due to recharacterization pursuant to Section 12.5. (g) Notwithstanding the above, within twelve (12) months after the end of the Plan Year (or, if the Prior Year Testing method is used, within twelve (12) months after the end of the prior Plan Year), the Employer may make a special Qualified Non-Elective Contribution or Qualified Matching Contribution in accordance with one of the following provisions which contribution shall be allocated to the Qualified Non-Elective Contribution Account or Qualified Matching Contribution Account of each Non-Highly Compensated eligible to share in the allocation in accordance with such provision. The Employer shall provide the Administrator with written notification of the amount of the contribution being made and for which provision it is being made pursuant to. (1) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated in the same proportion that each Non-Highly (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 68 DEFINED CONTRIBUTION PROTOTYPE PLAN Compensated Participant's 414(s) Compensation for the year (or prior year if the Prior Year Testing method is being used) bears to the total 414(s) Compensation of all Non-Highly Compensated Participants for such year. (2) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated in the same proportion that each Non-Highly Compensated Participant's 414(s) Compensation for the year (or prior year if the Prior Year Testing method is being used) bears to the total 414(s) Compensation of all Non-Highly Compensated Participants for such year. However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded. (3) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated in equal amounts (per capita). (4) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated in equal amounts (per capita). However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded. (5) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated to the Qualified Non-Elective Contribution Account of the Non-Highly Compensated Participant having the lowest 414(s) Compensation, until one of the tests set forth in Section 12.6 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to Section 4.4. This process shall continue until one of the tests set forth in Section 12.6 is satisfied (or is anticipated to be satisfied). (6) A Qualified Non-Elective Contribution may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated to the Qualified Non-Elective Contribution Account of the Non-Highly Compensated Participant having the lowest 414(s) Compensation, until one of the tests set forth in Section 12.6 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to Section 4.4. This process shall continue until one of the tests set forth in Section 12.6 is satisfied (or is anticipated to be satisfied). However, for purposes of this contribution, Non-Highly Compensated Employees who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded. (7) A "Matching Contribution" may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated on behalf of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Elective Deferrals for the year bears to the total Elective Deferrals of all Non-Highly Compensated Participants. The Employer shall designate, at the time the contribution is made, whether the contribution made pursuant to this provision shall be a Qualified Matching Contribution allocated to a Participant's Qualified Matching Contribution Account or an Employer Non-Elective Contribution allocated to a Participant's Non-Elective Account. (8) A "Matching Contribution" may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.6. Such contribution shall be allocated on behalf of each Non-Highly Compensated Participant in the same proportion that each Non-Highly Compensated Participant's Elective Deferrals for the year bears to the total Elective Deferrals of all Non-Highly Compensated Participants. The Employer shall designate, at the time the contribution is made, whether the contribution made pursuant to this provision shall be a Qualified Matching Contribution allocated to a Participant's Qualified Matching Contribution Account or an Employer Non-Elective Contribution allocated to a Participant's Non-Elective Account. However, for purposes of this (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 69 DEFINED CONTRIBUTION PROTOTYPE PLAN contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded. (9) A "Matching Contribution" may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated on behalf of the Non-Highly Compensated Participant having the lowest Elective Deferrals until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied). The Employer shall designate, at the time the contribution is made, whether the contribution made pursuant to this provision shall be a Qualified Matching Contribution allocated to a Participant's Qualified Matching Contribution Account or an Employer Non-Elective Contribution allocated to a Participant's Non-Elective Account. (10) A "Matching Contribution" may be made on behalf of Non-Highly Compensated Participants in an amount sufficient to satisfy (or to prevent an anticipated failure of) one of the tests set forth in Section 12.4. Such contribution shall be allocated on behalf of the Non-Highly Compensated Participant having the lowest Elective Deferrals until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied), or until such Non-Highly Compensated Participant has received the maximum "Annual Addition" pursuant to Section 4.4. This process shall continue until one of the tests set forth in Section 12.4 is satisfied (or is anticipated to be satisfied). The Employer shall designate, at the time the contribution is made, whether the contribution made pursuant to this provision shall be a Qualified Matching Contribution allocated to a Participant's Qualified Matching Contribution Account or an Employer Non-Elective Contribution allocated to a Participant's Non-Elective Account. However, for purposes of this contribution, Non-Highly Compensated Participants who are not employed at the end of the Plan Year (or at the end of the prior Plan Year if the Prior Year Testing method is being used) and, if this is a standardized Plan, who have not completed more than 500 Hours of Service (or three (3) consecutive calendar months if the Elapsed Time Method is selected in the Adoption Agreement) during such Plan Year, shall not be eligible to share in the allocation and shall be disregarded. (h) Any Excess Aggregate Contributions (and "Income") which are distributed on or after 2 1/2 months after the end of the Plan Year shall be subject to the ten percent (10%) Employer excise tax imposed by Code Section 4979. 12.8 SAFE HARBOR PROVISIONS (a) The provisions of this Section will apply if the Employer has elected, in the Adoption Agreement, to use the "ADP Test Safe Harbor" or "ACP Test Safe Harbor." If the Employer has elected to use the "ADP Test Safe Harbor" for a Plan Year, then the provisions relating to the ADP test described in Section 12.4 and in Code Section 401(k)(3) do not apply for such Plan Year. In addition, if the Employer has also elected to use the "ACP Test Safe Harbor" for a Plan Year, then the provisions relating to the ACP test described in Section 12.6 and in Code Section 401(m)(2) do not apply for such Plan Year. Furthermore, to the extent any other provision of the Plan is inconsistent with the provisions of this Section, the provisions of this Section will govern. (b) For purposes of this Section, the following definitions apply: (1) "ACP Test Safe Harbor" means the method described in subsection (c) below for satisfying the ACP test of Code Section 401(m)(2). (2) "ACP Test Safe Harbor Matching Contributions" means "Matching Contributions" described in subsection (d)(1). (3) "ADP Test Safe Harbor" means the method described in subsection (c) for satisfying the ADP test of Code Section 401(k)(3). (4) "ADP Test Safe Harbor Contributions" means "Matching Contributions" and nonelective contributions described in subsection (c)(1) below. (5) "Compensation" means Compensation as defined in Section 1.11, except, for purposes of this Section, no dollar limit, other than the limit imposed by Code Section 401(a)(17), applies to the Compensation of a Non-Highly Compensated Employee. However, solely for purposes of determining the Compensation subject to a Participant's deferral election, the Employer may use an alternative definition to the one described in the preceding sentence, provided such alternative definition is a reasonable definition (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 70 DEFINED CONTRIBUTION PROTOTYPE PLAN within the meaning of Regulation 1.414(s)-1(d)(2) and permits each Participant to elect sufficient Elective Deferrals to receive the maximum amount of "Matching Contributions" (determined using the definition of Compensation described in the preceding sentence) available to the Participant under the Plan. (6) "Eligible Participant" means a Participant who is eligible to make Elective Deferrals under the Plan for any part of the Plan Year (or who would be eligible to make Elective Deferrals but for a suspension due to a hardship distribution described in Section 12.9 or to statutory limitations, such as Code Sections 402(g) and 415) and who is not excluded as an "Eligible Participant" under the 401(k) Safe Harbor elections in the Adoption Agreement. (7) "Matching Contributions" means contributions made by the Employer on account of an "Eligible Participant's" Elective Deferrals. (c) The provisions of this subsection apply for purposes of satisfying the "ADP Test Safe Harbor." (1) The "ADP Test Safe Harbor Contribution" is the contribution elected by the Employer in the Adoption Agreement to be used to satisfy the "ADP Test Safe Harbor." However, if no contribution is elected in the Adoption Agreement, the Employer will contribute to the Plan for the Plan Year a "Basic Matching Contribution" on behalf of each "Eligible Employee." The "Basic Matching Contribution" is equal to (i) one-hundred percent (100%) of the amount of an "Eligible Participant's" Elective Deferrals that do not exceed three percent (3%) of the Participant's "Compensation" for the Plan Year, plus (ii) fifty percent (50%) of the amount of the Participant's Elective Deferrals that exceed three percent (3%) of the Participant's "Compensation" but do not exceed five percent (5%) of the Participant's "Compensation." (2) Except as provided in subsection (e) below, for purposes of the Plan, a Basic Matching Contribution or an Enhanced Matching Contribution will be treated as a Qualified Matching Contribution and a Nonelective Safe Harbor Contribution will be treated as a Qualified Non-Elective Contribution. Accordingly, the "ADP Test Safe Harbor Contribution" will be fully Vested and subject to the distribution restrictions set forth in Section 12.2(c) (i.e., may generally not be distributed earlier than separation from service, death, disability, an event described in Section 401(k)(1), or, in case of a profit sharing plan, the attainment of age 59 1/2.). In addition, such contributions must satisfy the "ADP Test Safe Harbor" without regard to permitted disparity under Code Section 401(l). (3) At least thirty (30) days, but not more than ninety (90) days, before the beginning of the Plan Year, the Employer will provide each "Eligible Participant" a comprehensive notice of the Participant's rights and obligations under the Plan, written in a manner calculated to be understood by the average Participant. However, if an Employee becomes eligible after the 90th day before the beginning of the Plan Year and does not receive the notice for that reason, the notice must be provided no more than ninety (90) days before the Employee becomes eligible but not later than the date the Employee becomes eligible. (4) In addition to any other election periods provided under the Plan, each "Eligible Participant" may make or modify a deferral election during the thirty (30) day period immediately following receipt of the notice described in subsection (3) above. Furthermore, if the "ADP Test Safe Harbor" is a "Matching Contribution" each "Eligible Employee" must be permitted to elect sufficient Elective Deferrals to receive the maximum amount of "Matching Contributions" available to the Participant under the Plan. (d) The provisions of this subsection apply if the Employer has elected to satisfy the "ACP Test Safe Harbor." (1) In addition to the "ADP Test Safe Harbor Contributions," the Employer will make any "Matching Contributions" in accordance with elections made in the Adoption Agreement. Such additional "Matching Contributions" will be considered "ACP Test Safe Harbor Matching Contributions." (2) Notwithstanding any election in the Adoption Agreement to the contrary, an "Eligible Participant's" Elective Deferrals in excess of six percent (6%) of "Compensation" may not be taken into account in applying "ACP Test Safe Harbor Matching Contributions." In addition, effective with respect to Plan Years beginning after December 31, 1999, any portion of an "ACP Test Safe Harbor Matching Contribution" attributable to a discretionary "Matching Contribution" may not exceed four percent (4%) of an "Eligible Participant's" "Compensation." (e) The Plan is required to satisfy the ACP test of Code Section 401(m)(2), using the current year testing method, if the Plan permits after-tax voluntary Employee contributions or if matching contributions that do not satisfy the "ACP Test Safe Harbor" may be made to the Plan. In such event, only "ADP Test Safe Harbor Contributions" or "ACP Test Safe Harbor Contributions" that exceed the amount needed to satisfy the "ADP Test Harbor" or "ACP Test Safe Harbor" (if the Employer has elected to use the "ACP Test Safe Harbor") may be treated as Qualified Nonelective Contributions or Qualified Matching Contributions in applying the ACP test. In addition, in (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 71 DEFINED CONTRIBUTION PROTOTYPE PLAN applying the ACP test, elective contributions may not treated as matching contributions under Code Section 401(m)(3). Furthermore, in applying the ACP test, the Employer may elect to disregard with respect to all "Eligible Participants" (1) all "Matching Contributions" if the only "Matching Contributions" made to the Plan satisfy the "ADP Test Safe Harbor Contribution" (the "Basic Matching Contribution" or the "Enhanced Matching Contribution") and (2) if the "ACP Test Safe Harbor" is satisfied, "Matching Contributions" that do not exceed four percent (4%) of each Participant's "Compensation." 12.9 ADVANCE DISTRIBUTION FOR HARDSHIP (a) The Administrator, at the election of a Participant, shall direct the Trustee to distribute to the Participant in any one Plan Year up to the lesser of (1) 100% of the accounts as elected in the Adoption Agreement valued as of the last Valuation Date or (2) the amount necessary to satisfy the immediate and heavy financial need of the Participant. Any distribution made pursuant to this Section shall be deemed to be made as of the first day of the Plan Year or, if later, the Valuation Date immediately preceding the date of distribution, and the account from which the distribution is made shall be reduced accordingly. Withdrawal under this Section shall be authorized only if the distribution is for one of the following or any other item permitted under Regulation 1.401(k)-1(d)(2)(iv): (1) Medical expenses described in Code Section 213(d) incurred by the Participant, the Participant's spouse, or any of the Participant's dependents (as defined in Code Section 152) or necessary for these persons to obtain medical care as described in Code Section 213(d); (2) Costs directly related to the purchase (excluding mortgage payments) of a principal residence for the Participant; (3) Payment of tuition and related educational fees, and room and board expenses, for the next twelve (12) months of post-secondary education for the Participant, the Participant's spouse, children, or dependents (as defined in Code Section 152); or (4) Payments necessary to prevent the eviction of the Participant from the Participant's principal residence or foreclosure on the mortgage on that residence. (b) No distribution shall be made pursuant to this Section unless the Administrator, based upon the Participant's representation and such other facts as are known to the Administrator, determines that all of the following conditions are satisfied: (1) The distribution is not in excess of the amount of the immediate and heavy financial need of the Participant (including any amounts necessary to pay any federal, state, or local taxes or penalties reasonably anticipated to result from the distribution); (2) The Participant has obtained all distributions, other than hardship distributions, and all nontaxable loans currently available under all plans maintained by the Employer (to the extent the loan would not increase the hardship); (3) The Plan, and all other plans maintained by the Employer, provide that the Participant's elective deferrals and nondeductible voluntary Employee contributions will be suspended for at least twelve (12) months after receipt of the hardship distribution; and (4) The Plan, and all other plans maintained by the Employer, provide that the Participant may not make elective deferrals for the Participant's taxable year immediately following the taxable year of the hardship distribution in excess of the applicable limit under Code Section 402(g) for such next taxable year less the amount of such Participant's elective deferrals for the taxable year of the hardship distribution. (c) Notwithstanding the above, distributions from the Participant's Elective Deferral Account, Qualified Matching Contribution Account and Qualified Non-Elective Account pursuant to this Section shall be limited solely to the Participant's Elective Deferrals and any income attributable thereto credited to the Participant's Elective Deferral Account as of December 31, 1988. Furthermore, if a hardship distribution is permitted from more than one account type, the Administrator may determine any ordering of a Participant's hardship distribution from such accounts. (d) Any distribution made pursuant to this Section shall be made in a manner which is consistent with and satisfies the provisions of Section 6.5, including, but not limited to, all notice and consent requirements of Code Sections 411(a)(11) and 417 and the Regulations thereunder. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 72 DEFINED CONTRIBUTION PROTOTYPE PLAN ARTICLE XIII SIMPLE 401(K) PROVISIONS 13.1 SIMPLE 401(k) PROVISIONS (a) If elected in the Adoption Agreement, this Plan is intended to be a SIMPLE 401(k) plan which satisfies the requirements of Code Sections 401(k)(11) and 401(m)(10). (b) The provisions of this Article apply for a "year" only if the following conditions are met: (1) The Employer adopting this Plan is an "eligible employer." An "eligible employer" means, with respect to any "year," an Employer that had no more than 100 Employees who received at least $5,000 of "compensation" from the Employer for the preceding "year." In applying the preceding sentence, all employees of an Affiliated Employer are taken into account. An "eligible employer" that has elected to use the SIMPLE 401(k) provisions but fails to be an "eligible employer" for any subsequent "year," is treated as an "eligible employer" for the two (2) "years" following the last "year" the Employer was an "eligible employer." If the failure is due to any acquisition, disposition, or similar transaction involving an "eligible employer," the preceding sentence applies only if the provisions of Code Section 410(b)(6)(C)(i) are satisfied. (2) No contributions are made, or benefits accrued for services during the "year," on behalf of any "eligible employee" under any other plan, contract, pension, or trust described in Code Section 219(g)(5)(A) or (B), maintained by the Employer. (c) To the extent that any other provision of the Plan is inconsistent with the provisions of this Article, the provisions of this Article govern. 13.2 DEFINITIONS (a) "Compensation" means, for purposes of this Article, the sum of the wages, tips, and other compensation from the Employer subject to federal income tax withholding (as described in Code Section 6051(a)(3)) and the Employee's salary reduction contributions made under this or any other 401(k) plan, and, if applicable, elective deferrals under a Code Section 408(p) SIMPLE plan, a SARSEP, or a Code Section 403(b) annuity contract and compensation deferred under a Code Section 457 plan, required to be reported by the Employer on Form W-2 (as described in Code Section 6051(a)(8)). For self-employed individuals, "compensation" means net earnings from self-employment determined under Code Section 1402(a) prior to subtracting any contributions made under this Plan on behalf of the individual. The provisions of the plan implementing the limit on Compensation under Code Section 401(a)(17) apply to the "compensation" under this Article. (b) "Eligible employee" means, for purposes of this Article, any Participant who is entitled to make elective deferrals described in Code Section 402(g) under the terms of the Plan. (c) "Year" means the calendar year. 13.3 CONTRIBUTIONS (a) Salary Reduction Contributions (1) Each "eligible employee" may make a salary reduction election to have "compensation" reduced for the "year" in any amount selected by the Employee subject to the limitation in subsection (c) below. The Employer will make a salary reduction contribution to the Plan, as an Elective Deferral, in the amount by which the Employee's "compensation" has been reduced. (2) The total salary reduction contribution for the "year" cannot exceed $6,000 for any Employee. To the extent permitted by law, this amount will be adjusted to reflect any annual cost-of-living increases announced by the IRS. (b) Other Contributions (1) Matching Contributions. Unless (2) below is elected, each "year" the Employer will make a matching contribution to the Plan on behalf of each Employee who makes a salary reduction election under Section 13.3(a). The amount of the matching contribution will be equal to the Employee's salary reduction contribution up to a limit of three percent (3%) of the Employee's "compensation" for the full "year." (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 73 DEFINED CONTRIBUTION PROTOTYPE PLAN (2) Nonelective Contributions. For any "year," instead of a matching contribution, the Employer may elect to contribute a nonelective contribution of two percent (2%) of "compensation" for the "year" for each "eligible employee" who received at least $5,000 of "compensation" from the Employer for the "year." (c) Limitation on Other Contributions No Employer or Employee contributions may be made to this Plan for the "year" other than salary reduction contributions described in Section 13.3(a), matching or nonelective contributions described in Section 13.3(b) and rollover contributions described in Regulation Section 1.402(c)-2, Q&A-1(a). Furthermore, the provisions of Section 4.4 which implement the limitations of Code Section 415 apply to contributions made pursuant to this Section. 13.4 ELECTION AND NOTICE REQUIREMENTS (a) Election Period (1) In addition to any other election periods provided under the Plan, each "eligible employee" may make or modify a salary reduction election during the 60-day period immediately preceding each January 1st. (2) For the "year" an Employee becomes eligible to make salary reduction contributions under this Article, the 60-day election period requirement of subsection (a)(1) is deemed satisfied if the Employee may make or modify a salary reduction election during a 60-day period that includes either the date the Employee becomes eligible or the day before. (3) Each "eligible employee" may terminate a salary reduction election at any time during the "year." (b) Notice Requirements (1) The Employer will notify each "eligible employee" prior to the 60-day election period described in Section 13.4(a) that a salary reduction election or a modification to a prior election may be made during that period. (2) The notification described in (1) above will indicate whether the Employer will provide a matching contribution described in Section 13.3(b)(1) or a two percent (2%) nonelective contribution described in section 13.3(b)(2). 13.5 VESTING REQUIREMENTS All benefits attributable to contributions made pursuant to this Article are nonforfeitable at all times, and all previous contributions made under the Plan are nonforfeitable as of the beginning of the Plan Year that the 401(k) SIMPLE provisions apply. 13.6 TOP-HEAVY RULES The Plan is not treated as a top heavy plan under Code Section 416 for any year for which the provisions of this Article are effective and satisfied. 13.7 NONDISCRIMINATION TESTS The Plan is treated as meeting the requirements of Code Sections 401(k)(3)(A)(ii) and 401(m)(2) for any "year" for which the provisions of this Article are effective and satisfied. Accordingly, Sections 12.4, 12.5, 12.6 and 12.7 shall not apply to the Plan. (C) Copyright 2001 Employee Benefit Compliance Services, Inc. 74 EX-10.7 16 g89544exv10w7.txt EX-10.7 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN EXHIBIT 10.7 FORM OF NAUGATUCK VALLEY SAVINGS AND LOAN SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN . . . FORM OF NAUGATUCK VALLEY SAVINGS AND LOAN SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN TABLE OF CONTENTS Article I - Introduction.................................................... 1 Article II - Definitions.................................................... 2 Article III - Eligibility and Participation................................. 5 Article IV - Benefits....................................................... 6 Article V - Accounts........................................................ 8 Article VI - Supplemental Benefit Payments.................................. 9 Article VII - Claims Procedures............................................ 10 Article VIII - Amendment and Termination................................... 12 Article IX - General Provisions............................................ 13

ARTICLE I INTRODUCTION SECTION 1.01 PURPOSE, DESIGN AND INTENT. (a) The purpose of the Naugatuck Valley Savings and Loan Supplemental Executive Retirement Plan (the "Plan") is to assist Naugatuck Valley Savings and Loan (the "Bank") and its affiliates in retaining the services of key employees until their retirement, to induce such employees to use their best efforts to enhance the business of the Bank and its affiliates, and to provide certain supplemental retirement benefits to such employees. (b) The Plan, in relevant part, is intended to constitute an unfunded "excess benefit plan" as defined in Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended. In this respect, the Plan is specifically designed to provide certain key employees with retirement benefits that would have been provided under various tax-qualified retirement plans sponsored by the Bank but for the applicable limitations placed on benefits and contributions under such plans by various provisions of the Internal Revenue Code of 1986, as amended. 1 ARTICLE II DEFINITIONS SECTION 2.01 DEFINITIONS. In this Plan, whenever the context so indicates, the singular or the plural number and the masculine or feminine gender shall be deemed to include the other, the terms "he," "his," and "him," shall refer to a Participant or a beneficiary of a Participant, as the case may be, and, except as otherwise provided, or unless the context otherwise requires, the capitalized terms shall have the following meanings: (a) "AFFILIATE" means any corporation, trade or business, which, at the time of reference, is together with the Bank, a member of a controlled group of corporations, a group of trades or businesses (whether or not incorporated) under common control, or an affiliated service group, as described in Sections 414(b), 414(c), and 414(m) of the Code, respectively, or any other organization treated as a single employer with the Bank under Section 414(o) of the Code. (b) "APPLICABLE LIMITATIONS" means one or more of the following, as applicable: (i) the maximum limitations on annual additions to a tax-qualified defined contribution plan under Section 415(c) of the Code; (ii) the maximum limitation on the annual amount of compensation that may, under Section 401(a)(17) of the Code, be taken into account in determining contributions to and benefits under tax-qualified plans; and (iii) the maximum limitations, under Sections 401(k), 401(m), or 402(g) of the Code, on pre-tax contributions that may be made to a qualified defined contribution plan. (c) "BANK" means Naugatuck Valley Savings and Loan, and its successors. (d) "BOARD OF DIRECTORS" means the Board of Directors of the Bank. (e) "CHANGE IN CONTROL" means the earliest occurrence of one of the following events: (i) Merger: The Company merges into or consolidates with another corporation, or merges another corporation into the Company, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were stockholders of the Company immediately before the merger or consolidation. (ii) Acquisition of Significant Share Ownership: The Company files, or is required to file, a report on Schedule 13D or another form or schedule (other than Schedule 13G) required under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 25% or more of a class of the Company's voting securities, but this clause (b) shall not apply to beneficial ownership of Company voting shares held in a 2 fiduciary capacity by an entity of which the Company directly or indirectly beneficially owns 50% or more of its outstanding voting securities. (iii) Change in Board Composition: During any period of two consecutive years, individuals who constitute the Company's Board of Directors at the beginning of the two-year period cease for any reason to constitute at least a majority of the Company's Board of Directors; provided, however, that for purposes of this clause (iii), each director who is first elected by the board (or first nominated by the board for election by the stockholders) by a vote of at least two-thirds (2/3) of the directors who were directors at the beginning of the two-year period shall be deemed to have also been a director at the beginning of such period; or (iv) Sale of Assets: The Company sells to a third party all or substantially all of its assets. (f) "CODE" means the Internal Revenue Code of 1986, as amended. (g) "COMMITTEE" means the person(s) designated by the Board of Directors, pursuant to Section 9.02 of the Plan, to administer the Plan. (h) "COMMON STOCK" means the common stock of the Company. (i) "COMPANY" means Naugatuck Valley Financial Corporation and its successors. (j) "ELIGIBLE INDIVIDUAL" means any Employee who participates in the ESOP or the Savings Plan, as the case may be, and whom the Board of Directors determines is one of a "select group of management or highly compensated employees," as such phrase is used for purposes of Sections 101, 201, and 301 of ERISA. (k) "EMPLOYEE" means any person employed by the Bank or an Affiliate. (l) "EMPLOYER" means the Bank or Affiliate thereof that employs the Employee. (m) "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. (n) "ESOP" means the Naugatuck Valley Savings and Loan Employee Stock Ownership Plan, as amended from time to time. (o) "ESOP ACQUISITION LOAN" means a loan or other extension of credit incurred by the trustee of the ESOP in connection with the purchase of Common Stock on behalf of the ESOP. (p) "ESOP VALUATION DATE" means any day as of which the investment experience of the trust fund of the ESOP is determined and individuals' accounts under the ESOP are adjusted accordingly. (q) "EFFECTIVE DATE" means January 1, 2004. 3 (r) "PARTICIPANT" means an Eligible Employee who is entitled to benefits under the Plan. (s) "PLAN" means this Naugatuck Valley Savings and Loan Supplemental Executive Retirement Plan. (t) "SAVINGS PLAN" means the Naugatuck Valley Savings and Loan Employees Savings Plan, as amended from time to time. (u) "SUPPLEMENTAL ESOP ACCOUNT" means an account established by an Employer, pursuant to Section 5.01 of the Plan, with respect to a Participant's Supplemental ESOP Benefit. (v) "SUPPLEMENTAL ESOP BENEFIT" means the benefit credited to a Participant pursuant to Section 4.01 of the Plan. (w) "SUPPLEMENTAL SAVINGS BENEFIT" means the benefit credited to a Participant pursuant to Section 4.03 of the Plan. (x) "SUPPLEMENTAL SAVINGS ACCOUNT" means an account established by an Employer, pursuant to Section 5.03 of the Plan, with respect to a Participant's Supplemental Savings Benefit. (y) "SUPPLEMENTAL STOCK OWNERSHIP ACCOUNT" means an account established by an Employer, pursuant to Section 5.02 of the Plan, with respect to a Participant's Supplemental Stock Ownership Benefit. (z) "SUPPLEMENTAL STOCK OWNERSHIP BENEFIT" means the benefit credited to a Participant pursuant to Section 4.02 of the Plan. 4 ARTICLE III ELIGIBILITY AND PARTICIPATION SECTION 3.01 ELIGIBILITY AND PARTICIPATION. (a) Each Eligible Employee may participate in the Plan. An Eligible Employee shall become a Participant in the Plan upon designation as such by the Board of Directors. An Eligible Employee whom the Board of Directors designates as a Participant in the Plan shall commence participation as of the date established by the Board of Directors. The Board of Directors shall establish an Eligible Employee's date of participation at the same time it designates the Eligible Employee as a Participant in the Plan. (b) The Board of Directors may, at any time, designate an Eligible Employee as a Participant for any or all supplemental benefits provided for under Article IV of the Plan. 5 ARTICLE IV BENEFITS SECTION 4.01 SUPPLEMENTAL ESOP BENEFIT. As of the last day of each plan year of the ESOP, the Employer shall credit the Participant's Supplemental ESOP Account with a Supplemental ESOP Benefit equal to the excess of (a) over (b), where: (a) Equals the annual contributions made by the Employer and/or the number of shares of Common Stock released for allocation in connection with the repayment of an ESOP Acquisition Loan that would otherwise be allocated to the accounts of the Participant under the ESOP for the applicable plan year, if the provisions of the ESOP were administered without regard to any of the Applicable Limitations; and (b) Equals the annual contributions made by the Employer and/or the number of shares of common stock released for allocation in connection with the repayment of an ESOP Acquisition Loan that are actually allocated to the accounts of the Participant under the provisions of the ESOP for that particular plan year, after giving effect to any reduction of such allocation required by any of the Applicable Limitations. SECTION 4.02 SUPPLEMENTAL STOCK OWNERSHIP BENEFIT. (a) Upon a Change in Control, the Employer shall credit to the Participant's Supplemental Stock Ownership Account a Supplemental Stock Ownership Benefit equal to (i) less (ii), the result of which is multiplied by (iii), where: (i) Equals the total number of shares of Common Stock acquired with the proceeds of all ESOP Acquisition Loans (together with any dividends, cash proceeds, or other medium related to such ESOP Acquisition Loans) that would have been allocated or credited for the benefit of the Participant under the ESOP and/or this Plan, as the case may be, had the Participant continued in the employ of the Employer through the first ESOP Valuation Date following the last scheduled payment of principal and interest on all ESOP Acquisition Loans outstanding at the time of the Change in Control; and (ii) Equals the total number of shares of Common Stock acquired with the proceeds of all ESOP Acquisition Loans (together with any dividends, cash proceeds, or other medium related to such ESOP Acquisition Loans) and allocated for the benefit of the Participant under the ESOP and/or this Plan, as the case may be, as of the first ESOP Valuation Date following the Change in Control; and (iii) Equals the fair market value of the Common Stock immediately preceding the Change in Control. 6 (b) For purposes of clause (i) of subsection (a) of this Section 4.02, the total number of shares of Common Stock shall be determined by multiplying the sum of (i) and (ii) by (iii), where: (i) equals the average of the total shares of Common Stock acquired with the proceeds of an ESOP Acquisition Loan and allocated for the benefit of the Participant under the ESOP as of the three most recent ESOP Valuation Dates preceding the Change in Control (or lesser number if the Participant has not participated in the ESOP for three full years); (ii) equals the average number of shares of Common Stock credited to the Participant's Supplemental ESOP Account for the three most recent plan years of the ESOP (such that the three most recent plan years coincide with the three most recent ESOP Valuation Dates referred to in (i) above); and (iii) equals the original number of scheduled annual payments on the ESOP Acquisition Loans. SECTION 4.03 SUPPLEMENTAL SAVINGS BENEFIT. A Participant's Supplemental Savings Benefit under the Plan shall be equal to the excess of (a) over (b), where: (a) is the sum of the matching contributions and other contributions of the Employer that would otherwise be allocated to an account of the Participant under the Savings Plan for a particular year, if the provisions of the Savings Plan were administered without regard to any of the Applicable Limitations; and (b) is the sum of the matching contributions and other contributions of the Employer that are actually allocated on account of the Participant under the provisions of the Savings Plan for that particular year, after giving effect to any reduction of such allocation required by any of the Applicable Limitations. 7 ARTICLE V ACCOUNTS SECTION 5.01 SUPPLEMENTAL ESOP BENEFIT ACCOUNT. For each Participant who is credited with a benefit pursuant to Section 4.01 of the Plan, the Employer shall establish, as a memorandum account on its books, a Supplemental ESOP Account. Each year, the Committee shall credit to the Participant's Supplemental ESOP Account the amount of benefits determined under Section 4.01 of the Plan for that year. The Committee shall credit the account with an amount equal to the appropriate number of shares of Common Stock or other medium of contribution that would have otherwise been made to the Participant's accounts under the ESOP but for the limitations imposed by the Code. Shares of Common Stock shall be valued under this Plan in the same manner as under the ESOP. Cash contributions credited to a Participant's Supplemental ESOP Account shall be credited annually with interest at a rate equal to the combined weighted return provided to the Participant's non-stock accounts under the ESOP. SECTION 5.02 SUPPLEMENTAL STOCK OWNERSHIP ACCOUNT. The Employer shall establish, as a memorandum account on its books, a Supplemental Stock Ownership Account. Upon a Change in Control, the Committee shall credit to the Participant's Supplemental Stock Ownership Account the amount of benefits determined under Section 4.02 of the Plan. The Committee shall credit the account with an amount equal to the appropriate number of shares of Common Stock or other medium of contribution that would have otherwise been made to the Participant's accounts under the ESOP. Shares of Common Stock shall be valued under this Plan in the same manner as under the ESOP. Cash contributions credited to a Participant's Supplemental Stock Ownership Account shall be credited annually with interest at a rate equal to the combined weighted return provided to the Participant's non-stock accounts under the ESOP. SECTION 5.03 SUPPLEMENTAL SAVINGS ACCOUNT. The Employer shall establish a memorandum account, the "Supplemental Savings Account" for each Participant on its books, and each year the Committee will credit the amount of contributions determined under Section 4.03 of the Plan. Contributions credited to a Participant's Supplemental Savings Account shall be credited monthly with interest at a rate equal to the combined weighted return provided to the Participant's account(s) under the Savings Plan. 8 ARTICLE VI SUPPLEMENTAL BENEFIT PAYMENTS SECTION 6.01 PAYMENT OF SUPPLEMENTAL ESOP BENEFIT. (a) A Participant's Supplemental ESOP Benefit shall be paid to the Participant or, in the event of the Participant's death, to his beneficiary, in the same form, time and medium (i.e., cash and/or shares of Common Stock) as his benefits are paid under the ESOP. (b) A Participant shall have a non-forfeitable right to the Supplemental ESOP Benefit credited to him under this Plan in the same percentage as he has benefits allocated to him under the ESOP at the time the benefits become distributable to him under the ESOP. SECTION 6.02 PAYMENT OF SUPPLEMENTAL STOCK OWNERSHIP BENEFIT. (a) A Participant's Supplemental Stock Ownership Benefit shall be paid to the Participant or, in the event of the Participant's death, to his beneficiary, in the same form, time and medium (i.e., cash and/or shares of Common Stock) as his benefits are paid under the ESOP. (b) A Participant shall always have a fully non-forfeitable right to the Supplemental Stock Ownership Benefit credited to him under this Plan. SECTION 6.03 PAYMENT OF SUPPLEMENTAL SAVINGS BENEFIT. (a) A Participant's Supplemental Savings Benefit shall be paid to the Participant or, in the event of the Participant's death, to his beneficiary, in the same form and at the same time as his benefits are paid under the Savings Plan. (b) A Participant shall have a non-forfeitable right to his Supplemental Savings Benefit under this Plan in the same percentage as he has to his matching contributions under the Savings Plan at the time the benefits become distributable to him under the Savings Plan. SECTION 6.04 ALTERNATIVE PAYMENT OF BENEFITS. Notwithstanding the other provisions of this Article VI, a Participant may, with prior written consent of the Committee and upon such terms and conditions as the Committee may impose, request that the Supplemental ESOP Benefit and/or the Supplemental Stock Ownership Benefit and/or the Supplemental Savings Benefit to which he is entitled be paid commencing at a different time, over a different period, in a different form, or to different persons, than the benefit to which he or his beneficiary may be entitled under the ESOP or the Savings Plan. 9 ARTICLE VII CLAIMS PROCEDURES SECTION 7.01 CLAIMS REVIEWER. For purposes of handling claims with respect to this Plan, the "Claims Reviewer" shall be the Committee, unless the Committee designates another person or group of persons as Claims Reviewer. SECTION 7.02 CLAIMS PROCEDURE. (a) An initial claim for benefits under the Plan must be made by the Participant or his beneficiary or beneficiaries in accordance with the terms of this Section 7.02. (b) Not later than ninety (90) days after receipt of such a claim, the Claims Reviewer will render a written decision on the claim to the claimant, unless special circumstances require the extension of such 90-day period. If such extension is necessary, the Claims Reviewer shall provide the Participant or the Participant's beneficiary or beneficiaries with written notification of such extension before the expiration of the initial 90-day period. Such notice shall specify the reason or reasons for the extension and the date by which a final decision can be expected. In no event shall such extension exceed a period of ninety (90) days from the end of the initial 90-day period. (c) In the event the Claims Reviewer denies the claim of a Participant or any beneficiary in whole or in part, the Claims Reviewer's written notification shall specify, in a manner calculated to be understood by the claimant, the reason for the denial; a reference to the Plan or other document or form that is the basis for the denial; a description of any additional material or information necessary for the claimant to perfect the claim; an explanation as to why such information or material is necessary; and an explanation of the applicable claims procedure. (d) Should the claim be denied in whole or in part and should the claimant be dissatisfied with the Claims Reviewer's disposition of the claimant's claim, the claimant may have a full and fair review of the claim by the Committee upon written request submitted by the claimant or the claimant's duly authorized representative and received by the Committee within sixty (60) days after the claimant receives written notification that the claimant's claim has been denied. In connection with such review, the claimant or the claimant's duly authorized representative shall be entitled to review pertinent documents and submit the claimant's views as to the issues, in writing. The Committee shall act to deny or accept the claim within sixty (60) days after receipt of the claimant's written request for review unless special circumstances require the extension of such 60-day period. If such extension is necessary, the Committee shall provide the claimant with written notification of such extension before the expiration of such initial 60-day period. In all events, the Committee shall act to deny or accept the claim within 120 days of the receipt of the claimant's written request for review. The action of the Committee shall be in the form 10 of a written notice to the claimant and its contents shall include all of the requirements for action on the original claim. (e) In no event may a claimant commence legal action for benefits the claimant believes are due the claimant until the claimant has exhausted all of the remedies and procedures afforded the claimant by this Article VII. 11 ARTICLE VIII AMENDMENT AND TERMINATION SECTION 8.01 AMENDMENT OF THE PLAN. The Bank may from time to time and at any time amend the Plan; provided, however, that such amendment may not adversely affect the rights of any Participant or beneficiary with respect to any benefit under the Plan to which the Participant or beneficiary may have previously become entitled prior to the effective date of such amendment without the consent of the Participant or beneficiary. The Committee shall be authorized to make minor or administrative changes to the Plan, as well as amendments required by applicable federal or state law (or authorized or made desirable by such statutes); provided, however, that such amendments must subsequently be ratified by the Board of Directors. SECTION 8.02 TERMINATION OF THE PLAN. The Bank may at any time terminate the Plan; provided, however, that such termination may not adversely affect the rights of any Participant or beneficiary with respect to any benefit under the Plan to which the Participant or beneficiary may have previously become entitled prior to the effective date of such termination without the consent of the Participant or beneficiary. Any amounts credited to the supplemental accounts of any Participant shall remain subject to the provisions of the Plan and no distribution of benefits shall be accelerated because of termination of the Plan. 12 ARTICLE IX GENERAL PROVISIONS SECTION 9.01 UNFUNDED, UNSECURED PROMISE TO MAKE PAYMENTS IN THE FUTURE. The right of a Participant or any beneficiary to receive a distribution under this Plan shall be an unsecured claim against the general assets of the Bank or its Affiliates, and neither a Participant, nor his designated beneficiary or beneficiaries, shall have any rights in or against any amount credited to any account under this Plan or any other assets of the Bank or an Affiliate. The Plan at all times shall be considered entirely unfunded both for tax purposes and for purposes of Title I of ERISA. Any funds invested hereunder shall continue for all purposes to be part of the general assets of the Bank or an Affiliate and available to its general creditors in the event of bankruptcy or insolvency. Accounts under this Plan and any benefits which may be payable pursuant to this Plan are not subject in any manner to anticipation, sale, alienation, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors of a Participant or a Participant's beneficiary. The Plan constitutes a mere promise by the Bank or Affiliate to make benefit payments in the future. No interest or right to receive a benefit may be taken, either voluntarily or involuntarily, for the satisfaction of the debts of, or other obligations or claims against, such Participant or beneficiary, including claims for alimony, support, separate maintenance and claims in bankruptcy proceedings. SECTION 9.02 COMMITTEE AS PLAN ADMINISTRATOR. (a) The Plan shall be administered by the Committee designated by the Board of Directors of the Bank. (b) The Committee shall have the authority, duty and power to interpret and construe the provisions of the Plan as it deems appropriate. The Committee shall have the duty and responsibility of maintaining records, making the requisite calculations and disbursing the payments hereunder. In addition, the Committee shall have the authority and power to delegate any of its administrative duties to employees of the Bank or an Affiliate, as they may deem appropriate. The Committee shall be entitled to rely on all tables, valuations, certificates, opinions, data and reports furnished by any actuary, accountant, controller, counsel or other person employed or retained by the Bank with respect to the Plan. The interpretations, determinations, regulations and calculations of the Committee shall be final and binding on all persons and parties concerned. SECTION 9.03 EXPENSES. Expenses of administration of the Plan shall be paid by the Bank or an Affiliate. SECTION 9.04 STATEMENTS. The Committee shall furnish individual annual statements of accrued benefits to each Participant, or current beneficiary, in such form as determined by the Committee or as required by law. 13 SECTION 9.05 RIGHTS OF PARTICIPANTS AND BENEFICIARIES. (a) The sole rights of a Participant or beneficiary under this Plan shall be to have this Plan administered according to its provisions and to receive whatever benefits he or she may be entitled to hereunder. (b) Nothing in the Plan shall be interpreted as a guaranty that any funds in any trust which may be established in connection with the Plan or assets of the Bank or an Affiliate will be sufficient to pay any benefit hereunder. (c) The adoption and maintenance of this Plan shall not be construed as creating any contract of employment or service between the Bank or an Affiliate and any Participant or other individual. The Plan shall not affect the right of the Bank or an Affiliate to deal with any Participants in employment or service respects, including their hiring, discharge, compensation, and other conditions of employment or service. SECTION 9.06 INCOMPETENT INDIVIDUALS. The Committee may, from time to time, establish rules and procedures which it determines to be necessary for the proper administration of the Plan and the benefits payable to a Participant or beneficiary in the event that such Participant or beneficiary is declared incompetent and a conservator or other person is appointed and legally charged with that Participant's or beneficiary's care. Except as otherwise provided for herein, when the Committee determines that such Participant or beneficiary is unable to manage his financial affairs, the Committee may pay such Participant's or beneficiary's benefits to such conservator, person legally charged with such Participant's or beneficiary's care, or institution then contributing toward or providing for the care and maintenance of such Participant or beneficiary. Any such payment shall constitute a complete discharge of any liability of the Bank or an Affiliate and the Plan for such Participant or beneficiary. SECTION 9.07 SALE, MERGER OR CONSOLIDATION OF THE BANK. The Plan may be continued after a sale of assets of the Bank, or a merger or consolidation of the Bank into or with another corporation or entity only if, and to the extent that, the transferee, purchaser or successor entity agrees to continue the Plan. Additionally, upon a merger, consolidation or other change in control any amounts credited to Participant's deferral accounts shall be placed in a grantor trust to the extent not already in such a trust. In the event that the Plan is not continued by the transferee, purchaser or successor entity, then the Plan shall be terminated subject to the provisions of Section 8.02 of the Plan. Any legal fees incurred by a Participant in determining benefits to which such Participant is entitled under the Plan following a sale, merger, or consolidation of the Bank or an Affiliate of which the Participant is an Employee or, if applicable, a member of the Board of Directors, shall be paid by the resulting or succeeding entity. 14 SECTION 9.08 LOCATION OF PARTICIPANTS. Each Participant shall keep the Bank informed of his current address and the current address of his designated beneficiary or beneficiaries. The Bank shall not be obligated to search for any person. If such person is not located within three (3) years after the date on which payment of the Participant's benefits payable under this Plan may first be made, payment may be made as though the Participant or his beneficiary had died at the end of such three-year period. SECTION 9.09 LIABILITY OF THE BANK AND ITS AFFILIATES. Notwithstanding any provision herein to the contrary, neither the Bank nor any individual acting as an employee or agent of the Bank shall be liable to any Participant, former Participant, beneficiary, or any other person for any claim, loss, liability or expense incurred in connection with the Plan, unless attributable to fraud or willful misconduct on the part of the Bank or any such employee or agent of the Bank. SECTION 9.10 GOVERNING LAW. All questions pertaining to the construction, validity and effect of the Plan shall be determined in accordance with the laws of the United States and, to the extent not preempted by such laws, by the laws of the State of Connecticut. 15 Having been adopted by its Board of Directors, this Plan is executed by its duly authorized officer this ____day of ________, 2004. NAUGATUCK VALLEY SAVINGS AND LOAN Attest: ___________________________ By: ____________________________________ Corporate Secretary For the Entire Board of Directors 16 EX-10.8 17 g89544exv10w8.txt EX-10.8 EMPLOYEE SEVERANCE COMPENSATION PLAN EXHIBIT 10.8 FORM OF NAUGATUCK VALLEY SAVINGS AND LOAN CHANGE IN CONTROL SEVERANCE PLAN SECTION 1. PLAN PURPOSE. The purpose of the Naugatuck Valley Savings and Loan Change in Control Severance Plan is to assure for Naugatuck Valley Savings and Loan the continued services of Bank employees in the event of a Change in Control of Naugatuck Valley Financial Corporation or the Bank. The benefits contemplated by the Plan recognize the value of the services and contributions of Eligible Employees and seek to minimize the adverse effects upon the Bank of uncertainties regarding continued employment, reduced employee benefits, management changes and relocations that may arise in the event of a Change in Control. The Board of Directors of the Bank further believes that the Plan will aid the Bank in attracting and retaining the highly qualified employees essential to its continued success. SECTION 2. DEFINITIONS. Whenever used herein, the following terms shall have the meanings set forth below: (a) "Affiliate" means any parent or subsidiary corporation affiliated with the Bank. (b) "Annual Compensation" means [REGULAR BASE SALARY OR TOTAL HOURLY WAGES PAID DURING THE MOST RECENT 12 MONTHS ENDED AS OF THE DATE OF TERMINATION OF EMPLOYMENT, WHICH IS INCLUDIBLE IN THE GROSS INCOME OF THE ELIGIBLE EMPLOYEE FOR FEDERAL INCOME TAX PURPOSES. ANNUAL COMPENSATION SHALL EXCLUDE OVERTIME, BONUSES, PREMIUMS, INCENTIVE COMPENSATION IN ANY FORM, TRAVEL AND SIMILAR BUSINESS EXPENSES OR ALLOWANCE AND ANY OTHER SPECIAL PAYMENTS.] (c) "Bank" means Naugatuck Valley Savings and Loan, or any successor thereto. (d) "Change in Control" means any of the following: (i) Merger: The Company merges into or consolidates with another corporation, or merges another corporation into the Company, and as a result less than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were stockholders of the Company immediately before the merger or consolidation; (ii) Acquisition of Significant Share Ownership: A report on Schedule 13D or another form or schedule (other than Schedule 13G) is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 25% or more of a class of the Company's voting securities, but this clause (b) shall not apply to beneficial ownership of Company voting shares held in a fiduciary capacity by an entity of which the Company directly or indirectly beneficially owns 50% or more of its outstanding voting securities; (iii) Change in Board Composition: During any period of two consecutive years, individuals who constitute the Company's Board of Directors at the beginning of the two-year period cease for any reason to constitute at least a majority of the Company's Board of Directors; provided, however, that for purposes of this clause (iii) each director who is first elected by the board (or first nominated by the board for election by stockholders) by a vote of at least two-thirds of the directors who were directors at the beginning of the period shall be deemed to have been a director at the beginning of the two-year period; or (iv) Sale of Assets: The Company sells to a third party all or substantially all of its assets. A Change in Control shall not occur as a result of a mutual holding company reorganization or second-step conversion of the Bank from the mutual to the stock form of ownership. (e) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (f) "Company" means Naugatuck Valley Financial Corporation or any successor thereto. (g) "Comparable Position" means a position which: (i) requires skills and knowledge similar to that required for the Eligible Employee's position immediately prior to a Change in Control; or (ii) involves a work schedule that is substantially similar to that followed by the Eligible Employee immediately prior to a Change in Control. A position shall not fail to be a "Comparable Position," solely because it results in a change in the Eligible Employee's (A) title, (B) supervisory authority or (C) reporting responsibilities in connection with a Change in Control. (h) "Disqualified Individual" has the same meaning as such term is defined in Section 280G of the Code and applicable regulations issued thereunder. (i) "Eligible Employee" means any Employee of the Bank or an affiliate who has been employed by the Bank for at least [________] as of the date of a Change in Control and whose employment status, within [________] following a change in control, is affected in any one of the following ways without prior consent: (i) The Eligible Employee is involuntarily terminated by the Company, the Bank or an Affiliate for any reason other than Just Cause. 2 (ii) The Eligible Employee voluntarily terminates employment following a relocation of employment to a work site that is more than 35 miles from its location immediately prior to the Change in Control. (iii) The Eligible Employee voluntarily terminates employment due to a reduction in base salary below the amount being paid immediately prior to the Change in Control. (iv) The Eligible Employee voluntarily terminates employment due to a failure by the Company or an Affiliate to offer or employ the Eligible Employee in a Comparable Position. (j) "Employee" means any person who has been employed by the Bank or any Affiliate for at least [________] days, on a full-time salaried basis, immediately prior to the Change in Control, excluding any person who is covered by an employment contract, change in control or severance agreement with the Bank or any Affiliate. (k) "Excess Parachute Payment" has the same meaning as such term is defined in Section 280G of the Code and applicable regulations issued thereunder. (l) "Just Cause," with respect to termination of employment, means an act or acts of personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order. In determining incompetence, acts or omissions shall be measured against standards generally prevailing in the banking industry, as determined by the Boards of Directors of the Bank or the Company. (m) "Leave of Absence" means solely for Plan purposes, the taking of an authorized or approved leave of absence under the provisions of (i) the Family and Medical Leave Act ("FMLA"), (ii) any state law providing quantitatively similar benefits to the FMLA, or (iii) an authorized leave policy of the Bank or an Affiliate. (n) "Plan" means this Naugatuck Valley Savings and Loan Change in Control Severance Plan, as may be amended from time to time. (o) "Year of Service" means each consecutive 12 month period, beginning with an employee's date of hire and continuing through a termination of employment, in which an Employee is credited with at least one hour of service in each month. The taking of a Leave of Absence shall be counted toward a Year of Service if such time period would otherwise qualify toward completion of a Year of Service for purposes of the Plan. For purposes of determining a severance benefit under this Plan, partial years will be rounded up to the nearest whole Year of Service. 3 SECTION 3. SEVERANCE BENEFIT TO ELIGIBLE EMPLOYEES. (a) Each Eligible Employee shall be entitled to receive a severance benefit equal to [ONE-TWELFTH (1/12) OF HIS OR HER ANNUAL COMPENSATION FOR EACH YEAR OF SERVICE WITH THE BANK OR AN AFFILIATE. NOTWITHSTANDING THE FOREGOING, AN ELIGIBLE EMPLOYEE SHALL BE ENTITLED TO A MAXIMUM SEVERANCE BENEFIT EQUAL TO ______________________________] (b) All severance payments shall be made in a single lump sum payment, payable within ten (10) days of the Eligible Employee's termination of employment. (c) Notwithstanding anything in the Plan to the contrary, if all or a portion of a severance benefit payment to an Eligible Employee who is a Disqualified Individual is considered an Excess Parachute Payment under Section 280G of the Code, the payment shall be reduced to the maximum amount that does not constitute an Excess Parachute Payment. (d) The Eligible Employee shall not be required to mitigate damages in relation to a severance benefit by seeking other employment or otherwise, nor shall the amount of a severance benefit be reduced by any compensation earned by the Eligible Employee as a result of employment obtained after termination of employment hereunder. SECTION 4. WRITTEN ACKNOWLEDGMENT. As a condition to receiving any payments pursuant to Section 3 of this Plan, the Eligible Employee shall deliver to the Bank or any applicable Affiliate on the date of his or her employment termination a written Acknowledgment signed by the Eligible Employee stating (i) that the severance payment to be made to the Eligible Employee pursuant to paragraph 3 above is in full and complete satisfaction of all liabilities and obligations of the Bank and its Affiliates, directors, officers, employees and agents, except for any tax-qualified plan benefits that may be due and owing and except for any liabilities or obligations that may be required by law, and (ii) that the Bank or any Affiliate shall not have any other liabilities or obligations to the Eligible Employee relating to the Eligible Employee's employment by the Bank or any Affiliate. SECTION 5. LEGAL FEES AND EXPENSES. All reasonable legal fees and other expenses paid or incurred by a party hereto pursuant to any dispute or question of interpretation relating to this Plan shall be paid or reimbursed by the prevailing party in any legal judgment, arbitration or settlement. SECTION 6. REQUIRED PROVISIONS. (a) The Bank or any of its Affiliates may terminate an employee's employment at any time, but any termination by the Bank or any of its Affiliates, other than termination for Just Cause, shall not prejudice that employee's right to compensation under this Plan. An employee shall not have the right to receive compensation for any period after termination for Just Cause as defined in Section 2(g) of this Plan. (b) If an Employee is suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the 4 Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e)(3) or (g)(1), the Bank's obligations under this Plan shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Employee all or part of the compensation withheld while their obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If an employee is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default as defined in Section 3(x)(1) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1813(x)(1), all obligations of the Bank under this Plan shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (e) All obligations of the Bank under this Plan shall be terminated, except to the extent it is determined that the Plan's continuation is necessary for the continued operation of the institution: (i) by the Bank's appropriate federal banking agency as defined at 12 U.S.C. Section 1813(g) or by the Federal Deposit Insurance Corporation (FDIC), at the time of entry into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act; or (ii) by the Bank's appropriate federal banking agency as defined at 12. U.S.C. Section 1813(g), at the time such agency approves a supervisory merger to resolve problems related to the operation of the Bank, or when the Bank is determined by the agency to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (f) Any payments made pursuant to this Plan, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. SECTION 7. ADMINISTRATIVE PROVISIONS. (a) The administrator of the Plan shall be under the supervision of the Board of Directors of the Bank or a committee appointed by the Board of Directors of the Bank (the "Board"). It shall be a principal duty of the Board to see that the Plan is carried out, in accordance with its terms, for the exclusive benefit of persons entitled to participate in the Plan and without discrimination among Participants. The Board will have full power to administer the Plan in all of its details; provided, however, that the Board remains subject to the requirements of ERISA. For this purpose, the Board's powers will include, but will not be limited to, the following authority, in addition to all other powers provided for by this Plan: (i) to make and enforce such rules and regulations as it deems necessary or proper for the efficient administration of the Plan; (ii) to interpret the Plan, its interpretation thereof in good faith to be final and conclusive on all persons claiming benefits under the Plan; (iii) to decide all questions concerning the Plan and the eligibility of any person to participate in the Plan; (iv) to compute 5 the amount of severance benefits payable to any Eligible Employee or other person in accordance with the provisions of the Plan, and to determine the person or persons to whom such benefits will be paid; (v) to authorize severance benefits; (vi) to appoint such agents, counsel, accountants, consultants and actuaries as may be required to assist in administering the Plan; and (vii) to allocate and delegate its responsibilities under the Plan and to designate other persons to carry out any of its responsibilities under the Plan, any such allocation, delegation or designation to be by written instrument and in accordance with Section 405 of ERISA, if applicable. (b) The Board will be a "named fiduciary" for purposes of Section 402(a)(1) of ERISA with authority to control and manage the operation and administration of the Plan, and will be responsible for complying with all of the reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA. SECTION 8. CLAIMS AND REVIEW PROCEDURES. (a) If any person believes he is being denied any rights or benefits under the Plan, such person may file a claim in writing with the Board. If any such claim is wholly or partially denied, the Board will notify the claimant of its decision in writing. Such notification will be written in a manner calculated to be understood by the claimant and will contain: (i) specific reasons for the denial, (ii) specific references to pertinent Plan provisions, (iii) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary and (iv) information as to the steps to be taken if the claimant wishes to submit a request for review. Such notification will be given within 90 days after the claim is received by the Board (or within 180 days, if special circumstances require an extension of time for processing the claim, and if written notice of such extension and circumstances is given to the claimant within the initial 90 day period). If such notification is not given within such period, the claim will be considered denied as of the last day of such period and the claimant may request a review of the claim. (b) Within 60 days after the date on which a claimant receives a written notice of a denied claim (or, if applicable, within 60 days after the date on which such denial is considered to have occurred) the claimant (or his duly authorized representative) may (i) file a written request with the Board for a review of his denied claim and of pertinent documents and (ii) submit written issues and comments to the Board. The Board will notify the claimant of its decision in writing. Such notification will be written in a manner calculated to be understood by the claimant and will contain specific reasons for the decision as well as specific references to pertinent Plan provisions. The decision on review will be made within 60 days after the request for review is received by the Board (or within 120 days, if special circumstances require an extension of time for processing the request, such as an election by the Board to hold a hearing, and if written notice of such extension and circumstances is given to the claimant within the initial 60 day period). If the decision on review is not made within such period, the claim will be considered denied. SECTION 9. GOVERNING LAW. To the extent not pre-empted by federal law, this plan shall be governed by the laws of the State of Connecticut. 6 SECTION 10. TERMINATION OR AMENDMENT. This plan may be amended or terminated at any time prior to a Change in Control, in the full discretion of the Board of Directors of the Bank. This plan may not be terminated or amended at the time of or following a Change in Control. Having been duly adopted by the Board of Directors of the Bank, this Plan is executed by a duly authorized officer of the Bank on this _____ day of ______________________, 2004. ATTEST: NAUGATUCK VALLEY SAVINGS AND LOAN ____________________ By: _______________________________________ For the Entire Board of Directors 7 EX-10.9 18 g89544exv10w9.txt EX-10.9 DEATH BENEFIT PLAN, JOHN C. ROMAN EXHIBIT 10.9 OFFICER'S DEATH BENEFIT AGREEMENT THIS AGREEMENT, made this 22nd day of April 2003, by and between Naugatuck Valley Savings and Loan, S.B., a banking corporation organized and existing under the laws of the United States of America, hereinafter referred to as the "Bank", and John C. Roman, hereinafter referred to as the "Officer". WITNESSETH: WHEREAS, the Officer is currently retained by the Bank; WHEREAS, the Bank recognizes the valuable services heretofore performed for it by the Officer; WHEREAS, the Bank desires to retain the valuable service and loyalty of the Officer and to induce the Officer to remain with the Bank; WHEREAS, the Officer wishes to be assured that his beneficiary will be entitled to a certain benefit for some definite period of time from and after the Officer's death; WHEREAS, the Bank intends to purchase for its own benefit a life insurance policy on the life of the Officer; and WHEREAS, the Bank desires to provide a lesser death benefit from said life insurance proceeds payable by Bank to the designated beneficiary of the Officer in the event of his death under certain circumstances as well as other such benefits as set forth herein, and both parties desire to enter into this Agreement to evidence the terms and conditions of such benefits; NOW, THEREFORE, in consideration of the mutual covenants and Agreements herein contained, it is agreed as follows: Upon the death of the Officer, a death benefit will be payable to his designed beneficiary. The death benefit payable pursuant to this subparagraph shall be Twenty-five Thousand and 00/100ths dollars ($25,000.00) paid in a lump sum. 1. The Death benefit payable pursuant to the paragraph above shall be paid to the beneficiary or beneficiaries irrevocably designated by the Officer by written instrument delivered to the Bank within six (6) months of the date hereof. If no such designation is made within said time period, or if all designated beneficiaries predecease the Officer, such death benefit shall be paid as follows: a) To Officer's spouse, if living; or if not, b) To Officer's lawful descendants, per stirpes, then living; or if none, c) To the duly appointed legal representative of the Officer; or d) If there shall be no such legal representative duly appointed and qualified within six (6) months of the date of death of the Officer, then to such persons as, at the date of his death, would be entitled to share in the distribution of his/her personal estate under the provisions of the State of Connecticut statute then in force governing the descent of intestate property, in the proportions specified in such statute. 1 2. Every notice or other communication required by or appropriate to this Agreement from any party shall be in writing addressed to the Bank at 333 Church Street, Naugatuck, CT 06770, or to John C. Roman at 90 Parish Drive, Kensington, CT 06037; or to such other addresses as shall have been specified by notice given as herein provided. Any such notice or other communication shall be deemed to have been given on the third business day after it is sent by certified mail, postage prepaid, addressed as aforesaid. 3. Suicide. Notwithstanding anything to the contrary in this Agreement, the benefits otherwise provided herein shall not be payable if the Officer's death results from suicide, whether sane or insane, within two years after the execution of this Agreement. 4. This document sets forth the entire Agreement and understanding between the parties hereto representing the death benefit payable by the Bank upon the death of the Officer and merges all prior discussions between them with respect to that subject matter only, and not party shall be bound by any representation, definition, condition or provision other than as expressly stated in this Agreement or as subsequently set forth in an amendment hereto adopted in the manner provided above. 5. Officer agrees on behalf of himself, his heirs, executors and administrators and any other person or persons claiming any benefit under his by virtue of this Agreement that this Agreement and all rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by the Officer or by any beneficiary, heir, executor, administrator or other person claiming under the Officer by virtue of this Agreement and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge or hypothecation or any other disposition of such rights, interests and benefits contrary to the foregoing provisions or the levy or any execution, attachment or similar process thereon shall be null and void and without effect. 6. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives and successors, and any successor to the Bank shall be deemed substituted for the Bank under the terms of this Agreement. As used herein, the term "successor" shall include any person, firm, corporation or any other business entity which, at any time, whether by consolidation, merger, purchase or otherwise, acquires all or substantially all of the assets or business of the Bank. 7. The validity, construction and enforceability of this Agreement shall be governed in all respects by the laws of the United States of America. 8. Nothing contained in this Agreement shall be construed to be a contract for employment for any term of years, nor as conferring upon the Officer the right to continue employment with the Bank in the Officer's present capacity. It is not intended as a current employment contract. 9. Notwithstanding any of the preceding provisions of the Agreement, neither the Bank, nor any individual acting as an Officer or agent of the Bank or as a Member of the Board of Directors, shall be liable to any Officer, former Officer, or any other person for any claim, loss, liability or expense incurred in connection with the Agreement. 10. Nothing contained in this Agreement shall affect the right of the Officer to participate in, or be covered by, any qualified or non-qualified pension, profit sharing, group, bonus or other 2 supplemental compensation or fringe benefit Agreement constituting apart of the Bank's existing or future compensation structure. 11. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and which shall constitute but one and the same Agreement, which shall be sufficiently evidenced for all purposes by anyone executed counterpart. 12. This Agreement cannot be amended except by the written mutual consent of both parties hereto. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on this 22nd day of April, 2003. /s/ John C. Roman ------------------------------------ Officer NAUGATUCK VALLEY SAVINGS AND LOAN, S.B. Naugatuck, CT By: /s/ Dominic J. Alegi, Jr. -------------------------------- Executive Vice President Title 3 EX-10.10 19 g89544exv10w10.txt EX-10.10 DEATH BENEFIT PLAN, DOMINIC J. ALEGI, JR. EXHIBIT 10.10 OFFICER'S DEATH BENEFIT AGREEMENT THIS AGREEMENT, made this 22nd day of April 2003, by and between Naugatuck Valley Savings and Loan, S.B., a banking corporation organized and existing under the laws of the United States of America, hereinafter referred to as the "Bank", and Dominic J. Alegi, Jr, hereinafter referred to as the "Officer". WITNESSETH: WHEREAS, the Officer is currently retained by the Bank; WHEREAS, the Bank recognizes the valuable services heretofore performed for it by the Officer; WHEREAS, the Bank desires to retain the valuable service and loyalty of the Officer and to induce the Officer to remain with the Bank; WHEREAS, the Officer wishes to be assured that his beneficiary will be entitled to a certain benefit for some definite period of time from and after the Officer's death; WHEREAS, the Bank intends to purchase for its own benefit a life insurance policy on the life of the Officer; and WHEREAS, the Bank desires to provide a lesser death benefit from said life insurance proceeds payable by Bank to the designated beneficiary of the Officer in the event of his death under certain circumstances as well as other such benefits as set forth herein, and both parties desire to enter into this Agreement to evidence the terms and conditions of such benefits; NOW, THEREFORE, in consideration of the mutual covenants and Agreements herein contained, it is agreed as follows: Upon the death of the Officer, a death benefit will be payable to his designed beneficiary. The death benefit payable pursuant to this subparagraph shall be Twenty-five Thousand and 00/100ths dollars ($25,000.00) paid in a lump sum. 1. The Death benefit payable pursuant to the paragraph above shall be paid to the beneficiary or beneficiaries irrevocably designated by the Officer by written instrument delivered to the Bank within six (6) months of the date hereof. If no such designation is made within said time period, or if all designated beneficiaries predecease the Officer, such death benefit shall be paid as follows: a) To Officer's spouse, if living; or if not, b) To Officer's lawful descendants, per stirpes, then living; or if none, c) To the duly appointed legal representative of the Officer; or d) If there shall be no such legal representative duly appointed and qualified within six (6) months of the date of death of the Officer, then to such persons as, at the date of his death, would be entitled to share in the distribution of his/her personal estate under the 1 provisions of the State of Connecticut statute then in force governing the descent of intestate property, in the proportions specified in such statute. 2. Every notice or other communication required by or appropriate to this Agreement from any party shall be in writing addressed to the Bank at 333 Church Street, Naugatuck, CT 06770, or to Dominic J. Alegi, Jr. at 19 Heritage Drive, Naugatuck, CT 06770; or to such other addresses as shall have been specified by notice given as herein provided. Any such notice or other communication shall be deemed to have been given on the third business day after it is sent by certified mail, postage prepaid, addressed as aforesaid. 3. Suicide. Notwithstanding anything to the contrary in this Agreement, the benefits otherwise provided herein shall not be payable if the Officer's death results from suicide, whether sane or insane, within two years after the execution of this Agreement. 4. This document sets forth the entire Agreement and understanding between the parties hereto representing the death benefit payable by the Bank upon the death of the Officer and merges all prior discussions between them with respect to that subject matter only, and not party shall be bound by any representation, definition, condition or provision other than as expressly stated in this Agreement or as subsequently set forth in an amendment hereto adopted in the manner provided above. 5. Officer agrees on behalf of himself, his heirs, executors and administrators and any other person or persons claiming any benefit under his by virtue of this Agreement that this Agreement and all rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by the Officer or by any beneficiary, heir, executor, administrator or other person claiming under the Officer by virtue of this Agreement and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge or hypothecation or any other disposition of such rights, interests and benefits contrary to the foregoing provisions or the levy or any execution, attachment or similar process thereon shall be null and void and without effect. 6. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives and successors, and any successor to the Bank shall be deemed substituted for the Bank under the terms of this Agreement. As used herein, the term "successor" shall include any person, firm, corporation or any other business entity which, at any time, whether by consolidation, merger, purchase or otherwise, acquires all or substantially all of the assets or business of the Bank. 7. The validity, construction and enforceability of this Agreement shall be governed in all respects by the laws of the United States of America. 8. Nothing contained in this Agreement shall be construed to be a contract for employment for any term of years, nor as conferring upon the Officer the right to continue employment with the Bank in the Officer's present capacity. It is not intended as a current employment contract. 9. Notwithstanding any of the preceding provisions of the Agreement, neither the Bank, nor any individual acting as an Officer or agent of the Bank or as a Member of the Board of Directors, shall be liable to any Officer, former Officer, or any other person for any claim, loss, liability or expense incurred in connection with the Agreement. 2 10. Nothing contained in this Agreement shall affect the right of the Officer to participate in, or be covered by, any qualified or non-qualified pension, profit sharing, group, bonus or other supplemental compensation or fringe benefit Agreement constituting apart of the Bank's existing or future compensation structure. 11. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and which shall constitute but one and the same Agreement, which shall be sufficiently evidenced for all purposes by anyone executed counterpart. 12. This Agreement cannot be amended except by the written mutual consent of both parties hereto. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on this 22nd day of April, 2003. /s/ Dominic J. Alegi, Jr. ------------------------ Officer NAUGATUCK VALLEY SAVINGS AND LOAN, S.B. Naugatuck, CT By: /s/ John C. Roman ----------------- President and Chief Executive Officer Title 3 EX-10.11 20 g89544exv10w11.txt EX-10.11 DEATH BENEFIT PLAN, LEE R. SCHLESINGER EXHIBIT 10.11 OFFICER'S DEATH BENEFIT AGREEMENT THIS AGREEMENT, made this 10th day of December 2003, by and between Naugatuck Valley Savings and Loan, S.B., a banking corporation organized and existing under the laws of the United States of America, hereinafter referred to as the "Bank", and Lee R. Schlesinger, hereinafter referred to as the "Officer". WITNESSETH: WHEREAS, the Officer is currently retained by the Bank; WHEREAS, the Bank recognizes the valuable services heretofore performed for it by the Officer; WHEREAS, the Bank desires to retain the valuable service and loyalty of the Officer and to induce the Officer to remain with the Bank; WHEREAS, the Officer wishes to be assured that his beneficiary will be entitled to a certain benefit for some definite period of time from and after the Officer's death; WHEREAS, the Bank intends to purchase for its own benefit a life insurance policy on the life of the Officer; and WHEREAS, the Bank desires to provide a lesser death benefit from said life insurance proceeds payable by Bank to the designated beneficiary of the Officer in the event of his death under certain circumstances as well as other such benefits as set forth herein, and both parties desire to enter into this Agreement to evidence the terms and conditions of such benefits; NOW, THEREFORE, in consideration of the mutual covenants and Agreements herein contained, it is agreed as follows: Upon the death of the Officer, a death benefit will be payable to his designed beneficiary. The death benefit payable pursuant to this subparagraph shall be Twenty-five Thousand and 00/100ths dollars ($25,000.00) paid in a lump sum. 1. The Death benefit payable pursuant to the paragraph above shall be paid to the beneficiary or beneficiaries irrevocably designated by the Officer by written instrument delivered to the Bank within six (6) months of the date hereof. If no such designation is made within said time period, or if all designated beneficiaries predecease the Officer, such death benefit shall be paid as follows: a) To Officer's spouse, if living; or if not, b) To Officer's lawful descendants, per stirpes, then living; or if none, c) To the duly appointed legal representative of the Officer; or d) If there shall be no such legal representative duly appointed and qualified within six (6) months of the date of death of the Officer, then to such persons as, at the date of his death, would be entitled to share in the distribution of his/her personal estate under the provisions of the State of Connecticut statute then in force governing the descent of intestate property, in the proportions specified in such statute. 1 2. Every notice or other communication required by or appropriate to this Agreement from any party shall be in writing addressed to the Bank at 333 Church Street, Naugatuck, CT 06770, or to Lee R. Schlesinger at 1101 Meriden Rd., Waterbury, CT 06705; or to such other addresses as shall have been specified by notice given as herein provided. Any such notice or other communication shall be deemed to have been given on the third business day after it is sent by certified mail, postage prepaid, addressed as aforesaid. 3. Suicide. Notwithstanding anything to the contrary in this Agreement, the benefits otherwise provided herein shall not be payable if the Officer's death results from suicide, whether sane or insane, within two years after the execution of this Agreement. 4. This document sets forth the entire Agreement and understanding between the parties hereto representing the death benefit payable by the Bank upon the death of the Officer and merges all prior discussions between them with respect to that subject matter only, and not party shall be bound by any representation, definition, condition or provision other than as expressly stated in this Agreement or as subsequently set forth in an amendment hereto adopted in the manner provided above. 5. Officer agrees on behalf of himself, his heirs, executors and administrators and any other person or persons claiming any benefit under his by virtue of this Agreement that this Agreement and all rights, interests and benefits hereunder shall not be assigned, transferred, pledged or hypothecated in any way by the Officer or by any beneficiary, heir, executor, administrator or other person claiming under the Officer by virtue of this Agreement and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge or hypothecation or any other disposition of such rights, interests and benefits contrary to the foregoing provisions or the levy or any execution, attachment or similar process thereon shall be null and void and without effect. 6. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives and successors, and any successor to the Bank shall be deemed substituted for the Bank under the terms of this Agreement. As used herein, the term "successor" shall include any person, firm, corporation or any other business entity which, at any time, whether by consolidation, merger, purchase or otherwise, acquires all or substantially all of the assets or business of the Bank. 7. The validity, construction and enforceability of this Agreement shall be governed in all respects by the laws of the United States of America. 8. Nothing contained in this Agreement shall be construed to be a contract for employment for any term of years, nor as conferring upon the Officer the right to continue employment with the Bank in the Officer's present capacity. It is not intended as a current employment contract. 9. Notwithstanding any of the preceding provisions of the Agreement, neither the Bank, nor any individual acting as an Officer or agent of the Bank or as a Member of the Board of Directors, shall be liable to any Officer, former Officer, or any other person for any claim, loss, liability or expense incurred in connection with the Agreement. 10. Nothing contained in this Agreement shall affect the right of the Officer to participate in, or be covered by, any qualified or non-qualified pension, profit sharing, group, bonus or other 2 supplemental compensation or fringe benefit Agreement constituting apart of the Bank's existing or future compensation structure. 11. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original and which shall constitute but one and the same Agreement, which shall be sufficiently evidenced for all purposes by anyone executed counterpart. 12. This Agreement cannot be amended except by the written mutual consent of both parties hereto. IN WITNESS WHEREOF, the parties have caused this Agreement to be executed on this 10th day of December, 2003. /s/ Lee R. Schlesinger ------------------------------- Officer NAUGATUCK VALLEY SAVINGS AND LOAN, S.B. Naugatuck, CT By: /s/ John C. Roman ------------------------------- President and CEO Title 3 EX-23.1 21 g89544exv23w1.txt EX-23.1 CONSENT OF MULDOON MURPHY FAUCETTE & AGUGG EXHIBIT 23.1 CONSENT We hereby consent to the references to this firm and our opinions in, and the inclusion of our opinions as exhibits to: the Registration Statement on Form S-1 filed by Naugatuck Valley Financial Corporation (the "Company"), and all amendments thereto; in the Form H-(e)1-S for the Company and Naugatuck Valley Mutual Holding Company, and all amendments thereto; in the Notice of Mutual Holding Company Reorganization on Form MHC-1 filed by Naugatuck Valley Savings and Loan, S.B. (the "Bank"), and all amendments thereto; and in the Application for Approval of Minority Stock Issuance on Form MHC-2 filed by the Company, and all amendments thereto, relating to the mutual holding company reorganization of the Bank. /s/ Muldoon Murphy Faucette & Aguggia LLP MULDOON MURPHY FAUCETTE & AGUGGIA LLP Dated this 18th day of June 2004 EX-23.2 22 g89544exv23w2.txt EX-23.2 CONSENT OF SNYDER & HALLER, P.C. EXHIBIT 23.2 [LETTERHEAD OF SNYDER & HALLER, P.C.] CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the use of our report dated January 9, 2004 (except as to Note 14, which is as of May 17, 2004), on the financial statements of Naugatuck Valley Savings and Loan, S.B. as of December 31, 2003 and 2002, and for each of the years in the three-year period ended December 31, 2003, in the Registration Statement on Form S-1 filed by Naugatuck Valley Financial Corporation, the Holding Company Application on Form H-(e)1-S filed by Naugatuck Valley Financial Corporation and Naugatuck Valley Mutual Holding Company, the Notice of Mutual Holding Company Reorganization on Form MHC-1 filed by Naugatuck Valley Savings and Loan, S.B. and Application for Approval of Minority Stock Issuance on Form MHC-2 filed by the Naugatuck Valley Financial Corporation, all relating to the mutual holding company reorganization of Naugatuck Valley Savings and Loan, S.B. We further consent to the reference to our firm under the heading "Experts" in the Prospectus. /s/ Snyder & Haller, P.C. Hartford, Connecticut June 18, 2004 EX-23.3 23 g89544exv23w3.txt EX-23.3 CONSENT OF KELLER & COMPANY, INC. [LETTERHEAD OF KELLER & COMPANY, INC.] June 18, 2004 Re: Valuation Appraisal of Naugatuck Valley Financial Corporation Naugatuck Valley Savings and Loan Naugatuck, Connecticut We hereby consent to the use of our firm's name in the Form S-1 and in the Form MHC-2 of Naugatuck Valley Financial Corporation, and to the reference to our firm under the heading "Experts" in the prospectus, and to the inclusion of our opinion regarding the valuation of Naugatuck Valley Financial Corporation, provided in our Valuation Appraisal Report and any Valuation Updates, in the Form S-1 to be filed by with the Securities and Exchange Commission and the Form MHC-2 to be filed with the Office of Thrift Supervision and any amendments thereto. Very truly yours, KELLER & COMPANY, INC. by: /s/Michael R. Keller --------------------------------------- Michael R. Keller President EX-24.1 24 g89544exv24w1.txt EX-24.1 POWERS OF ATTORNEY POWERS OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints John C. Roman as the true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for them and in their name, place and stead, in any and all capacities to sign any or all amendments to the Form MHC-1, Notice of Mutual Holding Company Reorganization, and Form MHC-2, Application for Approval of a Minority Stock Issuance by a Savings Association Subsidiary of a Mutual Holding Company, (collectively, the "Applications") by Naugatuck Valley Savings and Loan, S.B., and the Registration Statement on Form S-1 by Naugatuck Valley Financial Corporation and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Office of Thrift Supervision (the "OTS") or the U.S. Securities and Exchange Commission, respectively, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done as fully to all intents and purposes as they might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent or his substitute or substitute may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of Part 563b of the OTS Rules and Regulations and the Securities Act of 1933, as amended, and any rules and regulations promulgated thereunder, the foregoing Powers of Attorney prepared in conjunction with the Applications and the Registration Statement on Form S-1 have been duly signed by the following persons in the capacities and on the dates indicated. NAME DATE /s/ John C. Roman June 15, 2004 - ------------------------------------------------ John C. Roman President, Chief Executive Officer and Director (principal executive officer) Naugatuck Valley Financial Corporation President, Chief Executive Officer and Director Naugatuck Valley Savings and Loan, S.B. /s/ Lee R. Schlesinger June 15, 2004 - ------------------------------------------------ Lee R. Schlesinger Vice President and Controller (principal financial and accounting officer) Naugatuck Valley Financial Corporation Vice President and Controller Naugatuck Valley Savings and Loan, S.B. /s/ Ronald D. Lengyel June 15, 2004 - ------------------------------------------------ Ronald D. Lengyel Chairman of the Board Naugatuck Valley Financial Corporation Chairman of the Board, Treasurer and Director Naugatuck Valley Savings and Loan, S.B. /s/ Carlos S. Batista June 15, 2004 - ------------------------------------------------ Carlos S. Batista Director Naugatuck Valley Financial Corporation Director Naugatuck Valley Savings and Loan, S.B. /s/ Richard M. Famiglietti June 15, 2004 - ------------------------------------------------ Richard M. Famiglietti Director Naugatuck Valley Financial Corporation Director Naugatuck Valley Savings and Loan, S.B. /s/ James A. Mengacci June 15, 2004 - ------------------------------------------------ James A. Mengacci Director Naugatuck Valley Financial Corporation Director Naugatuck Valley Savings and Loan, S.B. /s/ Michael S. Plude June 15, 2004 - ------------------------------------------------ Michael S. Plude Director Naugatuck Valley Financial Corporation Director Naugatuck Valley Savings and Loan, S.B. /s/ Camilo P. Vieira June 15, 2004 - ------------------------------------------------ Camilo P. Vieira Director Naugatuck Valley Financial Corporation Director Naugatuck Valley Savings and Loan, S.B. /s/ Jane H. Walsh June 15, 2004 - ------------------------------------------------ Jane H. Walsh Director Naugatuck Valley Financial Corporation Director Naugatuck Valley Savings and Loan, S.B. EX-99.1 25 g89544exv99w1.txt EX-99.1 APPRAISAL REPORT OF KELLER & COMPANY, INC. EXHIBIT 99.1 - -------------------------------------------------------------------------------- CONVERSION VALUATION APPRAISAL REPORT Prepared for: NAUGATUCK VALLEY FINANCIAL CORPORATION NAUGATUCK, CONNECTICUT - -------------------------------------------------------------------------------- As Of: May 21, 2004 Prepared By: KELLER & COMPANY, INC. 555 Metro Place North Suite 524 Dublin, Ohio 43017 (614) 766-1426 KELLER & COMPANY - -------------------------------------------------------------------------------- CONVERSION VALUATION APPRAISAL REPORT Prepared for: Naugatuck Valley Financial Corporation Naugatuck, Connecticut - -------------------------------------------------------------------------------- As Of: May 21, 2004 TABLE OF CONTENTS
PAGE INTRODUCTION 1 I. DESCRIPTION OF NAUGATUCK VALLEY SAVINGS AND LOAN General 4 Performance Overview 8 Income and Expense 10 Yields and Costs 16 Interest Rate Sensitivity 18 Lending Activities 20 Nonperforming Assets 26 Investments 28 Deposit Activities 29 Borrowings 30 Subsidiaries 30 Office Properties 31 Management 31 II. DESCRIPTION OF PRIMARY MARKET AREA 32 III. COMPARABLE GROUP SELECTION Introduction 39 General Parameters Merger/Acquisition 40 Mutual Holding Companies 40 Trading Exchange 42 IPO Date 42 Geographic Location 42 Asset Size 43 Balance Sheet Parameters Introduction 44 Cash and Investments to Assets 45 Mortgage-Backed Securities to Assets 45 One- to Four-Family Loans to Assets 46 Total Net Loans to Assets 46 Total Net Loans and Mortgage-Backed Securities to Assets 46 Borrowed Funds to Assets 47 Equity to Assets 47 Performance Parameters Introduction 48
TABLE OF CONTENTS (CONT.)
PAGE III. COMPARABLE GROUP SELECTION (CONT.) Performance Parameters (cont.) Return on Average Assets 48 Return on Average Equity 49 Net Interest Margin 49 Operating Expenses to Assets 50 Noninterest Income to Assets 50 Asset Quality Parameters Introduction 51 Nonperforming Assets to Assets 51 Repossessed Assets to Assets 52 Loan Loss Reserve to Assets 52 The Comparable Group 52 IV. ANALYSIS OF FINANCIAL PERFORMANCE 54 V. MARKET VALUE ADJUSTMENTS Earnings Performance 57 Market Area 62 Financial Condition 64 Asset, Loan and Deposit Growth 67 Dividend Payments 68 Subscription Interest 69 Liquidity of Stock 70 Management 71 Marketing of the Issue 72 VI. VALUATION METHODS 73 Price to Book Value Method 74 Price to Earnings Method 76 Price to Assets Method 77 Valuation Conclusion 78
LIST OF EXHIBITS
NUMERICAL PAGE EXHIBITS 1 Consolidated Statements of Financial Condition - At March 31, 2004, and December 31, 2003 80 2 Consolidated Statements of Financial Condition - At December 31, 1999 through 2002 81 3 Consolidated Statements of Income - Three months ended March 31, 2003 and 2004, and Year Ended December 31, 2003 82 4 Consolidated Statements of Income - Years ended December 31, 1999 through 2002 83 5 Selected Financial Information 84 6 Income and Expense Trends 85 7 Normalized Earnings Trend 86 8 Performance Indicators 87 9 Volume/Rate Analysis 88 10 Yield and Cost Trends 89 11 Gap Analysis 90 12 Loan Portfolio Composition 91 13 Loan Maturity Schedule 92 14 Loan Originations and Purchases 93 15 Delinquent Loans 94 16 Nonperforming Assets 95 17 Classified Assets 96 18 Allowance for Loan Losses 97 19 Investment Portfolio Composition 98 20 Mix of Deposits 99 21 Certificates of Deposit by Rate and Maturity 100 22 Deposit Activity 101 23 Borrowed Funds Activity 102 24 Offices of Naugatuck Valley Savings and Loan . 103 25 Management of the Bank 104 26 Key Demographic Data and Trends 105 27 Key Housing Data 106 28 Major Sources of Employment 107 29 Unemployment Rates 108 30 Market Share of Deposits 109 31 National Interest Rates by Quarter 110 32 Thrift Stock Prices and Pricing Ratios 111 33 Key Financial Data and Ratios 119 34 Recently Converted Thrift Institutions 128 35 Acquisitions and Pending Acquisitions 129
LIST OF EXHIBITS (CONT.)
NUMERICAL PAGE EXHIBITS 36 Thrift Stock Prices and Pricing Ratios - Mutual Holding Companies 130 37 Key Financial Data and Ratios - Mutual Holding Companies 132 38 Balance Sheets Parameters - Comparable Group Selection 134 39 Operating Performance and Asset Quality Parameters - Comparable Group Selection 137 40 Balance Sheet Ratios Final Comparable Group 141 41 Operating Performance and Asset Quality Ratios Final Comparable Group 142 42 Balance Sheet Totals - Final Comparable Group 143 43 Balance Sheet - Asset Composition Most Recent Quarter 144 44 Balance Sheet - Liability and Equity Most Recent Quarter 145 45 Income and Expense Comparison Trailing Four Quarters 146 46 Income and Expense Comparison as a Percent of Average Assets - Trailing Four Quarters 147 47 Yields, Costs and Earnings Ratios Trailing Four Quarters 148 48 Dividends, Reserves and Supplemental Data 149 49 Valuation Analysis and Conclusions 150 50 Market Pricings and Financial Ratios - Stock Prices Comparable Group 151 51 Pro Forma Minimum Valuation 152 52 Pro Forma Mid-Point Valuation 153 53 Pro Forma Maximum Valuation 154 54 Pro Forma Superrange Valuation 155 55 Summary of Valuation Premium or Discount 156

ALPHABETICAL EXHIBITS PAGE A Background and Qualifications 157 B RB 20 Certification 161 C Affidavit of Independence 162
INTRODUCTION Keller & Company, Inc. is an independent appraisal firm for financial institutions and has prepared this Conversion Valuation Appraisal Report ("Report") to provide the pro forma market value of the to-be-issued common stock of Naugatuck Valley Financial Corporation (the "Corporation"), a Delaware corporation, formed as a mid-tier holding company to own all of the common stock of Naugatuck Valley Savings and Loan ("Naugatuck Valley" or the "Bank"), Naugatuck, Connecticut. The Corporation will be majority owned by Naugatuck Valley Mutual Holding Company, a federally-chartered mutual holding company. Under the Plan of Conversion, the Corporation will be majority owned by Naugatuck Valley Mutual Holding Company, which will own 55.0 percent of the Corporation. The Corporation will sell 43.0 percent on the appraised value of the Corporation as determined in this Report in a minority stock offering and will issue the remaining 2.0 percent to a newly formed foundation, the Naugatuck Valley Charitable Foundation ("Foundation"). The Application is being filed with the Office of Thrift Supervision ("OTS") of the Department of the Treasury and the Securities and Exchange Commission ("SEC"). Such Application for Conversion has been reviewed by us, including the Prospectus and related documents, and discussed with the Bank's management and the Bank's conversion counsel, Muldoon Murphy Faucette & Aguggia LLP, Washington, D.C. This conversion appraisal was prepared based on the guidelines provided by OTS entitled "Guidelines for Appraisal Reports for the Valuation of Savings Institutions Converting from the Mutual to Stock Form of Organization", in accordance with the OTS application requirements of Regulation Section 563b and the OTS's Revised Guidelines for Appraisal Reports, and represents a full appraisal report. The Report provides detailed exhibits based on the Revised Guidelines and a discussion on each of the fourteen factors that need to be considered. Our valuation will be updated in accordance with the Revised Guidelines and will consider any changes in market conditions for thrift institutions. INTRODUCTION (CONT.) We define the pro forma market value as the price at which the stock of the Corporation after conversion would change hands between a typical willing buyer and a typical willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, and with both parties having reasonable knowledge of relevant facts in an arm's-length transaction. The appraisal assumes the Bank is a going concern and that the shares issued by the Corporation in the conversion are sold in noncontrol blocks. As part of our appraisal procedure, we have reviewed the financial statements for the five fiscal years ended December 31, 1999 through 2003, and for the three months ended March 31, 2003 and 2004, and discussed them with Naugatuck Valley's management and with Naugatuck Valley's independent auditors, Snyder & Haller, P.C., Hartford, Connecticut. We have also discussed and reviewed with management other financial matters and have reviewed internal projections. We have reviewed the Corporation's preliminary Form SB-2 and the Bank's preliminary Form MHC and discussed them with management and with the Bank's conversion counsel. To gain insight into the Bank's local market condition, we have visited Naugatuck Valley's main office and have traveled the surrounding area. We have studied the economic and demographic characteristics of the primary market area, and analyzed the Bank's primary market area relative to Connecticut and the United States. We have also examined the competitive market within which Naugatuck Valley operates, giving consideration to the area's numerous financial institution offices, mortgage banking offices, and credit union offices and other key market area characteristics, both positive and negative. We have given consideration to the market conditions for securities in general and for publicly-traded thrift stocks in particular. We have examined the performance of selected publicly-traded thrift institutions and compared the performance of Naugatuck Valley to those selected institutions. INTRODUCTION (CONT.) Our valuation is not intended to represent and must not be interpreted to be a recommendation of any kind as to the desirability of purchasing the to-be-outstanding shares of common stock of the Corporation. Giving consideration to the fact that this appraisal is based on numerous factors that can change over time, we can provide no assurance that any person who purchases the stock of the Corporation in the minority stock offering in this mutual-to-stock conversion will subsequently be able to sell such shares at prices similar to the pro forma market value of the Corporation as determined in this conversion appraisal. I. DESCRIPTION OF NAUGATUCK VALLEY SAVINGS AND LOAN GENERAL Naugatuck Valley was organized in 1922 as a state-chartered mutual savings and loan with the name Naugatuck Building and Loan and then changed its name to Savings and Loan Association of Naugatuck, Inc. in 1951. Then in 1974, the Bank changed its name to Naugatuck Valley Savings And Loan Association, Inc. Naugatuck Valley converted from a state-chartered savings association to a state-chartered savings bank in 2003 with the name Naugatuck Valley Savings and Loan, S.B. and then converted to a federally-chartered stock savings bank in 2004 with the name Naugatuck Valley Savings and Loan. The Bank also formed a mid-tier stock holding company in 2004 with the name Naugatuck Valley Financial Corporation, which will own all of the stock of the Bank. The Bank's mutual holding company Naugatuck Valley Mutual Holding Company, will own 55.0 percent of Naugatuck Valley Financial Corporation. Naugatuck Valley conducts its business from its main office in Naugatuck, Connecticut and its four branch offices in Fairfield and New Haven Counties. The Bank serves its customers from these five offices. The Bank's primary market area is focused on New Haven County, where four of its five offices are located. Naugatuck Valley's deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation ("FDIC") in the Savings Association Insurance Fund ("SAIF"). The Bank is also subject to certain reserve requirements of the Board of Governors of the Federal Reserve Bank (the "FRB"). Naugatuck Valley is a member of the Federal Home Loan Bank (the "FHLB") of Boston and will be regulated by the OTS and by the FDIC. As of March 31, 2004, Naugatuck Valley had assets of $242,148,000, deposits of $187,474,000 and equity of $21,656,000. Naugatuck Valley has been principally engaged in the business of serving the financial needs of the public in its local communities and throughout its primary market area as a community-oriented institution. Naugatuck Valley has been involved in the origination of residential mortgage loans secured by one- to four-family dwellings, including construction GENERAL (CONT.) loans, which represented 77.3 percent of its loan originations during the fiscal year ended March 31, 2004. Consumer loan originations represented a moderate 14.2 percent and a strong 26.4 percent of total originations for the same respective time periods. At March 31, 2004, 69.7 percent of its gross loans consisted of residential real estate loans on one- to four-family dwellings, excluding construction and home equity loans, compared to a larger 86.4 percent at December 31, 1999, with the primary sources of funds being retail deposits from residents in its local communities and FHLB advances. The Bank is also an originator of multi-family and commercial real estate loans, construction loans, consumer loans, and commercial business loans. Consumer loans include home equity loans and lines of credit, automobile loans, loans on deposit accounts and other secured and unsecured personal loans. The Bank had cash and investments of $44.8 million, or a moderate 18.5 percent of its assets, excluding FHLB stock which totaled $1.8 million or 0.7 percent of assets. The Bank had $10.2 million of its investments in mortgage-backed and related securities representing 4.2 percent of assets, excluding $4.7 million in collateralized mortgage obligations. Deposits, FHLB advances and equity have been the primary sources of funds for the Bank's lending and investment activities. The total amount of stock to be sold by the Corporation in the minority stock offering will be $21.5 million or 2,150,000 shares at $10 per share based on the midpoint of the appraised value of $50.0 million, representing 43.0 percent of the total value, excluding the 2.0 percent to the Foundation. The net conversion proceeds will be $20.7 million, reflecting conversion expenses of approximately $795,000. The actual cash proceeds to the Bank of $10.3 million will represent 50 percent of the net conversion proceeds. The ESOP will represent 8 percent of the gross shares issued in the minority offering and to the Foundation, or 180,000 shares at $10 per share, representing $1,800,000. The Bank's net proceeds will be used to fund new loans, to open new branches and to invest in securities following their initial deployment to short term investments. The Bank may also use the proceeds to expand services, expand operations or acquire other financial service organizations, diversity into other businesses, or for any other GENERAL (CONT.) purposes authorized by law. The Corporation will use its proceeds to fund the ESOP, to purchase short- and intermediate-term government or federal agency securities or to invest in short-term deposits and can use the proceeds to pay dividends and buy back shares of common stock in the future. The Bank has experienced a moderate deposit increase over the past four fiscal years with deposits increasing 39.9 percent from December 31, 1999 to December 31, 2003, or an average of 10.0 percent per year. From December 31, 2003, to March 31, 2004, deposits increased by 2.2 percent or 8.8 percent, annualized, compared to a 5.9 percent growth rate in fiscal 2003. The Bank has focused on increasing its residential real estate loan, construction loan, commercial real estate and multi-family loans, home equity loans and commercial loan activity during the past five years, monitoring its net interest margin and earnings and strengthening its equity to assets ratio. Equity to assets increased from 8.33 percent of assets at December 31, 1999, to 8.70 percent at December 31, 2003, and then increased slightly to 8.94 percent at March 31, 2004, due to a steady rise in earnings combined with moderate growth in assets. The primary lending strategy of Naugatuck Valley has been to focus on the origination of adjustable-rate and fixed-rate one-to four-family loans, the origination of construction loans, the origination of commercial mortgage and multi-family loans, and the origination of consumer loans, including home equity loans. The Bank's share of one- to four-family mortgage loans has decreased moderately, from 86.4 percent of gross loans at December 31,1999, to 69.7 percent as of March 31, 2004. Commercial real estate and multi-family loans increased from 0.6 percent of loans to 8.2 percent from December 31, 1999, to March 31, 2004, respectively, while construction loans increased from 2.2 percent to 7.9 percent during the same time period. All types of real estate loans as a group decreased slightly from 89.1 percent of gross loans at December 31, 1999, to 85.8 percent at March 31, 2004. The decrease in real estate loans was partially offset by the Bank's increases in commercial business loans and consumer loans. The Bank's share of commercial loans GENERAL (CONT.) witnessed an increase in their share of loans from 0.1 percent at December 31, 1999, to 2.3 percent at March 31, 2004, and the dollar level of commercial business loans increased from $194,000 to $4.2 million. Consumer loans also witnessed an increase in their share of loans from 10.7 percent at December 31, 1999, to 12.0 percent at March 31, 2004. Management's internal strategy has also included continued emphasis on maintaining an adequate and appropriate level of allowance for loan losses relative to loans and nonperforming assets in recognition of the more stringent requirements within the industry to establish and maintain a higher level of general valuation allowances and also in recognition of the Bank's rising level of higher risk loans and higher charge-offs. At December 31, 1999, Naugatuck Valley had $1,935,000 in its loan loss allowance or 1.38 percent of gross loans and 103.1 percent of nonperforming assets, which decreased to $1,811,000 and represented a lower 0.98 percent of gross loans but a higher 184.8 percent of nonperforming assets at March 31, 2004. The basis of earnings for the Bank has been interest income from loans and investments with the net interest margin being the key determinant of net earnings with a rising emphasis on noninterest income. With a primary dependence on net interest margin for earnings, current management will focus on continuing to strengthen the Bank's net interest margin without undertaking excessive credit risk combined with controlling the Bank's interest risk position and continuing to strive to increase noninterest income. PERFORMANCE OVERVIEW The financial position of Naugatuck Valley at year end December 31, 1999 through December 31, 2003, and at March 31, 2004, is shown in Exhibits 1 through 4. Exhibit 5 provides selected financial data at December 31, 1999, through 2003 and at March 31, 2004. Naugatuck Valley has focused on growing its asset base combined with strengthening its equity ratio, increasing its loan portfolio and investment securities, and growing retail deposits. The impact of these trends, recognizing the change in interest rates, has been a rise in net interest rate spread from 3.64 percent at December 31, 1999, to 3.77 percent at December 31, 2003, and then a decrease to 3.72 percent for the three months ended March 31, 2004. With regard to the Bank's financial condition, Naugatuck Valley has experienced a relatively strong increase in assets from December 31, 1999, through March 31, 2004, with a similar increase in deposits, a moderate increase in FHLB advances and a moderate increase in the dollar level of equity over the past five periods. The Bank witnessed a total increase in assets of $74.3 million or 43.7 percent for the period of December 31, 1999, to December 31, 2003, representing an average annual increase in assets of 10.9 percent. For the year ended December 31, 2003, assets increased $16.0 million or 7.0 percent. For the three months ended March 31, 2004, the Bank's assets decreased $1.8 million or 0.7 percent. Over the past four fiscal periods, the Bank experienced its largest dollar rise in assets of $26.9 million in fiscal year 2002, which represented a strong 13.3 percent increase in assets funded by a rise in deposits of $15.6 million and a rise in FHLB advances of $7.7 million. This increase in assets was succeeded by a $16.0 million or 7.0 percent increase in assets in fiscal year 2003 and then a $1.8 million decrease or 0.7 percent from December 31, 2003, to March 31, 2004. Naugatuck Valley's loan portfolio, which included mortgage loans and non-mortgage loans, increased from $138.2 million at December 31, 1999, to $182.3 million at March 31, 2004, and represented a total increase of $44.1 million, or 73.2 percent. The average annual increase during that period was 7.5 percent. For the year ended December 31, 2003, loans PERFORMANCE OVERVIEW (CONT.) increased $14.3 million or 8.6 percent. For the three months ended March 31, 2004, net loans increased $1.9 million or 1.1 percent, representing 4.4 percent, annualized. Naugatuck Valley has obtained funds through deposits and FHLB advances in response to the demand for loans and secondary market activity. The Bank's competitive rates for deposits in its local market in conjunction with its focus on service and a modest network of offices have been the sources for attracting retail deposits. Deposits increased $52.3 million or 39.9 percent from 1999 to 2003, with an average annual rate of increase of 10.0 percent. For the three months ended March 31, 2004, deposits increased by $4.0 million or 2.2 percent, annualized to 8.8 percent. The Bank's largest fiscal year deposit growth was in 2001, when deposits increased $20.2 million or a relatively strong 14.8 percent. The Bank's FHLB advances increased from $21.7 million at December 31, 1999, to $35.0 million at December 31, 2003, and then decreased to $30.1 million at March 31, 2004. The Bank has been able to increase its equity level each fiscal year from 1999 through 2003 and in the three months ended March 31, 2004. At December 31, 1999, the Bank had equity of $14.1 million, representing a 8.33 percent equity to assets ratio and then increased to $21.2 million at December 31, 2003, representing a higher 8.70 percent equity to assets ratio due to the Bank's higher earnings. At March 31, 2004, equity was a higher $21.7 million and a higher 8.94 percent of assets due to the Bank's moderate earnings and shrinkage in assets. The overall rise in the equity to assets ratio from 1999 to 2003 is the result of the Bank's overall rising earnings performance impacted by the Bank's growth in assets. The dollar level of equity increased 50.1 percent from December 31, 1999, to December 31, 2003, representing an average annual increase of 12.5 percent and increased 2.1 percent for the three months ended March 31, 2004, or 8.3 percent, annually. INCOME AND EXPENSE Exhibit 6 presents selected operating data for Naugatuck Valley, reflecting the Bank's income and expense trends. This table provides key income and expense figures in dollars for the fiscal years of 1999 through 2003 and for the three months ended March 31, 2004. Naugatuck Valley witnessed an overall increase in its dollar level of interest income from December 31, 1999, to December 31, 2002, and then a decrease for the year ended December 31, 2003 and for the three months ended March 31, 2004, due to the decrease in interest rates in the market and at the Bank. Interest income was $11.4 million in 1999 and a higher $13.2 million in 2002. This trend was a rising trend that continued each year from 1999 through 2002. For the year ended December 31, 2003, interest income was a lesser $12.6 million, compared to a higher $13.2 million in 2002. For the three months ended March 31, 2004, interest income was $3.0 million compared to a higher $3.3 million for the three months ended March 31, 2003. The Bank's interest expense experienced a similar trend with an overall increase from fiscal year 1999 to 2001, and then decreased in 2002 and 2003. Interest expense increased $906,000 or 17.2 percent from 1999 to 2001, compared to a larger dollar increase in interest income of $1.4 million but a smaller 11.2 percent increase for the same time period. Interest expense then decreased $879,000 or 14.2 percent from 2001 to 2002, compared to an increase in interest income of $547,000 or 4.3 percent. Such increase in interest income in 2002, notwithstanding the decrease in interest expense, resulted in a larger dollar increase in annual net interest income of $1.4 million or 22.1 percent for the fiscal year ended December 31, 2002, and a moderate increase in net interest margin. Interest expense decreased $1.1 million or 20.0 percent in 2003, compared to a smaller $534,000 decrease in interest income with a modest decrease in net interest margin. In summary, net interest income increased from $6.1 million in 1999, to $8.4 million in 2003. Then, for the three months ended March 31, 2004, Naugatuck Valley's actual net interest income was $2,090,000 or $8.4 million, annualized, which was similar to the $2,084,000 for the three months ended March 31, 2004, or $8.3 million, annualized. INCOME AND EXPENSE (CONT.) The Bank has made provisions for loan losses in each of the past five fiscal years of 1999 through 2003 but not in the three months ended March 31, 2004. The amounts of those provisions were determined in recognition of the Bank's levels of nonperforming assets, charge-offs, repossessed assets, the Bank's rise in lending activity, and industry norms. The loan loss provisions were $110,000 in 1999, $73,000 in 2000, $80,000 in 2001, $231,000 in 2002 and $45,000 in 2003. The higher provision in 2002 was related to the need to strengthen the allowance for loan losses after higher charge-offs in 1999 and 2000. The impact of these loan loss provisions has been to provide Naugatuck Valley with a general valuation allowance of $1,811,000 at March 31, 2004, or 0.98 percent of gross loans and 184.8 percent of nonperforming assets. Total other income or noninterest income indicated a rising trend from fiscal year 1999 through 2003. The highest level of noninterest income was in fiscal year 2003 at $1.1 million or 0.46 percent of assets, including only $14,000 in gains on the sale of loans. The lowest level of noninterest income was $523,000 in 1999, representing 0.31 percent of assets. The average noninterest income level for the past five fiscal years was $791,000 or 0.39 percent of average assets. In the three months ended March 31, 2004, noninterest income was $333,000 or 0.55 percent of assets on an annualized basis. Noninterest income consists primarily of service charges and loan fees, income from bank-owned life insurance, income from investment advisory services, and other income and gains on the sale of loans and investments. The Bank's general and administrative expenses or noninterest expenses increased from $4.2 million for the fiscal year of 1999 to $6.8 million for the fiscal year ended December 31, 2003. The largest dollar increase in noninterest expenses was $1.0 million from 2002 to 2003. This larger increase in noninterest expenses was due primarily to the Bank's office expansion and the addition of new staffing combined with the normal rise in overhead expenses. On a percent of average assets basis, operating expenses increased from 2.49 percent of average assets for the fiscal year ended December 31, 1999, to 2.94 percent for the fiscal year ended December 31, INCOME AND EXPENSE (CONT.) 2003. For the three months ended March 31, 2004, Naugatuck Valley's ratio of operating expenses to average assets was a higher 3.16 percent. The net earnings position of Naugatuck Valley has indicated volatility from 1999 to 2003, and then a decrease in performance in the three months ended March 31, 2004. The annual net income figures for the fiscal years of 1999 to 2003 were $829,000, $1,619,000, $1,182,000, $1,920,000 and $1,806,000, respectively, representing returns on average assets of 0.50 percent, 0.96 percent, 0.65 percent, 0.91 percent and 0.77 percent for fiscal years 1999 through 2003, respectively. For the three months ended March 31, 2004, net earnings were $378,000, representing an annualized return on average assets of 0.63 percent. Exhibit 7 provides the Bank's normalized earnings or core earnings for the twelve months ended March 31, 2004 and the fiscal year 2003. The Bank's normalized earnings eliminate any nonrecurring income and expense items. There were two adjustments, one to income to reduce the Bank's gain on sale of investments and one adjustment to expenses to reduce the credit on the sale of foreclosed real estate. The key performance indicators comprised of selected performance ratios, asset quality ratios and capital ratios are shown in Exhibit 8 to reflect the results of performance. The Bank's return on assets increased from 0.50 percent in 1999, to 0.96 percent in fiscal year 2000, then decreased to 0.65 percent in fiscal year 2001. It then increased to 0.91 percent in 2002 and was a lower 0.77 percent in 2003. It was still lower for the three months ended March 31, 2004, at 0.63 percent, annualized, due primarily to the Bank's decrease in its net interest margin and rise in noninterest expenses. The Bank's net interest rate spread increased from 3.64 percent in 1999 to 3.78 percent in 2000, then decreased to 3.50 percent in 2001 and then rose to 3.77 percent in fiscal year 2002 and remained at 3.77 percent in fiscal 2003. For the three months ended March 31, 2004, net interest spread decreased to 3.72 percent, annualized. The Bank's net interest margin indicated INCOME AND EXPENSE (CONT.) a similar overall trend, increasing from 3.88 percent in 1999 to 3.98 percent in 2000, and then decreased to 3.71 percent in 2001, rising to 3.90 percent in fiscal year 2002, and then decreasing to 3.85 percent in fiscal year 2003 and then decreasing further to 3.77 percent for the three months ended March 31, 2004, annualized. Naugatuck Valley's net interest rate spread increased 13 basis points from 1999 to 2003 to 3.77 percent from 3.64 percent in 1999. The Bank's net interest margin followed a more stable trend, decreasing 3 basis points to 3.85 percent in 2003 from 3.88 percent in 1999. For the three months ended March 31, 2004, Naugatuck Valley's annualized net interest spread decreased 5 basis points to 3.72 percent, and its net interest margin decreased 8 basis points to 3.77 percent. The Bank's return on average equity increased from 1999 to 2003. The return on average equity increased from 5.98 percent in 1999 to 8.59 percent in fiscal year 2003. For the three months ended March 31, 2004, return on average equity was a lesser 6.99 percent, annualized, due to the Bank's lower earnings, resulting in a lower return on equity. Naugatuck Valley's ratio of interest-earning assets to interest-bearing liabilities decreased modestly from 107.34 percent at December 31, 1999, to 103.69 percent at December 31, 2003, and continued to decrease to 102.93 percent at March 31, 2004. The Bank's decrease in its ratio of interest-earning assets to interest-bearing liabilities is primarily the result of the Bank's purchase of $4.7 million in bank-owned life insurance in 2003. The Bank's ratio of noninterest expenses to average assets increased from 2.49 percent in fiscal year 1999 to a higher 2.94 percent in fiscal year 2003, due to the Bank's stronger growth in assets combined with moderate increases in noninterest expenses. For the three months ended March 31, 2004, noninterest expenses to assets further increased to 3.16 percent related to office expansion costs. Another key noninterest expense ratio reflecting efficiency of operation is the ratio of noninterest expenses to noninterest income plus net interest income referred to as the "efficiency ratio." The industry norm is 57.3 percent with the lower the ratio indicating higher efficiency. The Bank has been characterized with a lower level of efficiency historically INCOME AND EXPENSE (CONT.) reflected in its higher efficiency ratio, which increased from 62.0 percent in 1999 to 71.62 percent in 2003. The ratio then increased to 77.2 percent for the three months ended March 31, 2004, due to a rise in noninterest expenses discussed previously. Earnings performance can be affected by an institution's asset quality position. The ratio of nonperforming assets to total assets is a key indicator of asset quality. Naugatuck Valley witnessed a decrease in its nonperforming asset ratio from 1999 to 2003, and the ratio was below the industry norm in 2003 and at March 31, 2004. Nonperforming assets consist of loans delinquent 90 days or more, nonaccruing loans, real estate owned and repossessed assets. Naugatuck Valley's nonperforming assets consisted of nonaccrual loans and real estate owned in 1999 through 2003 and at March 31, 2004. The ratio of nonperforming assets to total assets was 1.11 percent at December 31, 1999, then decreased to 0.46 percent at December 31, 2003. At March 31, 2004, Naugatuck Valley's ratio of nonperforming assets to total assets decreased slightly to 0.40 percent of assets. Two other indicators of asset quality are the Bank's ratios of allowance for loan losses to total loans and also to nonperforming loans. The Bank's allowance for loan losses was 1.38 percent of loans at December 31, 1999, and decreased to 0.99 percent at December 31, 2003, and then decreased to 0.98 percent of loans at March 31, 2004, with the decrease due to the Bank's higher charge-offs in 2003 combined with growth in loans. As a percentage of nonperforming loans, Naugatuck Valley's allowance for loan losses was 130.22 percent in 1999 and 199.78 percent in 2003. At March 31, 2004, the ratio was a higher 213.31 percent. Exhibit 9 provides the changes in net interest income due to rate and volume changes for the fiscal years of 2002 and 2003 and for the three months ended March 31, 2004. In fiscal year 2002, net interest income increased $1,426,000, due to an increase in interest income of $547,000 accented by a $879,000 decrease in interest expense. The increase in interest income was due to an increase due to volume of $1,426,000, reduced by a decrease due to rate of $879,000. INCOME AND EXPENSE (CONT.) For the fiscal year ended December 31, 2003, net interest income increased $524,000 due to a $1,058,000 decrease in interest expense reduced by a $534,000 decrease in interest income. The decrease in interest income was due to a $1,120,000 decrease due to rate reduced by a $586,000 increase due to volume. The decline in interest expense was the result of a decrease due to rate of $986,000 accented by a decrease due to volume of $72,000. For the three months ended March 31, 2004, compared to the three months ended March 31, 2003, net interest income increased $6,000 due to a $236,000 decrease in interest income reduced by a $230,000 decrease in interest expense. The decrease in interest income was due to a $431,000 decrease due to rate reduced by a $195,000 increase due to volume. The decline in interest expense was the result of a decrease due to rate of $457,000 reduced by an increase due to volume of $227,000. YIELDS AND COSTS The overview of yield and cost trends for the years ended December 31, 2001, 2002 and 2003, for the three months ended March 31, 2003 and 2004, and at March 31, 2004, can be seen in Exhibit 10, which offers a summary of key yields on interest-earning assets and costs of interest-bearing liabilities. Naugatuck Valley's weighted average yield on its loan portfolio decreased 113 basis points from fiscal year 2001 to 2003, from 7.56 percent to 6.431 percent, and then decreased 54 basis points to 5.89 percent for the three months ended March 31, 2004, compared to a higher 6.75 percent for the three months ended March 31, 2003. The yield on investment securities decreased 134 basis points from 5.12 percent in 2001 to 3.78 percent in fiscal year 2003 and then increased 8 basis points to 3.86 percent for the three months ended March 31, 2004, compared to a higher 4.11 percent for the three months ended March 31, 2003. The yield on Fed funds sold decreased 289 basis points from fiscal year 2001 to 2003, from 3.95 percent to 1.06 percent and then decreased another 18 basis points to 0.88 percent for the three months ended March 31, 2004, compared to a higher 1.10 percent for the three months ended March 31, 2003. The combined weighted average yield on all interest-earning assets decreased 148 basis points to 5.79 percent from fiscal year 2001 to 2003, reflecting the Bank's higher yield on loans. The yield on interest-earning assets for the three months ended March 31, 2004, was a lower 5.46 percent, compared to a higher 6.12 percent for the three months ended March 31, 2003. Naugatuck Valley's weighted average cost of interest-bearing liabilities decreased 175 basis points to 2.01 percent from fiscal year 2001 to 2003, which was greater than the Bank's 148 basis point increase in yield, resulting in an increase in the Bank's interest rate spread of 27 basis points from 3.51 percent to 3.78 percent from 2001 to 2003. For the three months ended March 31, 2004, the Bank's cost of funds decreased 27 basis points to 1.74 percent, compared to a 33 basis point decrease in yield on interest-earning assets, resulting in a lower net interest rate spread by 6 basis points to 3.72 percent compared to 3.81 percent for the three months ended March 31, 2003. The Bank's net interest margin increased from 3.71 percent in fiscal year 2001 to 3.90 percent in fiscal year 2002, and then decreased to 3.85 percent in fiscal year 2003. The YIELDS AND COSTS (CONT.) Bank's net interest margin for the three months ended March 31, 2004, decreased to 3.77 percent compared to a higher 3.92 percent for the three months ended March 31, 2003. The Bank's yield on earning assets decreased 14 basis points to 5.32 percent at March 31, 2004, compared to 5.46 percent for the three months ended March 31, 2004. The Bank's cost of funds decreased to 1.71 percent at March 31, 2004, compared to 1.74 percent for the three months ended March 31, 2003. The resultant net interest rate spread decreased 11 basis points to 3.61 percent at March 31, 2004, compared to 3.72 percent for the three months ended March 31, 2004. INTEREST RATE SENSITIVITY Naugatuck Valley has monitored its interest rate sensitivity position and focused on maintaining a reasonable level of rate sensitive assets. Naugatuck Valley has recognized the thrift industry's historically higher interest rate risk exposure, which caused a negative impact on earnings and market value of equity as a result of significant fluctuations in interest rates, specifically rising rates. Such exposure was due to the disparate rate of maturity and/or repricing of assets relative liabilities commonly referred to as an institution's "gap." The larger an institution's gap, the greater the risk (interest rate risk) of earnings loss due to a decrease in net interest margin and a decrease in market value of equity or portfolio loss. In response to the potential impact of interest rate volatility and negative earnings impact, many institutions have taken steps during the past five years to reduce their gap position. This frequently results in a decline in the institution's net interest margin and overall earnings performance. Naugatuck Valley has responded to the interest rate sensitivity issue by originating more adjustable-rate commercial real estate and multi-family and residential mortgage loans. The Bank measures its interest rate risk through the use of the calculation of its change in annual net interest income under rising and falling interest rate assumptions and by the determination of its cumulative interest-rate gap and corresponding ratio of cumulative interest-rate gap as a percentage of interest-earning assets. The cumulative interest-rate gap for the Bank is calculated on a quarterly basis by an outside firm. Such cumulative interest-rate gaps based on different maturities are reflective of the Bank's interest rate risk exposure. There are numerous factors which have a measurable influence on interest rate sensitivity in addition to changing interest rates. Such key factors to consider when analyzing interest rate sensitivity include the loan payoff schedule, accelerated principal payments, deposit maturities, interest rate caps on adjustable-rate loans and deposit withdrawals. Exhibit 11 provides the Bank's cumulative interest-rate gap as of March 31, 2004, and the ratio of cumulative interest rate sensitivity gap to total assets. Such calculations are prepared by INTEREST RATE SENSITIVITY (CONT.) an outside firm, and the focus of this exposure table is the cumulative one-year and three-year interest rate gap levels for the Bank. The Bank's one-year cumulative interest rate gap at March 31, 2004, was a negative 11.71 percent, representing a cumulative dollar negative gap of $28,363,000. The Bank's three-year cumulative interest rate gap ratio at March 31, 2004, was a negative 13.24 percent, representing a dollar negative gap of a larger $32,056,000. In both calculations, all of the Bank=s $25.0 million in money market deposit accounts was categorized as maturing in one year or less in contrast to many other calculations by outside firms that prepare interest rate risk reports which assume only a portion of these accounts mature in one year or less. Such variance in assumption could reduce the Bank=s negative one-year, cumulative gap ratio, due to the fact that the Bank has $25.0 million in this category. However, all of the Bank's savings and NOW accounts, which totaled $76.0 million, were categorized in the over ten year maturity in contrast to many other reports which spread these accounts over the ten year period with regard to maturity. The Bank is aware of its moderate interest rate risk position. Due to Naugatuck Valley's recognition of the need to control its interest rate risk, the Bank has focused on being more active in the origination of adjustable-rate commercial real estate and multi-family loans, adjustable-rate residential mortgage loans and shorter term consumer loans, construction loans and commercial business loans and plans to continue this lending strategy combined with selling a portion of its fixed-rate, residential mortgage loans in the future. LENDING ACTIVITIES Naugatuck Valley has focused its lending activity on the origination of conventional mortgage loans secured by one- to four-family dwellings, commercial real estate loans, including multi-family loans, construction loans, commercial business loans and consumer loans. Exhibit 12 provides a summary of Naugatuck Valley's loan portfolio, by loan type, at December 31, 1999 through 2003, and at March 31, 2004. The primary loan type for Naugatuck Valley has been residential loans secured by one- to four-family dwellings, representing 69.7 percent of the Bank's gross loans as of March 31, 2004. This share of these loans has seen a moderate decrease from 86.4 percent at December 31, 1999. The second largest real estate loan type as of March 31, 2004, was commercial real estate loans, including multi-family loans, which comprised a modest 8.2 percent of gross loans compared to 0.6 percent as of December 31, 1999. The third key real estate loan type was construction loans, which represented 7.9 percent of gross loans as of March 31, 2004, compared to a lower 2.2 percent at December 31, 1999. These three real estate loan categories represented a strong 85.8 percent of gross loans at March 31, 2004, compared to a larger 89.1 percent of gross loans at December 31, 1999. Commercial business loans represent a smaller size loan category for Naugatuck Valley. Commercial business loans totaled $4.2 million and represented 2.3 percent of gross loans at March 31, 2004, compared to a lesser 0.1 percent at December 31, 1999. The consumer loan category was the other key loan category at March 31, 2004, and represented a moderate 12.0 percent of gross loans compared to 10.7 percent at December 31, 1999. Consumer loans were the second largest overall loan type at March 31, 2004, and also at December 31, 1999, surpassing construction loans and commercial real estate and multi-family loans. The Bank's consumer loans include home equity loans, home equity lines of credit, automobile loans, savings account loans and secured and unsecured personal loans. The overall mix of loans has witnessed modest changes from fiscal year-end 1999 to March 31, 2004, with the Bank having decreased its share of residential mortgage loans to offset its increases in LENDING ACTIVITIES (CONT.) construction loans, commercial real estate and multi-family loans, commercial business loans and consumer loans, primarily comprised of home equity loans. The emphasis of Naugatuck Valley's lending activity is the origination of conventional mortgage loans secured by one- to four-family residences. Such residences are located in Naugatuck Valley's primary market area, which includes Fairfield and New Haven Counties. At March 31, 2004, 69.7 percent of Naugatuck Valley's gross loans consisted of loans secured by one- to four-family residential properties. The Bank offers several types of adjustable-rate mortgage loans, ("ARMs") with adjustment periods of one year, three years, five years and seven years. The interest rates on ARMs are generally indexed to the one-year Treasury constant maturity index. ARMs have a maximum rate adjustment of 2.0 percent at each adjustment period and 6.0 percent for the life of the loan. Rate adjustments are computed by adding a stated margin to the index, generally 2.75 percent. The Bank retains all ARMs which it originates. The majority of ARMs have terms of 15 to 20 years with a maximum term of 30 years. The Bank periodically offers adjustable-rate mortgage loans with discounted or teaser rates at rates below those which would prevail under normal computations based upon a determination of market factors and competitive rates in the market. On such discounted loans, the borrower is qualified at both the initial rate and the fully-indexed rate. The Bank's one- to four-family mortgage loans remain outstanding for shorter periods than their contractual terms, because borrowers have the right to refinance or prepay. These mortgage loans contain "due on sale" clauses which permit the Bank to accelerate the indebtedness of the loan upon transfer of ownership of the mortgage property. The Bank's other key mortgage loan product is a fixed-rate mortgage loan with a share of Naugatuck Valley's new fixed-rate mortgage loans being sold in the secondary market. The LENDING ACTIVITIES (CONT.) Bank has historically retained most of its fixed-rate mortgage loans. Fixed-rate mortgage loans have a maximum term of 30 years. The Bank's fixed-rate mortgage loans conform to FHLMC underwriting standards. The normal loan-to-value ratio for conventional mortgage loans to purchase or refinance one-to four-family dwellings generally does not exceed 80 percent at Naugatuck Valley, even though the Bank is permitted to make loans up to a 97 percent loan-to-value ratio. While the Bank does make loans up to 97 percent of loan-to-value, the Bank generally requires private mortgage insurance or additional collateral for the amount in excess of the 80.0 percent loan-to-value ratio. Mortgage loans originated by the Bank include due-on-sale clauses enabling the Bank to adjust rates on fixed-rate loans in the event the borrower transfers ownership. Naugatuck Valley has also been an originator of adjustable-rate and fixed-rate commercial real estate loans and multi-family loans in the past and will continue to make multi-family and commercial real estate loans. The Bank had a total of $15.3 million in commercial real estate and multi-family loans at March 31, 2004, or 8.2 percent of gross loans, compared to only $773,000 or 0.6 percent of gross loans at December 31, 1999. The major portion of commercial real estate and multi-family loans are secured by condominiums, apartment buildings, small retail establishments and office buildings and other owner-occupied properties used for business. Most of the multi-family and commercial real estate loans are fully amortizing with a term of up to 20 years for adjustable-rate loans with one-year, three-year or five-year adjustment periods. There are no interest rate caps. The maximum loan-to-value ratio is normally 80 percent. The Bank also originates construction loans to individuals and to a lesser extent to builders for the construction of residential projects, including condominiums, apartments, and single-family subdivisions as well as owner-occupied properties used for business. The Bank had $14.8 million or 7.9 percent of gross loans in construction loans. Construction loans LENDING ACTIVITIES (CONT.) normally have a term of nine months for the construction period with a fixed interest rate for the term of the loan and a loan-to-value ratio of no more than 80.0 percent. The construction loan normally converts to a permanent loan at the end of the construction period. The Bank will originate commercial construction loans for a loan-to-value ratio of up to 75.0 percent with a term of nine months to two years. The Bank also originates land loans to individuals, area homebuilders and developers. Land loans normally have rates tied to the one-year constant maturity Treasury index with a margin of 3.75 percent with terms of up to twenty years. The maximum loan-to-value ratio is 75.0 percent. Land loan rates adjust annually after a five-year initial period. Naugatuck Valley is an originator of commercial business loans with these loans totaling $4.2 million at March 31, 2004, and representing 2.3 percent of gross loans. Commercial business loans are normally secured by business assets such as inventory or business equipment. These loans have a maximum loan-to-value ratio of 75.0 percent of the personal property. These loans have terms of one to seven years. Naugatuck Valley has also been involved in consumer lending. Consumer loans originated consist primarily of home equity loans and lines of credit, which represented a total of $21.5 million or 96.0 percent of consumer loans at March 31, 2004, up from $13.7 million or 90.0 percent of consumer loans at December 31, 1999. Total consumer loans were $22.4 million or 12.0 percent of gross loans at March 31, 2004, and a lesser $15.2 million or 10.7 percent of gross loans at December 31, 1999. Naugatuck Valley offers home equity loans and lines of credit with a maximum loan-to-value ratio of 80.0 percent. These loans have a term of up to ten years with rates generally tied to the current prime rate. Exhibit 13 provides a loan maturity schedule and breakdown and summary of Naugatuck Valley's fixed- and adjustable-rate loans, indicating a majority of fixed-rate loans. At March 31, 2004, 16.9 percent of the Bank's loans due after March 31, 2005, were adjustable-rate and 83.1 LENDING ACTIVITIES (CONT.) percent were fixed-rate. The Bank has a moderate 25.2 percent of its loans at March 31, 2004, due in one year or less with another 9.6 percent due in one to five years. As indicated in Exhibit 14, Naugatuck Valley experienced a significant increase in its one-to four-family loan originations and total loan originations from fiscal year 2001 to 2003. Total loan originations in fiscal year 2001 were $62.6 million compared to $101.0 million in fiscal year 2003, reflective of a higher level of real estate loans accented by higher levels of construction loans and consumer loans. The increase in one- to four-family real estate loan originations from 2001 to 2003 of $29.6 million constituted 77.2 percent of the $38.4 million aggregate increase in total loan originations from 2001 to 2003, with construction loans increasing $5.8 million, representing 15.0 percent of the total increase in loan originations. Consumer loans increased $3.7 million from 2001 to 2003. Loan originations for the three months ended March 31, 2004, were $13.7 million, representing a lesser $54.8 million on an annualized basis, indicating a significant decrease in loan origination activity. Loan originations on residential real estate loans represented 56.0 percent of total loan originations in fiscal year 2001, and 64.0 percent in fiscal year 2003. Residential real estate loan originations decreased to 41.6 percent of total loan originations for the three months ended March 31, 2004. Consumer loans represented 17.0 percent of total loan originations in 2001 and a lesser 14.2 percent in 2003. For the three months ended March 31, 2004, these loans represented a larger 26.4 percent of total originations. Construction loans represented a moderate 12.3 percent of total loan originations in 2001 and a similar 13.3 percent in 2003. For the three months ended March 31, 2004, construction loans represented a larger 20.5 percent of total loan originations. The Bank had no loan purchases from December 31, 2001, through March 31, 2004. Overall, loan originations and purchases exceeded principal payments, loans sales, loan repayments and other deductions in each of the periods. In fiscal 2001, loan originations exceeded reductions by $12.6 million, increasing to $15.3 million in 2003. For the three months LENDING ACTIVITIES (CONT.) ended March 31, 2004, loan originations were greater than total reductions by $1.7 million with total loan sales representing $1.9 million. NONPERFORMING ASSETS Naugatuck Valley understands asset quality risk and the direct relationship of such risk to delinquent loans and nonperforming assets, including real estate owned. The quality of assets has been a key concern to financial institutions throughout many regions of the country. A number of financial institutions have been confronted with rapid increases in their levels of nonperforming assets and have been forced to recognize significant losses, setting aside major valuation allowances. A sharp increase in nonperforming assets has often been related to specific regions of the country and has frequently been associated with higher risk loans, including purchased commercial real estate loans and multi-family loans. Naugatuck Valley has not been faced with such problems in the past and has made a concerted effort to control its nonperforming assets, recognizing the depressed nature of its local economy, and has been successful. Exhibit 15 provides a summary of Naugatuck Valley's delinquent loans at December 31, 2001 through 2003, and at March 31, 2004, indicating an overall increase in delinquent loans from December 31, 2001, to December 31, 2003, and then a decrease by March 31, 2004. The Bank had $845,000 in loans delinquent 60 to 89 days at March 31, 2004. Loans delinquent 30 to 59 days totaled $797,000 at March 31, 2004, with these two categories representing 0.88 percent of gross loans with most of them real estate loans. At December 31, 2003, delinquent loans of 30 to 89 days totaled $2,159,000 or 1.17 percent of gross loans compared to a lesser $1,549,000 or 0.98 percent of gross loans at December 31, 2001. It is normal procedure for Naugatuck Valley's board to review most loans delinquent 30 days or more on a monthly basis, to assess their collectibility and to initiate any direct contact with borrowers. When a loan is delinquent 15 days, the Bank sends the borrower a late payment notice. The Bank then initiates both written and oral communication with the borrower if the loan remains delinquent and sends additional notices after 30 days and 60 days of delinquency. When the loan becomes delinquent at least 90 days, the Bank will normally commence foreclosure proceedings. The Bank does not normally accrue interest on loans past due 90 days NONPERFORMING ASSETS (CONT.) or more unless the loan is adequately collateralized and in the process of collection. Most loans delinquent 90 days or more are placed on a nonaccrual status, and at that point in time the Bank pursues foreclosure procedures. Exhibit 16 provides a summary of Naugatuck Valley's nonperforming assets at March 31, 2004, and at December 31, 1999 through 2003. Nonperforming assets normally consist of loans 90 days or more past due, nonaccruing loans and repossessed assets. The Bank had no loans 90 days or more past due during these periods. The Bank has normally carried a moderate level of nonperforming assets. Naugatuck Valley's level of nonperforming assets ranged from a high dollar amount of $1,877,000 or 1.11 percent of total assets at December 31, 1999, to a low dollar amount of $1,114,000 or 0.46 percent of assets at December 31, 2003. The Bank's nonperforming assets totaled $1,332,000 at December 31, 2002, representing 0.58 percent of assets and have decreased to $980,000 at March 31, 2004, representing 0.40 percent of assets. Naugatuck Valley's level of nonperforming assets was less than its level of classified assets. The Bank's level of classified assets was $2,618,000 or 1.08 percent of assets at March 31, 2004 (reference Exhibit 17). The Bank's classified assets consisted of $2,595,000 in substandard assets, $21,000 in assets classified as doubtful and $2,000 classified as loss. Exhibit 18 shows Naugatuck Valley's allowance for loan losses at March 31, 2003 and 2004, and for fiscal years ended 1999 through 2003, indicating the activity and the resultant balances. Naugatuck Valley has witnessed a modest decrease in its balance of allowance for loan losses from $1,935,000 at December 31, 1999 to $1,810,000 at December 31, 2003. The balance in allowance for loan losses then increased slightly to $1,811,000 at March 31, 2004, with provisions of $110,000 in 1999, $72,000 in 2000, $80,000 in 2001, $231,000 in 2002, $45,000 in fiscal 2003, with no provisions in the first three months ended March 31, 2004. The Bank had net charge-offs of $451,000 in fiscal 1999, $258,000 in fiscal 2000, $93,000 in 2002 and $229,000 in 2003 with net recoveries of $27,000 in 2001 and $1,000 for NONPERFORMING ASSETS (CONT.) the three months ended March 31, 2004. The Bank's ratio of allowance for loan losses to gross loans was 1.38 percent at December 31, 1999, and a lower 0.99 percent at December 31, 2003, due to higher net charge-offs. The allowance for loan losses to gross loans decreased to 0.98 percent of loans at March 31, 2004, due to no provisions and modest loan growth. Allowance for loan losses to nonperforming assets was 103.1 percent at December 31, 1999, and a larger 162.5 percent at December 31, 2003. The ratio of allowance for loan losses to nonperforming assets was a modestly higher 184.8 percent at March 31, 2004. INVESTMENTS The investment and securities portfolio, excluding interest-bearing deposits, has been comprised of U.S. government and federal agency obligations, mortgage-backed securities, Fed funds, and collateralized mortgage obligations. Exhibit 19 provides a summary of Naugatuck Valley's investment portfolio at December 31, 2001, 2002 and 2003 and at March 31, 2004, excluding FHLB stock. The exhibit also includes a summary of the Bank's mortgage-backed securities. Investment securities totaled $32.9 million at March 31, 2004, compared to $38.7 million at December 31, 2003, and $21.0 million at December 31, 2001. Included in these totals are $2.5 million in interest-bearing and U.S. government securities that are held-to-maturity at March 31, 2004, a lesser $1.6 million at December 31, 2003, and a lesser $596,000 at December 31, 2001. The primary component of investment securities at March 31, 2004, was U.S. government and federal agency obligations, representing 47.1 percent of total investments, excluding FHLB stock compared to a larger 82.7 percent at December 31, 2001. The Bank also had interest-bearing deposits totaling $11.9 million at March 31, 2004, and a greater $12.6 million at December 31, 2001. The Bank had $1,757,000 in FHLB stock at March 31, 2004. The weighted average yield on investment securities was 3.91 percent at March 31, 2004. DEPOSIT ACTIVITIES The mix of deposits by amount from December 31, 2001, to March 31, 2004, is provided in Exhibit 20. There has been a moderate change in both total deposits and in the deposit mix during this period. Total deposits have increased from $156.7 million at December 31, 2001, to $187.5 million at March 31, 2004, representing an increase of $30.8 million or 19.7 percent. Certificates of deposit have decreased from $89.7 million at December 31, 2001, to $86.4 million at March 31, 2004, representing a decrease of $3.3 million or 3.6 percent, while savings, NOW, MMDA and noninterest-bearing accounts have increased $34.1 million from $67.0 million at December 31, 2001, to $101.0 million at March 31, 2004 or 50.9 percent. The Bank's share of certificates of deposit witnessed a decrease since 2001, declining from a moderate 57.3 percent of deposits at December 31, 2001, to a lower 46.1 percent of deposits at March 31, 2004. The major component of certificates at March 31, 2004, had rates between 1.00 percent and 1.99 percent and represented 37.8 percent of certificates. At December 31, 2001, the major component of certificates was the 4.00 percent to 4.99 percent category with a lesser 29.4 percent of certificates. The category witnessing the strongest growth from December 31, 2001, to March 31, 2004, was certificates with rates between 1.00 percent and 1.99 percent, which increased $32.7 million during this time period. The category witnessing the largest decrease from December 31, 2001, to March 31, 2004, was certificates with rates between 4.00 percent and 4.99 percent, which declined $18.5 million. Exhibit 21 provides a breakdown of certificates by maturity as of March 31, 2004. A strong 60.8 percent of the Bank's certificates of deposit mature in one year or less. The largest category of certificates based on interest rate was certificates with rates from 1.00 percent to 1.99 percent, totaling $32.7 million, representing 37.8 percent of certificates. Exhibit 22 shows the Bank's deposit activity for the three years ended December 31, 2001, 2002 and 2003, and for the three months ended March 31, 2003 and 2004. Excluding interest credited, Naugatuck Valley experienced net increases in deposits in each fiscal year and for the three months ended March 31, 2003 and 2004. In fiscal year 2001, there was a net increase in DEPOSIT ACTIVITY (CONT.) deposits of $15.1 million, then a lesser $7.4 million in 2003 and $3.4 million for the three months ended March 31, 2004. Including interest credited, there was a larger net increase in deposits. In fiscal year 2001, there was a net increase in deposits of $20.2 million resulting in a 14.8 percent increase in deposits, including interest credited; and in 2003, there was a net increase in deposits of $10.2 million or 5.9 percent. For the three months ended March 31, 2004, a net increase in deposits of $4.0 million produced a net rise in deposits of 2.2 percent, or 8.8 percent, annualized. BORROWINGS Naugatuck Valley has made regular use of FHLB advances from December 31, 1999, to March 31, 2004. The Bank had $30.1 million in FHLB advances at March 31, 2004, with an average rate of 4.78 percent compared to a lesser $23.4 million at December 31, 2001, with an average rate of 6.51 percent (reference Exhibit 23). SUBSIDIARIES Naugatuck Valley had one wholly-owned subsidiary at March 31, 2004, Naugatuck Valley Mortgage Servicing Corporation. Naugatuck Valley Mortgage Servicing Corporation was established in 1999 to service mortgage loans originated by the Bank, and at March 31, 2004, the Mortgage Servicing Corporation had $152.2 million in assets. Naugatuck Valley Mortgage Servicing Corporation qualifies as a "passive investment company," which exempts it from Connecticut income tax. OFFICE PROPERTIES Naugatuck Valley had five offices at March 31, 2004, located in New Haven and Fairfield Counties (reference Exhibit 24). Naugatuck Valley owns three offices and leases two offices. The Bank's net investment in its office premises totaled $4.7 million or 1.93 percent of assets at March 31, 2004, and the Bank's investment in fixed assets was $6.2 million or 2.56 percent of assets at March 31, 2004. MANAGEMENT The president and chief executive officer of Naugatuck Valley is John C. Roman, who is also a director. Mr. Roman joined the Bank to serve as vice president and chief lending officer. He was then appointed president and chief executive officer in 1999 and was also appointed a director. Prior to joining Naugatuck Valley, Mr. Roman was vice president of MidConn Bank, Kensington, Connecticut, from 1994 to 1998 and served as assistant vice president of Eagle Bank, Bristol, Connecticut, the successor to MidConn Bank as the result of a merger. Dominic J. Alegi, Jr. is executive vice president in charge of retail banking. He joined the Bank in 1970. Mr. Alegi is also executive vice president of Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company. Mr. Alegi became executive vice president in 1989, previously serving the Bank as senior vice president. Jane H. Walsh is senior vice president and also a director. She joined the Bank in 1974 and is responsible for operations. Mr. William C. Nimons is senior vice president and joined the Bank in 2001. Mr. Lee R. Schlesinger is vice president and controller of the Bank. He joined the Bank in 1983 and has served in his present position since 2003. II. DESCRIPTION OF PRIMARY MARKET AREA Naugatuck Valley's retail market area encompasses all of Fairfield and New Haven Counties, Connecticut ("market area") where the Bank's offices are located, with the two largest offices located in Naugatuck in New Haven County. The Bank has five offices, one in Fairfield County and four in New Haven County with New Haven County being the core of the Bank's market area. Exhibit 26 provides a summary of key demographic data and trends for Naugatuck and Fairfield and New Haven Counties, Connecticut and the United States. Overall, from 1990 to 2000, population increased in all areas. The population increased by only 1.2 percent in Naugatuck, 2.5 percent in New Haven County, 6.6 percent in Fairfield County, 3.6 percent in Connecticut and 13.2 percent in the United States. Future population projections indicate that population will continue to increase in all areas from 2000 through the year 2008. Naugatuck's population is projected to increase by 3.7 percent with the populations of Fairfield and New Haven Counties, Connecticut and the United States projected to increase by 4.3 percent, 2.5 percent, 3.6 percent and 9.9 percent, respectively. New Haven County is projected to have the smallest population increase. Consistent with its slightly rising trend in population, Naugatuck witnessed a smaller increase in households (families) of 4.4 percent from 1990 to 2000. During that same time period, the number of households increased in New Haven County by 4.9 percent, in Fairfield County by 6.2 percent, in Connecticut by 5.8 percent and in the United States by 14.7 percent. From 2000 through 2008, Naugatuck's households are projected to continue to increase by 5.4 percent, while the number of households are expected to increase by 5.5 percent in Fairfield County, 4.7 percent in New Haven County, 5.7 percent in Connecticut and by 11.0 percent in the United States. New Haven County indicates the smallest projected growth in households. In 1990, the per capita income in Naugatuck and New Haven County were lower than Connecticut, but higher than the United States. Naugatuck had a 1990 per capita DESCRIPTION OF PRIMARY MARKET AREA (CONT.) income of $16,691, New Haven County had a per capita income level of $17,666; while Fairfield County, Connecticut and the United States had 1990 per capita income levels of $26,161, $20,189 and $14,420, respectively. From 1990 to 2000, per capita income increased in all areas, with the United States having the greatest percent increase of 49.7 percent to $21,587. Naugatuck's per capita income increased from 1990 to 2000 by 36.3 percent to $22.757. Per capita income increased by 46.6 percent in Fairfield County to $38,350, by 38.3 percent in New Haven County to $24,439 and by 42.5 percent in Connecticut to $28,766. The 1990 median household income of $39,902 in Naugatuck was lower than the median household income in Connecticut at $41,721. New Haven County's median household income was $38,471 in 1990, which was also lower than Connecticut. Fairfield County had a 1990 median household income of $49,891, which was higher than all other median household income levels in Exhibit 26. From 1990 to 2000, median household income increased in all areas, with the United States indicating the highest rate of increase and New Haven County the lowest. Median household income increased by 28.4 percent to $51,247 in Naugatuck, by 26.9 percent to $48,834 in New Haven County, by 30.8 percent to $65,249 in Fairfield County, compared to a 29.3 percent increase to $53,935 in Connecticut and a 39.7 percent increase to $41,994 in the United States. From 2000 to 2008, median household income is projected to increase by 22.2 percent in Naugatuck, by 26.3 percent in New Haven County, by 37.5 percent in Fairfield County, while increasing by 27.4 percent in Connecticut and 29.3 percent in the United States. Based on those rates of increase, by 2008, median household income is expected to be $62,608 in Naugatuck , $61,659 in New Haven County, $89,694 in Fairfield County, $68,740 in Connecticut, and $54,319 in the United States. Naugatuck and New Haven County continue to indicate the lowest median household income levels. Exhibit 27 provides a summary of key housing data for Naugatuck, Fairfield County, New Haven County, Connecticut and the United States. In 1990, Naugatuck had a rate of owner-occupancy of 67.1 percent, higher than Connecticut at 65.6 percent and higher than the United DESCRIPTION OF PRIMARY MARKET AREA (CONT.) States at 64.2 percent, with New Haven County at 62.9 percent and Fairfield County at 68.2 percent. As a result, Naugatuck indicated a rate of renter-occupied housing of 32.9 percent, compared to 37.1 percent for New Haven County, 31.8 percent for Fairfield County, 34.4 percent for Connecticut and 35.8 percent for the United States. In 2000, owner- occupied housing increased in all the areas except Naugatuck. The owner-occupancy rates in 2000 rose to 69.2 percent, 63.1 percent, 66.8 percent and 66.2 percent in Fairfield County, New Haven County, Connecticut and the United States, respectively. Naugatuck's owner-occupancy rate decreased to 66.5 percent. Conversely, the renter-occupancy rates decreased in to levels of 30.8 percent, 39.6 percent, 33.2 percent and 33.8 percent in Fairfield County, New Haven County, Connecticut and the United States, respectively, while Naugatuck's renter-occupancy rate increased to 33.5 percent. New Haven County continued to indicate the lowest owner-occupancy rate and the highest renter-occupancy rate. Naugatuck's 1990 median housing value was $142,000, lower than Connecticut's median housing value of $176,700. New Haven County had a median housing value of a lower $164,400, much lower than Fairfield County's $248,300. The 1990 average median rent of Naugatuck was $578. Fairfield and New Haven Counties had median rent of $709 and $585, while Connecticut had a median rent of $598 and the United States had a lower median rent level of $374. In 2000, median housing value had decreased in Naugatuck, New Haven County and Connecticut. Naugatuck had a 2000 median housing value of $133,000 with New Haven County at a higher $151,900, Fairfield County at $288,900, Connecticut at $166,900 and the United States having risen to $119,600. In contrast, median rent levels had risen from 1990 to 2000 in all areas, with Fairfield County continuing to have the highest level at $838. The other 2000 median rent levels were $631, $666, $681 and $602 in Naugatuck, New Haven County, Connecticut and the United States, respectively. In 1990, the major source of employment for Naugatuck by industry group, based on share of employment, was the services industry at 30.6 percent with the manufacturing group a close second at 29.2 percent and the wholesale/retail sales group at 20.2 percent. The services industry DESCRIPTION OF PRIMARY MARKET AREA (CONT.) was responsible for 36.1 percent of jobs in Fairfield County, 37.8 percent in New Haven County, 36.4 percent in Connecticut and 34.0 percent in the United States (reference Exhibit 28). The manufacturing industry was also the second major employer in both counties and Connecticut at 20.4 percent, 21.1 percent and 20.5 percent, respectively. In the United States, the wholesale/retail trade group was the second largest employer at 27.5 percent. The wholesale/retail trade group was the third major overall employer in Fairfield and New Haven Counties and in Connecticut at 20.2 percent, 20.2 percent and 19.6 percent, respectively, while manufacturing was the third largest group in the United States at 19.2 percent. The construction group, finance, insurance and real estate group, transportation/utilities group, and the agriculture/mining group combined to provide 20.3 percent of employment in Naugatuck , 23.3 percent of employment in Fairfield County, 20.9 percent in New Haven County, 23.5 percent of employment in Connecticut and 19.3 percent in the United States. In 2000, the services industry, manufacturing industry and wholesale/retail trade industry provided the first, second and third highest levels of employment, respectively, for Naugatuck, New Haven County and Connecticut but not Fairfield County or the United States where the services industry, wholesale/retail trade and manufacturing industries provided the first, second and third highest levels of employment. The services industry accounted for 42.4 percent, 46.1 percent, 49.0 percent, 47.3 percent and 46.7 percent in Naugatuck, Fairfield and New Haven Counties, Connecticut and the United States, respectively. The manufacturing industry provided for 23.6 percent, 13.2 percent, 15.9 percent, 14.8 percent and 14.1 percent in the same respective areas. The wholesale/retail trade group provided 15.3 percent, 14.3 percent, 14.7 percent, 14.4 percent and 15.3 percent of employment in Naugatuck, Fairfield and New Haven Counties, Connecticut and the United States, respectively. DESCRIPTION OF PRIMARY MARKET AREA (CONT.) Naugatuck's major employer is the Peter Paul Division of Hershey with 282 persons employed. Some of the other large employers in the nearby areas of Waterbury, Southbury, Cheshire and Watertown are listed below.
Employer Number of Employees - -------- ------------------- Webster Bank (Corporate) 2,200 IBM 1,825 St. Mary's Hospital 1,825 The Waterbury Hospital 1,325 Bozzuto's 1,000 Pratt & Whitney Eagle Service 800 The Siemon Company 700 Webster Bank (Regional) 635 Connecticut Light & Power 595 Cheshire Direct 575 United Parcel Service 550 The Torrington Company 550 VNA Health Care 500 Crompton Corporation 500 SBC/SNET - Regional 500 Quassy Amusement Park 400 First Union National Bank (Regional) 350 New Opportunities for Waterbury 335 Filene's 330 Bristol Babcock, Inc. 325 Eyelematic Manufacturing Co. 300 Republican-American 300 Timex Corporation 300 Naugatuck Valley Community 290
The unemployment rate is another key economic indicator. Exhibit 29 shows the unemployment rates in Fairfield and New Haven Counties, Connecticut and the United States in 2000 through March 2004. New Haven County has been characterized by higher unemployment rates than Connecticut and similar to the United States. New Haven County's unemployment has been above Connecticut's and lower than the United States' until 2003. In 2000, Fairfield County had an unemployment rate of 1.9 percent, compared to unemployment DESCRIPTION OF PRIMARY MARKET AREA (CONT.) rates of 2.5 percent , 2.2 percent and 4.0 percent in New Haven County, Connecticut and the United States, respectively. Fairfield County's unemployment rate increased in 2001 to 3.1 percent, compared to 2.5 percent in New Haven County, 3.3 percent in Connecticut and a higher 4.8 percent in the United States. In 2002, Fairfield County again increased its rate of unemployment to 4.0 percent. New Haven County and Connecticut also increased to 4.8 percent and 4.3 percent, and the United States increased to 5.8 percent. In 2003, all areas had increases in their unemployment rates. Fairfield County's unemployment rate increased to 4.8 percent, and the unemployment rates in New Haven County, Connecticut and the United States increased to 6.0 percent, 5.5 percent and 6.0 percent, respectively. By March 2004, the unemployment rate decreased to 4.4 percent in Fairfield County, decreased to 5.6 percent in New Haven County, decreased to 5.2 percent in Connecticut and decreased to 5.4 percent in the United States. Exhibit 30 provides deposit data for banks and thrifts in Naugatuck Valley's two market area counties of Fairfield and New Haven Counties. Naugatuck Valley's deposit base was $188.8 million or a 1.0 percent share of the $18.6 billion total thrift deposits but only a 0.5 percent share of the total deposits, which were $36.4 billion as of June 30, 2003. It is evident from the size of the thrift deposits and bank deposits that Naugatuck Valley has a small deposit share, with the Bank having a minimal level of market penetration for thrift deposits and also for total deposits. Exhibit 31 provides interest rate data for each quarter for the years 2001 through 2003 and for the first quarter of 2004. The interest rates tracked are the Prime Rate, as well as 90-Day, One-Year and Thirty-Year Treasury Bills. Short term interest rates experienced a declining trend in 2001 and 2002 and then a flat trend in 2003. This trend indicates some increase in One-Year Treasury Bills and 30-Year Treasury Notes in the first quarter of 2004. SUMMARY To summarize, Naugatuck represents an area with slightly rising population and household trends during the 1990s and early 2000s. Such growth is projected to continue through 2008. Naugatuck displayed a lower per capita income and lower household income than Connecticut. In 1990, the median rent level of Naugatuck was lower than Connecticut's median rent. By 2000, the median rent level of Naugatuck was still lower than Connecticut's median rent. In 1990, Naugatuck's median housing value was also lower than Connecticut's but higher than in the United States, and in 2000, Naugatuck's median housing value was again lower than Connecticut's median housing value. The market area counties have had similar unemployment rates to Connecticut's. Finally, Naugatuck Valley is in a very competitive financial institution market slightly dominated by savings institutions and a total market deposit base for banks and thrifts in the market area counties that is $36.4 billion in deposits. III. COMPARABLE GROUP SELECTION INTRODUCTION Integral to the valuation of the Corporation is the selection of an appropriate group of publicly-traded thrift institutions, hereinafter referred to as the "comparable group". This section identifies the comparable group and describes each parameter used in the selection of each institution in the group, resulting in a comparable group based on such specific and detailed parameters, current financials and recent trading prices. The various characteristics of the selected comparable group provide the primary basis for making the necessary adjustments to the Corporation's pro forma value relative to the comparable group. There is also a recognition and consideration of financial comparisons with all publicly-traded, FDIC-insured thrifts in the United States and all publicly-traded, FDIC-insured thrifts in the New England region and in Connecticut. Exhibits 32 and 33 present Thrift Stock Prices and Pricing Ratios and Key Financial Data and Ratios, respectively, both individually and in aggregate, for the universe of 233 publicly-traded, FDIC-insured thrifts in the United States ("all thrifts"), excluding mutual holding companies, used in the selection of the comparable group and other financial comparisons. Exhibits 32 and 33 also subclassify all thrifts by region, including the 16 publicly-traded New England thrifts ("New England thrifts") and the 2 publicly-traded thrifts in Connecticut ("Connecticut thrifts"), and by trading exchange. Exhibit 34 presents prices, pricing ratios and price trends for all FDIC-insured thrifts completing their conversions between January 1, 2003, and May 21, 2004. The selection of the comparable group was based on the establishment of both general and specific parameters using financial, operating and asset quality characteristics of Naugatuck Valley as determinants for defining those parameters. The determination of parameters was also based on the uniqueness of each parameter as a normal indicator of a thrift institution's operating philosophy and perspective. The parameters established and defined are considered to be both reasonable and reflective of Naugatuck Valley's basic operation. INTRODUCTION (CONT.) Inasmuch as the comparable group must consist of at least ten institutions, the parameters relating to asset size and geographic location have been expanded as necessary in order to fulfill this requirement. GENERAL PARAMETERS MERGER/ACQUISITION The comparable group will not include any institution that is in the process of a merger or acquisition due to the price impact of such a pending transaction. The following thrift institutions were potential comparable group candidates but had to be eliminated due to their involvement in a merger/acquisition.
Institution State - ----------- ----- Falmouth Bancorp, Inc. Massachusetts First Security Fed Financial Illinois GA Financial, Inc. Pennsylvania Warwick Community Bancorp New York
There are no pending merger/acquisition transactions involving thrift institutions in Naugatuck Valley's city, county or market area, as indicated in Exhibit 35. MUTUAL HOLDING COMPANIES The comparable group will not include any mutual holding companies. The percentage of public ownership of individual mutual holding companies indicates a wide range from minimal to 49.0 percent, the largest permissible percentage, causing them to demonstrate certain MUTUAL HOLDING COMPANIES (CONT.) varying individual characteristics different among themselves and from conventional, publicly-traded companies. A further reason for the elimination of mutual holding companies as potential comparable group candidates relates to the presence of a mid-tier, publicly-traded holding company in some, but not all, mutual holding company structures. The presence of mid-tier holding companies can also result in inconsistent and unreliable comparisons among the relatively small universe of 38 publicly-traded mutual holding companies as well between those 38 entities and the larger universe of conventional, publicly-traded thrift institutions. As a result of the foregoing and other factors, mutual holding companies typically demonstrate higher pricing ratios that relate to their minority ownership structure and are inconsistent in their derivation with those calculated for conventionally structured, publicly-traded institutions. In our opinion, it is appropriate to limit individual comparisons to institutions that are 100 percent publicly owned. Exhibit 37 presents pricing ratios and Exhibit 38 presents key financial data and ratios for the 38 publicly-traded, FDIC-insured mutual holding companies in the United States. The following thrift institutions were potential comparable group candidates, but were not considered due to their mutual holding company form:
Institution State - ------------ ------ AJS Bancorp Inc., MHC Illinois BCSB BankcorpInc., MHC Maryland Eureka Financial Corp, MHC Pennsylvania Greater Delaware Valley, MHC Pennsylvania Greene County Bancorp, Inc., MHC New York Governeur Bancorp, MHC New York Jacksonville Bancorp, MHC Illinois Mid-Southern Savings Bank, MHC Indiana New England Bancshares, MHC Connecticut Oneida Financial Corp., MHC New York Pathfinder Bancorp, Inc., MHC New York Roebling Financial Corp, MHC New Jersey Rome Bancorp Inc., MHC New York Service Bancorp, Inc. MHC Massachusetts Westborough Financial Services, MHC Massachusetts Westfield Financial Inc., MHC Massachusetts
TRADING EXCHANGE It is necessary that each institution in the comparable group be listed on one of the three major stock exchanges, the New York Stock Exchange, the American Stock Exchange, or the National Association of Securities Dealers Automated Quotation System (NASDAQ). Such a listing indicates that an institution's stock has demonstrated trading activity and is responsive to normal market conditions, which are requirements for listing. Of the 271 publicly-traded, FDIC-insured savings institutions, including the 38 mutual holding companies, 17 are traded on the New York Stock Exchange, 18 are traded on the American Stock Exchange and 180 are traded on NASDAQ. There were an additional 48 institutions traded on the OTC Bulletin Board and 8 listed in the Pink Sheets, but they were not considered for the comparable group selection. IPO DATE Another general parameter for the selection of the comparable group is the initial public offering ("IPO") date, which must be at least four quarterly periods prior to the trading date of May 21, 2004, used in this report, in order to insure at least four consecutive quarters of reported data as a publicly-traded institution. The resulting parameter is a required IPO date prior to March 31, 2003. GEOGRAPHIC LOCATION The geographic location of an institution is a key parameter due to the impact of various economic and thrift industry conditions on the performance and trading prices of thrift institution stocks. Although geographic location and asset size are the two parameters that have been developed incrementally to fulfill the comparable group requirements, the geographic location parameter has nevertheless eliminated regions of the United States distant to Naugatuck Valley, including the western, southwestern and southeastern states. GEOGRAPHIC LOCATION (CONT.) The geographic location parameter consists of Connecticut and its surrounding states of Massachusetts, Rhode Island and New York, as well as the states of Delaware, Indiana, Illinois, Kentucky, Maryland, Maine, New Hampshire, New Jersey, Ohio, Pennsylvania and West Virginia for a total of sixteen states. To extend the geographic parameter beyond those states could result in the selection of similar thrift institutions with regard to financial conditions and operating characteristics, but with different pricing ratios due to their geographic regions. The result could then be an unrepresentative comparable group with regard to price relative to the parameters and, therefore, an inaccurate value. ASSET SIZE Asset size was another key parameter used in the selection of the comparable group. The range of total assets for any potential comparable group institution was $100 million to $1.0 billion, due to the general similarity of asset mix and operating strategies of institutions within this asset range, compared to Naugatuck Valley, with assets of approximately $242 million. Such an asset size parameter was necessary to obtain an appropriate comparable group of at least ten institutions. In connection with asset size, we did not consider the number of offices or branches in selecting or eliminating candidates, since that characteristic is directly related to operating expenses, which are recognized as an operating performance parameter. SUMMARY Exhibits 38 and 39 show the 58 institutions considered as comparable group candidates after applying the general parameters, with the shaded lines denoting the institutions ultimately selected for the comparable group using the balance sheet, performance and asset quality SUMMARY (CONT.) parameters established in this section. It should be noted that the comparable group candidates may be members of either the Bank Insurance Fund (BIF) or the Savings Association Insurance Fund (SAIF), since many members of each fund hold significant balances of deposits insured by the other fund. BALANCE SHEET PARAMETERS INTRODUCTION The balance sheet parameters focused on seven balance sheet ratios as determinants for selecting a comparable group, as presented in Exhibit 38. The balance sheet ratios consist of the following: 1. Cash and investments to assets 2. Mortgage-backed securities to assets 3. One- to four-family loans to assets 4. Total net loans to assets 5. Total net loans and mortgage-backed securities to assets 6. Borrowed funds to assets 7. Equity to assets The parameters enable the identification and elimination of thrift institutions that are distinctly and functionally different from Naugatuck Valley with regard to asset mix. The balance sheet parameters also distinguish institutions with a significantly different capital position from Naugatuck Valley. The ratio of deposits to assets was not used as a parameter as it is directly related to and affected by an institution's equity and borrowed funds ratios, which are separate parameters. CASH AND INVESTMENTS TO ASSETS The Bank's ratio of cash and investments to asset, excluding mortgage-backed securities, was 12.4 percent at March 31, 2004, and reflects Naugatuck Valley's share of investments modestly lower than national and regional averages. The Bank's investments have consisted primarily of U.S. government and federal agency securities, state and municipal obligations, debt securities, equity securities and federal funds sold. For its three most recent calendar years ended December 31, 2003, Naugatuck Valley's average ratio of cash and investments to assets was a similar 11.3 percent, ranging from a high of 18.9 percent in 2002 to a low of 10.4 percent in 2003, with modest change. It should be noted that, for the purposes of comparable group selection, Naugatuck Valley's $1.8 million balance of Federal Home Loan Bank stock at March 31, 2004, is included in the other assets category, rather than in cash and investments, in order to be consistent with reporting requirements and sources of statistical and comparative analysis related to the universe of comparable group candidates and the final comparable group. The parameter range for cash and investments is fairly broad, in spite of Naugatuck Valley's modestly higher balance of cash and investments, related to the general volatility of this parameter and institutions' varying liquidity options and approaches, including the purchase of mortgage-backed and mortgage derivative securities. The range has been defined as 25.0 percent or less of assets, with a midpoint of 13.0 percent. MORTGAGE-BACKED SECURITIES TO ASSETS At March 31, 2004, Naugatuck Valley's ratio of mortgage-backed securities to assets was a lower 6.2 percent compared to the regional average of 11.5 percent and the national average of 12.5 percent for publicly-traded thrifts. The Bank's three most recent calendar year average is 5.6 percent, also lower than industry averages. Inasmuch as many institutions purchase mortgage-backed securities as an alternative to both lending, relative to cyclical loan demand and prevailing interest rates, and other investment vehicles, this parameter is also fairly broad at 25.0 percent or less of assets and a midpoint of 13.0 percent. ONE- TO FOUR-FAMILY LOANS TO ASSETS Naugatuck Valley's lending activity is focused on the origination of residential mortgage loans secured by one- to four-family dwellings. One- to four-family loans, including construction loans, represented 54.65 percent of the Bank's assets at March 31, 2004, which is modestly higher than the national average of 46.0 percent. The parameter for this characteristic requires any comparable group institution to have from 30.0 percent to 70.0 percent of its assets in one- to four-family loans with a midpoint of 50.0 percent. TOTAL NET LOANS TO ASSETS At March 31, 2004, Naugatuck Valley had a 75.3 percent ratio of total net loans to assets and a similar three calendar year average of 75.2 percent, both being higher than the national average of 67.6 percent and the regional average of 61.5 percent for publicly-traded thrifts. The Bank's ratio of total net loans to assets has decreased since 2001. The parameter for the selection of the comparable group is from 50.0 percent to 90.0 percent with a midpoint of 70.0 percent. The lower end of the parameter range relates to the fact that, as the referenced national and regional averages indicate, many institutions hold greater volumes of investment securities and/or mortgage-backed securities as cyclical alternatives to lending, but may otherwise be similar to Naugatuck Valley. TOTAL NET LOANS AND MORTGAGE-BACKED SECURITIES TO ASSETS As discussed previously, Naugatuck Valley's shares of mortgage-backed securities to assets and total net loans to assets were 6.1 percent and 75.3 percent, respectively, for a combined share of 81.4 percent. Recognizing the industry and regional ratios of 12.5 percent and 11.5 percent, respectively, of mortgage-backed securities to assets, the parameter range for the comparable group in this category is 70.0 percent to 95.0 percent, with a midpoint of 83.0 percent. BORROWED FUNDS TO ASSETS Naugatuck Valley had a $30.1 million balance of borrowed funds at March 31, 2004, consisting of FHLB advances, representing 12.5 percent of assets. The average ratio of borrowed funds to assets for the past three years was 13.2 percent. The use of borrowed funds by some thrift institutions indicates an alternative to retail deposits and may provide a source of term funds for lending. The federal insurance premium on deposits has also increased the attractiveness of borrowed funds. The use of borrowed funds by some institutions indicates an alternative to retail deposits and may provide a source of longer term funds. The federal insurance premium on deposits has also increased the attractiveness of borrowed funds. The institutional demand for borrowed funds increased overall from 1997 through 2003 and then subsiding in early 2004. The rise was due to the greater competition for deposits and lower cost funds, resulting in an increase in borrowed funds by many institutions as an alternative to higher cost and/or longer term certificates. In 2002 and 2003, however, lower interest rates resulted in some moderation of borrowings by financial institutions, particularly among nonpublicly-traded institutions. The ratio of borrowed funds to assets, therefore, does not typically indicate higher risk or more aggressive lending, but primarily an alternative to retail deposits. The range of borrowed funds to assets is 40.0 percent or less with a midpoint of 20.0 percent. EQUITY TO ASSETS Naugatuck Valley's equity to assets ratio was 8.9 percent at March 31, 2004, and 8.7 percent at December 31, 2003, averaging 8.7 percent for the three calendar years ended December 31, 2003. After conversion, based on the midpoint value of $50.0 million and a 43 percent minority public offering of $21.5 million, with 50.0 percent of the net proceeds of the public offering going to the Bank, Naugatuck Valley's equity is projected to stabilize in the EQUITY TO ASSETS (CONT.) area of 12.5 percent of assets. Based on those equity ratios, we have defined the equity ratio parameter to be 6.0 percent to 18.0 percent with a midpoint ratio of 12.0 percent. PERFORMANCE PARAMETERS INTRODUCTION Exhibit 39 presents five parameters identified as key indicators of Naugatuck Valley's earnings performance and the basis for such performance both historically and during the four quarters ended March 31, 2004. The primary performance indicator is the Bank's core return on average assets (ROAA). The second performance indicator is the Bank's core return on average equity (ROAE). To measure the Bank's ability to generate net interest income, we have used net interest margin. The supplemental source of income for the Bank is noninterest income, and the parameter used to measure this factor is the ratio of noninterest income to average assets. The final performance indicator is the Bank's ratio of operating expenses or noninterest expenses to average assets, a key factor in distinguishing different types of operations, particularly institutions that are aggressive in secondary market activities, which often results in much higher operating costs and overhead ratios. RETURN ON AVERAGE ASSETS The key performance parameter is the core ROAA. For the twelve months ended March 31, 2004, Naugatuck Valley's core ROAA was 0.72 percent based on adjusted core earnings after taxes of $1,697,000, as detailed in Item I of this Report. The Bank's average ROAA over its most recent five calendar years of 1999 to 2003, based on net earnings, was a higher 0.91 percent, ranging from a low of 0.50 percent in 1999 to a high of 0.96 percent in 2000. RETURN ON AVERAGE ASSETS (CONT.) Considering the historical and current earnings performance of Naugatuck Valley, the range for the ROAA parameter based on core income has been defined as 0.60 percent to a high of 1.10 percent with a midpoint of 0.85 percent. RETURN ON AVERAGE EQUITY The ROAE has been used as a secondary parameter to eliminate any institutions with an unusually high or low ROAE that is inconsistent with the Bank's position. This parameter does not provide as much meaning for a newly converted thrift institution as it does for established stock institutions, due to the unseasoned nature of the capital structure of the newly converted thrift and the inability to accurately reflect a mature ROAE for the newly converted thrift relative to other stock institutions. Prior to conversion, the Bank's core ROAE for the twelve months ended March 31, 2004, was 8.11 percent based on adjusted core income. In its most recent five calendar years, the Bank's average ROAE, based on net earnings, was a lower 8.49 percent, ranging from a low of 5.98 percent in 1999 to a high of 10.71 percent in 2000. The parameter range for ROAE for the comparable group, based on core income, is from 4.0 percent to 12.0 percent with a midpoint of 8.0 percent. NET INTEREST MARGIN Naugatuck Valley had a net interest margin of 3.69 percent for the twelve months ended March 31, 2004, representing net interest income as a percentage of average interest-earning assets. The Bank's net interest margin in calendar years 1999 through 2003 averaged 3.86 NET INTEREST MARGIN (CONT.) percent, indicating a volatile trend from 1999 to 2003, reaching 3.98 percent in 2000 and dropping to 3.71 percent in 2001. The parameter range for the selection of the comparable group is from a low of 2.75 percent to a high of 4.50 percent with a midpoint of 3.63 percent. OPERATING EXPENSES TO ASSETS For the twelve months ended March 31, 2004, Naugatuck Valley had a higher than average 2.99 percent ratio of operating expense to average assets. In fiscal year 2003, the Bank's expense ratio was 2.94 percent, representing increases from 2.75 percent in 2002, 2.96 percent in 2001, 2.68 percent in 2000 and 2.49 percent in 1999. For its five most recent calendar years ended December 31, 2003, Naugatuck Valley's operating expense ratio averaged 2.76 percent. It should be noted that the Bank's operating expense ratio in 2003 was higher than the averages of 2.38 percent for all FDIC-insured savings institutions and 2.29 percent for all publicly-traded savings institutions. The operating expense to assets parameter for the selection of the comparable group is from a low of 2.00 percent to a high of 4.00 percent with a midpoint of 3.00 percent. NONINTEREST INCOME TO ASSETS Compared to publicly-traded thrifts, Naugatuck Valley has historically experienced a lower but increasing average dependence on noninterest income as a source of additional income. Naugatuck Valley's ratio of noninterest income to average assets was 0.31 percent in 1999, 0.34 percent in 2000, 0.37 percent in 2001, 0.43 percent in 2002 and 0.46 percent in 2003, all of NONINTEREST INCOME TO ASSETS (CONT.) which are much lower than the 1.36 percent average for publicly-traded thrift institutions for the most recent four quarters. The range for this parameter for the selection of the comparable group is 1.25 percent of average assets or less, with a midpoint of 0.63 percent. ASSET QUALITY PARAMETERS INTRODUCTION The final set of financial parameters used in the selection of the comparable group are asset quality parameters, also shown in Exhibit 39. The purpose of these parameters is to insure that any thrift institution in the comparable group has an asset quality position similar to that of Naugatuck Valley. The three defined asset quality parameters are the ratios of nonperforming assets to total assets, repossessed assets to total assets and loan loss reserves to total assets at the end of the most recent period. NONPERFORMING ASSETS TO ASSETS Naugatuck Valley's ratio of nonperforming assets to assets was 0.40 percent at March 31, 2004, which was much lower than the national average of 0.73 percent for publicly-traded thrifts but higher than the 0.10 percent for New England thrifts. Consistently lower than national averages, the Bank's ratio of nonperforming assets to total assets was 1.11 percent in 1999, 0.65 percent in 2000, 0.72 percent in 2001, 0.58 percent in 2002 and 0.46 percent in 2003, averaging 0.70 percent for its five most recent calendar years ended December 31, 2003. REPOSSESSED ASSETS TO ASSETS The parameter range for nonperforming assets to assets has been defined as 1.00 percent of assets or less with a midpoint of 0.50 percent. Naugatuck Valley had $131,000 in repossessed assets, representing 0.05 percent of assets. National and regional averages were 0.13 percent and 0.01 percent, respectively, for publicly-traded thrift institutions at March 31, 2004. The range for the repossessed assets to total assets parameter is 0.20 percent of assets or less with a midpoint of 0.10 percent. LOANS LOSS RESERVES TO ASSETS Naugatuck Valley had an allowance for loan losses of $1,811,000, representing a loan loss allowance to total assets ratio of 0.75 percent at March 31, 2004, which was slightly higher than its 0.74 percent ratio at December 31, 2003. For the five calendar years of 1999 to 2003, the Bank's loan loss reserve averaged 0.93 percent of assets with a downward trend from a high of 1.14 percent in 1999 to a low of 0.74 percent in 2003. The loan loss allowance to assets parameter range used for the selection of the comparable group required a minimum ratio of 0.20 percent of assets. THE COMPARABLE GROUP With the application of the parameters previously identified and applied, the final comparable group represents ten institutions identified in Exhibits 40, 41 and 42. The comparable group institutions range in size from $151.7 million to $917.6 million with an average asset size of $463.0 million and have an average of 7.3 offices per institution. One of THE COMPARABLE GROUP (CONT.) the comparable group institutions was converted in 1993, one in 1995, two in 1996, two in 1998, three in 1999 and one in 2002. Eight of the ten of the comparable group institutions are traded on NASDAQ, with two traded on the American Stock Exchange. The comparable group institutions as a unit have a ratio of equity to assets of 8.9 percent, which is 7.3 percent higher than all publicly-traded thrift institutions in the United States but 5.4 percent lower than publicly-traded thrift institutions in Connecticut; and for the most recent four quarters indicated a core return on average assets of 0.80 percent, lower than all publicly-traded thrifts at 1.07 percent and lower than publicly-traded Connecticut thrifts at 0.82 percent. IV. ANALYSIS OF FINANCIAL PERFORMANCE This section reviews and compares the financial performance of Naugatuck Valley to all publicly-traded thrifts, to publicly-traded thrifts in the New England region and to Connecticut thrifts, as well as to the ten institutions constituting Naugatuck Valley's comparable group, as selected and described in the previous section. The comparative analysis focuses on financial condition, earning performance and pertinent ratios as presented in Exhibits 43 through 48. As presented in Exhibits 43 and 44, at March 31, 2004, Naugatuck Valley's total equity of 8.94 percent of assets was lower than the 11.52 percent for the comparable group, the 8.33 percent for all thrifts, the 11.33 percent for New England thrifts and the 9.45 percent ratio for Connecticut thrifts. The Bank had a 75.29 percent share of net loans in its asset mix, slightly higher than the comparable group at 72.56 percent, all thrifts at 67.63 percent, New England thrifts at 61.49 percent and Connecticut thrifts at 47.22 percent. Naugatuck Valley's share of net loans, higher than industry averages, is primarily the result of its slightly lower 12.36 percent share of cash and investments and significantly lower than average 6.15 percent share of mortgage-backed securities. The comparable group had a modestly lower 10.56 percent share of cash and investments and a higher 11.48 percent share of mortgage-backed securities. All thrifts had 12.54 percent of assets in mortgage-backed securities and 15.38 percent in cash and investments. Naugatuck Valley's 77.42 percent share of deposits was higher than the comparable group, all thrifts and New England thrifts but lower than Connecticut thrifts, reflecting the Bank's lower than average 12.45 percent ratio of borrowed funds to assets. The comparable group had deposits of 66.16 percent and borrowings of 20.92 percent. All thrifts averaged a 56.66 percent share of deposits and 33.16 percent of borrowed funds, while New England thrifts had a 69.14 percent share of deposits and a 18.57 percent share of borrowed funds. Connecticut thrifts averaged an 80.44 percent share of deposits and an 8.93 percent share of borrowed funds. Naugatuck Valley had 0.01 percent in intangible assets at March 31, 2004, compared to 0.17 percent for the comparable group, 0.50 percent for all thrifts, 0.56 percent for New England thrifts and 0.61 percent for Connecticut thrifts. ANALYSIS OF FINANCIAL PERFORMANCE (CONT.) Operating performance indicators are summarized in Exhibits 45, 46 and 47 and provide a synopsis of key sources of income and key expense items for Naugatuck Valley in comparison to the comparable group, all thrifts, and regional thrifts for the trailing four quarters. As shown in Exhibit 47, for the twelve months ended March 31, 2004, Naugatuck Valley had a yield on average interest-earning assets slightly below the comparable group but higher than all thrifts, New England thrifts and Connecticut thrifts. The Bank's yield on interest-earning assets was 5.44 percent compared to the comparable group at 5.73 percent, all thrifts at 5.09 percent, New England thrifts at 5.07 percent and Connecticut thrifts at 4.90 percent. The Bank's cost of funds for the twelve months ended March 31, 2004, was lower than the comparable group, all thrifts and Connecticut thrifts, but higher than Connecticut thrifts. Naugatuck Valley had an average cost of interest-bearing liabilities of 1.87 percent compared to 2.73 percent for the comparable group, 2.31 percent for all thrifts, 2.36 percent for New England thrifts and 1.72 percent for Connecticut thrifts. The Bank's similar yield on interest-earning assets and slightly lower interest cost resulted in a net interest spread of 3.57 percent, which was higher than the comparable group at 3.00 percent, moderately higher than all thrifts at 2.91 percent, higher than New England thrifts at 2.70 percent and Connecticut thrifts at 3.18 percent. Naugatuck Valley generated a net interest margin of 3.69 percent for the twelve months ended March 31, 2004, based on its ratio of net interest income to average interest-earning assets, which was moderately higher than the comparable group ratio of 3.32 percent. All thrifts averaged a lower 3.14 percent net interest margin for the trailing four quarters, as did New England thrifts at 3.19 percent and Connecticut thrifts at a higher 3.48 percent. Naugatuck Valley's major source of earnings is interest income, as indicated by the operations ratios presented in Exhibit 46. The Bank made no provision for loan losses during the twelve months ended March 31, 2004. The comparable group indicated a provision representing 0.11 percent of assets, with all thrifts at 0.10 percent, New England thrifts at 0.09 percent and Connecticut thrifts at 0.01 percent. ANALYSIS OF FINANCIAL PERFORMANCE (CONT.) The Bank's noninterest income was $1.2 million or 0.50 percent of average assets for the twelve months ended March 31, 2004, including only $27,000 in gains on the sale of assets. Such a ratio of noninterest income to average assets was lower than the comparable group, which had a ratio of 0.72 percent, with all thrifts at 1.36 percent, New England thrifts at 0.56 percent and Connecticut thrifts at 0.61 percent. For the twelve months ended March 31, 2004, Naugatuck Valley's operating expense ratio was 2.99 percent of average assets, which was higher than the comparable group at 2.49 percent and higher than all thrifts at 2.29 percent, New England thrifts at 2.27 percent and Connecticut thrifts at 2.43 percent. The overall impact of Naugatuck Valley's income and expense ratios is reflected in the Bank's net income and return on assets. For the twelve months ended March 31, 2004, the Bank had net ROAA of 0.74 percent and core ROAA of 0.72 percent. For its most recent four quarters, the comparable group had a higher net and core ROAA of 0.83 percent and 0.80 percent, respectively. All publicly-traded thrifts averaged a higher net ROAA of 1.27 percent and a higher 1.07 percent core ROAA, with New England thrifts at a 0.79 percent core ROAA and Connecticut thrifts at a 0.82 percent core ROAA. V. MARKET VALUE ADJUSTMENTS This is a conclusive section where adjustments are made to determine the pro forma market value or appraised value of the Corporation based on a comparison of Naugatuck Valley with the comparable group. These adjustments will take into consideration such key items as earnings performance, primary market area, financial condition, asset and deposit growth, dividend payments, subscription interest, liquidity of the stock to be issued, management, and market conditions or marketing of the issue. It must be noted that all of the institutions in the comparable group have their differences among themselves and relative to the Bank, and, as a result, such adjustments become necessary. EARNINGS PERFORMANCE In analyzing earnings performance, consideration was given to net interest income, the amount and volatility of interest income and interest expense relative to changes in market area conditions and to changes in overall interest rates, the quality of assets as it relates to the presence of problem assets which may result in adjustments to earnings, due to charge-offs, the balance of current and historical classified assets and real estate owned, the balance of valuation allowances to support any problem assets or nonperforming assets, the amount and volatility of noninterest income, and the amount and ratio of noninterest expenses. As discussed earlier, the Bank has historically focused on increasing its net interest income and net income; maintaining its low ratio of nonperforming assets; monitoring and strengthening its ratio of interest sensitive assets relative to interest sensitive liabilities, thereby maintaining its overall interest rate risk; and maintaining adequate allowances for loan losses to reduce the impact of any unforeseen charge-offs. The Bank has also closely monitored its higher than average overhead expenses, which have increased in recent years as a result of branching. During the past five years, Naugatuck Valley's ratio of noninterest expense to average assets has indicated from 2.49 percent in 1999, which was generally in line with industry averages, to EARNINGS PERFORMANCE (CONT.) 2.94 percent in 2003 and 2.99 percent for the twelve months ended March 31, 2004, which are significantly higher than the current industry average of 2.29 percent for all publicly-traded thrifts. Following reorganization, the Bank will endeavor to maintain its higher net interest spread and net interest margin; increase its non-interest income; strengthen its net income and its lower return on assets; maintain its lower balances of non-performing and classified assets; closely monitor its interest rate gap; and reduce its operating expenses. Earnings are often related to an institution's ability to generate loans. The Bank was an active originator of both mortgage and non-mortgage loans in 2001, 2002 and 2003 and during the three months ended March 31, 2004. Naugatuck Valley's highest volume of originations occurring in 2003, reflecting the very low interest rate environment. In 2003, the predominant component of the Bank's one- to four-family residential mortgage loan originations was the refinancing of existing loans and consequently, its balance of such loans decreased by 0.59 percent or $781,000. That shrinkage was offset by substantial increases of 104.6 percent or $7.2 million for construction loans, 38.8 percent or $4.0 million for commercial real estate loans and 12.6 percent or $2.4 million for consumer loans, predominantly home equity loans. The Bank's lending activities in 2003 resulted in its overall loan growth of 9.0 percent in 2003, following growth of 4.8 percent in 2002 and 8.4 percent in 2001. For the three months ended March 31, 2004, total loan originations were considerably lower than in the first quarter of 2003, and annualized were also much lower than during 2003, with all real estate loans increasing $408,000 or $1.6 million annualized, compared to $10.4 million in 2003. During the first quarter of 2004, commercial business loans remained generally flat, compared to a $2.5 million increase in 2003; and consumer loans increased by $1.3 million or $5.2 million annualized, compared to $2.4 million in 2003. Total loan originations were at $64.3 million and $101.0 million during 2002 and 2003, respectively, decreasing to $13.7 million or $54.8 million annualized, during the three months ended March 31, 2004. For the three months ended March 31, 2004, real estate loans, EARNINGS PERFORMANCE (CONT.) commercial business loans and consumer loans, predominantly home equity loans, represented 66.4 percent, 7.1 percent, and 26.4 percent, respectively, of total loan originations. In comparison, during 2003, real estate loans, commercial business loans and consumer loans represented 82.7 percent, 3.2 percent and 14.2 percent, respectively, of total loan originations, indicating a significant annualized decrease in real estate loans and increases in commercial business loans and consumer loans in the first quarter of 2004. Total mortgage and non-mortgage loan originations were $13.7 million for the three months ended March 31, 2004, reduced by repayments and loan sales of $12.0 million, resulting in a net increase of $1.7 million in gross loans receivable to $186.7 million at March 31, 2004, compared to $185.0 million at December 31, 2003. In 2003, total loan originations were $101.1 million, reduced by repayments and loan sales of $85.7 million, resulting in a net increase of $15.3 million in gross loans receivable to $185.1 million at December 31, 2003, compared to $169.7 million at December 31, 2002. The impact of Naugatuck Valley's primary lending efforts has been to generate a yield on average interest-earning assets of 5.44 percent for the twelve months ended March 31, 2004, compared to a higher 5.73 percent for the comparable group, a lower 5.21 percent for all thrifts and a lower 5.07 percent for New England thrifts. The Bank's ratio of interest income to average assets was 5.25 percent for the twelve months ended March 31, 2004, lower than the comparable group at 5.30 percent, but higher than all thrifts at 4.65 percent and New England thrifts at 4.62 percent, reflecting the Bank's similar ratio of nonperforming assets and higher ratio of interest-earning assets. Naugatuck Valley's 1.87 percent cost of interest-bearing liabilities for the twelve months ended March 31, 2004, was lower than the comparable group at 2.73 percent, all thrifts at 2.31 and New England thrifts at 2.36 percent, but modestly higher than the two Connecticut thrifts at 1.72 percent. The Bank's resulting net interest spread of 3.57 percent for the twelve months ended March 31, 2004, was higher than the comparable group at 3.00 percent, all thrifts at 2.91 EARNINGS PERFORMANCE (CONT.) percent and New England thrifts at 2.70. The Bank's net interest margin of 3.69 percent, based on average interest-earning assets for the twelve months ended March 31, 2004, was higher than the comparable group at 3.32 percent, all thrifts at 3.14 percent and New England thrifts at 3.19 percent. The Bank's ratio of noninterest income to assets was 0.50 percent, including gains, for the twelve months ended March 31, 2004, lower than the comparable group at 0.72 percent, and more notably lower than all thrifts at 1.36 percent and modestly lower than New England thrifts at 0.56 percent. A small 2.3 percent of the Bank's noninterest income was comprised of gains on the sale of loans and other assets. The Bank's operating expenses were significantly higher than the comparable group, all thrifts and New England thrifts. For the twelve months ended March 31, 2004, Naugatuck Valley had an operating expenses to assets ratio of 2.99 percent compared to 2.49 percent for the comparable group, 2.29 percent for all thrifts and 2.27 percent for New England thrifts. Such higher operating expenses relate in part to the Bank's lower $37.5 million average deposits per branch, compared to the comparable group average of $40.9 million in deposits per branch, as well as its less favorable 73.7 percent efficiency ratio for the twelve months ended March 31, 2004, compared to the comparable group with an efficiency ratio of 65.03 percent. For the twelve months ended March 31, 2004, Naugatuck Valley generated a lower ratio of noninterest income, a higher ratio of noninterest expenses and a higher net interest margin relative to its comparable group. The Bank was absent a provision for loan losses during the twelve months ended March 31, 2004, compared to 0.11 percent ratio to assets for the comparable group, 0.10 percent for all thrifts and 0.09 percent for New England thrifts. The Bank's absence of a provision for loan losses during the twelve months ended March 31, 2004, reflected a decreasing trend in both nonperforming assets and charge-offs in recent periods, as well as a ratio of allowance for loan losses to total loans higher than the comparable and similar EARNINGS PERFORMANCE (CONT.) to all thrifts. The Bank's ratio of reserves to nonperforming assets was moderately lower than the comparable group and very similar to all thrifts. As a result of its operating characteristics, the Bank's net income and core income were lower than the comparable group for the twelve months ended March 31, 2004. Based on net earnings, the Bank had a return on average assets of 0.50 percent, 0.96 percent, 0.65 percent, 0.91 percent, 0.77 percent in 1999, 2000, 2001, 2002, and 2003, respectively, and 0.72 percent for the twelve months ended March 31, 2004. For the trailing twelve months, the comparable group had a higher net ROAA of 0.83 percent, while all thrifts indicated a still higher ROAA of 1.27 percent. The Bank's core or normalized earnings, as shown in Exhibit 7, were lower than its net earnings and resulted in a 0.72 percent core return on assets for the twelve months ended March 31, 2004. That core ROAA was also lower than the comparable group at 0.81 percent, all thrifts at 1.07 percent and New England thrifts at 0.79 percent. Following its reorganization, Naugatuck Valley's earnings will continue to be dependent on a combination of the overall trends in interest rates, the consistency, reliability and variation of its noninterest income and overhead expenses, its asset quality, its future needs for provisions for loan losses and the continuation of lower charge-offs and nonperforming assets. The Bank's noninterest income increased significantly in 2002 and 2003 due to higher originations, primarily refinances at lower interest rates, but it is likely that a rising interest rate environment will flatten and, perhaps, reduce that trend. Overhead expenses indicate a moderate annual increases from 1999 to 2003, with such expenses in the first quarter of 2004 annualizing to a 9.8 percent increase in 2004 compared to 2003 and remaining significantly higher than industry averages. The Bank's net interest margin, higher than the comparable group, has been the result of its lower yield on assets offset by its lower cost of funds. The impact of this trend has been a generally stable net interest margin with only mild fluctuation during the last five years and the three months ended March 31, 2004. EARNINGS PERFORMANCE (CONT.) In recognition of the foregoing earnings related factors, considering Naugatuck Valley's current performance measures, a downward adjustment has been made to the Corporation's pro forma market value for earnings performance. MARKET AREA Naugatuck Valley's primary market area for both retail deposits and lending consists of the Connecticut counties of Fairfield and New Haven. The Bank's home office and three of its four branches are in New Haven County and one branch is in Fairfield County. As discussed in Section II, from 1990 to 2000, population increased in all areas. The population increased by a modest 1.2 percent in Naugatuck and 2.5 percent in New Haven County, a moderate 6.6 percent in Fairfield County, 3.6 percent in Connecticut and 13.2 percent in the United States. From 2000 to 2008, Naugatuck's population is projected to increase by 3.7 percent with the populations of Fairfield and New Haven Counties, Connecticut and the United States projected to increase by 4.3 percent, 2.5 percent, 3.6 percent and 9.9 percent, respectively. Naugatuck experienced a smaller 4.4 percent increase in households from 1990 to 2000. During that period, households increased by 4.9 percent in New Haven County, 6.2 percent in Fairfield County, 5.8 percent in Connecticut and 14.7 percent in the United States. From 2000 through 2008, Naugatuck's households are projected to continue to increase by 5.4 percent, while the increase is projected to be 5.5 percent in Fairfield County, 4.7 percent in New Haven County, 5.7 percent in Connecticut and 11.0 percent in the United States. That historical and projected population and household growth was generally lower than Connecticut and the United States and moderately lower than the comparable group markets. In 2000, the median housing values in Naugatuck and New Haven County indicated decreases of 6.0 percent and 7.6 percent, respectively, from 1990, while Fairfield County MARKET AREA (CONT.) indicated an increase of 16.4 percent during that ten year period. With the exception of segments of Fairfield County, the median housing values in Naugatuck Valley's market area were lower than in Connecticut, but higher than in the United States. The median housing values in the Bank's market area, although higher in dollar value than the average of the comparable group markets due to regional characteristics, indicate lower growth relative to the comparable group markets. The average 2000 unemployment rate in the Bank's primary market area was 1.9 percent in Fairfield County and 2.5 percent in New Haven County, with Connecticut at 2.2 percent and the United States at 4.0 percent. By April, 2004, the unemployment rate increased to 4.4 percent in Fairfield County and a higher 5.6 percent in New Haven County, while Connecticut's unemployment rate increased to 5.2 percent and the rate in the United States increased to 5.4 percent. In April, 2004, the average unemployment of the comparable group markets was modestly lower than in either of the Bank's two market area counties Naugatuck Valley's primary market area is both suburban to Waterbury and exurban, also including smaller communities that are generally less affluent than the averages for Fairfield and New Haven Counties. For perspective, it should be noted that Fairfield County demographics include a number of very affluent residential and resort communities, such as Greenwich and Westport, which are geographically remote to the Bank's operations, which are concentrated in the Waterbury and New Haven County areas. In the Bank's primary market area counties, the services sector represented the primary source of employment in 2000 by a moderate margin, followed by the manufacturing and wholesale/retail sectors, generally consistent with state and national proportions. By 2000, however, the wholesale/retail sector and the manufacturing sector both experienced significant declines as employment sources, with the services sector growing to more than three times the employment of either the wholesale/retail and the manufacturing sectors. MARKET AREA (CONT.) Based on both deposits and loan originations, the financial competition in Naugatuck Valley's primary market area is significant, with competition from both regional institutions and national bank holding companies such as Bank of America, Wachovia and J.P. Morgan Chase. As of June 30, 2003, the Bank held a modest 1.2 percent of deposits in New Haven County and 0.09 percent of deposits in Fairfield County. Total bank and thrift deposits were $14.7 billion and $21.7 billion in New Haven County and Fairfield County, respectively, with banks and thrifts holding similar shares of deposits. In recognition of the foregoing factors, we believe that a downward adjustment is warranted for the Bank's primary market area relative to the comparable group. FINANCIAL CONDITION The financial condition of Naugatuck Valley is discussed in Section I and shown in Exhibits 1, 2, 5, and 12 through 23, and is compared to the comparable group in Exhibits 42, 43 and 44. The Bank's ratio of total equity to total assets was 8.94 percent at March 31, 2004, which was lower than the comparable group at 11.52 percent, all thrifts at 10.46 percent and New England thrifts at 11.33 percent. With the minority offering completed at the midpoint of the valuation range, the Corporation's pro forma equity to assets ratio will increase to approximately 15.14 percent, and the Bank's pro forma equity to assets ratio will increase to approximately 11.50 percent. The Bank's mix of assets and liabilities indicates both similarities to and variations from its comparable group. Naugatuck Valley had a modestly higher 75.3 percent ratio of net loans to total assets at March 31, 2004, compared to the comparable group at 72.6 percent. All thrifts indicated a lower 67.6 percent, as did New England thrifts at 61.5 percent. The Bank's 12.4 percent share of cash and investments was higher than the comparable group at 10.6 percent, while all thrifts were at 15.4 percent and New England thrifts were at a higher 26.2 percent. FINANCIAL CONDITION (CONT.) Naugatuck Valley's 6.2 percent ratio of mortgage-backed securities to total assets was lower than the comparable group at 11.5 percent and similarly lower than all thrifts at 12.5 percent. The Bank's 77.4 percent ratio of deposits to total assets was higher than the comparable group at 66.2 percent, all thrifts at 56.7 percent and New England thrifts at 69.1 percent. Naugatuck Valley's 12.5 percent ratio of borrowed funds to assets was lower than the comparable group at 20.9 percent, much lower than all thrifts at 33.2 percent and lower than New England thrifts at 18.6 percent. Naugatuck Valley had intangible assets of 0.01 percent of assets, consisting of mortgage servicing rights, and had repossessed real estate of 0.05 percent of assets, compared to ratios of 0.17 percent and 0.04 percent of intangible assets and real estate owned, respectively, for the comparable group. All thrifts had intangible assets of 0.50 percent and real estate owned of 0.13 percent. The financial condition of Naugatuck Valley is affected by its $980,000 million balance of nonperforming assets or 0.40 percent of assets at March 31, 2004, compared to a similar 0.38 percent for the comparable group, a higher 0.73 percent for all thrifts and a lower 0.10 percent for New England thrifts. Historically, the Bank's ratio of nonperforming assets to total assets has been similar to or somewhat higher than industry averages, but has decreased considerably in both dollars and ratio since December 31, 1999. The Bank's ratio of nonperforming assets to total assets was 1.11 percent, 0.65 percent, 0.72 percent, 0.58 percent and 0.46 percent at December 31, 1999, 2000, 2001, 2002, and 2003, respectively, decreasing slightly to 0.40 percent at March 31, 2004. The Bank had a lower 6.8 percent share of high risk real estate loans, compared to 17.8 percent for the comparable group and 21.1 percent for all thrifts. The regulatory definition of high risk real estate loans is all mortgage loans other than those secured by one- to four-family residential properties. FINANCIAL CONDITION (CONT.) At March 31, 2004, Naugatuck Valley had $1,811,000 of allowances for loan losses, which represented 0.75 percent of assets and 0.97 percent of total loans. The comparable group indicated allowances equal to 0.51 percent of assets and a smaller 0.67 percent of total loans, while all thrifts had allowances that averaged a lower 0.65 percent of assets, but a similar 0.98 percent of total loans. Also significant, however, is an institution's ratio of allowances for loan losses to nonperforming assets, since a portion of nonperforming assets might eventually be charged off. Naugatuck Valley's $1,811,000 of allowances for loan losses, represented 184.8 percent of nonperforming assets at March 31, 2004, compared to the comparable group's slightly higher 209.7 percent, with all thrifts at a similar 183.2 percent and New England thrifts at a much higher 509.2 percent. Naugatuck Valley's ratio of net charge-offs to average total loans was 0.11 percent for the twelve months ended March 31, 2004, compared to a lower 0.05 percent for the comparable group, 0.22 percent for all thrifts and 0.06 percent for New England thrifts. This ratio reflects the Bank's maintenance of a generally average ratio of reserves to loans, and a similar ratio of reserves to nonperforming assets. In 2003, the Bank's net charge-offs of $229,000 followed net charge-offs of $93,000 in 2002, net recoveries of $27,000 in 2001 and higher net charge-off of $258,000 and $451,000 in 2000 and 1999, respectively. For the three months ended March 31, 2004, the Bank had a recovery of $1,000 with no charge-offs. For the twelve months ended March 31, 2004, Naugatuck Valley took no provision for loan losses, but had net charge-offs of $195,000. Based on available information, the comparable group had a ratio of provisions for loan losses to net charge-offs of 227.17 percent, with all thrifts at 167.35 percent and New England thrifts at 151.21 percent. Naugatuck Valley has a minimal level of interest rate risk, evidenced by its modestly negative one year cumulative gap of 11.7 percent. The Bank's three year gap was also a modestly negative 13.2 percent. Compared to the comparable group, we believe that no adjustment is warranted for Naugatuck Valley's current financial condition. ASSET, LOAN AND DEPOSIT GROWTH During its most recent five calendar years, Naugatuck Valley has been characterized by lower average rates of growth in assets, loans and deposits relative to its comparable group. The Bank's average annual asset growth rate from 1999 to 2003, was 7.3 percent, compared to a higher 10.1 percent for the comparable group, a significantly higher 14.9 percent for all thrifts, and a modestly higher 10.6 percent for New England thrifts. The Bank's somewhat lower asset growth rate is reflective primarily of its smaller increase in loans during that five year period combined with mildly declining earnings trend. The Bank's loan portfolio indicates an average annual increase of 6.7 percent from 1999 to 2003, compared to average growth rates of 14.1 percent for the comparable group, 12.8 percent for all thrifts and 9.5 percent for New England thrifts. Naugatuck Valley's deposits indicate an average annual increase of 7.2 percent from 1999 to 2003. Annual deposit growth was from a low of 0.76 percent in 1999 to a high of 14.8 percent in 2001, compared to average growth rates of 8.3 percent for the comparable group, 11.0 percent for all thrifts and 9.3 percent for New England thrifts. Notwithstanding its lower rate of deposit growth, the Bank had a lower 17.7 percent five year average ratio of borrowed funds to assets, compared to the comparable group at 25.2 percent. The Bank's combined lower deposit growth and borrowed funds ratio reflects and confirms its smaller loan growth and funding needs Considering the demographics and competition in its market area, the Bank's ability to increase its asset, loan and deposit bases in the future is, to a great extent, dependent on its being able to competitively price its loan and savings products, to maintain a high quality of service to its customers, to increase its market share and to strengthen its loan origination activity. Naugatuck Valley's primary market area has experienced a relatively modest increase in population and households between 1990 and 2000 and those increases are projected to continue at rates similar to or lower than state and national rates through 2008. The Bank's primary market area indicates 2000 per capita income and median household income lower than Connecticut but higher than the United States for Naugatuck and New Haven County. In 2000, housing values in Naugatuck and New Haven County were also lower than Connecticut but ASSET, LOAN AND DEPOSIT GROWTH (CONT.) higher than the United States. As previously noted, the Bank's operations are concentrated in New Haven County, the location of Naugatuck and four of the Bank's five offices. Notwithstanding the proceeds of the contemplated minority offering, the Bank's primary dependence on its operations in New Haven County could result in the continuation of lower asset growth in the future as a result of its competitive operating environment in a market area with modest growth in population and households, projected to remain lower than state and national levels and growth in the future. Naugatuck Valley's competitive operating environment is likely to result in the continuation of lower loan and deposit growth and systemic asset growth for the Bank relative to the comparable group. Based on the foregoing factors, we have concluded that a downward adjustment to the Association's pro forma value is warranted. DIVIDEND PAYMENTS The Corporation has not committed to pay an initial cash dividend on its common stock. The future payment of cash dividends will depend upon such factors as earnings performance, financial condition, capital position, growth, asset quality and regulatory limitations. Each of the ten institutions in the comparable group paid cash dividends during the twelve months ended March 31, 2003, for an average dividend yield of 2.31 percent and an average payout ratio of 38.94 percent. During that twelve month period, the average dividend yield was 1.20 percent and the average payout ratio was 34.64 percent for the two Connecticut thrifts; and the average dividend was 1.94 percent and the average payout ratio was 40.13 percent for all thrifts. In our opinion, a downward adjustment to the pro forma market value of the Corporation is warranted related to dividend payments. SUBSCRIPTION INTEREST In 2003 and to date in 2004, investors' interest in new issues has been generally positive and subscription levels have been consistently high, although a few issues have received a less than strong reaction from the marketplace. Overall, although the reaction of IPO investors appears generally to be related to a number of analytical factors, including the financial performance and condition of the converting thrift institution, the strength of the local economy, general market conditions, aftermarket price trends and the anticipation of continuing merger/acquisition activity in the thrift industry, the smaller number of offerings appears to have concentrated greater subscription activity beyond the stronger institutions. Naugatuck Valley will direct its offering primarily to depositors and residents in its market area. The board of directors and officers anticipate purchasing approximately $1.0 million or 4.7 percent of the stock offered to the public based on the appraised midpoint valuation. At all ranges of the offering, 2.0 percent of the shares issued to the public and to Naugatuck Valley Mutual will be contributed to Naugatuck Valley Charitable Foundation. The Bank will form an ESOP, which plans to purchase 8.4 percent of the total shares issued in the current offering, including the shares issued to Naugatuck Valley Mutual and the charitable foundation. Additionally, the Prospectus restricts to 15,000 shares, based on the $10.00 per share purchase price, the total number of shares in the conversion that may be purchased by a single person, and to 20,000 shares by persons and associates acting in concert. The Bank has secured the services of Ryan Beck & Co. "Ryan Beck" to assist in the marketing and sale of the conversion stock. Based on the size of the offering, recent market movement and current market conditions, local market interest, the terms of the offering and recent subscription levels for initial mutual holding company offerings, we believe that an upward adjustment is warranted for the Bank's anticipated subscription interest. LIQUIDITY OF THE STOCK The Corporation will offer its shares through a subscription offering and, if required, a subsequent community offering with the assistance of Ryan Beck. The stock of the Corporation will trade on the NASDAQ National Market and the Corporation will pursue at least two market makers for its stock. The Bank's total public offering is considerably smaller in size to the average market value of the comparable group. The comparable group has an average market value of $62.6 million for the stock outstanding compared to a midpoint public offering of $21.5 million for the Corporation, less the ESOP and the estimated 100,000 shares to be purchased by officers and directors, which will reduce the Corporation's public market capitalization to approximately $18.7 million. Of the ten institutions in the comparable group, eight trade on NASDAQ and two trade on the American Stock Exchange, with those ten institutions indicating an average daily trading volume of 2,851 shares during the last four quarters. In further examining and analyzing the market for publicly-traded thrift stocks, we compared various characteristics of the 38 mutual holding companies with the 233 stock companies. Our findings indicate that both entity types have generally similar average market capitalization, with mutual holding companies at $415 million and stock companies at $515 million; and that both entity types have a generally similar average number of shares outstanding, with mutual holding companies averaging 15.0 million shares and stock companies averaging 17.1 million shares. We find it significant, however, notwithstanding the foregoing similarities, that the average daily trading volume of mutual holding companies was 20,796 during the past twelve months, while stock companies indicated a much higher average daily volume of 76,757 shares. Based on the average market capitalization, shares outstanding and daily trading volume of the comparable group, as well as the relative trading volume of publicly-traded mutual holding companies, we have concluded that a downward adjustment to the Corporation's pro forma market value is warranted relative to the anticipated liquidity of its stock. MANAGEMENT The president and chief executive officer of Naugatuck Valley is John C. Roman, who is also a director. Mr. Roman joined the Bank as vice president and chief lending officer and was appointed president and chief executive officer and was elected to the board in 1999. Prior to joining Naugatuck Valley, Mr. Roman was vice president of MidConn Bank, Kensington, Connecticut, from 1994 to 1998 and served as assistant vice president of Eagle Bank, Bristol, Connecticut, the successor to MidConn Bank as the result of a merger. Dominic J. Alegi, Jr. is executive vice president in charge of retail banking and has been with the Bank since 1970. Mr. Alegi is also executive vice president of Naugatuck Valley Financial and Naugatuck Valley Mutual Holding Company. Mr. Alegi became executive vice president in 1989, previously serving the Bank as senior vice president. Jane H. Walsh is senior vice president and a director, currently responsible for operations, and has been with the Bank since 1974. During the past five years and in the first quarter of 2004, Naugatuck Valley has been able to increase its deposit base, total assets and total equity, maintain a stable net interest margin, control nonperforming assets, classified loans and charge-offs, maintain an acceptable gap position, and maintain its market share in spite of increasing competition. Although the Bank's earnings and return on assets have been below comparable group and industry averages, and its operating expenses have been higher than such averages, management is confident that its branch network is well positioned for reasonable growth and enhanced profitability following its public offering. Overall, we believe the Bank to be professionally and knowledgeably managed, as are the comparable group institutions. It is our opinion that no adjustment to the pro forma market value of the Corporation is warranted for management. MARKETING OF THE ISSUE The necessity to build a new issue discount into the stock price of a converting thrift institution continues to be a closely examined issue in recognition of uncertainty among investors as a result of the thrift industry's dependence on interest rate trends, recent volatility in the stock market and pending federal legislation related to the regulation of financial institutions. Increased merger/acquisition activity, as well as the presence of new competitors in the financial institution industry, such as de novo institutions, investment firms, insurance companies and mortgage companies, have resulted in increased pressure on an individual institution's ability to attract retail deposits at normal rates rather than premium rates and to deploy new funds in a timely and profitable manner. Although we believe that a new issue discount applied to the price to book valuation approach is appropriate and necessary in some public offerings, in our opinion, various characteristics of the Corporation's reorganization transaction, as well as recent market trends, cause us to conclude that such a discount is not warranted in the case of this particular offering. Consequently, at this time we have made no adjustment to the Corporation's pro forma market value related to a new issue discount. VI. VALUATION METHODS Historically, the most frequently used method for determining the pro forma market value of common stock for thrift institutions by this firm has been the price to book value ratio method, due to the volatility of earnings in the thrift industry in the early to mid-1990s. As earnings in the thrift industry stabilized and improved in the late 1990s, more emphasis was placed on the price to earnings method, particularly considering increases in stock prices during those years. During the past few years, however, as decreasing interest rates have had varying effects on individual institutions, depending on the nature of their operations, the price to book value method has again become pertinent and meaningful in the objective of discerning commonality and comparability among institutions. In determining the pro forma market value of the Corporation, primary emphasis has been placed on the price to book value method, with additional analytical and correlative attention to the price to earnings and price to core earnings methods. In recognition of the volatility and variance in earnings due to fluctuations in interest rates, the continued differences in asset and liability repricing and the frequent disparity in value between the price to book approach and the price to earnings approach, a third valuation method, the price to net assets method, has also been used. The price to assets method is used less often for valuing ongoing institutions, but becomes more useful in valuing converting institutions when the equity position and earnings performance of the institutions under consideration are different. In addition to the pro forma market value, we have defined a valuation range with the minimum of the range being 85.0 percent of the pro forma market value, the maximum of the range being 115.0 percent of the pro forma market value, and a super maximum being 115.0 percent of the maximum. The pro forma market value or appraised value will also be referred to as the "midpoint value". Inasmuch as the ownership of Naugatuck Valley will remain in the mutual holding company form, the public offering of the Corporation will be based on the sale of shares to the public aggregating 43 percent of the fully converted pro forma market value of the Corporation at each of the valuation ranges defined in this Report with 2 percent VALUATION METHODS (CONT.) of the fully converted valuation being issued to the Foundation for a combined total of 45.0 percent issued to the public and to the Foundation. It should be noted that the fewer number of shares offered to the public and the lower proceeds resulting from that offering will result in actual pricing ratios considerably higher than those determined in the fully converted valuation of the Corporation where higher proceeds are assumed; and it should be noted that such higher pricing ratios, presented in detail in the offering prospectus, are pertinent to the prospective minority shareholders and their evaluation of the offering. In applying each of the valuation methods, consideration was given to the adjustments to the Bank's pro forma market value discussed in Section V. Downward adjustments were made for the Bank's earnings performance, market area, asset, loan and deposit growth, dividends, and liquidity of the stock. An upward adjustment was made for subscription interest. No adjustments were made for the Bank's financial condition, management and marketing of the issue. PRICE TO BOOK VALUE METHOD In the valuation of thrift institutions, the price to book value method focuses on an institution's financial condition, and does not give as much consideration to the institution's long term performance and value as measured by earnings. Due to the earnings volatility of many thrift stocks, the price to book value method is frequently used by investors who rely on an institution's financial condition rather than earnings performance. Although this method is, under certain circumstances, considered somewhat less meaningful for institutions that provide a consistent earnings trend, it remains significant and reliable when an institution's performance or general economic conditions are experiencing volatile or uncustomary trends related to PRICE TO BOOK VALUE METHOD (CONT.) internal or external factors, and serves as a complementary and correlative analysis to the price to earnings and price to assets approaches. It should be noted that the prescribed formulary computation of value using the pro forma price to book value method returns a price to book value ratio below market value on a fully converting institution. As noted previously, however, in the case of an initial mutual holding company minority offering where a majority of the shares will not be held by the public, the application of the prescribed formulary computation to the sale of all the shares based on the full valuation of the institution necessarily returns a higher book value per share and a lower price to book value ratio than is reflective of the actual number of shares to be owned by the public and the proceeds generated by such a smaller offering. In most instances, nevertheless, such a value remains below current comparable market values. Exhibit 50 shows the average and median price to book value ratios for the comparable group which were 120.40 percent and 117.5 percent, respectively. The full comparable group indicated a moderately wide range, from a low of 92.58 percent (Lincoln Bancorp) to a high of 140.87 percent (Wayne Savings Bancshares). The comparable group had slightly higher average and median price to tangible book value ratios of 121.89 percent and 119.36 percent, respectively, with the range of 95.15 percent to a higher 140.87 percent. Excluding the low and the high in the group, the comparable group's price to book value range narrowed from a low of 108.69 percent to a high of 139.69 percent; and the comparable group's price to tangible book value range also narrowed from a low of 109.77 percent to a high of 140.00. Considering the foregoing factors in conjunction with the adjustments made in Section V, we have determined a fully converted pro forma price to book value ratio of 74.91 percent and a price to tangible book value ratio of 75.24 percent at the midpoint. The price to book value ratio increases from 70.93 percent at the minimum to 81.08 percent at the super maximum, while the price to tangible book value ratio increases from 71.32 percent at the minimum to 81.41 PRICE TO BOOK VALUE METHOD (CONT.) percent at the super maximum. The price to book value ratio is 74.97 percent without recognition of the 2.0 percent foundation and is a higher $51.7 million value at the midpoint. The Corporation's pro forma price to book value and price to tangible book value ratios of 74.91 percent and 75.24 percent, respectively, as calculated using the prescribed formulary computation indicated in Exhibit 49, are influenced by the Bank's equity level and local market, as well as subscription interest in thrift stocks and overall market and economic conditions. Further, the Corporation's ratio of equity to assets after conversion at the midpoint of the valuation range will be approximately 12.67 percent compared to 11.52 percent for the comparable group. Based on the price to book value ratio and the Bank's total equity of $21,656,000 at March 31, 2004, the indicated fully converted pro forma market value of the Corporation using this approach is $50,116,051 at the midpoint (reference Exhibit 49). PRICE TO EARNINGS METHOD The foundation of the price to earnings method is the determination of the earnings base to be used, followed by the determination of an appropriate price to earnings multiple. As indicated in Exhibit 3, Naugatuck Valley's after tax net earnings for the twelve months ended March 31, 2004, were $1,755,000, and the Bank's core earnings for that period were a lesser $1,697,000, based on the adjustments shown in Exhibit 7. To determine the pro forma market value of the Corporation by using the price to earnings method, we applied the core earnings base of $1,697,000. In determining the price to core earnings multiple, we reviewed the range of price to core earnings and price to net earnings multiples for the comparable group and all publicly-traded thrifts. The average price to core earnings multiple for the comparable group was 17.78, while the median was 14.94. The average price to net earnings multiple was a similar 15.11 and the median multiple was 16.97. The comparable group's price to core earnings multiple was lower PRICE TO EARNINGS METHOD (CONT.) than the 23.31 average multiple for all publicly-traded, FDIC-insured thrifts and higher than their median of 17.09. The range in the price to core earnings multiple for the comparable group was from a low of 11.68 (LSB Financial Corp.) to a high of 23.02 (First Bancorp of Indiana). The range in the price to core earnings multiple for the comparable group, excluding the high and low ranges, was from a low multiple of 14.25 to a high of 22.21 times earnings for eight of the ten institutions in the group, indicating a modest narrowing of the range. Consideration was given to the adjustments to the Corporation's pro forma market value discussed in Section V. In recognition of those adjustments, we have determined a fully converted price to core earnings multiple of 28.16 at the midpoint, based on Naugatuck Valley's core earnings of $1,697,000 for twelve months ended March 31, 2004. Based on the Bank's core earnings base of $1,697,000 (reference Exhibit 49), the fully converted pro forma market value of the Corporation using the price to earnings method is $49,901,388 at the midpoint. PRICE TO ASSETS METHOD The final valuation method is the price to assets method. This method is not frequently used, since the calculation incorporates neither an institution's equity position nor its earnings base. Additionally, the prescribed formulary computation of value using the pro forma price to net assets method does not recognize the runoff of deposits concurrently allocated to the purchase of conversion stock, returning a pro forma price to net assets ratio below its true level following conversion. Further, once again as previously noted, the prescribed formulary computation of fully converted pro forma value does not recognize the lower pro forma asset base resulting from small offering proceeds. PRICE TO ASSETS METHOD (CONT.) Exhibit 50 indicates that the average price to assets ratio for the comparable group was 13.65 percent and the median was 13.16 percent. The range in the price to assets ratios for the comparable group varied from a low of 9.75 percent (LSB Financial Corp.) to a high of 18.10 percent (Atlantic Liberty Financial). The range narrows modestly with the elimination of the two extremes in the group to a low of 10.89 percent and a high of 16.80 percent. Consistent with the previously noted adjustments, it is our opinion that an appropriate price to assets ratio for the Corporation is 17.43 percent at the midpoint, which ranges from a low of 16.55 percent at the minimum to 24.93 percent at the super maximum. Based on the Bank's March 31, 2004, asset base of $242,148,000, the indicated pro forma market value of the Corporation using the price to assets method is $50,025,458 at the midpoint (reference Exhibit 49). VALUATION CONCLUSION Exhibit 55 provides a summary of the valuation premium or discount for each of the valuation ranges when compared to the comparable group based on each of the fully converted valuation approaches. At the midpoint value, the fully converted price to book value ratio of 74.91 percent for the Corporation represents a discount of 37.78 percent relative to the comparable group and decreases to 32.66 percent at the super maximum. As presented Exhibits 51 through 54 of this Report and as further detailed in the offering prospectus, however, recognizing the lower actual proceeds to be realized by the offering to the public of only 43 percent of the pro forma fully converted shares, the Corporation's pro forma book value and pro forma book value per share will be significantly lower and its corresponding price to book value ratio will be higher at the offering price of $10.00 per share. Specifically, the sale to the public of 43 percent of the shares, with 2 percent issued to the Foundation and the remaining 55 percent of the shares retained by the Corporation, results in a price to book value ratio of 116.14 percent, VALUATION CONCLUSION (CONT.) 127.23 percent, 136.80 percent and 146.20 percent at the minimum, midpoint, maximum and adjusted maximum of the actual offering range, respectively. Those ratios represent a discount at the minimum and premiums at the midpoint, the maximum and adjusted maximum relative to the average of the comparable group of 3.54 percent, for the discount, and 5.67 percent, 13.62 percent and 21.43 percent for the premiums at the minimum, midpoint, maximum and adjusted maximum of the actual offering range, respectively. The price to core earnings multiple of 28.16 for the Corporation at the midpoint value indicates a premium of 58.43 percent, increasing to a premium of 106.39 percent at the super maximum. The price to assets ratio at the midpoint of 17.43 percent represents a premium of 27.74 percent, increasing to a premium of 82.69 percent at the super maximum. It is our opinion that as of May 21, 2004, the fully converted pro forma market value of the Corporation, is $50,000,000 at the midpoint, representing 5,000,000 shares at $10.00 per share. The fully converted pro forma valuation range of the Corporation is from a minimum of $42,500,000 or 4,250,000 shares at $10.00 per share to a maximum of $57,500,000 or 5,750,000 shares at $10.00 per share, with such range being defined as 15 percent below the appraised value to 15 percent above the appraised value. The maximum, as adjusted, defined as 15 percent above the maximum of the range, is $66,125,000 or 6,612,500 shares at $10.00 per share (reference Exhibits 51 to 54). The fully converted pro forma appraised value of Naugatuck Valley Financial Corporation as of May 21, 2004, is $50,000.000 at the midpoint. [IN ACCORDANCE WITH RULE 202 OF REGULATION S-T, THE EXHIBITS TO THIS CONVERSION VALUATION APPRAISAL REPORT ARE BEING FILED IN PAPER PURSUANT TO A CONTINUING HARDSHIP EXEMPTION.] EX-99.4 26 g89544exv99w4.txt EX-99.4 FOUNDATION GIFT INSTRUMENT EXHIBIT 99.4 GIFT INSTRUMENT CHARITABLE GIFT TO NAUGATUCK VALLEY SAVINGS AND LOAN FOUNDATION Naugatuck Valley Financial Corporation ("Naugatuck Valley Financial"), desires to make a gift of its common stock to Naugatuck Valley Savings and Loan Foundation (the "Foundation"), a nonprofit corporation organized under the laws of the State of Delaware. The purpose of the donation is to establish a bond between Naugatuck Valley Financial and the community in which it and its affiliates operate to enable the community to share in the potential growth and success of Naugatuck Valley Financial and its affiliates over the long term. To that end, Naugatuck Valley Financial now gives, transfers, and delivers to the Foundation _________ shares of its common stock subject to the following conditions: 1. The Foundation shall use the donation solely for charitable purposes, including community development, in the communities in which Naugatuck Valley Financial and its affiliates operate in accordance with the provisions of the Foundation's Certificate of Incorporation; and 2. Consistent with Naugatuck Valley Financial's intent to form a long-term bond between Naugatuck Valley Financial and the community, the amount of common stock that may be sold by the Foundation in any one year shall not exceed 5% of the market value of the assets held by the Foundation, except that this restriction shall not prohibit the board of directors of the Foundation from selling a greater amount of common stock in any one year if the board of directors of the Foundation determines that the failure to sell a greater amount of the common stock held by the Foundation would: (a) result in a long-term reduction of the value of the Foundation's assets relative to their then current value that would jeopardize the Foundation's capacity to carry out its charitable purposes; or (b) otherwise jeopardize the Foundation's tax-exempt status. 3. The common stock contributed to the Foundation by Naugatuck Valley Financial shall, for so long as such shares are held by the Foundation, be voted in the same ratio as all other shares of common stock of Naugatuck Valley Financial which are voted on each and every proposal considered by the stockholders of Naugatuck Valley Financial. 4. For a period of five years from the date of the organization of the Foundation: (i) one board seat shall be reserved for an individual who has experience with local community charitable organizations and grant making in Naugatuck, Connecticut or its neighboring communities who is not an officer and/or director of Naugatuck Valley Financial or Naugatuck Valley Savings and Loan ("Naugatuck Valley Savings") and who is not an associate of any officer or director of Naugatuck Valley Financial or its affiliates or subsidiaries ("Community Member") and (ii) one board seat shall be reserved for an individual who is also a member of the board of directors of Naugatuck Valley Savings or a member of the board of directors of an acquiror or resulting institution in the event of a merger or acquisition of Naugatuck Valley Savings. 5. The Foundation shall comply with the following regulatory requirements imposed by the Office of Thrift Supervision ("OTS"): (a) the OTS may examine the Foundation at the Foundation's expense; (b) the Foundation must comply with all supervisory directives that the OTS imposes; (c) the Foundation must submit a copy of its Form 990-PF to the OTS on an annual basis; (d) the Foundation must operate in accordance with written policies adopted by its Board of Directors, including a conflict of interest policy; and (e) the Foundation may not engage in self-dealing, and must comply with all laws necessary to maintain its tax exempt status under the Internal Revenue Code. Dated: ----------------, 2004 NAUGATUCK VALLEY FINANCIAL CORPORATION By: --------------------------- Agreed and Accepted Naugatuck Valley Savings and Loan Foundation By: -------------------------------- GRAPHIC 27 g89544g8954405.gif GRAPHIC begin 644 g89544g8954405.gif M1TE&.#EA&`%6`*(``/___\S,S)F9F69F9C,S,P```````````"'Y!``````` M+``````8`58```/_"+K<_C#*2:N]..O-N_]-((YD:9YHJJYL";YP+,\T1!1X MKN]\[__`H#!'J!F/R*3Q-FPZG]!=44FM6J\.9G3+[1:FV+!X_-)ZS^@?F,QN MNVWIN)SXKMO;YKF>N[[[_TAY>X-.?8"'B"""A(Q`AHF0D1:+C952DIB9$Y26 MG8^:H)*'HZ2,IJBN=JJK@ZVOM6RQLGJTMKQ8N+ERN[W#2K_`:<+$ MRC7&QV?)R]$PSX.:;XXWEY^Q9Z@3P\(3Q]/7V M]_CY^OO\_?[_``,*'`BPP``%XH8(".!`0$(>!!BVFQCC"\(]$24(0".`_Z)' M&!8!//1QD,+&+AT_JO00RD3/C89$C$0G2Z0F;'O6RO_S^<`:#@VHTIU^KU!S6`1: M_`>?`O@5L.!P9@%W201`J44".!M6X,)\'4K@0HA+/+$@'#D<]F!Y/$RXXEI# MF&*&8.;Q18Q,-J)'AWHI4M`@:3DD84QX!>Z@HH0\YH`=#N/%&,&%+);U#8[O MA;;`<`12H$.4Y#'3A#"J>8;D7SORN$:$/IC2(H0ZY$C&=@?&)R5U5G(YIHAT MR$3D-$UXV`---]!$Q(!]&*/FA37^`2<(5-)9W5556H;EB3/@XB:;W#'`U1H] M%O8BEDY"L)J=&H[@@:DBHIIDG-:]B&&9.F@G@@.3`NFJJHH(0:D#:C"PT1I< MN4BIK$N"B.3\6GQTYQM2FNE>1#F$2U= MQ($+H;*"#1!/N/#LNH`J[GJ:)K$%3)`>M848RX-N3 MULJ4$KI4ZOF`3%-@>9"RW09,H,/73NMLQO%:[$/'`P,18+T15$83FD$R![\4>:+LQF^&./`M;ID[ MV;L3N+'OWI-9EO`[*OPCY7]V3D2;Q9M/X)9[ZYJ^Y308H^.9IX]LS?8>.Y_E M0`4^;'DL:0;,F-4LQY;MP,1:DX(<^^CV-@=$J`B3;1H>YP*XN!FT#@C38]\S]I@Q0$EA1SJ;CQ2SHBPS M."TE^#G9C-#H#OPIT""5"Q+&$'B\.+H2!)<$HP5RF2^XX2I<)^I0B&A(`+K! 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M&=%L(VB"0")[5$&!WI05!&-<`589[;(4+OB"4Q"1E7'&#A945]2`/S<:# D).:#DD.$=&*$882$ -----END PRIVACY-ENHANCED MESSAGE-----


United States	6035	To Be Applied For
(State or Other Jurisdiction of Incorporation or Organization)	(Primary Standard Industrial Classification Code Number)	(IRS Employer Identification No.)






		Proposed Maximum	Proposed Maximum	Amount of
Title of Each Class of	Amount to	Offering Price	Aggregate	Registration
Securities to be Registered	be Registered	Per Unit	Offering Price(1)	Fee


Common Stock $.01 par value	2,975,625 Shares(2)	$10.00	$29,756,250	$3,771

Participation Interests	(3)	—	$	(4)


		Page

THE OFFERING			1
	Securities Offered		1
	Election to Purchase Naugatuck Valley Financial Corporation Common Stock in the Reorganization and Stock Offering		1
	Value of Participation Interests		1
	Method of Directing Transfer		2
	Time for Directing Transfer		2
	Irrevocability of Transfer Direction		2
	Purchase Price of Naugatuck Valley Financial Corporation Common Stock		2
	Nature of a Participant’s Interest in Naugatuck Valley Financial Corporation Common Stock		2
	Voting and Tender Rights of Naugatuck Valley Financial Corporation Common Stock		2
DESCRIPTION OF THE 401(k) PLAN			3
	Introduction		3
	Eligibility and Participation		3
	Contributions Under the 401(k) Plan		3
	Limitations on Contributions		4
	401(k) Plan Investments		5
	Benefits Under the 401(k) Plan		7
	Withdrawals and Distributions from the 401(k) Plan		7
ADMINISTRATION OF THE 401(K) PLAN			8
	Trustee		8
	Reports to 401(k) Plan Participants		8
	Plan Administrator		8
	Amendment and Termination		9
	Merger, Consolidation or Transfer		9
	Federal Income Tax Consequences		9
	Restrictions on Resale		10
	SEC Reporting and Short-Swing Profit Liability		11
LEGAL OPINION			11


					Maximum
	Minimum		Maximum		As Adjusted

Number of shares		1,827,500		2,472,500		2,843,375
Gross offering proceeds	$	18,275,000	$	24,725,000	$	28,433,750
Estimated offering expenses	$	777,000	$	837,000	$	850,000
Estimated net proceeds	$	17,498,000	$	23,888,000	$	27,583,750
Estimated net proceeds per share	$	9.57	$	9.66	$	9.70


Q.		What will happen as a result of Naugatuck Valley Savings and Loan’s reorganization?

A.		Naugatuck Valley Savings and Loan is undergoing a transaction referred to as a mutual holding company reorganization. In addition, in connection with the reorganization, Naugatuck Valley Savings and Loan is undergoing a charter conversion. Currently, Naugatuck Valley Savings and Loan is a Connecticut-chartered mutual (meaning no stockholders) savings bank. As a result of the reorganization and charter conversion, Naugatuck Valley Savings and Loan will become a federally chartered stock savings bank in the mutual holding company structure with two holding companies. Naugatuck Valley Savings and Loan will form a new federally chartered stock holding company, Naugatuck Valley Financial, that will sell 43% of its common stock to the public and the Naugatuck Valley Savings and Loan employee stock ownership plan and will issue 55% of its common stock to Naugatuck Valley Mutual, a mutual holding company to be formed by Naugatuck Valley Savings and Loan. As part of the reorganization, we also intend to contribute 2% of the common stock issued in the reorganization to the Naugatuck Valley Savings and Loan Foundation, a charitable foundation we will form. After the reorganization, Naugatuck Valley Financial will own 100% of Naugatuck Valley Savings and Loan’s common stock.

Q.		Will the reorganization affect my deposit accounts or loans?

A.		No. The reorganization will not affect the balance or terms of deposit or loan accounts and deposits will continue to be federally insured by the Federal Deposit Insurance Corporation up to the maximum legal limits. Deposit accounts are not being converted to stock.

Q.		How many shares of stock are being offered for sale and at what price?

A.		We are offering for sale up to 2,472,500 shares of common stock at a price of $10.00 per share. We must sell at least 1,827,500 shares. If, as a result of regulatory considerations, demand for the shares or changes in market conditions, the independent appraiser determines the market value of Naugatuck Valley Savings and Loan has increased, we may sell up to 2,843,375 shares without giving you further notice or the opportunity to change or cancel your order.

Q.		Who may purchase shares of common stock in the offering?

A.		Rights to subscribe for common stock have been granted under our plan of reorganization to the following persons in the following descending order of priority:

		1. Naugatuck Valley Savings and Loan depositors with $50.00 or more on deposit as of April 30, 2003;

		2. Our tax-qualified employee stock benefit plans, including our employee stock ownership plan;

		3. Naugatuck Valley Savings and Loan depositors with $50.00 or more on deposit as of [Supplemental ERD]; and

		4. Naugatuck Valley Savings and Loan depositors as of [Voting RD].

		If the above persons do not subscribe for all of the shares offered for sale, we may offer the remaining shares in a community offering to the general public, giving preference to people who reside in Fairfield and New Haven Counties, Connecticut.


Equity Funds	%

ING VP International Value Portfolio — Class R		—	%
Janus Aspen Series Worldwide Growth Portfolio — Institutional Shares		—	%
AIM V.I. Capital Appreciation Fund — Series I Shares		—	%
FTVIP Franklin Small Cap Value Securities Fund — Class 2		—	%
ING Baron Small Cap Growth Portfolio — Initial Class		—	%
Lord Abbett Mid-Cap Value Portfolio — Class VC		—	%
Fidelity VIP Contrafund Portfolio — Initial Class		—	%
ING T. Rowe Price Growth Equity Portfolio — Initial Class		—	%
ING VP Index Plus LargeCap Portfolio — Class R		—	%
Lord Abbett Growth and Income Portfolio — Class VC		—	%
Calvert Social Balanced Portfolio		—	%
ING VP Strategic Allocation Balanced Portfolio — Class R
ING VP Strategic Allocation Growth Portfolio — Class R
ING VP Strategic Allocation Income Portfolio — Class R		—	%
ING PIMCO Total Return Portfolio — Initial Class
ING Fixed Account
ING VP Money Market Portfolio — Class R		—	%


	o	Yes, I direct the Trustee to purchase stock in the open market, if necessary.


Signature of Participant		------------------------------------ Date


	•	You may have priority rights to purchase shares of common stock.


Questions and Answers about the Stock Offering			ii
Summary			1
Risk Factors			15
A Warning About Forward-Looking Statements			20
Selected Financial and Other Data			21
Use of Proceeds			23
Our Dividend Policy			24
Market for the Common Stock			24
Capitalization			26
Regulatory Capital Compliance			28
Pro Forma Data			29
Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation			37
Our Business			38
Management’s Discussion and Analysis of Results of Operations and Financial Condition			46
Our Management			73
Subscriptions by Executive Officers and Directors			82
The Reorganization and Stock Offering			83
The Naugatuck Valley Savings and Loan Foundation			102
Regulation and Supervision			105
Federal and State Taxation			113
Restrictions on Acquisition of Naugatuck Valley Financial and Naugatuck Valley Savings and Loan			115
Description of Naugatuck Valley Financial Capital Stock			118
Transfer Agent and Registrar			119
Registration Requirements			119
Legal and Tax Opinions			119
Experts			119
Where You Can Find More Information			119
Index to Financial Statements of Naugatuck Valley Savings and Loan			121


Q.		What factors should I consider when deciding whether to purchase shares of stock in this offering?

A.		There are many important factors for you to consider before making an investment decision. You should read this entire prospectus, including the “Risk Factors” section, before making your investment decision.

Q.		Will I be charged a commission?

A.		No. You will not be charged a commission or fee to purchase shares in the offering.

Q.		How much stock may I buy?

A.		The minimum order is 25 shares. Generally, the individual purchase limitation is $150,000 of common stock (which equals 15,000 shares) in the subscription offering, and no person, either alone or together with associates and persons acting in concert with such person, may purchase more than $200,000 of common stock (which equals 20,000 shares) in all categories of the offering combined.

Q.		Will my stock be insured by deposit insurance or guaranteed by any government agency?

A.		No. Unlike insured deposit accounts at Naugatuck Valley Savings and Loan, our common stock, like other common stock, will not be insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.

Q.		When is the deadline for subscribing for stock?

A.		We must receive at our Stock Information Center a properly signed and completed order form with the required payment no later than 10:00 a.m., Eastern Time, on [Expiration Date]. Delivery of a stock order form may be made by: (1) mail, using the order reply envelope provided, (2) overnight delivery to the Stock Information Center address noted on the stock order form, or (3) hand-delivery to the Stock Information Center located at the main office of Naugatuck Valley Savings and Loan. Order forms may not be delivered to our branch offices.

Q.		Can I change my mind after I place my stock order?

A.		No. Once we receive your order, you cannot cancel or change it.

Q.		How can I pay for the stock?

A.		You have two options described on the order form: (1) you can pay by personal or bank check or money order; or (2) you can authorize a withdrawal from Naugatuck Valley Savings and Loan deposit accounts without checkwriting privileges. There will be no penalty for early withdrawal of certificate accounts. The amount(s) designated by you must be available within your account(s) at the time we receive the stock order form. Funds will not be withdrawn prior to completion of the offering period, but a hold will be placed on the dollar amounts designated, so the amounts will not be available to you for checkwriting or other purposes.

Q.		May I obtain a loan from Naugatuck Valley Savings and Loan to pay for my stock?

A.		No. Federal law prohibits Naugatuck Valley Savings and Loan from knowingly loaning funds to purchase stock in the offering. You may not submit a check on a Naugatuck Valley Savings and Loan line of credit as payment for shares. However, another financial institution may loan you money.

Q.		Can I subscribe for stock using funds in my individual retirement account at Naugatuck Valley Savings and Loan?

A.		You might be able to use IRA funds, however using them for this type of purchase requires special arrangements and additional processing time. If you are interested in using IRA funds held at Naugatuck Valley Savings and Loan or elsewhere, please promptly call the Stock Information Center for assistance. Your ability to use retirement funds may depend on timing constraints and, possibly, limitations imposed by the IRA trustee.


Q.		Does Naugatuck Valley Financial plan to pay dividends on the common stock?

A.		Yes. After the offering, we intend to adopt a policy of paying regular cash dividends, but we have not yet decided on the amount or frequency of payments or when payments may begin.

Q.		How do I sell my stock after I purchase it?

A.		After the shares begin trading, you may contact a firm offering investment services in order to buy or sell shares. We have applied to list our stock for trading on the Nasdaq National Market under the trading symbol “NVSL.” We cannot assure you that you will be able to sell your shares at or above the $10.00 per share offering price.

Q.		What happens if there are not enough shares of stock to fill all orders?

A.		If there is an oversubscription, then you might not receive any or all of the shares you ordered. We will allocate shares in the order of priority established in our plan of reorganization. Orders received in the subscription offering will have priority. If we are unable to fill your order, or can only fill your order in part, you will receive an appropriate refund, with interest. If you paid by check or money order, we will issue you a refund/interest check. If you paid by authorizing withdrawal from your Naugatuck Valley Savings and Loan deposit account(s), we will only withdraw the funds necessary to pay for the shares you receive. Unused funds, along with accrued interest, will remain in your account(s).

Q.		Who can help answer any other questions I might have about the stock offering?

A.		We encourage you to read this prospectus. You may direct questions to our Stock Information Center at ( ) . You may also visit our Stock Information Center, which is located at our main office, 333 Church Street, Naugatuck, Connecticut. The Stock Information Center is open Monday through Friday, except for bank holidays, from : a.m. to : p.m., Eastern Time. Our branches will not have offering materials and cannot accept order forms.



	At		At December 31,
	March 31,
	2004		2003		2002		2001		2000		1999


	(In thousands)
Financial Condition Data:
Total assets	$	242,148	$	243,956	$	227,998	$	201,105	$	177,449	$	169,710
Securities held-to-maturity		2,511		1,561		1,364		596		723		1,004
Securities available-for-sale		30,403		37,166		32,512		20,407		12,132		11,784
Loans receivable, net		182,311		180,378		166,046		158,456		145,831		138,171
Cash and cash equivalents		11,918		9,775		18,158		12,643		11,242		10,748
Deposits		187,474		183,455		173,231		156,662		136,452		131,153
FHLB advances		30,138		34,990		31,119		23,372		22,036		21,690
Total capital		21,656		21,217		19,850		17,497		15,984		14,135



	For the Three Months
	Ended March 31,				Year Ended December 31,

	2004		2003		2003		2002		2001		2000		1999


	(In thousands)
Operating Data:
Interest and dividend income	$	3,026	$	3,256	$	12,644	$	13,178	$	12,631	$	12,318	$	11,358
Interest expense		936		1,172		4,241		5,299		6,178		5,923		5,272

Net interest income		2,090		2,084		8,403		7,879		6,453		6,395		6,086
Provision for loan losses		—		45		45		231		80		73		110

Net interest income after provision for loan losses		2,090		2,039		8,358		7,648		6,373		6,322		5,976
Noninterest income		333		257		1,115		972		743		601		523
Noninterest expense		1,879		1,650		6,845		5,820		5,392		4,497		4,157

Income before provision for income taxes		544		646		2,628		2,800		1,724		2,426		2,342
Provision for income taxes		166		217		822		880		542		807		1,513

Net income	$	378	$	429	$	1,806	$	1,920	$	1,182	$	1,619	$	829



		At or For the Three
		Months Ended
		March 31,						At or For the Year Ended December 31,

		2004			2003			2003			2002			2001			2000			1999

Performance Ratios(1):
Return on average assets			0.63	%		0.76	%		0.77	%		0.91	%		0.65	%		0.96	%		0.50	%
Return on average equity			6.99			8.45			8.59			10.23			6.95			10.71			5.98
Interest rate spread(2)			3.72			3.81			3.77			3.77			3.50			3.78			3.64
Net interest margin(3)			3.77			3.92			3.85			3.90			3.71			3.98			3.88
Noninterest expense to average assets			3.16			2.94			2.94			2.75			2.96			2.68			2.49
Efficiency ratio(4)			77.20			70.21			71.62			65.20			74.43			63.58			62.01
Average interest-earning assets to average interest-bearing liabilities			102.93			104.77			103.69			105.20			105.87			105.57			107.34
Capital Ratios:
Total capital to risk-weighted assets			16.26			16.27			16.21			15.37			14.74			15.50			15.13
Tier I capital to risk-weighted assets			15.01			15.02			14.96			14.12			13.47			14.25			13.88
Tier I capital to average assets			8.83			8.59			8.64			8.30			8.40			8.83			8.25
Total equity to total assets			8.84			8.74			8.70			8.71			8.70			9.01			8.33
Asset Quality Ratios:
Allowance for loan losses as a percent of total loans			0.98			1.17			0.99			1.19			1.16			1.18			1.38
Allowance for loan losses as a percent of nonperforming loans			213.31			206.17			199.78			162.91			144.66			171.14			130.22
Net charge-offs to average loans outstanding during the period			—			0.02			0.13			0.05			(0.02	)		0.18			0.34
Nonperforming loans as a percent of total loans			0.46			0.57			0.50			0.73			0.80			0.69			1.06
Nonperforming assets as a percent of total assets			0.40			0.44			0.46			0.58			0.72			0.65			1.11
Other Data:
Number of:
	Deposit accounts		22,481			22,295			22,447			22,059			21,823			21,228			20,713
	Full service customer service facilities		5			5			5			4			3			3			3


		1,827,500		2,150,000		2,472,500		2,843,375
		Shares at		Shares at		Shares at		Shares at
		$10.00		$10.00		$10.00		$10.00
		Per		Per		Per		Per
		Share		Share		Share		Share


		(In thousands)
Offering proceeds		$	18,275	$	21,500	$	24,725	$	28,434
Less: estimated offering expenses			777		807		837		850

Net offering proceeds			17,498		20,693		23,888		27,584
Less:
	Proceeds contributed to Naugatuck Valley Savings and Loan		8,749		10,347		11,944		13,792
	Proceeds used for loan to employee stock ownership plan		1,530		1,800		2,070		2,381
	Proceeds to Naugatuck Valley Mutual		100		100		100		100

Proceeds remaining for Naugatuck Valley Financial		$	7,119	$	8,446	$	9,774	$	11,311



					Naugatuck Valley Financial Pro Forma Capitalization
			Naugatuck		Based Upon the Sale of
			Valley Savings
			and Loan		1,827,500			2,150,000			2,472,500			2,843,375
			Capitalization		Shares at			Shares at			Shares at			Shares at
			at March 31,		$10.00			$10.00			$10.00			$10.00
			2004		Per Share			Per Share			Per Share			Per Share


			(In thousands)
Deposits(1)			$	187,474	$	187,474		$	187,474		$	187,474		$	187,474
Advances from Federal Home Loan Bank				30,138		30,138			30,138			30,138			30,138

	Total deposits and borrowed funds		$	217,612	$	217,612		$	217,612		$	217,612		$	217,612

Stockholders’ equity:
	Preferred stock:
		1,000,000 shares, $.01 par value per share, authorized; none issued or outstanding	$	—	$	—		$	—		$	—		$	—
	Common stock:
		25,000,000, $.01 par value per share, authorized; specified number of shares assumed to be issued and outstanding		—		43			50			58			66
Additional paid-in capital				—		17,455			20,643			23,830			27,518
Retained earnings(2)				21,325		21,325			21,325			21,325			21,325
Net unrealized gain on available-for-sale securities, net				331		331			331			331			331
Plus: shares issued to the Foundation				—		850			1,000			1,150			1,323
Less:
	Capitalization of Naugatuck Valley Mutual			—		(100	)		(100	)		(100	)		(100	)
	Foundation contribution expense, net(3)			—		(561	)		(660	)		(759	)		(873	)
	Common stock acquired by employee stock ownership plan(4)			—		(1,530	)		(1,800	)		(2,070	)		(2,381	)
	Common stock to be acquired by stock-based incentive plan(5)			—		(1,366	)		(1,607	)		(1,848	)		(2,125	)

Total stockholders’ equity			$	21,656	$	36,447		$	39,182		$	41,917		$	45,084



							Pro Forma at March 31, 2004


																						15% Above
							Minimum of					Midpoint of					Maximum of					Maximum of
							Offering Range					Offering Range					Offering Range					Offering Range


		Historical at					1,827,500 Shares at					2,150,000 Shares at					2,472,500 Shares at					2,843,375 Shares at
		March 31, 2004					$10.00 Per Share					$10.00 Per Share					$10.00 Per Share					$10.00 Per Share

				Percent					Percent					Percent					Percent					Percent
				of					of					of					of					of
		Amount		Assets(1)			Amount		Assets			Amount		Assets			Amount		Assets			Amount		Assets


		(Dollars in thousands)
Generally accepted accounting principles capital		$	21,656		8.9	%	$	27,509		11.1	%	$	28,596		11.5	%	$	29,683		11.9	%	$	31,943		12.3	%
Tangible Capital:
	Capital level(2)	$	21,044		8.7	%	$	26,897		10.9	%	$	27,984		11.2	%	$	29,071		11.6	%	$	30,331		12.1	%
	Requirement		3,628		1.5			3,716		1.5			3,732		1.5			3,748		1.5	%		3,769		1.5

	Excess	$	17,416		7.2	%	$	23,182		9.4	%	$	24,252		9.7	%	$	25,322		10.1	%	$	26,564		10.6	%

Core Capital:
	Capital level(2)	$	21,044		8.7	%	$	26,897		10.9	%	$	27,984		11.2	%	$	29,071		11.6	%	$	30,331		12.1	%
	Requirement		9,675		4.0			9,909		4.0			9,952		4.0			9,996		4.0			10,046		4.0

	Excess	$	11,369		4.7	%	$	16,989		6.9	%	$	18,032		7.2	%	$	19,075		7.6	%	$	20,285		8.1	%

Total Risk-Based Capital:
	Total risk-based capital(3)	$	22,797		16.3	%	$	28,650		20.3	%	$	29,737		21.0	%	$	30,823		21.7	%	$	32,084		22.6	%
	Requirement		11,218		8.0			11,312		8.0			11,329		8.0			11,347		8.0			11,367		8.0

	Excess	$	11,578		8.3	%	$	17,338		12.3	%	$	18,407		13.0	%	$	19,477		13.7	%	$	20,771		14.6	%


			Three Months Ended March 31, 2004

												15% Above
			Minimum of			Midpoint of			Maximum of			Maximum of
			Offering			Offering			Offering			Offering
			Range			Range			Range			Range

			1,827,500			2,150,000			2,472,500			2,843,375
			Shares at			Shares at			Shares at			Shares at
			$10.00 Per			$10.00 Per			$10.00 Per			$10.00 Per
			Share			Share			Share			Share


			(Dollars in thousands, except per share amounts)
Gross proceeds			$	18,275		$	21,500		$	24,725		$	28,434
Less: estimated expenses				(777	)		(807	)		(837	)		(850	)

Estimated net proceeds				17,498			20,693			23,888			27,584
Less: cash to Naugatuck Valley Mutual				(100	)		(100	)		(100	)		(100	)
Less: common stock acquired by employee stock ownership plan(1)(4)				(1,530	)		(1,800	)		(2,070	)		(2,381	)
Less: common stock to be acquired by stock-based incentive plan(3)(4)				(1,366	)		(1,607	)		(1,848	)		(2,125	)

	Net investable proceeds		$	14,502		$	17,186		$	19,870		$	22,978

Pro Forma Net Income:
Pro forma net income(2):
	Historical		$	378		$	378		$	378		$	378
	Pro forma income on net investable proceeds			30			35			41			47
	Less: pro forma employee stock ownership plan adjustments(1)(4)			(17	)		(20	)		(23	)		(26	)
	Less: pro forma stock-based incentive plan adjustments(3)(4)(6)			(45	)		(53	)		(61	)		(70	)

		Pro forma net income	$	346		$	340		$	335		$	329

Pro forma net income per share(2):
	Historical		$	0.09			0.08			0.07			0.06
	Pro forma income on net investable proceeds			0.01			0.01			0.01			0.01
	Less: pro forma employee stock ownership plan adjustments(1)(4)			—			—			—			—
	Less: pro forma stock-based incentive plan adjustments(3)(4)(6)			(0.01	)		(0.01	)		(0.01	)		(0.01	)

		Pro forma net income per share	$	0.09		$	0.08		$	0.07		$	0.06

Offering price as a multiple of pro forma net income per share				27.78	x		31.25	x		35.71	x		41.67	x
Number of shares used to calculate pro forma net income per share(5)				4,099,550			4,823,000			5,546,450			6,378,418
Pro Forma Stockholders’ Equity:
Pro forma stockholders’ equity (book value):
	Historical		$	21,656		$	21,656		$	21,656		$	21,656
	Estimated net proceeds			17,498			20,693			23,888			27,584
	Plus: shares issued to the foundation			850			1,000			1,150			1,323
	Less: after-tax cost of foundation			(561	)		(660	)		(759	)		(873	)
	Less: capitalization of Naugatuck Valley Mutual			(100	)		(100	)		(100	)		(100	)
	Less: common stock acquired by employee stock ownership plan(1)(4)			(1,530	)		(1,800	)		(2,070	)		(2,381	)
	Less: common stock to be acquired by stock-based incentive plan(3)(4)(6)			(1,366	)		(1,607	)		(1,848	)		(2,125	)

		Pro forma stockholders’ equity	$	36,447		$	39,182		$	41,917		$	45,084

Pro forma stockholders’ equity per share:
	Historical		$	5.10		$	4.33		$	3.77		$	3.28
	Estimated net proceeds			4.12			4.14			4.15			4.17
	Plus: shares issued to the foundation			0.20			0.20			0.20			0.20
	Less: after-tax cost of foundation			(0.13	)		(0.13	)		(0.13	)		(0.13	)
	Less: capitalization of Naugatuck Valley Mutual			(0.02	)		(0.02	)		(0.02	)		(0.02	)
	Less: common stock acquired by employee stock ownership plan(1)(4)			(0.36	)		(0.36	)		(0.36	)		(0.36	)
	Less: common stock to be acquired by stock-based incentive plan(3)(4)(6)			(0.32	)		(0.32	)		(0.32	)		(0.32	)

		Pro forma stockholders’ equity per share	$	8.59		$	7.84		$	7.29		$	6.82

Offering price as a percentage of pro forma stockholders’ equity per share				116.41	%		127.55	%		137.17	%		146.63	%
Number of shares used to calculate pro forma stockholders’ equity per share				4,250,000			5,000,000			5,750,000			6,612,500



			Year Ended December 31, 2003

												15% Above
			Minimum of			Midpoint of			Maximum of			Maximum of
			Offering			Offering			Offering			Offering
			Range			Range			Range			Range

			1,827,500			2,150,000			2,472,500			2,843,375
			Shares at			Shares at			Shares at			Shares at
			$10.00 Per			$10.00 Per			$10.00 Per			$10.00 Per
			Share			Share			Share			Share


			(Dollars in thousands, except per share amounts)
Gross proceeds			$	18,275		$	21,500		$	24,725		$	28,434
Less: estimated expenses				(777	)		(807	)		(837	)		(850	)

Estimated net proceeds				17,498			20,693			23,888			27,548
Less: cash to Naugatuck Valley Mutual				(100	)		(100	)		(100	)		(100	)
Less: common stock acquired by employee stock ownership plan(1)(4)				(1,530	)		(1,800	)		(2,070	)		(2,381	)
Less: common stock to be acquired by stock-based incentive plan(3)(4)				(1,366	)		(1,607	)		(1,848	)		(2,125	)

	Net investable proceeds		$	14,502		$	17,186		$	19,870		$	22,978

Pro Forma Net Income:
Pro forma net income(2):
	Historical			1,806			1,806			1,806			1,806
	Pro forma income on net investable proceeds			120			142			164			190
	Less: pro forma employee stock ownership plan adjustments(1)(4)			(67	)		(79	)		(91	)		(105	)
	Less: pro forma stock-based incentive plan adjustments(3)(4)(6)			(180	)		(212	)		(244	)		(281	)

		Pro forma net income	$	1,679		$	1,657		$	1,635		$	1,610

Pro forma net income per share(2):
	Historical		$	0.44			0.37			0.33			0.28
	Pro forma income on net investable proceeds			0.03			0.03			0.03			0.03
	Less: pro forma employee stock ownership plan adjustments(1)(4)			(0.02	)		(0.02	)		(0.02	)		(0.02	)
	Less: pro forma stock-based incentive plan adjustments(3)(6)			(0.04	)		(0.04	)		(0.04	)		(0.04	)

		Pro forma net income per share	$	0.41		$	0.34		$	0.30		$	0.25

Offering price as a multiple of pro forma net income per share				24.39	x		29.41	x		33.33	x		40.00x
Number of shares used to calculate pro forma net income per share(5)				4,107,200			4,832,000			5,556,800			6,390,320
Pro Forma Stockholders’ Equity:
Pro forma stockholders’ equity (book value):
	Historical		$	21,217		$	21,217		$	21,217		$	21,217
	Estimated net proceeds			17,498			20,693			23,888			27,584
	Plus: shares issued to the foundation			850			1,000			1,150			1,323
	Less: after-tax cost of foundation			(561	)		(660	)		(759	)		(873	)
	Less: capitalization of Naugatuck Valley Mutual			(100	)		(100	)		(100	)		(100	)
	Less: common stock acquired by employee stock ownership plan(1)(4)			(1,530	)		(1,800	)		(2,070	)		(2,381	)
	Less: common stock to be acquired by stock-based incentive plan(3)(4)(6)			(1,366	)		(1,607	)		(1,848	)		(2,125	)

		Pro forma stockholders’ equity(6)	$	36,008		$	38,743		$	41,478		$	44,645

Pro forma stockholders’ equity per share:
	Historical		$	4.99		$	4.24		$	3.69		$	3.21
	Estimated net proceeds			4.12			4.14			4.15			4.17
	Plus: shares issued to the foundation			0.20			0.20			0.20			0.20
	Less: after-tax cost of foundation			(0.13	)		(0.13	)		(0.13	)		(0.13	)
	Less: capitalization of Naugatuck Valley Mutual			(0.02	)		(0.02	)		(0.02	)		(0.02	)
	Less: common stock acquired by employee stock ownership plan(1)(4)			(0.36	)		(0.36	)		(0.36	)		(0.36	)
	Less: common stock to be acquired by stock-based incentive plan(3)(4)(6)			(0.32	)		(0.32	)		(0.32	)		(0.32	)

		Pro forma stockholders’ equity per share	$	8.48		$	7.75		$	7.21		$	6.75

Offering price as a percentage of pro forma stockholders’ equity per share				117.92	%		129.03	%		138.70	%		148.15	%
Number of shares used to calculate pro forma stockholders’ equity per share				4,250,000			5,000,000			5,750,000			6,612,500


											15% Above
		Minimum			Midpoint			Maximum			Maximum
		of Offering			of Offering			of Offering			of Offering
		Range			Range			Range			Range


		(Dollars in thousands, except per share amounts)
After-tax expense of contribution to foundation:
	Three months ended March 31, 2004	$	561		$	660		$	759		$	873
	Year ended December 31, 2003		561			660			759			873

Pro forma net income:
	Three months ended March 31, 2004	$	(215	)	$	(320	)	$	(424	)	$	(544	)
	Year ended December 31, 2003		1,118			997			876			737

Pro forma net income per share:
	Three months ended March 31, 2004	$	(0.05	)	$	(0.07	)	$	(0.08	)	$	(0.09	)
	Year ended December 31, 2003		0.27			0.21			0.16			0.12



		At the Minimum of						At the Midpoint of						At the Maximum of						At the Maximum, as
		Estimated Valuation						Estimated Valuation						Estimated Valuation						Adjusted, of Estimated
		Range						Range						Range						Valuation Range

		With			No			With			No			With			No			With			No
		Foundation			Foundation			Foundation			Foundation			Foundation			Foundation			Foundation			Foundation


		(Dollars in thousands, except per share amounts)
Estimated offering amount(1)		$	18,275		$	19,775		$	21,500		$	23,265		$	24,725		$	26,755		$	28,434		$	30,768
Estimated pro forma valuation			42,500			43,945			50,000			51,700			57,500			59,455			66,125			68,373
Pro forma total assets			256,650			258,030			259,334			260,958			262,018			263,885			265,126			267,273
Pro forma total liabilities			220,203			220,492			220,152			220,492			220,101			220,492			220,042			220,492
Pro forma stockholders’ equity			36,447			37,538			39,182			40,466			41,917			43,393			45,084			46,781
Pro forma net income			346			347			340			342			335			336			329			330
Pro forma stockholders’ equity per share			8.59			8.54			7.84			7.83			7.29			7.30			6.82			6.84
Pro forma net income per share			0.09			0.09			0.08			0.08			0.07			0.08			0.06			0.07
Pro Forma Pricing Ratios:
	Offering price as a percentage of pro forma stockholders’ equity		116.41	%		117.07	%		127.55	%		127.76	%		137.17	%		137.01	%		146.63	%		146.15	%
	Offering price as a multiple of pro forma net income per share (annualized)		27.78			27.78			31.25			31.25			35.71			35.71			41.67			41.67
	Offering price to assets		15.17			17.02			17.43			17.86			19.57			22.52			21.93			25.57
Pro Forma Financial Ratios:
	Return on assets (annualized)		0.54			0.54			0.52			0.52			0.51			0.51			0.50			0.49
	Return on stockholders’ equity (annualized)		3.80			3.70			3.47			3.38			3.20			3.10			2.92			2.82
	Stockholders’ equity to total assets		14.20			14.55			15.11			15.51			16.00			16.44			17.00			17.50


	Year		Net Book Value
	Opened/		at March 31,		Square		Owned/		Date of Lease
Location	Acquired		2004		Footage		Leased		Expiration


	(Dollars in thousands)
Main Office:
333 Church Street		1996	$	2,775		23,000		Owned		—
Naugatuck, Connecticut 06770
Branches:
1009 New Haven Road		2001		1,368		3,300		Owned		—
Naugatuck, Connecticut 06770
127 South Main Street		1997		205		960		Owned		—
Beacon Falls, Connecticut 06403
860 Bridgeport Avenue		2001		69		725		Leased		2006	(1)
Shelton, Connecticut 06484
49 Pershing Drive		2003		268		1,950		Leased		2013	(2)
Derby, Connecticut 06418
Other Properties:
1007 New Haven Road		1974		42		1,725		Leased		2014	(3)
Naugatuck, Connecticut 06770
249 West Street(4)		2002		367		N/A		Owned		—
Seymour, Connecticut 06483
135 South Main Street(5)		2003		147		N/A		Owned		—
Beacon Falls, Connecticut 06403


	*Operating as an independent community-oriented financial institution*


	*Expanding our branch network and upgrading our existing branches*


	*Pursuing Opportunities to Increase and Diversify Lending in Our Market Area*


	*Applying Conservative Underwriting Practices to Maintain the Quality of Our Loan Portfolio*


	*Managing our Net Interest Margin and Interest Rate Risk*


				Commercial
		Real Estate		Business		Consumer		Total
		Loans		Loans		Loans		Loans


		(In thousands)
One year or less		$	30,085	$	2,740	$	14,256	$	47,081
More than one year to five years			14,998		1,406		1,442		17,846
More than five years			115,045		69		6,699		121,813

	Total	$	160,128	$	4,215	$	22,397	$	186,740


					Floating or
			Fixed-Rates		Adjustable-Rates		Total


			(In thousands)
Real estate loans:
	One- to four-family		$	99,941	$	13,509	$	113,450
	Construction			5,505		520		6,025
	Multi-family and commercial			1,814		8,754		10,568
Commercial business loans				810		665		1,475
Consumer loans				7,991		150		8,141

		Total	$	116,061	$	23,598	$	139,659



										At December 31,


		At March 31, 2004								2003								2002

							% of								% of								% of
				% of			Loans in					% of			Loans in					% of			Loans in
				Allowance			Category					Allowance			Category					Allowance			Category
				to Total			to Total					to Total			to Total					to Total			to Total
		Amount		Allowance			Loans			Amount		Allowance			Loans			Amount		Allowance			Loans


		(Dollars in thousands)
One- to four-family		$	876		48.37	%		69.65	%	$	902		49.83	%		70.98	%	$	1,541		77.28	%		77.85	%
Construction			118		6.52			7.92			110		6.08			7.62			25		1.25			4.06
Multi-family and commercial real estate			272		15.02			8.18			271		14.97			7.71			98		4.91			6.06
Commercial business			75		4.14			2.26			42		2.32			2.29			9		0.45			1.00
Consumer loans			246		13.58			11.99			232		12.82			11.40			78		3.91			11.03
Unallocated			224		12.37			—			253		13.98			—			243		12.19			—

	Total allowance for loan losses	$	1,811		100.00	%		100.00	%	$	1,810		100.00	%		100.00	%	$	1,994		100.00	%		100.00	%



								More than					More than
			Less Than					One Year to					Five Years to					More than
			One Year					Five Years					Ten Years					Ten Years					Total

					Weighted					Weighted					Weighted					Weighted					Weighted
			Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average
			Value		Yield			Value		Yield			Value		Yield			Value		Yield			Value		Yield


			(Dollars in thousands)
Available-for-sale securities:
	U.S. Government and agency obligations		$	2,380		5.92	%	$	10,134		4.95	%	$	2,991		3.89	%	$	—		—	%	$	15,505		4.89	%
	Mortgage-backed securities			—		—			—		—			1,968		3.50			8,233		3.91			10,201		3.84
	Collateralized mortgage obligations			—		—			—		—			—		—			4,697		4.16			4,697		4.16

		Total available-for-sale securities		2,380		5.92			10,134		4.95			4,959		3.75			12,930		4.00			30,403		4.43
Held-to-maturity securities:
	U.S. Government and agency obligations			—		—			706		3.85			—					—					706		3.85
	Interest bearing balances			190		1.55			1,615		2.84			—					—					1,805		2.71

		Total held-to-maturity securities		190		1.55			2,321		3.15			—					—					2,511		3.03

		Total	$	2,570		5.59	%	$	12,455		4.61	%	$	4,959		3.75	%	$	12,930		4.00	%	$	32,914		4.32	%


		Certificate
Maturity Period		Accounts

		(In thousands)
Three months or less		$	5,698
Over three through six months			1,852
Over six through twelve months			2,082
Over twelve months			8,029

	Total	$	17,661



		Amount Due

								More						Percent
				More Than		More Than		Than		More				of Total
		Less Than		One Year to		Two Years to		Three to		Than Four				Certificate
		One Year		Two Years		Three Years		Four Years		Years		Total		Accounts


						(Dollars in thousands)
0.00 - 0.99%		$	17,097	$	19	$	—	$	—	$	—	$	17,116		19.80	%
1.00 - 1.99			26,187		5,948		530		—		—		32,665		37.79
2.00 - 2.99			6,264		3,191		3,072		234		1,109		13,870		16.05
3.00 - 3.99			1,701		1,748		408		4,725		5,359		13,941		16.13
4.00 - 4.99			1,265		1,469		1,491		3,472		174		7,871		9.11
5.00 - 5.99			24		944		—		—		—		968		1.12
6.00 - 6.99			—		—		—		—		—		—		—

	Total	$	52,538	$	13,319	$	5,501	$	8,431	$	6,642	$	86,431		100.00	%



							Three Months Ended March 31,


				At March 31, 2004			2004							2003

									Interest							Interest
							Average		and		Yield/			Average		and		Yield/
				Yield/Cost			Balance		Dividends		Cost			Balance		Dividends		Cost


				(Dollars in thousands)
Interest-earning assets:
	Loans				5.74	%	$	182,960	$	2,695		5.89	%	$	170,527	$	2,877		6.75	%
	Fed Funds sold				0.90			4,991		11		0.88			6,888		19		1.10
	Investment securities				3.91			32,091		310		3.86			33,733		347		4.11
	Federal Home Loan Bank stock				2.15			1,757		10		2.28			1,561		13		3.33

			Total interest-earning assets		5.32			221,799		3,026		5.46			212,709		3,256		6.12

Noninterest-earning assets								16,423							11,727

			Total assets				$	238,222						$	224,436

Interest-bearing liabilities:
	Certificate accounts				2.15		$	86,163	$	453		2.10		$	90,105	$	656		2.91
	Regular savings accounts				0.39			42,178		47		0.45			38,378		73		0.76
	Checking and NOW accounts				0.16			31,662		15		0.19			28,011		28		0.40
	Money market savings accounts				0.91			24,854		55		0.89			18,940		62		1.31

		Total interest-bearing deposits			1.22			184,857		570		1.23			175,434		819		1.87
	FHLB advances				4.77			30,635		366		4.78			27,584		353		5.12

			Total interest-bearing liabilities		1.71			215,492		936		1.74			203,018		1,172		2.31

	Noninterest-bearing liabilities							1,090							1,118

		Total liabilities						216,582							204,136

Capital								21,640							20,300

Total liabilities and capital							$	238,222						$	224,436

Net interest income									$	2,090						$	2,084

Interest rate spread					3.61							3.72							3.81
Net interest margin					3.73							3.77							3.92
Average interest-earning assets to average interest-bearing liabilities					102.40	%						102.93	%						104.77	%