SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
|x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 0001049895
Medford Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3384928
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
29 High Street
Medford, Massachusetts 02155
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (781) 395-7700
------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.50 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. |X|
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based on the closing price on March 3, 1998, on the NASDAQ
National Market was $197,894,463. Although directors and executive officers of
the registrant were assumed to be "affiliates" of the registrant for the
purposes of this calculation, this classification is not to be interpreted as an
admission of such status.
As of March 3, 1998, 4,549,298 shares of the registrant's common stock
were issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Medford Bancorp, Inc. Definitive Notice of Annual Meeting
and Proxy Statement for the Annual Meeting of Stockholders to be held on April
27, 1998 are incorporated by reference into Parts I and III of this Form 10-K.
<PAGE>
PART I
ITEM 1. BUSINESS
General
Medford Bancorp Inc., (the "Company") was organized by Medford Savings Bank (the
"Bank") for the purpose of reorganizing the Bank into a holding company
structure. The Company acquired 100% of the outstanding shares of the Bank's
common stock in a 1:1 exchange of the Company's common stock. This
reorganization became effective on November 26, 1997 whereupon the Bank became a
wholly-owned subsidiary of the Company and the Bank's former stockholders became
stockholders of the Company (the "Reorganization").
Established as a Massachusetts savings bank in 1869, the Bank converted from
mutual to stock form on March 18, 1986 and issued 3,680,000 shares of common
stock. The Bank is principally engaged in the business of attracting deposits
from the general public, originating residential and commercial real estate
mortgages, consumer and commercial loans, and investing in securities on a
continuous basis. For a detailed description of the Company's business and
financial information, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," of this report. The Bank is
headquartered in Medford, Massachusetts, which is located approximately seven
miles north of downtown Boston. The Bank principally offers its products and
services through a network of sixteen banking offices located in Medford,
Malden, Arlington, Belmont, Burlington, North Reading, Waltham, and Wilmington.
The Bank's primary market area includes these communities as well as other
cities and towns in Middlesex County and the surrounding area north of Boston.
The Bank presently has one wholly-owned subsidiary, Medford Securities
Corporation ("MSC"), which became operational on March 1, 1995. MSC engages
exclusively in the buying, selling, dealing in, and holding of securities.
Supervision and Regulation
General. The Company is a Massachusetts corporation and a bank holding company
subject to regulation and supervision by the Board of Governors of the Federal
Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding
Company Act of 1956, as amended, and files with the Federal Reserve Board an
annual report and such additional reports as the Federal Reserve Board may
require. The Company is also subject to the jurisdiction of the Massachusetts
Commissioner of Banks. As a bank holding company, the Company's activities are
limited to the business of banking and activities closely related or incidental
to banking. The Company may not directly or indirectly acquire the ownership or
control of more than 5 percent of any class of voting shares or substantially
all of the assets of any company that is not engaged in activities closely
related to banking and also generally must provide notice to or obtain approval
of the Federal Reserve Board in connection with any such acquisition.
As a Massachusetts-chartered savings bank, the Bank is subject to comprehensive
regulation and examination by the Federal Deposit Insurance Corporation (the
"FDIC") which insures its deposits to the maximum extent permitted by law, and
by the Commissioner of Banks of the Commonwealth of Massachusetts (the
"Commissioner"). The Bank is also subject to certain requirements established by
the Federal Reserve Board and is a member of the Federal Home Loan Bank of
Boston.
Federal Deposit Insurance Corporation. The FDIC insures the Bank's deposit
accounts to the $100,000 maximum per separately insured account. As a
state-chartered, FDIC-insured nonmember savings bank, the Bank is subject to
regulation, examination, and supervision by the FDIC and to reporting
requirements of the FDIC. The FDIC has adopted requirements setting minimum
standards for capital adequacy. Pursuant to FDIC requirements, the Bank must
maintain a Tier 1 capital to risk-weighted assets ratio of 4.00% and a total
capital to risk-weighted assets ratio of 8.00%. The FDIC also imposes a leverage
capital ratio of at least 3.00% for the most highly rated banks and a leverage
capital ratio between 4.00% and 5.00% for other banks. The Bank exceeded all
applicable requirements at December 31, 1997. Furthermore, under the capital
standards established pursuant to the FDIC Improvement Act of 1991 ("FDICIA"),
the Bank is currently well-capitalized.
Federal Home Loan Bank System. The Federal Home Loan Bank System functions as a
reserve credit source for its member financial institutions and is governed by
the Federal Housing Finance Board ("FHFB"). The Bank is a voluntary member of
the Federal Home Loan Bank of Boston ("FHLBB"). Members of the FHLBB are
required to own capital stock that is directly proportionate to the member's
home mortgage loans and borrowings from the FHLBB outstanding from time to time.
FHLBB advances must be secured by specific types of collateral and may be
obtained only for the purpose of providing funds for residential housing
finance.
1
<PAGE>
Federal Reserve Board Regulations. Regulation D promulgated by the Federal
Reserve Board requires all depository institutions, including the Bank, to
maintain reserves against its transaction accounts (generally, demand deposits,
NOW accounts and certain other types of accounts that permit payments or
transfer to third parties) or non-personal time deposits (generally, money
market deposit accounts or other savings deposits held by corporations or other
depositors that are not natural persons, and certain other types of time
deposits), subject to certain exemptions. Because required reserves must be
maintained in the form of either vault cash, a non-interest bearing account at a
Federal Reserve Bank or a pass-through account as defined by the Federal Reserve
Board, the effect of this reserve requirement is to reduce the amount of the
institution's interest-bearing assets.
Massachusetts Commissioner of Banks. The Bank is also subject to regulation,
examination and supervision by the Commissioner and to the reporting
requirements promulgated by the Commissioner. Massachusetts statutes and
regulations govern, among other things, investment powers, lending powers,
deposit activities, maintenance of surplus and reserve accounts, the
distribution of earnings, the payment of dividends, issuance of capital stock,
branching, acquisitions and mergers and consolidation. Any Massachusetts bank
that does not operate in accordance with the regulations, policies and
directives of the Commissioner may be subject to sanctions for noncompliance.
The Commissioner may, under certain circumstances, suspend or remove officers or
directors who have violated the law, conducted the Bank's business in a manner
which is unsafe, unsound or contrary to the depositor's interest, or been
negligent in the performance of their duties.
In response to a Massachusetts law enacted in 1996, in 1997 the Commissioner
finalized rules that give Massachusetts banks, and their subsidiaries, many
powers equivalent to those of national banks. The Commissioner also has adopted
procedures expediting branching by strongly capitalized banks.
Depositors Insurance Fund. All Massachusetts-chartered savings banks are
required to be members of the Depositors Insurance Fund ("DIF"), a corporation
created by the Commonwealth of Massachusetts for the purpose of insuring savings
bank deposits not covered by federal deposit insurance. To the extent the Bank's
deposit accounts are not insured by federal insurance, such deposits are insured
by the DIF.
Federal Deposit Insurance Corporation Improvement Act of 1991. FDICIA made
extensive changes to the federal banking laws. Among other things, FDICIA
requires federal bank regulatory agencies to take prompt corrective action to
address the problems of, and imposes significant restrictions on,
under-capitalized banks. With certain exceptions, FDICIA prohibits state banks
from making equity investments and engaging, as principals, in activities which
are not permissible for national banks, such as insurance underwriting. FDICIA
required banks to divest any impermissible equity investments by December 19,
1996. FDICIA also amends federal statutes governing extensions of credit to
directors, executive officers and principal shareholders of banks, savings
associations and their holding companies, limits the aggregate amount of
depository institutions' loans to insiders to the amount of the institution's
unimpaired capital and surplus, restricts depository institutions that are not
well-capitalized from accepting brokered deposits without an express waiver from
the FDIC, and imposes certain advance notice requirements before closing a
branch office. Pursuant to the FDICIA, the FDIC has adopted a framework of
risk-based deposit insurance assessments that take into account different
categories and concentrations of bank assets and liabilities. In late 1997, the
FDIC proposed to revise its regulations relating to FDICIA to generally ease the
ability of state nonmember banks and their subsidiaries to engage in certain
activities not permissible for a national bank, such as real estate development.
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the
Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994
("Riegle-Neal"), different types of interstate transactions and activities are
permitted. Interstate transactions and activities provided for under the law
include: (i) bank holding company acquisitions of separately held banks in a
state other than a bank holding company's home state; (ii) mergers between banks
with different home states, including consolidations of affiliated banks; (iii)
establishment of interstate branches either de novo or by branch acquisition;
and (iv) affiliate banks acting as agents for one another for certain banking
functions without being considered a "branch". In general, subject to certain
limitations, nationwide interstate acquisitions are now permissible,
irrespective of state law limitations other than limitations related to deposit
concentrations and bank age requirements. Interstate mergers also are
permissible. Affiliated banks may act as agents for one another. Each of the
transactions and activities must be approved by the appropriate federal bank
regulator, with separate and specific criteria established for each category.
In 1996, Massachusetts enacted interstate banking laws in response to
Riegle-Neal. The laws permit, subject to certain deposit and other limitations,
interstate acquisitions, mergers and branching on a reciprocal basis. The new
interstate banking law is likely to make it easier for out-of-state institutions
to attempt to purchase or otherwise acquire or to compete with the Bank in
Massachusetts, and similarly makes it easier for Massachusetts banks to compete
outside the state.
Financial Modernization. Various federal legislative proposals are pending to
"modernize" the nation's financial system. Although the proposals vary, most
generally would allow for some mixing of banking and commerce and generally
would repeal most laws limiting the ability of banks and securities companies to
be affiliated.
2
<PAGE>
Federal Securities Laws. Upon consummation of the Reorganization, the reporting
obligations of the Bank under the Securities Exchange Act of 1934 (the "Exchange
Act"), as administered by the FDIC, were replaced with substantially identical
obligations of the Company under the Exchange Act, as administered by the
Securities and Exchange Commission (the "SEC"). Pursuant to the Exchange Act,
the Company files annual, quarterly, and periodic reports with the SEC. The
Company is also subject to the insider trading requirements of Sections 16(a)
and 16(b) of the Exchange Act, as administered by the SEC. In connection with
the Reorganization, the Bank deregistered the Bank's common stock under the
Exchange Act.
Other Activities
The Bank owns stock in The Savings Bank Life Insurance Company of Massachusetts
("SBLI"). The Bank sells life insurance and tax-deferred annuities and sold over
$1.7 million in SBLI annuities in 1997, making it the top seller of this product
in Massachusetts.
The Bank provides safe deposit services at nine of its branches.
The Bank originates 30-year, fixed-rate, residential 1-4 family loans in
correspondent relationships with third parties such as Plymouth Mortgage Company
and Chase Manhattan Mortgage Corporation, whereby the Bank originates loans in
exchange for an origination fee.
Competition
The Company faces substantial competition for loan origination and for the
attraction and retention of deposits. Competition for loan origination arises
primarily from commercial banks, other thrift institutions, credit unions and
mortgage companies. The Company competes for loans on the basis of product
variety and flexibility, competitive interest rates and fees, service quality
and convenience.
Competition for the attraction and retention of deposits arises primarily from
commercial banks, other thrift institutions, and credit unions having presence
within and around the market area served by the Bank's main office and its
community branch and ATM network. There are approximately 200 of these financial
institutions in the Bank's market area. In addition, the Company competes with
regional and national firms which offer stocks, bonds, mutual funds and other
investment alternatives to the general public. The Company competes on its
ability to satisfy such requirements of savers and investors as product
alternatives, competitive rates, liquidity, service quality, convenience, and
safety against loss of principal and earnings.
Management believes that the Company's emphasis on personal service and
convenience, coupled with active involvement within the communities it serves,
contribute to its ability to compete successfully.
Employees
As of December 31, 1997, the Bank employed 215 full-time staff, including 41
officers, and 82 part-time staff. None of the Bank's employees is represented by
a labor union. The Company has no officers or employees separate from the Bank.
Executive Officers of the Company and Bank
The executive officers of the Company and/or the Bank, their positions with the
Company and/or the Bank and their ages as of February 28, 1998 are as follows:
Name Age Position
Arthur H. Meehan [62] President and Chief Executive Officer of the Company
and the Bank; Chairman of the Board of Directors of
the Company and the Bank
Phillip W. Wong [48] Senior Vice President, Chief Financial Officer and
Treasurer of the Company; Executive Vice
President and Chief Financial Officer of the Bank
George A. Bargamian [49] Senior Vice President of the Bank (Retail)
3
<PAGE>
Name Age Position
Mona Bishlawi [37] Senior Vice President of the Bank (Finance)
Eric B. Loth [55] Senior Vice President of the Bank (Lending)
William F. Rivers [42] Senior Vice President of the Bank (Administration)
Arthur H Meehan. Mr. Meehan commenced his employment with the Bank in February
1992. Prior to this date, Mr. Meehan served as Executive Vice President of the
Bank of New England Corporation.
Phillip W. Wong. Mr. Wong commenced his employment with the Bank as Senior Vice
President in December 1992 and was promoted to Executive Vice President in 1997.
Prior to this date, Mr. Wong served as Chief Financial Officer of Guaranty-First
Trust Co. in Waltham, Massachusetts.
George A. Bargamian. Mr. Bargamian was hired by the Bank as Director of
Marketing in 1988, and was promoted to Vice President and Senior Vice President
of the Bank during 1988. Mr. Bargamian formerly served as Assistant Vice
President of Marketing for First Mutual of Boston.
Mona Bishlawi. Ms. Bishlawi commenced her employment with the Bank as Controller
in 1993, served as Vice President from 1994-1997, and was promoted to Senior
Vice President in 1997. Ms. Bishlawi formerly served as Assistant Vice President
and Assistant Controller at Eastern Bank Corporation in Lynn, Massachusetts.
Eric B. Loth. Mr. Loth commenced his employment with the Bank as Senior Vice
President in August 1994. Prior to this date, Mr. Loth served as Vice President
of Lending at Sterling Bank in Waltham, Massachusetts.
William F. Rivers. Mr. Rivers commenced his employment with the Bank in January
1974, served as Assistant Treasurer from 1980-1985, Vice President from
1985-1988, and was promoted to Senior Vice President in 1988.
ITEM 2. PROPERTIES
All of the Bank's branches located in Medford (except for the West Medford
branch), the branch located in Arlington, and the Malden Center, Maplewood and
Oak Grove branches located in Malden are owned by the Bank. All other branches
are leased from unrelated third parties. The Company also owns a building that
houses the Company's finance department, which is currently available for sale.
The Company also owns an office building currently housing the Company's lending
and certain administrative offices. Additional space in this building is leased
to third parties, and the remainder is available for the Bank's expansion needs.
In 1997, the Bank purchased an office building located between the main branch
office in Medford and the lending and administrative office building. The
Company also purchased a tract of land in the City of Tewksbury with plans to
construct a new branch office. Subject to the foregoing, the Company believes
that its properties are adequate for its present needs.
The Bank has also acquired properties through foreclosure, which are presently
being marketed by local real estate brokers or the Company's lending staff.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings to which the Company is a party or to
which any of its property is subject, although the Company is a party to
ordinary routine litigation incidental to its business.
4
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 16, 1997, a special meeting of the stockholders of the Bank (the
"Special Meeting") was held to consider and vote upon the Reorganization. A
brief description of the vote and the results of the vote are incorporated
herein by reference to the Bank's proxy statement for the Special Meeting and
the Bank's Current Report on Form F-3, respectively, filed as exhibits to the
Company's Current Report on Form 8-K filed with the SEC on November 26, 1997.
5
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's (and, prior to the Reorganization, the Bank's) common stock is
quoted on the NASDAQ National Market System under the symbol "MDBK". The
following table sets forth cash dividends declared on common stock and the high
and low closing prices for the quarters indicated. All prices set forth below
are based on information provided by the National Association of Securities
Dealers, Inc.
Common Stock Sale Prices
------------------------ Dividends Declared
High Low Per Share
---- --- ---------
1997 1st quarter $29 3/4 $24 1/2 $0.18
2nd quarter 30 1/2 24 3/4 0.18
3rd quarter 36 29 1/4 0.18
4th quarter 42 34 0.36
1996 1st quarter $24 1/4 $20 $0.17
2nd quarter 23 1/4 19 3/4 0.17
3rd quarter 24 1/2 20 3/4 0.17
4th quarter 27 23 0.32
At March 2, 1998, according to the Company's transfer agent, the Company had
approximately 1,182 record holders of its common stock. The number of holders of
record does not reflect the number of persons or entities who or which held
their stock in nominee or "street" name through various brokerage firms or other
entities.
The declaration of future dividends to the Company's stockholders is subject to
future operating results, financial conditions, tax and legal considerations and
other factors, such as the Bank's ability to declare and pay dividends to the
Company. As the principal asset of the Company, the Bank currently provides the
only source of payment of dividends by the Company. FDICIA limits the ability of
undercapitalized insured banks to pay dividends. Moreover, under Massachusetts
law, a stock-form savings bank may pay dividends only out of its net profits and
only to the extent such dividends do not impair the Bank's capital and surplus
accounts. Provided that the Bank can meet these requirements, Massachusetts law
permits a bank to distribute net profits as a dividend so long as, after such
distribution, either (i) the Bank's capital and surplus accounts equal at least
10% of its deposit liabilities or (ii) the Bank's surplus account equals 100% of
its capital account, subject to certain exceptions. Under Federal Reserve Board
and FDIC regulations, the Company and the Bank would be prohibited from
declaring dividends, if among other things, they were not in compliance with
applicable regulatory capital requirements. If there is no surplus, dividends
may be paid out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Funds held by the Company are
available for various corporate uses, including the payment of future dividends.
6
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $1,135,572 $1,039,098 $ 955,933 $ 915,055 $ 831,939
Investment securities 513,418 424,966 363,599 332,248 294,390
Loans, net 570,844 560,855 529,424 523,125 478,632
Deposits 821,706 792,141 791,851 791,780 735,753
Stockholders' equity 101,510 92,521 86,076 76,363 71,352
Book value per share 22.35 20.40 19.46 17.37 16.45
Stockholders' equity to total assets 8.94% 8.90% 9.00% 8.35% 8.58%
Number of offices 16 16 16 15 12
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Years Ended December 31,
-------------------------------------------------------------------------------
(Dollars in thousands, except per share data) 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Interest and dividend income $ 75,332 $ 68,711 $ 64,405 $ 55,401 $ 55,868
Interest expense 41,349 36,462 32,724 24,523 25,642
---------- ---------- ---------- ---------- ----------
Net interest income 33,983 32,249 31,681 30,878 30,226
---------- ---------- ---------- ---------- ----------
Provision for loan losses 125 215 772 583 2,110
Other income:
Gain (loss) on investment securities, net 835 413 96 (65) 753
All other income 3,007 2,902 3,050 2,960 2,383
---------- ---------- ---------- ---------- ----------
Total other income 3,842 3,315 3,146 2,895 3,136
---------- ---------- ---------- ---------- ----------
Operating expenses 19,054 18,075 18,169 19,645 19,418
---------- ---------- ---------- ---------- ----------
Income before income taxes 18,646 17,274 15,886 13,545 11,834
Provision for income taxes 7,256 6,845 6,463 5,292 4,665
---------- ---------- ---------- ---------- ----------
Net income $ 11,390 $ 10,429 $ 9,423 $ 8,253 $ 7,169
========== ========== ========== ========== ==========
Basic earnings per share $ 2.51 $ 2.31 $ 2.14 $ 1.89 $ 1.66
========== ========== ========== ========== ==========
Diluted earnings per share $ 2.39 $ 2.21 $ 2.02 $ 1.78 $ 1.57
========== ========== ========== ========== ==========
Cash dividends declared per share $ 0.90 $ 0.83 $ 0.71 $ 0.62 $ 0.50
========== ========== ========== ========== ==========
SELECTED RATIOS
Return on average assets 1.05% 1.05% 1.01% 0.95% 0.87%
Return on average equity 11.81 11.72 11.52 11.14 10.21
Average equity to average assets 8.91 8.98 8.75 8.53 8.49
Weighted average rate spread 2.84 3.00 3.20 3.50 3.64
Net yield on average earning assets 3.26 3.39 3.54 3.74 3.86
Dividend payout ratio - basic earnings per share 35.86 35.93 33.18 32.80 30.12
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
On May 6, 1994, the Bank acquired certain assets and assumed certain liabilities
of the former Commercial Bank and Trust Company ("CBTC").
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This Form 10-K contains certain statements that may be considered
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. The Company's actual results could differ materially from those
projected in the forward-looking statements as a result, among other factors, of
changes in general, national or regional economic conditions, changes in loan
default and charge-off rates, reductions in deposit levels necessitating
increased borrowing to fund loans and investments, changes in interest rates,
and changes in the assumptions used in making such forward-looking statements.
The following discussion should be read in conjunction with the accompanying
consolidated financial statements and selected consolidated financial data
included within this report. Given that the Company's principal activity
currently is ownership of the Bank, for ease of reference, the term "Company' in
this Item generally will refer to the investments and activities of the Company
and the Bank, except where otherwise noted.
GENERAL
The Company's net income is primarily attributable to its level of net interest
income, which represents the difference between interest and dividend income
earned on earning assets and interest paid on deposits and other borrowed money.
The main components of the Company's earning assets are loans, investment
securities and short-term investments. Interest-bearing deposits include NOW,
savings, money market and term certificates of deposit. The net interest income
performance of the Company is significantly affected by general economic
conditions, by the Company's corporate strategies, its asset/liability
management, tactical programs and by the policies of regulatory authorities.
Sources of non-interest income such as loan servicing fees, gains/losses on
sales of investment securities and other fees derived from various banking
services contribute positively to the Company's results. The principal operating
expenses of the Bank are salaries and employee benefits, occupancy and equipment
expenses, data processing expenses, deposit insurance premiums, amortization of
intangibles, advertising and marketing and other general and administrative
expenses.
In 1996, the Company invested approximately $1.7 million in the purchase and
installation of a new loan and deposit processing system. The one-time expenses
charged to operations in 1996 to convert to the new system were approximately
$378,000.
The Company achieved record net income of $11.4 million for 1997, an increase of
$961,000, or 9.2% compared to net income of $10.4 million for 1996. Earnings per
share for 1997 were $2.51 ($2.39 on a diluted basis) compared with $2.31 ($2.21
on a diluted basis) for 1996, an increase of 20 cents or 8.7% compared to the
previous year.
At December 31, 1997, total assets were $1.1 billion, an increase of 9.3% from
the prior year. Total loans increased 1.7% to $577.6 million at December 31,
1997. The Bank sold $11.1 million of education loans in the second quarter of
1997 and $20.5 million of residential loans in the fourth quarter of 1997.
Excluding the loan sales, loan growth was approximately 7.0%. Investment
securities increased 20.8% to $513.4 million at December 31, 1997. Total
deposits increased 3.7% to $821.7 million, and borrowed funds increased 38.6% to
$205.8 million. Stockholders' equity increased 9.7% to $101.5 million at
December 31, 1997, representing a book value of $22.35 per share, up from $20.40
at December 31, 1996. The capital to assets ratio was 8.94%, exceeding all
regulatory requirements.
FINANCIAL CONDITION
Investment Portfolio
The investment policy of the Company is structured to provide an adequate level
of liquidity in order to meet anticipated deposit outflows, normal working
capital needs and expansion of the loan portfolio within guidelines approved by
the Board of Directors, while earning market returns. Accordingly, the majority
of investments are in shorter-term government, agency, or high-quality (rated
"A" or better) corporate securities. Investment bonds purchased generally have
maturities or call dates within three years or less. Although the emphasis on
short-term and medium-term investments reduces the overall yield, this strategy
is in accordance with the Company's desire to minimize interest rate risk.
8
<PAGE>
Investment securities increased 20.8% from $425.0 million at December 31, 1996
to $513.4 million at December 31, 1997. The increase was primarily in
mortgage-backed securities and corporate bonds designated as "available for
sale". During 1997, the Company implemented a strategy using the investment
portfolio to increase earning assets and generate higher levels of interest
income. In order to increase the overall yield of the investment portfolio, the
strategy also included a program of replacing U.S. Government and federal
agencies as they matured or were sold with mortgage-backed securities and
corporate bonds. At December 31, 1996, 53% of the investment portfolio was in
U.S. Government and federal agencies, while mortgage-backed securities
represented 7%. At December 31, 1997, U.S. Government and federal agencies were
reduced to 37% of total investment securities, and mortgage-backed securities
were increased to 24%. The mortgage-backed securities pools added to this
portfolio throughout 1997 consisted primarily of fixed-rate, low-coupon,
government-backed securities that have limited extension or contraction risk.
Consideration is given to the underlying collateral, the impact of rising or
falling rates on the average life of these securities and other factors
associated with the Bank's investment policies and strategies.
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. All other marketable investment securities are classified as
"available for sale" and reflected on the balance sheet at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity. As of December 31, 1997, the net unrealized
gain on investments classified as "available for sale" was $2,156,000 and the
net unrealized gain on investments classified as "held to maturity" was
$279,000.
In November 1995, the Financial Accounting Standards Board issued guidance
allowing a one-time reassessment of an entity's investment classifications
during the period November 15, 1995 to December 31, 1995. As a result, the
amortized cost of securities held to maturity that were transferred to available
for sale amounted to $26,987,000 and the related unrealized loss amounted to
$206,000.
In addition, the Bank also held limited amounts of equity securities subject to
the investment limitations imposed by FDICIA and the Commissioner.
The following table sets forth certain information concerning the investment
portfolio at carrying value:
At December 31,
------------------------------
1997 1996 1995
-------- -------- --------
(In thousands)
Investment securities:
Debt securities:
U.S. Government and federal agency $190,579 $224,519 $193,106
Mortgage-backed securities 122,447 27,814 32,780
State and municipal -- 89 232
Corporate bonds 185,859 159,892 126,545
Equity securities 14,533 12,652 10,936
-------- -------- --------
Total investment securities $513,418 $424,966 $363,599
======== ======== ========
9
<PAGE>
The following table sets forth the maturity distribution of debt securities
(excluding mortgage-backed securities) at carrying value, with related weighted
average yields:
<TABLE>
<CAPTION>
At December 31, 1997
---------------------------------------------------------------------------------
Weighted Weighted Weighted
Within Average Over 1 Year Average Over 5 Years Average
1 Year Yield to 5 Years Yield to 10 Years Yield
--------- ----------- ------------ ------------ ------------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agency $ 60,918 5.85% $ 34,134 6.16% $ -- --%
Other 54,878 5.97 218,451 6.00 8,057 5.95
--------- ------------ -----------
$ 115,796 5.91% $ 252,585 6.02% $ 8,057 5.95%
========= ============ ===========
</TABLE>
Loan Portfolio
The Company offers a variety of lending products, including fixed-rate and
adjustable-rate residential mortgages, equity lines of credit, fixed-rate and
adjustable-rate commercial mortgages, construction loans, consumer loans,
education loans, and commercial business loans. As a portfolio lender, the
Company generally retains all newly originated loans. From time to time, the
Company originates and retains 30-year, fixed-rate residential loans. More
frequently, however, the 30-year, fixed-rate residential loan is generally
offered whereby the Bank originates the loan for a correspondent and collects an
origination fee. During the fourth quarter of 1997, the Company originated and
retained $4.1 million of 30-year, fixed-rate residential loans in order to
improve the yield on residential loans.
Real estate and commercial loan originations are initiated by the Bank's
officers and lending personnel from a number of sources including referrals from
realtors, builders, attorneys, and customers. Direct mail to existing and
potential customers is used to solicit other loan services. Advertising media is
also used to promote loans. The Bank employs on-the-road originators and pays
them commissions for loan originations. Applications for residential and
consumer loans are accepted at all of the Bank's locations and are referred to
the main office for processing.
The Company has lending policies in place which are intended to control credit
risk inherent in the origination and retention of loans in portfolio. Among
other considerations, these policies delineate the Bank's geographic market
region, and establish credit procedures and acceptable loan-to-value ratios for
all loans. Additional specific policies are in effect for commercial and
commercial real estate loans.
Loans increased modestly in 1997 as the Bank sold $11.1 million of education
loans in the second quarter, and $20.5 million of residential loans in the
fourth quarter. Excluding the loan sales, loan growth was approximately 7.0%. It
is the Bank's intention to sell education loans in the repayment stage as
conditions warrant. The increase in loans is primarily in residential,
construction, and commercial asset-based loans. All other loan categories
remained fairly stable from December 31, 1996 as new loan originations replaced
amortization and payoffs. The Company expects continued intense competition for
loans within its geographic region despite improvement in the regional economy.
Within this framework, management has intensified marketing efforts for
residential loans and asset-based lending.
10
<PAGE>
Composition of portfolio. The following table shows the composition of the loan
portfolio by type of loan:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C>
Commercial loans $ 14,941 $ 11,014 $ 9,075 $ 10,270 $ 9,991
Loans secured by real estate:
Residential * 389,593 380,627 353,172 350,013 308,895
Construction loans, net of unadvanced
funds 11,278 8,719 8,591 7,577 2,541
Commercial 124,094 123,158 125,771 125,190 127,550
Second mortgages 1,539 1,928 2,175 2,441 3,087
Equity lines of credit 22,146 21,169 20,819 20,080 18,943
Consumer loans 12,931 20,548 16,710 14,396 13,942
--------- --------- --------- --------- ---------
576,522 567,163 536,313 529,967 484,949
Add: Net premium on loans acquired 270 354 504 648 833
Net deferred origination costs (fees) 785 569 73 49 (143)
Less: Allowance for loan losses (6,733) (7,231) (7,466) (7,539) (7,007)
--------- --------- --------- --------- ---------
Loans, net $ 570,844 $ 560,855 $ 529,424 $ 523,125 $ 478,632
========= ========= ========= ========= =========
</TABLE>
* Residential first mortgages represent qualified collateral under a blanket
lien securing FHLBB borrowings. See "Borrowings" for a more detailed
explanation of this lien.
The following table presents the maturity distribution of commercial and
construction loans at December 31, 1997:
Maturities
----------------------------------------------------------
1 Year Over 1 Year Over
or Less to 5 Years 5 Years Total
----------- -------------- ----------- -----------
(In thousands)
Commercial loans $ 9,907 $ 4,341 $ 693 $ 14,941
Construction loans 4,807 2,422 4,049 11,278
Generally, construction loans provide for payments of interest only during the
construction period, and then payments of principal and interest throughout the
life of the loans. In all cases, these loans have adjustable interest rates.
Commercial loans with maturities of over one year will be subject to interest
rate adjustment or maturity according to the following schedule:
Scheduled Maturity or Rate Adjustment
--------------------------------------------
Over 1 Year Over
to 5 Years 5 Years Total
------------- ----------- ------------
(In thousands)
Predetermined rates $ 1,106 $ -- $ 1,106
Adjustable rates 3,235 693 3,928
------------- ----------- ------------
$ 4,341 $ 693 $ 5,034
============= =========== ============
11
<PAGE>
Non-performing Assets
It is the Bank's general policy to discontinue the accrual of interest on loans
over 90 days past due. Interest accrual ceases, and all previously accrued but
unpaid interest is reversed, when a loan is placed on non-accrual status. At the
option of management, a loan may be placed on non-accrual status prior to being
90 days past due if the collection of future interest and principal is, in the
opinion of management, doubtful.
On January 1, 1995, the Bank adopted Statement of Financial Accounting Standards
("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan." Under this
Statement, a loan is considered impaired when, based on current information and
events, it is probable that a creditor will be unable to collect the scheduled
payments of principal or interest when due according to the contractual terms of
the loan agreement. All of the Bank's loans which have been identified as
impaired have been measured by the fair value of existing collateral. When
impaired loans become 90 days or more delinquent, they are generally maintained
on non-accrual status whereby interest income is recognized only when received.
The restatement of previously issued financial statements to conform with SFAS
No. 114 is expressly prohibited. The Bank does not apply SFAS No. 114 to
individual consumer loans which are collectively evaluated for impairment.
The following table sets forth information with respect to non-accrual loans,
restructured loans and foreclosed real estate at the dates indicated. The Bank
did not have any loans 90 days or more past due and still accruing at the dates
indicated.
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Impaired loans accounted for on a non-accrual basis $ 1,726 $ 2,752 $ 4,239 $ n/a $ n/a
Other loans accounted for on a non-accrual basis -- 687 82 1,740 2,229
Troubled debt restructurings n/a n/a n/a 829 2,082
Foreclosed real estate 48 276 350 1,444 2,763
------- ------- ------- ------- -------
$ 1,774 $ 3,715 $ 4,671 $ 4,013 $ 7,074
======= ======= ======= ======= =======
</TABLE>
At December 31, 1997, all loans on non-accrual status were considered impaired.
At December 31, 1996, $687,000 of loans were 90 days or more past due but were
not considered impaired. Management expected the two commercial real estate
borrowers involved to resume scheduled payments of principal and interest in
accordance with the contractual terms of the loan agreements.
The balance of in-substance foreclosures that would have been restated and
classified as impaired loans in accordance with SFAS No. 114 at December 31,
1994 was $302,000. The increase in non-accrual loans in 1995 was primarily
attributable to the death of a commercial real estate borrower. Subsequent to
the borrower's death, the debt was assumed by a new borrower and loan
performance resumed.
Loans accounted for on a non-accrual basis at December 31, 1997 had gross
interest income of $406,000 that would have been recorded during 1997 if the
loans had remained current in accordance with original terms. The amount of
interest income on such loans that was included in net income for the period was
$85,000.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged through the statement of income. Assessing the adequacy of the allowance
for loan losses involves substantial uncertainties and is based on management's
evaluation of the amount required to absorb estimated losses inherent in the
loan portfolio after weighing various factors. Among the factors that management
considers are the quality of specific loans, risk characteristics of the loan
portfolio, level of non-performing loans, current economic conditions, trends in
delinquency and charge-offs and collateral value of the underlying security.
Ultimate losses may vary significantly from current estimates.
Quarterly reviews of the loan portfolio are performed to identify loans for
which specific allowance allocations are considered prudent. After specific
allocations are made, a review is made to determine whether the remaining
unallocated portion of the allowance is adequate to cover possible unidentified
loan losses.
12
<PAGE>
The Bank recorded a provision for loan losses for the year ended December 31,
1997 of $125,000, compared with $215,000 for the year ended December 31, 1996.
At December 31, 1997, the allowance for loan losses totaled $6.7 million or 390%
of non-accrual loans at that date, compared with $7.2 million or 210.3% of
non-accrual loans at December 31, 1996. Non-accrual loans at December 31, 1997
were $1.7 million or 0.30% of total net loans, compared with $3.4 million or
0.61% of total net loans at December 31, 1996.
An analysis of the allowance for loan losses is presented in the following
table:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Allowance for loan losses, beginning of year $ 7,231 $ 7,466 $ 7,539 $ 7,007 $ 6,649
------- ------- ------- ------- -------
Loans charged-off --- Residential real estate (38) (64) (66) (267) (406)
--- Commercial real estate (720) (656) (884) -- (1,329)
--- Consumer (42) (89) (28) (34) (28)
--- Commercial (31) (21) (100) (8) (227)
Recoveries --- Residential real estate 26 7 104 218 4
--- Commercial real estate 147 348 102 35 229
--- Consumer 25 8 10 5 5
--- Commercial 10 17 17 -- --
------- ------- ------- ------- -------
Net charge-offs (623) (450) (845) (51) (1,752)
------- ------- ------- ------- -------
Provision for loan losses, charged to operations 125 215 772 583 2,110
------- ------- ------- ------- -------
Allowance for loan losses, end of year $ 6,733 $ 7,231 $ 7,466 $ 7,539 $ 7,007
======= ======= ======= ======= =======
Ratio of net charge-offs to average loans 0.11% 0.08% 0.16% 0.01% 0.37%
======= ======= ======= ======= =======
</TABLE>
An analysis of the allocation of the allowance for loan losses is presented in
the following table:
<TABLE>
<CAPTION>
At December 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
----------------- ----------------- ----------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Loans of Loans of Loans of Loans of Loans
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential real estate $1,067 71.73% $1,179 71.23% $1,036 70.17% $2,669 70.29% $2,397 68.24%
Commercial real estate 5,220 21.49 5,711 21.68 6,118 23.43 4,553 23.62 4,444 26.30
Construction 169 1.95 131 1.53 129 1.60 114 1.43 22 0.52
Consumer 48 2.24 44 3.62 47 3.11 49 2.72 44 2.88
Commercial 229 2.59 166 1.94 136 1.69 154 1.94 100 2.06
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $6,733 100.00% $7,231 100.00% $7,466 100.00% $7,539 100.00% $7,007 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
While management considers the allowance for loan losses to be adequate at
December 31, 1997, there is no assurance that additional charge-offs and
provisions will not be necessary in 1998. The provision for loan losses during
1998 will depend primarily on market conditions and the Bank's actual
experience.
Loan Concentrations
Other than the focus of the Bank's lending activities to its market area, the
Bank does not have a concentration of loans exceeding 10% of total loans at the
end of 1997.
13
<PAGE>
Deposits
Deposits historically have been the Bank's primary source of funds. The Bank
offers a wide variety of deposit programs to attract both short-term and
long-term deposits from individuals, partnerships and corporations, non-profits
and municipalities. Deposit products include regular savings accounts, NOW
accounts, money market deposit accounts, individual retirement accounts, term
certificates, and retail and commercial demand deposit accounts. The Bank also
solicits corporate and municipal jumbo term deposits.
The Bank's Retail Banking Division places emphasis on sales of its products and
quality of service to attract and retain customers. Management measures the
sales performance of platform personnel in terms of cross-sales of additional
products above the primary product which the customer requests. Platform
personnel are evaluated in part, based on a cross-sell ratio which is the total
number of these additional products sold to a customer divided by the number of
customers. For 1997 this cross-sell ratio was 1.96, meaning for each customer
"buying" one product, the customer was "sold" a total of 1.96 products, or
approximately two products per customer.
The Bank utilizes products and services such as its FREEDOM 55(TM) mature market
program targeted to particular market segments to attract depositors interested
in long-term savings and to create multiple account relationships with these
depositors. Management believes that the customers attracted to these programs
have an increased sense of loyalty to the Bank, and accordingly, the funds
deposited into these programs are less volatile than other deposits.
While deposit flows are by nature unpredictable, management controls the Bank's
deposit growth through selective pricing and sales oriented marketing programs.
The low interest rate environment, coupled with continued strength in the stock
market and mutual funds continue to present management with the challenge of
attracting and retaining deposits. To maintain stable deposit rates and manage
interest rate risk, the Bank's strategy has been to grow deposit levels through
selective promotions. To increase core deposits, the Bank continues to promote
its "ComboPlus" account which combines a statement savings account and checking
account into one convenient account offered at a competitive rate which exceeds
the regular statement and passbook savings account rates. This account type has
contributed to the increase in savings and demand deposits.
Total deposits increased $29.6 million or 3.7% to $821.7 million at December 31,
1997 from $792.1 million at December 31, 1996. When compared to the prior year,
demand deposits increased 10.1% while NOW deposits decreased 2.4%. Savings and
money market deposits increased 3.0% and term certificates increased 4.6%. In
previous years, the Bank experienced disintermediation from regular savings
deposits and money market deposits to term certificates. In 1997, the response
to a flat yield curve by customers of the Bank has been an increase in more
liquid and shorter term deposit products.
The following table indicates the balances in various deposit accounts at the
end of each reported period:
At December 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
(In thousands)
Demand accounts $ 44,196 $ 40,124 $ 36,427
NOW accounts 59,368 60,839 63,248
Savings and money market accounts 325,340 315,771 314,813
Term certificates 392,802 375,407 377,363
--------- --------- ---------
$ 821,706 $ 792,141 $ 791,851
========= ========= =========
14
<PAGE>
The following table sets forth the average deposits of the Bank with related
average rates paid during each reported period:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------- ----------------------- -----------------------
Average Rate Average Rate Average Rate
Balance Paid Balance Paid Balance Paid
---------- ---------- ---------- ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Demand accounts $ 35,210 --% $ 30,935 --% $ 25,752 --%
NOW accounts 59,485 1.00 61,317 1.10 62,178 1.47
Savings and money market deposits 322,079 2.96 316,498 2.80 334,739 2.68
Term certificates 391,204 5.42 378,680 5.52 357,031 5.32
</TABLE>
Included in term certificates of deposit are certificates having balances of
$100,000 or more. At December 31, 1997, such term certificates had the following
maturities:
At December 31, 1997
- ---------------------------------------------------------------------------
3 Months Over 3 Months Over 6 Months Over
or Less to 6 Months to 12 Months 12 Months Total
- ------------ --------------- ----------------- ------------ -----------
(In thousands)
$ 19,265 $ 6,335 $ 9,158 $ 19,036 $ 53,794
Borrowed Funds
The Bank is a voluntary member of the FHLBB. As such, the Bank may borrow up to
its qualified collateral, as defined by the FHLBB.
The Bank has selectively borrowed funds from the FHLBB to fund purchases of
loans or large loan originations in addition to purchases of mortgage-backed
securities. Short-term borrowings typically fund purchases or originations of
one-year adjustable-rate loans, or are used to meet the Bank's daily liquidity
needs. Long-term debt typically funds purchases of three-year adjustable-rate
residential mortgage loans or the origination of certain commercial real estate
loans. The Bank also enters into repurchase or reverse repurchase agreements
with a number of authorized brokers as an alternative source of funds.
Securities sold under agreements to repurchase are borrowings that mature within
one year and are secured by U.S. government obligations. Total borrowed funds
increased to $205.8 million at December 31, 1997 from $148.5 million at December
31, 1996, reflecting management's decision to utilize borrowings as a supplement
to current deposit activity levels. The Bank took advantage of relatively low
interest rates to increase long-term borrowings which were employed to fund the
increase in the residential loan portfolio and purchases of mortgage-backed
securities.
15
<PAGE>
The following table presents, by category, the borrowings of the Bank for the
reported periods:
<TABLE>
<CAPTION>
At December 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Short-term borrowings:
FHLBB advances $ -- $ 30,000 $ 20,000
Federal Reserve Bank of Boston advances 2,059 1,233 --
Securities sold under agreements to repurchase 93,611 49,584 20,281
-------- -------- --------
Total short-term borrowings $ 95,670 $ 80,817 $ 40,281
======== ======== ========
Weighted average rate 5.72% 5.82% 5.92%
Average balance of short-term borrowings during
the year $ 70,417 $ 49,123 $ 34,594
Weighted average rate paid on short-term
borrowings during the year 5.53% 5.37% 6.17%
Maximum amount outstanding at any month-end
during the year $ 99,593 $ 80,817 $ 42,406
Long-term debt:
FHLBB advances $110,109 $ 67,647 $ 32,147
======== ======== ========
Weighted average rate 6.02% 6.10% 6.19%
Average balance of long-term debt during the year $ 98,972 $ 55,276 $ 29,307
Weighed average rate paid on long-term
debt during the year 6.19% 6.14% 5.88%
Maximum amount outstanding at any month-end
during the year $115,156 $ 68,647 $ 32,147
</TABLE>
Stockholders' Equity
The Bank's capital to assets ratio was 8.94% at December 31, 1997, compared to
8.90% at December 31, 1996. The Bank's capital ratios at December 31, 1997 and
1996 exceeded all regulatory requirements. Book value at December 31, 1997 was
$22.35 per share, compared with $20.40 per share at December 31, 1996. (See
"Liquidity and Capital Resources.")
16
<PAGE>
RESULTS OF OPERATIONS
General
In 1997, the Company reported consolidated net income of $11.4 million or $2.51
basic earnings per share, as compared to net income of $10.4 million or $2.31
per share in 1996 and net income of $9.4 million or $2.14 per share in 1995.
Diluted earnings per share were $2.39, $2.21 and $2.02 for 1997, 1996 and 1995,
respectively. Consolidated net income in 1997 increased 9% over 1996 and
consolidated net income in 1996 increased 11% over 1995. Diluted earnings per
share in 1997 increased 8% over 1996 and diluted earnings per share in 1996
increased 9% over 1995. The Company's return on assets was 1.05% for 1997 and
1996, as compared to 1.01% in 1995. The return on equity increased to 11.81% in
1997 from 11.72% in 1996 and 11.52% in 1995.
The increased earnings for 1997 when compared to 1996 reflect a $1.7 million
increase in net interest income due to higher average earning assets, a
reduction in the provision for loan losses of $90,000 due to positive credit
quality trends, and an increase in net gains on the sale of securities and loans
amounting to $719,000. Service fees from transaction accounts and other income
decreased $192,000 from the prior year, as customers shifted to lower cost
products. Total operating expenses increased $979,000 from the prior year.
Included in the increase were one-time expenses of approximately $200,000
related to the formation of the holding company, and $260,000 applicable to tax
filing matters. In 1996, the Company incurred $378,000 of one-time expenses
concurrent with the purchase and installation of a new loan and deposit system.
The increase in earnings in 1996 when compared to 1995 reflects an increase in
net interest income, a reduction in the provision for loan losses, and an
increase in net gains on the sales of investment securities. "Core" operating
expenses, which are defined to exclude net gains and losses from foreclosed real
estate and one-time expenses decreased $806,000 between 1996 and 1995. The
reduction is attributed to the virtual elimination in 1996 of deposit insurance
expense and on-going cost control. A total of $1.7 million was invested in 1996
on the installation of a new system that is represented by hardware and software
which was capitalized.
Net Interest Income
Net interest income was $34.0 million in 1997; an increase of $1.7 million or
5.4% from $32.2 million in 1996, and an increase of $2.3 million or 7.3% from
$31.7 million in 1995. Average earning assets in 1997 increased $91.3 million as
compared to $81.3 million of increased interest-bearing liabilities; the
difference resulting from higher demand deposits and capital. As a result, the
excess of earning assets to interest-bearing liabilities increased 11.2% to
$99.9 million from the $89.8 million in 1996. In addition, the Bank improved its
average earning assets to average assets ratio to 96.2%, up from 96.0% in the
prior year. The earnings on this excess flow directly to interest income.
The flattening of the yield curve in 1997 has compressed the net interest margin
and spread. As a result, changes in the mix of earning assets and higher funding
costs reduced the net interest margin in 1997 to 3.26% from 3.39% in 1996 and
3.54% in 1995. The Company's most integral challenge is managing net interest
income. Management continued to maintain a stable net interest margin by closely
monitoring the behavior of the loan portfolio under varying market rate
environments in order to maximize the yield on earning assets. During 1997,
average loan balances represented 53.2% of average assets. This compares with
54.9% in 1996, and 57.4% in 1995. The average investment securities balance was
43.0% of average assets in 1997 as compared to 41.1% in 1996 and 38.1% in 1995.
As the percentage of loans to assets decreases and the percentage of investments
to assets increases, the net interest margin declines as loans are typically a
higher yielding asset than the types of securities in which the Bank generally
invests.
Management closely monitors funding costs, and utilizes borrowings as an
alternative to deposits when pricing or availability is more advantageous. The
average deposits balance represented 82.0%, and average borrowings represented
18.0%, of total interest bearing liabilities in 1997 as compared to 87.9% and
12.1%, respectively, in 1996, and 92.2% and 7.8%, respectively, in 1995. The
increased reliance on borrowings in 1997 resulted in a higher cost of funds,
thereby reducing the net interest margin.
17
<PAGE>
Interest and Dividend Income
Interest and dividend income totalled $75.3 million for 1997; an increase of
$6.6 million or 9.6% from 1996. Interest and dividend income totalled $68.7
million for 1996; an increase of $4.3 million or 6.7% from 1995. The weighted
average yield on earning assets was 7.23% in 1997 and 1996, compared to 7.20% in
1995.
Interest income on loans increased 6.3% or $2.8 million to $46.2 million in 1997
primarily as the result of increases in the average loans outstanding and a
modest increase in the average yield on loans to 8.02%. Increased residential
1-4 family loan volume contributed $2.3 million of additional interest income.
The average yield on residential 1-4 family loans remained flat at 7.50% when
compared with 1996. Interest income on commercial loans increased $417,000 as a
result of asset-based loan volume. In addition, the yield on commercial loans
improved 9 basis points to 9.62% in 1997 as asset-based loans typically command
a higher rate.
Commercial real estate loans contributed $97,000 of additional interest income
in 1997. Included in interest income from commercial real estate loans in 1996
was $251,000 which related to recoveries that had been charged-off in a prior
period. Interest income on consumer loans increased a modest $16,000 from the
prior year primarily due to the sale of $11.1 million in education loans in the
second quarter of 1997.
Interest income on investments was $29.1 million in 1997 compared with $25.3
million in 1996. The $58.6 million increase in the average balance of investment
securities, principally in higher yielding corporate bonds and mortgage-backed
securities, contributed $3.8 million of additional interest income. Investing in
higher yielding instruments increased the yield on investments by 5 basis points
to 6.25% in 1997.
Interest income on loans was $43.5 million in 1996 compared with $42.7 million
in 1995, as modest increases in average loans outstanding and yield combined to
generate $774,000 in additional interest income on loans. Interest income on
residential 1-4 family loans increased $248,000 in 1996 compared to 1995 levels
as loan volume increased. The yield on residential loans remained stable from
year to year at approximately 7.50%. Interest income on commercial real estate
loans increased $393,000 from 1995 levels; $251,000 of which related to
recoveries that had been charged-off in a prior period. The remaining increase
is attributable to the upward repricing of adjustable-rate loans. Interest
income on consumer loans increased $154,000 in 1996; primarily as a result of
growth in student loan volume. The increases were offset by a decrease in
interest income on commercial loans of $21,000 as the yield on loans declined.
As in 1995, the Bank elected not to price loan products aggressively, thereby
generating only a modest increase in volume. The overall yield on loans
increased from 7.94% in 1995 to 7.99% in 1996.
Interest income on investments was $25.3 million in 1996 compared with $21.7
million in 1995. The increase of $49.4 million in the average balance of
investments in 1996 coupled with an increase in the yield on investments
contributed an additional $3.5 million in interest income. During 1996, the Bank
increased its investment in U.S. government and agency obligations and corporate
bonds with the intent to generate additional interest income. The weighted
average yield on investment securities, including short-term investments,
increased to 6.20% in 1996 from 6.09% in 1995, reflecting the purchase of
additional investment securities and the reinvestment of proceeds from
maturities and sales at higher yields.
Interest Expense
Interest expense was $41.3 million in 1997, up $4.9 million or 13.4% from 1996.
Interest expense was $36.5 million in 1996, an increase of $3.3 million or 11.4%
from 1995. The cost of funds increased to 4.39% in 1997 compared with 4.23% in
1996 and 4.00% in 1995 principally as a result of the increased reliance on
borrowed funds.
Interest expense on deposits was $31.3 million in 1997, compared with $30.4
million in 1996. Average interest-bearing deposits increased $16.3 million
resulting in an increase in interest expense of $895,000. The Company continues
to focus on increasing certain core deposit accounts. As a result, pricing
strategies were implemented raising certain core deposit product rates while
lowering term certificate rates. The weighted average rate paid on savings and
money market deposits increased to 2.96% in 1997 compared with 2.80% in 1996.
The increased rate coupled with a $5.6 million increase in the average balance
added $688,000 of interest expense in 1997. The weighted average rate paid on
term certificates decreased to 5.42% from 5.52%. The lower rate partially offset
the increased interest expense on term certificates, resulting from a $12.5
million increase in the average balance which added $288,000 of interest
expense. The average balance of NOW deposits decreased a modest $1.8 million.
This decrease along with a lowering of the rate paid reduced interest expense by
$81,000. The overall weighted average rate paid on deposits increased to 4.06%
in 1997 from 4.03% in 1996. The increase is principally due to
disinteremediation from the lower rate passbook savings into the higher rate
"ComboPlus" statement savings, an increase in money market rates, and the 2 year
certificate of deposit promotion offered during the first six months of the
year.
18
<PAGE>
Interest expense on borrowed funds was $10.0 million in 1997, compared with $6.0
million in 1996. Management took advantage of declining interest rates to extend
and increase borrowings. Longer-term FHLBB borrowings were acquired to fund and
manage the interest rate risk resulting from growth in the residential loan
portfolio. The increase in interest expense is the result of a $65.0 million
increase in the average balance of borrowings coupled with a weighted average
rate that was 15 basis points over the prior year's cost of funds. The increase
in rate is attributed to the longer term of the borrowings. In addition, a
significant portion of overall borrowings continue to include short-term
repurchase agreements of U.S. Government securities that contribute to the
funding of the Bank's investment portfolio.
Interest expense on deposits was $30.4 million and interest expense on borrowed
funds was $6.0 million in 1996, compared with $28.9 million and $3.9 million,
respectively, in 1995. While interest-bearing deposit levels remained stable in
1996 as compared with 1995, a certain level of disintermediation from lower rate
passbook savings accounts to higher rate core deposits and term certificates
increased the average cost of interest-bearing deposits. In addition, the Bank
leveraged its strong capital position by increasing average borrowed funds to
$104.4 million at an average cost of 5.78% in 1996 from $63.9 million at an
average cost of 6.04% in 1995. This cost reduction was achieved by adjusting the
borrowed funds mix, in part towards greater short-term, secured borrowings, such
as repurchase agreements, at rates averaging 5.07% in 1996 versus 5.93% in 1995.
This rate decline more than offset the higher average rates paid for increased
average levels of long-term FHLBB advances, at 6.14% in 1996 versus 5.88% in
1995.
Rate/Volume Analysis
The following table presents, for the periods indicated, changes in interest and
dividend income and changes in interest expense attributable to changes in
interest rates and volumes of interest-bearing assets and liabilities. Changes
attributable to both rate and volume have been allocated proportionally to the
two categories.
<TABLE>
<CAPTION>
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Increase (Decrease)
----------------------------- -----------------------------
Volume Rate Total Volume Rate Total
------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME
Short-term investments $ (234) $ 1 $ (233) $ 54 $ (50) $ 4
Mortgage-backed investments 2,668 87 2,755 333 106 439
Other investment securities 1,362 (22) 1,340 2,727 362 3,089
Loans 2,623 136 2,759 505 269 774
------- ------- ------- ------- ------- -------
Total interest and dividend income 6,419 202 6,621 3,619 687 4,306
------- ------- ------- ------- ------- -------
INTEREST EXPENSE
NOW deposits (20) (61) (81) (12) (226) (238)
Savings deposits and MMDA 158 530 688 (500) 392 (108)
Term certificates 683 (395) 288 1,179 736 1,915
Short-term borrowings 1,176 83 1,259 808 (307) 501
Long-term debt 2,704 29 2,733 1,590 78 1,668
------- ------- ------- ------- ------- -------
Total interest expense 4,701 186 4,887 3,065 673 3,738
------- ------- ------- ------- ------- -------
Net interest income $ 1,718 $ 16 $ 1,734 $ 554 $ 14 $ 568
======= ======= ======= ======= ======= =======
</TABLE>
19
<PAGE>
Distribution of Assets and Liabilities; Interest Rates and Interest Differential
The following presents an analysis of average yields earned and rates paid for
the years indicated. Average balances are computed using daily averages except
for average stockholders' equity for which month-end balances are used.
<TABLE>
<CAPTION>
Years Ended December 31, 1997 December 31, 1996 December 31, 1995
- --------------------------------------------------------------------- --------------------------- ---------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
---------- ------- ------- -------- ------- ------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
Earnings assets:
Short-term investments $ 3,852 $ 205 5.32% $ 8,257 $ 438 5.30% $ 7,289 $ 434 5.95%
Mortgage-backed
investments 70,635 4,588 6.50 29,506 1,833 6.21 24,059 1,394 5.79
Other investment securities 391,312 24,326 6.22 369,421 22,986 6.22 325,504 19,897 6.11
Loans (a) 576,258 46,213 8.02 543,547 43,454 7.99 537,226 42,680 7.94
- --------------------------------------------------------------------------------------------------------------------------------
Total earning assets 1,042,057 75,332 7.23 950,731 68,711 7.23 894,078 64,405 7.20
Other assets 41,288 -- -- 40,101 -- -- 41,457 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total assets $1,083,345 -- -- $990,832 -- -- $935,535 -- --
================================================================================================================================
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest-bearing liabilities:
NOW deposits $ 59,485 $ 595 1.00% $ 61,317 $ 676 1.10% $ 62,178 $ 914 1.47%
Savings deposits and MMDA 322,079 9,540 2.96 316,498 8,851 2.80 334,739 8,959 2.68
Term certificates 391,204 21,193 5.42 378,680 20,906 5.52 357,031 18,991 5.32
Short-term borrowings 70,417 3,896 5.53 49,123 2,637 5.37 34,594 2,136 6.17
Long-term debt 98,972 6,125 6.19 55,276 3,392 6.14 29,307 1,724 5.88
- --------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 942,157 41,349 4.39 860,894 36,462 4.23 817,849 32,724 4.00
Other liabilities 44,704 -- -- 40,982 -- -- 35,868 -- --
Stockholders' equity 96,484 -- -- 88,956 -- -- 81,818 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders'
equity $1,083,345 -- -- $990,832 -- -- $935,535 -- --
================================================================================================================================
Net interest income $33,983 $32,249 $31,681
Weighted average rate spread (b) 2.84% 3.00% 3.20%
Net yield on average earning assets (c) 3.26% 3.39% 3.54%
================================================================================================================================
</TABLE>
(a) Includes non-accrual loans.
(b) Weighted average yield on earning assets less weighted average rate paid
on interest-bearing liabilities.
(c) Net interest income divided by average earning assets.
20
<PAGE>
Provision for loan losses
The provision for loan losses represents a charge against current earnings and
an addition to the allowance for loan losses. The provision is determined by
management on the basis of many factors including the quality of specific loans,
risk characteristics of the loan portfolio, the level of non-performing loans,
current economic conditions, trends in delinquency and charge-offs, and
collateral values of the underlying security. Ultimate losses may vary from
current estimates.
The Bank recorded a provision of $125,000 for loan losses in 1997. This compares
with a provision of $215,000 for the year ended December 31, 1996 and $772,000
for the year ended December 31, 1995. In 1997, the Bank continued to experience
positive trends in credit quality as indicated by the decline in non-performing
loans from $4.3 million in 1995 to $3.4 million in 1996 and to $1.7 million in
1997. Net loans charged-off totaled $623,000, $450,000 and $845,000,
respectively, for the years ended December 31, 1997, 1996 and 1995. The increase
in net loans charged-off in 1997 is principally the result of charging off one
large commercial real estate borrower. A reserve for loan losses had been
provided for this loan in a prior year.
While management considers the allowance for loan losses to be adequate at
December 31, 1997, there is no assurance that additional charge-offs and
provisions will not be necessary in 1998. The provision for loan losses during
1998 will depend primarily on market conditions and the Bank's actual
experience.
Other income
Total other income amounted to $3.8 million for the year ended December 31,
1997, as compared to $3.3 million for year ended December 31, 1996, and $3.1
million for the year ended December 31, 1995. In 1997, customer service fees
declined $185,000 from 1996 and $374,000 from 1995, in part reflecting lower
revenues on deposit accounts as customers migrate to deposit products with lower
or no service fees. The Company's experience in recent years has been customer
willingness to forego earning interest on a deposit account in exchange for
reduced service charges. Net gains on the sale of securities were $835,000 in
1997, compared with net gains of $413,000 and $96,000 in 1996 and 1995,
respectively. Management elects to sell securities when tactical opportunities
arise to do so and recognize a gain without impairing the yield or liquidity of
the investment portfolio. The net gain on the sale of loans of $306,000 in 1997
was related to the sale of education loans.
Operating expenses
Operating expenses were $19.1 million for 1997, up $979,000 or 5.4% over 1996
operating expenses of $18.1 million. Included in professional fees and other
general and administrative operating expenses were $200,000 of one-time expenses
incurred in the formation of a holding company structure, which the Company
elected not to capitalize. Also included in other general and administrative
operating expenses was $260,000 of one-time expenses applicable to tax filing
matters. 1996 operating expenses reflect $378,000 of one-time expenses
associated with the conversion to new operating systems. The most significant
increase in 1997 operating expenses was in salary and benefit costs, which
increased 5.5% as a result of regular annual merit increases. Other increases
include occupancy and equipment depreciation resulting from the Bank's
investment of approximately $1.7 million in new technology. Upgrading to new
technology has enabled the Bank to realize savings in data processing operating
expenses. In 1997, the Bank experienced a $99,000 increase in FDIC deposit
insurance expense after a significant reduction from 1995 to 1996. The Bank's
expense ratio, which is the ratio of operating expenses to average assets was
1.76% in 1997 compared with 1.82% in 1996 and 1.94% in 1995. Management
continues to focus on cost containment with the intent to be a low cost provider
of high quality banking products and services.
21
<PAGE>
Operating expenses were $18.1 million for 1996, down $94,000 or 0.5% from $18.2
million in 1995. As shown in the table below, "core" operating expenses,
excluding gains and losses on the sale of foreclosed real estate and $378,000 of
one-time expenses associated with the conversion to new operating systems, were
comparable to 1995 except for the virtual elimination of FDIC deposit insurance
assessments in 1996. The $378,000 of one-time expenses are shown by category in
the table below:
<TABLE>
<CAPTION>
"Core" Comparable
1996 Conversion- 1995
Operating Related Operating
Expenses, One-time Expenses,
as Reported Expenses Net as Reported Change
------------- -------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Salaries and employee benefits $ 9,778 $ 12 $ 9,766 $ 9,551 $ 215
Occupancy and equipment 1,998 10 1,988 1,910 78
Deposit insurance 13 - 13 927 (914)
Data processing 1,606 179 1,427 1,452 (25)
Professional fees 517 19 498 577 (79)
Amortization of intangibles 1,248 - 1,248 1,293 (45)
Advertising and marketing 722 28 694 692 2
Other general and administrative 2,128 130 1,998 2,036 (38)
------------ ------------- ------------ ------------ ------------
Totals $18,010 $378 $17,632 $18,438 $(806)
============ ============= ============ ============ ============
</TABLE>
Salaries and employee benefits increased 2.4% as a result of regular annual
merit increases. Occupancy and equipment expenses increased in 1996 over 1995 as
the Bank incurred a full year of operating expenses associated with the Waltham
branch which was opened in April 1995.
Provision for income taxes
The Bank's effective tax rate for the year ended December 31, 1997 was 38.9% as
compared with 39.6% and 40.7% for the years ended December 31, 1996 and 1995.
The effective tax rates exceeded the statutory federal tax rates of 34.0% for
taxable income up to $10.0 million and 35.0% for taxable income exceeding $10.0
million principally due to state taxes. The passage of tax legislation in 1995
reduced the Bank's state tax rate.
22
<PAGE>
IMPACT OF INFLATION
The consolidated financial statements and related consolidated financial data
presented herein have been prepared in accordance with generally accepted
accounting principles, which require the measurement of financial position and
results of operations in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation. The
primary effect of inflation on the operations of the Bank is reflected in
increased operating costs. Unlike most industrial companies, virtually all
assets of a financial institution are monetary in nature. As a result, interest
rates have a more significant effect on a financial institution's performance
than the effect of general levels of inflation. Interest rates do not
necessarily move in the same direction or in the same magnitude as the prices of
goods and services.
LIQUIDITY AND CAPITAL RESOURCES
The Bank's principal sources of funds are customer deposits, amortization and
payoff of existing loan principal, and sales or maturities of various investment
securities. The Bank is a voluntary member of the FHLBB and as such, may take
advantage of the FHLBB's borrowing programs to enhance liquidity and leverage
its favorable capital position. The Bank also may draw on lines of credit at the
FHLBB and a large commercial bank or enter into repurchase or reverse repurchase
agreements with authorized brokers. These various sources of liquidity are used
to fund withdrawals, new loans, and investments.
Management seeks to promote deposit growth while controlling the Bank's cost of
funds. Sales-oriented programs to attract new depositors and the cross-selling
of various products to its existing customer base are currently in place.
Management reviews, on an ongoing basis, possible new products, with particular
attention to products and services which will aid in retaining the Bank's base
of lower-costing deposits.
Maturities and sales of investment securities provide significant liquidity to
the Bank. The Bank's policy of purchasing shorter-term debt securities reduces
market risk in the bond portfolio while providing significant cash flow. For the
year ended December 31, 1997, cash flow from maturities of securities was $99.2
million and proceeds from sales of securities totaled $19.6 million, compared to
maturities of securities of $87.9 million and proceeds from sales of securities
of $32.6 million for the year ended December 31, 1996. Principal payments on
mortgage-backed investments during the years ended December 31, 1997 and 1996
totaled $8.7 million and $4.7 million, respectively. Purchases of securities
during 1997 and 1996 totaled $212.5 million and $188.7 million, respectively.
These purchases consisted primarily of short-term debt instruments. During
periods of high interest rates or active mortgage origination, maturities in the
bond portfolio have provided significant liquidity to the Bank, generally at a
lower cost than borrowings.
Amortization and pay-offs of the loan portfolio contribute significant liquidity
to the Bank. Traditionally, amortization and pay-offs are reinvested into loans.
Excess liquidity is invested in short-term debt instruments.
The Bank has also used borrowed funds as a source of liquidity. At December 31,
1997, the Bank's outstanding borrowings from the FHLBB were $110.1 million. The
Bank also utilizes repurchase agreements to fund loan purchases or to leverage
the balance sheet. At December 31, 1997, securities sold under agreements to
repurchase totaled $93.6 million.
Residential and commercial mortgage loan originations for the years ended
December 31, 1997, 1996 and 1995 totaled $124.2 million, $96.4 million and $65.4
million, respectively. Commitments to originate commercial and residential real
estate mortgages at December 31, 1997 were $14.9 million, excluding unadvanced
construction funds totaling $10.7 million. Management believes that adequate
liquidity is available to fund loan commitments utilizing deposits, loan
amortization, maturities of securities, or borrowings.
The Bank's capital position (total stockholders' equity) was $101.5 million, or
8.94% of total assets at December 31, 1997, compared with $92.5 million, or
8.90% of total assets at December 31, 1996.
The FDIC imposes capital guidelines on the Bank. The guidelines define core or
"tier 1" capital and supplementary or "tier 2" capital and assign weights to
broad categories of assets and certain off-balance sheet items. Ratios of tier 1
and tier 1 plus tier 2 capital to assets are then calculated. Banks must
maintain a tier 1 capital to risk-weighted assets ratio of 4.00% and a total
capital to risk-weighted assets ratio of 8.00%. The consolidated Company and the
Bank's tier 1 risk-based capital ratio, as defined by the FDIC, at December 31,
1997 was 14.7% and 13.6%, respectively, which exceeds both risk-based capital
requirements.
Massachusetts-chartered savings banks insured by the FDIC are required to
maintain minimum leverage capital (tier 1 capital) of 3.0% to 5.0% of total
assets, as adjusted, depending on an individual bank's rating. The Bank's
leverage capital ratio at December 31, 1997, as defined by the FDIC, was 7.8%,
which exceeds the FDIC's requirements.
23
<PAGE>
YEAR 2000 DISCLOSURE
The year 2000 issue exists because many computer systems and applications
currently use two-digit date fields to designate a year. As the century date
change occurs, date sensitive systems recognize the year 2000 as 1900, or, not
at all. This inability to recognize or properly treat the year 2000 may cause
systems to process critical financial and operational information incorrectly.
A Year 2000 Task Force Committee represented by members of senior management was
formed in 1997 and is responsible for year 2000 compliance. The Committee has
developed an action plan with goals, objectives and target dates. In 1997, the
Company assessed and continues to assess the impact of the year 2000 issue on
its operations. Anticipated spending for the year 2000 computer system
programming modifications will be expensed as incurred and, based upon currently
available information, is not expected to have a material impact on the
Company's on-going results of operations. However, if the efforts initiated by
the Committee are not completed on time, or if the cost of updating or replacing
the Company's information systems exceeds the Company's current estimates, the
Year 2000 issue could have a material adverse impact on the Company's business,
financial condition or results of operations.
The Company also intends to determine the extent to which the Company may be
vulnerable to any failures by its service providers, other third party vendors,
and customers to remedy their own Year 2000 issues, and is in the process of
initiating formal communications with these parties. At this time, the Company
is unable to estimate the nature or extent of any potential adverse impact
resulting from the failure of these third parties to achieve Year 2000
compliance, although the Company does not currently anticipate any material
adverse impact. However, there can be no assurance that these third parties will
not experience Year 2000 problems or that any problems would not have a material
effect on the Company's operations. Because the cost and timing of Year 2000
compliance by third parties such as service providers and customers is not
within the Company's control, no assurance can be given with respect to the cost
or timing of such efforts or any potential adverse effects on the Company of any
failure by these third parties to achieve Year 2000 compliance.
24
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Through the Bank's Asset-Liability Management Committee ("ALCO"), which is
comprised of certain senior and middle management personnel, the Bank closely
monitors the level and general mix of interest rate-sensitive assets and
liabilities. The primary objective of the Bank's ALCO program is to manage the
assets and liabilities of the Bank to enhance profitability and capital at
prudent levels of liquidity, interest rate, credit and market risk.
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The Bank's market risk arises primarily from interest rate risk
inherent in lending, investing in marketable securities, deposit taking, and
borrowing activities. To that end, management actively monitors and manages its
interest rate risk exposure. In addition, the Bank is exposed to equity price
risk associated with investing in marketable equity securities, which is not
material.
The Bank's primary objective in managing interest rate risk is to minimize the
adverse impact of changes in interest rates on the Bank's net interest income
and capital, while adjusting the Bank's asset-liability mix to achieve the
maximum yield to cost spread from the mix. However, a sudden and substantial
increase or decrease in interest rates may adversely impact the Bank's earnings
to the extent that interest sensitive assets and liabilities do not change at
the same speed, to the same extent, or on the same basis. It is ALCO's general
policy to closely match the maturity or rate sensitivity of its assets and
liabilities. Strategies implemented to improve the match between interest-rate
sensitive assets and liabilities include, but are not limited to: daily
monitoring of the Bank's changing cash requirements, with particular
concentration on investment in shorter-term securities; a general policy of
originating adjustable-rate and fifteen-year, fixed-rate mortgage loans for the
Bank's own portfolio, monitoring the cost and composition of deposits; and
generally using matched borrowings to fund specified purchases of loan packages
and large loan originations. Occasionally, management may choose to deviate
somewhat from specific matching of maturities of assets and liabilities to take
advantage of an opportunity to enhance yields; for example holding fixed-rate
mortgage loans in portfolio in the last quarter of 1997.
The Bank seeks to manage its liability portfolio in order to effectively plan
and manage growth and maturities of deposits. Plans designed to achieve growth
of different deposit types are reviewed regularly. Programs which are designed
to build multiple relationships with customers and to enhance the Bank's ability
to retain deposits at controlled rates of interest have been implemented.
Management has also adopted a policy of reviewing interest rates on an ongoing
basis on all deposit accounts in order to monitor deposit growth and interest
costs.
In addition to attracting deposits, the Bank has selectively borrowed funds
using advances from the FHLBB and reverse repurchase agreements.
25
<PAGE>
The following table presents, as of December 31, 1997, interest-rate sensitive
assets and liabilities categorized by expected maturity and weighted average
rate. Expected maturities are contractual maturities adjusted for amortization
and prepayments of principal. For adjustable-rate instruments, contractual
maturity is deemed to be the earliest possible interest rate adjustment date.
<TABLE>
<CAPTION>
(Dollars in thousands) Overnight 0-1 yr. 1-2 yrs. 2-3 yrs. 3-4 yrs. 4-5 yrs. 5+ yrs. Total
--------- -------- -------- -------- -------- ------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate-sensitive assets:
Short-term investments $ 2,804 $ -- $ -- $ -- $ -- $ -- $ -- $ 2,804
5.35%
Mortgage-backed investments -- 25,754 20,360 17,001 13,763 10,383 34,703 121,964
6.61% 6.61% 6.61% 6.61% 6.61% 6.61%
Other investment securities -- 125,764 116,873 83,467 44,014 -- 5,075 375,193
6.09% 6.13% 6.42% 6.09% 5.63%
Adjustable-rate mortgages 22,146 157,976 85,966 45,060 36,243 33,456 23,193 404,040
8.95% 8.41% 8.27% 8.06% 7.76% 7.76% 7.31%
Fixed-rate mortgages -- 18,886 17,204 16,584 15,425 16,055 59,825 143,979
7.76% 7.61% 7.60% 7.59% 7.59% 7.40%
All other loans 22,916 2,913 1,180 575 165 39 44 27,832
8.80% 10.88% 10.26% 10.39% 10.00% 10.00% 8.19%
- -------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive assets 47,866 331,293 241,583 162,687 109,610 59,933 122,840 1,075,812
- -------------------------------------------------------------------------------------------------------------------------------
Rate-sensitive liabilities:
NOW accounts 59,368 -- -- -- -- -- -- 59,368
1.00%
Regular savings 254,741 -- -- -- -- -- -- 254,741
2.76%
Money market accounts 70,599 -- -- -- -- -- -- 70,599
3.69%
Term certificates -- 265,321 98,153 15,918 5,709 7,567 134 392,802
5.28% 5.90% 6.11% 5.94% 5.94% 5.59%
Borrowings -- 142,662 50,000 12,717 -- -- 400 205,779
5.66% 6.02% 6.41% 5.61%
- -------------------------------------------------------------------------------------------------------------------------------
Total rate-sensitive liabilities 384,708 407,983 148,153 28,635 5,709 7,567 534 983,289
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The prepayment experience reflected is based on the Bank's historical
experience. Based on the Bank's experience, partial or full payment prior to
contractual maturity can be expected and is reflected. Given the interest rate
environment at December 31, 1997, management applies the assumption that on
average, 7% of the outstanding loan and mortgage-backed securities balances will
prepay annually. When adjustable-rate loans reprice at the rate adjustment date,
they are generally indexed to the one-, three-, or five-year Treasury rate with
an average spread of 275 basis points, with average period caps of 2.0% and
life-time caps of 6.0%. The table does not include loans which have been placed
on non-accrual status.
Assets and liabilities that are immediately replicable are placed in the
overnight column. These financial instruments do not have a contractual maturity
date. Although NOW, savings and money market deposit accounts are subject to
immediate repricing or withdrawal, based on the Bank's history, management
considers these liabilities to have longer lives and less interest rate
sensitivity than term certificates.
26
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
Independent Auditors' Report..................................................28
Consolidated Balance Sheets at December 31, 1997 and 1996.....................29
Consolidated Statements of Income for the years ended December 31, 1997,
1996 and 1995...............................................................30
Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995......................................31
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995.........................................32-33
Notes to Consolidated Financial Statements.................................34-60
27
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Medford Bancorp, Inc.:
We have audited the consolidated balance sheets of Medford Bancorp, Inc. and
subsidiary as of December 31, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each of
the years in the three-year period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company'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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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 Medford Bancorp,
Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
January 21, 1998
28
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
-------------- --------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 13,376 $ 11,900
Short-term investments (Note 2) 2,804 4,529
----------- -----------
Cash and cash equivalents 16,180 16,429
Investment securities available for sale (Note 3) 402,723 268,379
Investment securities held to maturity (Note 3) 103,823 150,591
Restricted equity securities 6,872 5,996
Loans (Notes 4 and 7) 577,577 568,086
Less allowance for loan losses (6,733) (7,231)
----------- -----------
Loans, net 570,844 560,855
----------- -----------
Banking premises and equipment, net (Note 5) 10,738 10,896
Accrued interest receivable 9,472 9,291
Goodwill and deposit-based intangibles 5,748 6,896
Other assets (Note 9) 9,172 9,765
----------- -----------
Total assets $ 1,135,572 $ 1,039,098
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits (Note 6) $ 821,706 $ 792,141
Short-term borrowings (Note 7) 95,670 80,817
Long-term debt (Note 8) 110,109 67,647
Accrued taxes and expenses (Note 12) 3,988 3,701
Other liabilities 2,589 2,271
----------- -----------
Total liabilities 1,034,062 946,577
----------- -----------
Commitments and contingencies (Note 10)
Stockholders' equity (Notes 11 and 13):
Serial preferred stock, $.50 par value, 5,000,000 shares authorized;
none issued -- --
Common stock, 15,000,000 shares authorized; $.50 par value,
4,541,148 and 4,534,648 shares issued, respectively 2,271 2,267
Additional paid-in capital 28,977 28,848
Retained earnings 68,938 61,634
----------- -----------
100,186 92,749
Net unrealized gain (loss) on securities available for sale,
after tax effects (Notes 3 and 9) 1,324 (228)
----------- -----------
Total stockholders' equity 101,510 92,521
----------- -----------
Total liabilities and stockholders' equity $ 1,135,572 $ 1,039,098
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
29
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------- ------------ -------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 46,213 $ 43,454 $ 42,680
Interest on debt securities 28,210 24,167 20,864
Dividends on equity securities 704 652 427
Interest on short-term investments 205 438 434
---------- ---------- ----------
Total interest and dividend income 75,332 68,711 64,405
---------- ---------- ----------
Interest expense:
Interest on deposits 31,328 30,433 28,864
Interest on short-term borrowings 3,896 2,637 2,136
Interest on long-term debt 6,125 3,392 1,724
---------- ---------- ----------
Total interest expense 41,349 36,462 32,724
---------- ---------- ----------
Net interest income 33,983 32,249 31,681
Provision for loan losses (Note 4) 125 215 772
---------- ---------- ----------
Net interest income, after provision for loan losses 33,858 32,034 30,909
---------- ---------- ----------
Other income:
Customer service fees 1,973 2,158 2,347
Gain on sales of investment securities, net (Note 3) 835 413 96
Gain on sale of loans 306 -- --
Miscellaneous 728 744 703
---------- ---------- ----------
Total other income 3,842 3,315 3,146
---------- ---------- ----------
Operating expenses:
Salaries and employee benefits (Note 12) 10,320 9,778 9,551
Occupancy and equipment (Notes 5 and 10) 2,289 1,998 1,910
Deposit insurance 112 13 927
Data processing 1,416 1,606 1,452
Professional fees 672 517 577
Amortization of intangibles 1,206 1,248 1,293
Advertising and marketing 614 722 692
Other general and administrative 2,425 2,193 1,767
---------- ---------- ----------
Total operating expenses 19,054 18,075 18,169
---------- ---------- ----------
Income before income taxes 18,646 17,274 15,886
Provision for income taxes (Note 9) 7,256 6,845 6,463
---------- ---------- ----------
Net income $ 11,390 $ 10,429 $ 9,423
========== ========== ==========
Weighted averages shares outstanding:
Basic 4,540,256 4,522,839 4,409,906
========== ========== ==========
Diluted 4,770,442 4,723,649 4,659,059
========== ========== ==========
Earnings per share:
Basic $ 2.51 $ 2.31 $ 2.14
========== ========== ==========
Diluted $ 2.39 $ 2.21 $ 2.02
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
30
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Net
Unrealized
Gain (Loss) on
Common Stock Additional Securities
--------------------- Paid-In Retained Available
Shares Dollars Capital Earnings for Sale Total
--------- --------- --------- --------- --------- ---------
(In thousands, except number of shares)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 4,395,790 $ 2,198 $ 27,390 $ 48,677 $ (1,902) $ 76,363
Net income -- -- -- 9,423 -- 9,423
Cash dividends declared ($.71 per share) -- -- -- (3,134) -- (3,134)
Issuance of common stock under stock
option plan and related income tax benefits 27,400 14 252 -- -- 266
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- -- -- -- 3,158 3,158
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 4,423,190 2,212 27,642 54,966 1,256 86,076
Net income -- -- -- 10,429 -- 10,429
Cash dividends declared ($.83 per share) -- -- -- (3,761) -- (3,761)
Issuance of common stock under stock
option plan and related income tax benefits 111,458 55 1,206 -- -- 1,261
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- -- -- -- (1,484) (1,484)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1996 4,534,648 2,267 28,848 61,634 (228) 92,521
Net income -- -- -- 11,390 -- 11,390
Cash dividends declared ($.90 per share) -- -- -- (4,086) -- (4,086)
Issuance of common stock under stock
option plan and related income tax benefits 6,500 4 129 -- -- 133
Change in net unrealized gain (loss) on securities
available for sale, after tax effects -- -- -- -- 1,552 1,552
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 4,541,148 $ 2,271 $ 28,977 $ 68,938 $ 1,324 $ 101,510
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
31
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------- ------------ -------------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 11,390 $ 10,429 $ 9,423
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for loan and foreclosed real estate losses 125 265 611
Depreciation and amortization, net 2,163 2,205 1,640
Net gain on sales of foreclosed real estate (44) (15) (299)
Gains on sales of investment securities, net (835) (413) (96)
Gain on sale of loans (306) -- --
Increase in accrued interest receivable and other assets (291) (2,294) (1,341)
Deferred tax benefit (610) (295) (402)
Increase in accrued taxes and expenses
and other liabilities 521 1,576 727
--------- --------- ---------
Net cash provided by operating activities 12,113 11,458 10,263
--------- --------- ---------
Cash flows from investing activities:
Maturities of investment securities available for sale 52,185 38,168 26,210
Proceeds from sales of investment securities available for sale 19,572 32,602 25,363
Purchases of investment securities available for sale (211,653) (153,844) (103,142)
Maturities of investment securities held to maturity 47,034 49,780 97,782
Purchases of investment securities held to maturity and FHLBB stock (876) (34,886) (76,519)
Principal amortization of mortgage-backed investments
available for sale 8,701 4,746 4,796
Loans originated and purchased, net of amortization and payoffs (42,032) (32,163) (8,492)
Proceeds from sale of loans 31,900 -- --
Proceeds from sales of foreclosed real estate 662 384 2,920
Purchases of banking premises and equipment, net (866) (2,018) (755)
--------- --------- ---------
Net cash used in investing activities (95,373) (97,231) (31,837)
--------- --------- ---------
</TABLE>
(continued)
See accompanying notes to consolidated financial statements.
32
<PAGE>
MEDFORD BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------- ------------- -------------
(In thousands)
<S> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits 29,565 290 71
Net increase in borrowings with maturities of three months
or less 44,853 35,536 23,356
Proceeds of short-term borrowings with maturities in
excess of three months -- 25,000 25,000
Repayment of short-term borrowings with maturities in
excess of three months (30,000) (20,000) (25,000)
Proceeds from long-term debt 67,509 39,000 16,400
Repayment of long-term debt (25,047) (3,500) (9,500)
Issuance of common stock 34 610 150
Cash dividends paid (3,903) (3,504) (2,907)
-------- -------- --------
Net cash provided by financing activities 83,011 73,432 27,570
-------- -------- --------
Net change in cash and cash equivalents (249) (12,341) 5,996
Cash and cash equivalents at beginning of year 16,429 28,770 22,774
-------- -------- --------
Cash and cash equivalents at end of year $ 16,180 $ 16,429 $ 28,770
======== ======== ========
Supplementary information:
Interest paid on deposit accounts $ 31,263 $ 30,474 $ 28,773
Interest paid on borrowed funds 9,942 5,640 3,662
Income taxes paid, net of refunds 7,455 6,671 6,234
</TABLE>
See accompanying notes to consolidated financial statements.
33
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1997, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The consolidated financial statements include the accounts of Medford Bancorp,
Inc. (the "Company") and its wholly-owned subsidiary, Medford Savings Bank (the
"Bank"). Pursuant to a Plan of Reorganization and Acquisition (the "Plan") dated
July 29, 1997, the Bank formed the Company as a subsidiary of the Bank and
completed a reorganization on November 26, 1997 whereby the Company became the
Bank's parent company. Each issued and outstanding share of common stock of the
Bank, par value $.50 per share (together with associated preferred stock
purchase rights) was converted into and exchanged for one share of common stock
of the Company, par value $.50 per share (together with associated preferred
stock purchase rights). The Bank's wholly-owned subsidiary, Medford Securities
Corporation engages in the buying, selling, dealing in, or holding of
securities. All significant intercompany balances and transactions have been
eliminated in consolidation.
Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
consolidated balance sheet and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. A
material estimate that is particularly susceptible to significant change in the
near term relates to the determination of the allowance for losses on loans.
Business
The Company is principally engaged in the business of attracting deposits from
the general public, originating residential and commercial real estate mortgages
and consumer and commercial loans, and investing in securities. The Company is
headquartered in Medford, Massachusetts, which is located approximately seven
miles north of downtown Boston. It has a network of sixteen banking offices
located in Medford, Malden, Arlington, Belmont, Burlington, North Reading,
Waltham, and Wilmington. The Company's primary market area includes these
communities as well as other cities and towns in Middlesex County and the
surrounding area north of Boston.
Reclassification
Certain amounts have been reclassified in the 1996 and 1995 consolidated
financial statements to conform to the 1997 presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash, amounts due from banks and short-term
investments.
Short-term Investments
Short-term investments mature within one year and are carried at cost.
34
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment Securities
Investments in debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to maturity" and reflected
at amortized cost. All other marketable investment securities are classified as
"available for sale" and reflected on the balance sheet at fair value, with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity. Purchase premiums and discounts on debt
securities are amortized to earnings by a method which approximates the interest
method over the terms of the investments. Declines in the value of investments
that are deemed to be other than temporary are reflected in earnings when
identified. Gains and losses on disposition of investments are recorded on the
trade date and computed by the specific identification method.
Restricted equity securities include stock of the Federal Home Loan Bank of
Boston and The Savings Bank Life Insurance Company of Massachusetts, both of
which are carried at cost.
Loans
The Company grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans in
the eastern New England area. The ability of the Company's debtors to honor
their obligations is dependent upon the real estate, construction, and general
economic sectors of that region.
Loans, as reported, have been increased by the net premium on loans acquired and
net deferred loan origination costs, and reduced by unadvanced loan funds and
the allowance for loan losses.
Interest on loans is recognized on a simple interest basis and is not accrued on
loans which are ninety days or more past due. Loans may be placed on non-accrual
status prior to becoming ninety days past due if the collection of principal and
interest is, in the opinion of management, doubtful. Loans which are identified
as impaired are generally placed on non-accrual status. Interest income
previously accrued on such loans is reversed against current period earnings.
Interest income on all non-accrual loans is recognized only to the extent of
interest payments received.
Premiums and discounts on loans acquired and net deferred loan origination costs
are amortized as an adjustment of the related loan yields by the interest method
over the contractual lives of the loans.
Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan losses
charged to operations and is maintained at a level considered adequate to
provide for reasonably foreseeable loan losses.
The provision and the level of the allowance are evaluated on a regular basis by
management and are based upon management's periodic review of the collectibility
of the loans in light of historical experience, known inherent risks in the
nature and volume of the loan portfolio, levels of non-performing loans, adverse
situations that may affect the borrower's ability to repay, trends in
delinquencies and charge-offs, estimated value of any underlying collateral, and
prevailing economic conditions. This evaluation is inherently subjective as it
requires estimates that are susceptible to significant change. Ultimate losses
may vary from current estimates and future additions to the allowance may be
necessary.
Loan losses are charged against the allowance when management believes the
collectibility of the loan balance is unlikely. Subsequent recoveries, if any,
are credited to the allowance.
35
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Loan Losses (concluded)
A loan is considered impaired when, based on current information and events, it
is probable that a creditor will be unable to collect the scheduled principal or
interest when due according to the contractual terms of the loan agreement.
Factors considered by management in determining impairment include payment
status, collateral value, and the probability of collecting scheduled principal
and interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. An impaired loan
is required to be measured on a loan-by-loan basis by either the present value
of expected future cash flows discounted at the loan's effective interest rate,
the loan's obtainable market price, or the fair value of the collateral if the
loan is collateral dependent. All of the Company's loans which have been
identified as impaired have been measured by the fair value of existing
collateral.
Larger groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Company does not separately identify individual
consumer loans for impairment disclosures.
Foreclosed Real Estate
Real estate properties acquired through foreclosure, included in other assets,
are initially recorded at the lower of cost or fair value at the date of
foreclosure. Costs relating to development and improvement of property are
capitalized, whereas costs relating to holding property are expensed. Valuations
are periodically performed by management, and an allowance for losses is
established through a charge to operations if the carrying value of a property
exceeds its fair value less estimated costs to sell.
Banking Premises and Equipment
Land is carried at cost. Buildings and equipment are carried at cost, less
accumulated depreciation computed on the straight-line method over the estimated
useful lives of the assets. It is the Bank's general practice to charge the cost
of maintenance and repairs to earnings when incurred; major expenditures for
betterments are capitalized and depreciated.
Intangible Assets
Intangible assets pertaining to core deposits acquired are amortized over 15
years on an accelerated basis, based on the expected run-off of the related
deposits. Goodwill is amortized by the straight-line method over periods ranging
from 10 to 15 years.
36
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
Deferred tax assets and liabilities are reflected at currently enacted income
tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted accordingly
through the provision for income taxes. The Company's base amount of its federal
income tax reserve for loan losses is a permanent difference for which there is
no recognition of a deferred tax liability. However, the loan loss allowance
maintained for financial reporting purposes is a temporary difference with
allowable recognition of a related deferred tax asset, if deemed realizable.
Pension Plan
The compensation cost of an employee's pension benefit is recognized on the net
periodic pension cost method over the employee's approximate service period. The
aggregate cost method is utilized for funding purposes.
Stock Compensation Plans
In accordance with provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company has
elected to continue to measure compensation cost for its stock compensation
plans using the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees," whereby compensation
cost is the excess, if any, of the quoted market price of the stock at the grant
date (or other measurement date) over the amount an employee must pay to acquire
the stock. Stock options issued under the Company's stock option plans have no
intrinsic value at the grant date, and under Option No. 25 no compensation cost
is recognized for them. The Company is required to make pro forma disclosures of
net income and earnings per share and other disclosures, as if compensation cost
had been measured at the grant date based on the fair value of the award and
recognized over the service period, which is usually the vesting period. The pro
forma disclosures include the effects of all awards granted on or after January
1, 1995.
Earnings Per Share
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, "Earnings per Share", which requires that earnings per share be
calculated on a basic and a dilutive basis. Basic earnings per share represents
income available to common stock divided by the weighted-average number of
common shares outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive potential
common shares had been issued, as well as any adjustment to income that would
result from the assumed conversion. Potential common shares that may be issued
by the Company relate solely to outstanding stock options, and are determined
using the treasury stock method. The assumed conversion of outstanding dilutive
stock options would increase the shares outstanding but would not require an
adjustment to income as a result of the conversion. The Statement is effective
for interim and annual periods ending after December 15, 1997, and requires the
restatement of all prior-period earnings per share data presented. Accordingly,
the Company has restated all earnings per share data presented herein.
For the years ended December 31, 1997, 1996 and 1995, options applicable to
27,000 shares, 3,000 shares and 970 shares, respectively, were anti-dilutive and
excluded from the diluted earnings per share computations.
37
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Recent Accounting Pronouncements
In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
effective for fiscal years beginning after December 15, 1997. Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Certain FASB statements, however, require entities to
report specific changes in assets and liabilities, such as unrealized gains and
losses on available-for-sale securities, as a separate component of the equity
section of the balance sheet. Such items, along with net income, are components
of comprehensive income. SFAS No. 130 requires that all items of comprehensive
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Additionally, SFAS No. 130 requires
that the accumulated balance of other comprehensive income be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The Company will adopt these disclosure
requirements beginning in the first quarter of 1998.
In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," effective for fiscal years beginning after
December 15, 1997. SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments in annual and
interim financial statements. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
Generally, financial information is required to be reported on the basis that it
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. The Statement also requires descriptive
information about the way that the operating segments were determined, the
products and services provided by the operating segments, differences between
the measurements used in reporting segment information and those used by the
enterprise in its general-purpose financial statements, and changes in the
measurement of segment amounts from period to period. Management has not yet
determined how the adoption of SFAS No. 131 will impact the Company's financial
reporting.
2. SHORT-TERM INVESTMENTS
Short-term investments consist of the following:
December 31,
---------------------------
1997 1996
----------- -----------
(In thousands)
Federal funds sold $2,802 $4,500
Other interest-bearing deposits 2 29
------ ------
Total short-term investments $2,804 $4,529
====== ======
38
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT SECURITIES
The amortized cost and fair value of investment securities, with gross
unrealized gains and losses at December 31, 1997 and 1996, follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1997 Cost Gains Losses Value
- ---------------------------------------------- ------------- ------------ ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale
Debt securities:
Corporate bonds $176,093 $ 1,102 $ (107) $177,088
Mortgage-backed 121,964 641 (158) 122,447
U.S. Government and federal agency 95,277 482 (232) 95,527
-------- -------- -------- --------
Total debt securities 393,334 2,225 (497) 395,062
Marketable equity securities 7,233 482 (54) 7,661
-------- -------- -------- --------
Total securities available
for sale $400,567 $ 2,707 $ (551) $402,723
======== ======== ======== ========
Securities Held to Maturity
U.S. Government and federal agency $ 95,052 $ 326 $ (59) $ 95,319
Corporate bonds 8,771 12 -- 8,783
-------- -------- -------- --------
Total securities held to maturity $103,823 $ 338 $ (59) $104,102
======== ======== ======== ========
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
- ---------------------------------------------- ------------- ------------ ------------ -------------
(In thousands)
<S> <C> <C> <C> <C>
Securities Available for Sale
Debt securities:
State and municipal $ 88 $ 1 $ -- $ 89
Corporate bonds 150,774 745 (350) 151,169
Mortgage-backed 28,101 82 (369) 27,814
U.S. Government and federal agency 83,301 280 (930) 82,651
-------- -------- -------- --------
Total debt securities 262,264 1,108 (1,649) 261,723
Marketable equity securities 6,538 236 (118) 6,656
-------- -------- -------- --------
Total securities available
for sale $268,802 $ 1,344 $ (1,767) $268,379
======== ======== ======== ========
Securities Held to Maturity
U.S. Government and federal agency $141,868 $ 522 $ (299) $142,091
Corporate bonds 8,723 32 -- 8,755
-------- -------- -------- --------
Total securities held to maturity $150,591 $ 554 $ (299) $150,846
======== ======== ======== ========
</TABLE>
39
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT SECURITIES (concluded)
The amortized cost and fair value of debt securities by contractual maturity at
December 31, 1997 is as follows:
<TABLE>
<CAPTION>
Available for Sale Held to Maturity
--------------------------- ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
Within 1 year $ 46,073 $ 46,107 $ 69,689 $ 69,730
After 1 year through 5 years 217,230 218,451 34,134 34,372
After 5 years through 10 years 8,067 8,057 -- --
-------- -------- -------- --------
271,370 272,615 103,823 104,102
Mortgage-backed 121,964 122,447 -- --
-------- -------- -------- --------
$393,334 $395,062 $103,823 $104,102
======== ======== ======== ========
</TABLE>
At December 31, 1997, U.S. Government obligations with an amortized cost of
$92,352,000, a fair value of $92,612,000 and accrued interest receivable of
$1,296,000 have been pledged as collateral for securities sold under agreements
to repurchase. In addition, U.S. Government obligations with an amortized cost
of $7,997,000 and a fair value of $8,057,000 have been pledged as collateral for
a line of credit and to secure public funds. (See Note 7.)
For the years ended December 31, 1997, 1996 and 1995, proceeds from the sales of
securities available for sale amounted to $19,572,000, $32,602,000 and
$25,363,000, respectively. Gross realized gains amounted to $800,000, $412,000
and $211,000, respectively. There were no gross realized losses in 1997, $56,000
in 1996 and $26,000 in 1995. For the years ended December 31, 1997, 1996 and
1995, proceeds from the sales of securities held to maturity that were sold
within three months of maturity amounted to $12,034,000, $29,973,000 and
$59,782,000, respectively. These sales have been included in the Statement of
Cash Flows as maturities. Gross realized gains on these sales amounted to
$35,000, $61,000 and $4,000, respectively, and gross realized losses amounted to
$4,000 and $93,000 in 1996 and 1995, respectively.
Mortgage-backed investments consist of adjustable-rate collateralized mortgage
obligations and fixed-rate participation certificates guaranteed by the Federal
National Mortgage Association, the Federal Home Loan Mortgage Corporation or the
Government National Mortgage Association.
In November 1995, the FASB issued guidance allowing a one-time reassessment of
an entity's investment classifications during the period November 15, 1995 to
December 31, 1995. As a result, the amortized cost of securities held to
maturity that were transferred to available for sale amounted to $26,987,000 and
the related unrealized loss amounted to $206,000.
40
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS
A summary of the balances of loans follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
-------------- ---------------
(In thousands)
<S> <C> <C>
Mortgage loans on real estate:
Residential 1 - 4 family $ 389,593 $ 380,627
Commercial 124,094 123,158
Construction 21,989 18,155
Second mortgages 1,539 1,928
Equity lines of credit 22,146 21,169
--------- ---------
559,361 545,037
Less: Unadvanced loan funds (10,711) (9,436)
--------- ---------
548,650 535,601
--------- ---------
Other loans:
Commercial 14,941 11,014
Personal 2,432 2,219
Education and other 10,499 18,329
--------- ---------
27,872 31,562
--------- ---------
Add: Net premium on loans acquired 270 354
Net deferred loan origination costs 785 569
--------- ---------
Total loans 577,577 568,086
Less allowance for loan losses (6,733) (7,231)
--------- ---------
Loans, net $ 570,844 $ 560,855
========= =========
</TABLE>
41
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. LOANS (concluded)
An analysis of the allowance for loan losses follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 7,231 $ 7,466 $ 7,539
Provision for loan losses 125 215 772
------- ------- -------
7,356 7,681 8,311
Recoveries 208 380 233
Loans charged-off (831) (830) (1,078)
------- ------- -------
Balance at end of year $ 6,733 $ 7,231 $ 7,466
======= ======= =======
</TABLE>
The following is a summary of the recorded investment in impaired and
non-accrual loans:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996
------------- -------------
(In thousands)
<S> <C> <C>
Impaired loans with no valuation allowance $ 302 $ 870
Impaired loans with a corresponding valuation allowance 1,424 3,154
------ ------
Total impaired loans $1,726 $4,024
====== ======
Corresponding valuation allowance $ 85 $ 968
====== ======
Non-accrual loans $1,726 $3,439
====== ======
</TABLE>
No additional funds are committed to be advanced in connection with impaired
loans.
For the years ended December 31, 1997, 1996 and 1995, the average recorded
investment in impaired loans amounted to $3,806,000, $4,751,000 and $3,827,000,
respectively. The Bank recognized interest income on impaired loans, on a cash
basis, of $74,000 in 1997, $153,000 in 1996 and $167,000 in 1995 during the
periods that they were impaired.
42
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation of banking premises and
equipment and their estimated useful lives follows:
<TABLE>
<CAPTION>
December 31,
-------------------------- Estimated
1997 1996 Useful Lives
----------- ----------- -------------------
(In thousands)
<S> <C> <C> <C>
Banking Premises:
Land $ 1,249 $ 782 --
Buildings 9,355 9,634 5 - 50 years
Equipment 5,652 6,780 3 - 25 years
-------- --------
16,256 17,196
Less accumulated depreciation (5,518) (6,300)
-------- --------
$ 10,738 $ 10,896
======== ========
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1996 and 1995
amounted to $1,024,000, $772,000 and $713,000, respectively.
6. DEPOSITS
A summary of deposit balances, by type, is as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1997 1996
------------- -------------
(In thousands)
<S> <C> <C>
Demand $ 44,196 $ 40,124
NOW 59,368 60,839
Regular savings 254,741 245,891
Money market deposits 70,599 69,880
-------- --------
Total non-certificate accounts 428,904 416,734
-------- --------
Term certificates ($100,000 or more) 53,794 46,564
Other term certificates 339,008 328,843
-------- --------
Total term certificates 392,802 375,407
-------- --------
Total deposits $821,706 $792,141
======== ========
</TABLE>
43
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. DEPOSITS (concluded)
A summary of term certificate accounts, by maturity, is as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------------ ------------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------------- ------------- ------------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Within 1 year $265,321 5.28% $247,599 5.17%
Over 1 year to 3 years 114,071 5.93 113,220 5.64
Over 3 years to 5 years 13,276 5.94 14,579 6.18
Over 5 years 134 5.59 9 6.08
-------- --------
$392,802 5.48% $375,407 5.35%
======== ========
</TABLE>
7. SHORT-TERM BORROWINGS
Short-term borrowings consist of the following:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------------- ----------------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
----------- ------------- ----------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Securities sold under agreements to repurchase $93,611 5.73% $49,584 5.99%
Federal Reserve Bank of Boston advances 2,059 5.29 1,233 5.00
Federal Home Loan Bank of Boston ("FHLBB") advances -- -- 30,000 5.56
------- -------
$95,670 5.72% $80,817 5.82%
======= =======
</TABLE>
Securities sold under agreements to repurchase are borrowings that mature within
one year and are secured by U.S. Government obligations. (See Note 3.) The
amount of securities collateralizing the agreements to repurchase remains in
investment securities and the obligation to repurchase securities sold is
reflected as a liability in the consolidated balance sheets.
The Company has a $2,000,000 line of credit (treasury, tax and loan) with the
Federal Reserve Bank of Boston, all of which was advanced at December 31, 1997.
The interest rate adjusts weekly and certain U.S. Government obligations have
been pledged as collateral for the line of credit. (See Note 3.)
The Company also has an available line of credit with the FHLBB at an interest
rate that adjusts daily. Borrowings under the line are limited to 2% of the
Bank's total assets. All borrowings from the FHLBB are secured by a blanket lien
on qualified collateral, defined principally as 75% of the carrying value of
first mortgage loans on owner-occupied residential property and 90% of the
market value of U.S. Government and federal agency securities.
44
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. LONG-TERM DEBT
Long-term debt consists of FHLBB advances secured by a blanket lien on qualified
collateral (see Note 7), as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------------- ---------------------------
Weighted Weighted
Average Average
Maturity Amount Rate Amount Rate
- --------------------- ----------- ----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1997 $ -- --% $ 25,047 6.23%
1998 46,992 5.91 32,200 5.86
1999 50,000 6.02 5,000 5.87
2000 12,717 6.41 5,000 7.22
2005 400 5.61 400 5.61
--------- --------
$ 110,109 6.02% $ 67,647 6.10%
========= ========
</TABLE>
9. INCOME TAXES
Allocation of the provision for federal and state income taxes between current
and deferred portions is as follows:
Years Ended December 31,
------------------------------------
1997 1996 1995
--------- ---------- ---------
(In thousands)
Current tax provision:
Federal $ 6,672 $ 5,774 $ 5,206
State 1,194 1,366 1,659
------- ------- -------
7,866 7,140 6,865
------- ------- -------
Deferred tax benefit:
Federal (525) (240) (306)
State (85) (55) (96)
------- ------- -------
(610) (295) (402)
------- ------- -------
$ 7,256 $ 6,845 $ 6,463
======= ======= =======
45
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (continued)
The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Statutory rates 35.0% 34.0% 34.0%
Increase resulting from:
State taxes, net of federal tax benefit 3.9 5.0 6.6
Other, net -- .6 .1
---- ---- ----
Effective tax rates 38.9% 39.6% 40.7%
==== ==== ====
</TABLE>
The components of the net deferred tax asset, included in other assets, are as
follows:
December 31,
-------------------------
1997 1996
---------- -----------
(In thousands)
Deferred tax assets:
Federal $ 4,215 $ 4,175
State 1,537 1,629
------- -------
5,752 5,804
------- -------
Deferred tax liabilities:
Federal (2,098) (1,774)
State (642) (601)
------- -------
(2,740) (2,375)
------- -------
Net deferred tax asset $ 3,012 $ 3,429
======= =======
46
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES (concluded)
The tax effects of each type of income and expense item that give rise to
deferred taxes are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
---------- ---------
(In thousands)
<S> <C> <C>
Cash basis of accounting $ 124 $ 55
Investments:
Net unrealized (gain) loss on securities available for sale (832) 195
Other (284) (193)
Depreciation (980) (901)
Deferred loan origination fees 100 (231)
Allowance for loan losses 2,482 2,465
Employee benefit plans 1,614 1,128
Other 788 911
------- -------
Net deferred tax asset $ 3,012 $ 3,429
======= =======
</TABLE>
A summary of the change in the net deferred tax asset is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1997 1996 1995
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 3,429 $ 2,151 $ 3,915
Deferred tax effect of the change in net unrealized
gains and losses on securities available for sale (1,027) 983 (2,166)
Deferred tax benefit for the year 610 295 402
------- ------- -------
Balance at end of year $ 3,012 $ 3,429 $ 2,151
======= ======= =======
</TABLE>
The federal income tax reserve for loan losses at the Company's base year is
$8,265,000. If any portion of the reserve is used for purposes other than to
absorb the losses for which established, approximately 150% of the amount
actually used (limited to the amount of the reserve) would be subject to
taxation in the fiscal year in which used. As the Company intends to use the
reserve only to absorb loan losses, a deferred income tax liability of
$3,389,000 has not been provided.
47
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding commitments and
contingencies which are not reflected in the consolidated financial statements.
Employment and Special Termination Agreements
The Company has entered into an employment agreement with the President and
Chief Executive Officer that provides for a specified minimum annual
compensation and the continuation of benefits currently received. However, such
employment may be terminated for cause, as defined, without incurring any
continuing obligations. The Company and/or the Bank has also entered into
special termination agreements with the President and Chief Executive Officer
and certain senior executives. The agreements generally provide for certain
lump-sum severance payments within a three-year period following a "change in
control," as defined in the agreements.
Loan Commitments
The Company 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.
These financial instruments include commitments to extend credit. Such
commitments involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized on the consolidated balance sheet. The
Company's exposure to credit loss is represented by the contractual amount of
these commitments. The Company uses the same credit policies in making
commitments as it does for on-balance-sheet instruments.
The following financial instruments were outstanding whose contract amounts
represent credit risk:
<TABLE>
<CAPTION>
Contract Amount
at December 31,
------------------------------
1997 1996
----------- -----------
(In thousands)
<S> <C> <C>
Commitments to grant loans $ 14,918 $ 13,607
Unadvanced funds on equity lines of credit 24,848 20,479
Unadvanced funds on commercial lines of credit 8,407 6,884
</TABLE>
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
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for lines of credit may expire without
being drawn upon. Therefore, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. Funds disbursed under these financial
instruments are generally collateralized by real estate, except for the
commercial lines of credit which are generally secured by the business assets of
the borrower.
48
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (concluded)
Operating Lease Commitments
Pursuant to the terms of noncancelable lease agreements in effect at December
31, 1997, pertaining to banking premises and equipment, future minimum rent
commitments aggregate $540,000 through the year 2002. In addition, the leases
contain options to extend for periods up to fifteen years. Total rent expense
for the years ended December 31, 1997, 1996 and 1995 amounted to $290,000,
$282,000 and $270,000, respectively.
Other Commitments and Contingencies
Various legal claims also arise from time to time in the normal course of
business which, in the opinion of management, will not have a material effect on
the Company's consolidated financial statements.
11. STOCKHOLDERS' EQUITY
Minimum regulatory capital requirements
The Company (on a consolidated basis) and the Bank are 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 Company's and Bank's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Company and/or the Bank must meet specific capital
guidelines that involve quantitative measures of their assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. Holding companies are not subject to prompt corrective action
provisions. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1997 and
1996, that the Company and the Bank met all capital adequacy requirements to
which they are subject.
49
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY (continued)
Minimum regulatory capital requirements (continued)
As of December 31, 1997, the Company and the Bank were well capitalized under
the applicable regulatory framework. To be categorized as well capitalized, the
Company and the Bank must maintain minimum total risk-based and Tier 1
risk-based ratios as set forth in the following tables. In addition, the Bank
must maintain a minimum Tier 1 capital to average assets to be categorized as
well capitalized. As well capitalized entities, the Company and the Bank are
entitled to engage in specified activities on a more expedited basis than
entities that are not well capitalized. There are no conditions or events that
management believes have changed the Company's or Bank's category. The Company's
and the Bank's actual capital amounts and ratios as of December 31, 1997, and
the Bank's actual capital amounts and ratios as of December 31, 1996, are also
presented in the tables.
<TABLE>
<CAPTION>
December 31, 1997
-----------------------------------------------------------------------------------
Minimum
Minimum To Be Categorized
Capital as Well
Actual Requirement Capitalized
------------------------- ------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- -------- ------------- -------- ------------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to Risk-Weighted Assets:
Consolidated $100,938 15.8% $ 51,267 8.0% $ 64,080 10.0%
Bank 93,910 14.7 51,267 8.0 64,080 10.0
Tier 1 Capital to Risk-Weighted Assets:
Consolidated 94,205 14.7 25,633 4.0 38,450 6.0
Bank 87,177 13.6 25,633 4.0 38,450 6.0
Tier 1 Capital to Average Assets:
Consolidated 94,205 8.5 43,334 4.0 N/A N/A
54,167 5.0
Bank 87,177 7.8 43,334 4.0 54,167 5.0
54,167 5.0
</TABLE>
50
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY (concluded)
Minimum regulatory requirements (concluded)
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------------------------------------------
Minimum
To Be Well
Minimum Capitalized Under
Capital Prompt Corrective
Actual Requirement Action Provisions
------------------------- -------------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- -------- ------------- --------- ------------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total Capital to risk $ 92,796 16.0% $ 46,409 8.0% $ 58,012 10.0%
weighted assets - Bank
Tier 1 Capital to risk 85,565 14.8 23,205 4.0 34,807 6.0
weighted assets - Bank
Tier 1 Capital to average 85,565 8.4 40,752 4.0 50,940 5.0
assets - Bank 50,940 5.0
</TABLE>
Restrictions on dividends, loans and advances
Federal and state banking regulations place certain restrictions on dividends
paid and loans or advances made by the Bank to the Company. The total amount of
dividends which may be paid at any date under Massachusetts law is generally
limited to the retained earnings of the Bank, and loans or advances are limited
to 10% of the Bank's capital stock and surplus, as defined, (which for this
purpose represents Tier 1 and Tier 2 capital, as calculated under the risk-based
capital guidelines, plus the balance of the allowance for loan losses excluded
from Tier 2 capital) on a secured basis.
In addition, dividends paid by the Bank to the Company would be prohibited if
the effect thereof would cause the Bank's capital to be reduced below applicable
minimum capital requirements.
At December 31, 1997, $51,267,000 of the Company's equity in the Bank was
restricted and funds available for loans or advances amounted to $8,717,000.
Shareholder Rights Plan
The Company has a Shareholder Rights Plan which distributed one preferred stock
purchase right for each outstanding share of common stock. Such rights only
become exercisable, or transferable apart from the common stock, ten business
days after a person or group acquires beneficial ownership of, or commences a
tender or exchange offer for, 15% or more of the Company's common stock, or the
declaration by the Board of Directors that any person is an Adverse Person. Each
right may then be exercised to acquire one one-hundredth of a share of Series A
Junior Participating Cumulative Preferred Stock at an exercise price of $90,
subject to adjustment. If the Company is acquired in a merger or other business
combination transaction, or 50% of the Company's assets or earning power is
sold, the rights entitle holders to acquire common stock of the Acquiring Person
having a value twice the exercise price of the rights. The rights may be
redeemed in whole by the Company at $.01 per right at any time until the
earliest of (i) the declaration of a person as an Adverse Person, (ii) the tenth
day following public announcement that a 15% position has been acquired, or
(iii) the expiration date of the Company's Amended and Restated Shareholder
Rights Agreement. The rights will expire on September 22, 2003.
51
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EMPLOYEE BENEFIT PLANS
Pension Plan
The Bank provides basic and supplemental pension benefits for eligible employees
through the Savings Banks Employees Retirement Association Pension Plan. Each
employee reaching the age of 21 and having completed at least 1,000 hours of
service in one twelve-month period beginning with such employee's date of
employment, or any anniversary thereof, automatically becomes a participant in
the pension plan. Participants are fully vested after three years of such
service.
Net periodic pension expense for the plan years ended October 31, 1997, 1996 and
1995 consisted of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
(In thousands)
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 511 $ 514 $ 395
Interest cost on projected benefits 313 305 283
Actual return on plan assets (603) (503) (544)
Net amortization and deferral (19) (19) (19)
Net loss 224 218 292
----- ----- -----
Net periodic pension expense $ 426 $ 515 $ 407
===== ===== =====
</TABLE>
Total pension expense for the years ended December 31, 1997, 1996 and 1995
amounted to $426,000, $540,000 and $402,000, respectively.
According to the Association's actuary, a reconciliation of the funded status of
the plan is as follows:
<TABLE>
<CAPTION>
October 31,
--------------------------
1997 1996
----------- -----------
(In thousands)
<S> <C> <C>
Plan assets at fair value $ 4,830 $ 3,994
Projected benefit obligation 4,965 4,180
------- -------
Excess of projected benefit obligation over plan assets (135) (186)
Unamortized net surplus since adoption of SFAS No. 87 (265) (284)
Unrecognized net gain (1,577) (1,431)
------- -------
Accrued pension liability $(1,977) $(1,901)
======= =======
</TABLE>
The accumulated benefit obligation (substantially all vested) at October 31,
1997 amounted to $2,924,000, which was less than the fair value of plan assets
at that date.
For the plan years ended October 31, 1997, 1996 and 1995, actuarial assumptions
include an assumed discount rate on benefit obligations of 7.25%, 7.50% and
7.00%, respectively, and an expected long-term rate of return on plan assets of
8.00% for all years. An annual salary increase of 5% was utilized for all years.
52
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. EMPLOYEE BENEFIT PLANS (concluded)
401(k) Plan
The Bank maintains a 401(k) plan that provides for voluntary contributions by
participating employees ranging from 1 percent to 15 percent of their
compensation, subject to certain limits based on federal tax laws. Each employee
reaching the age of 21 and having completed at least 1,000 hours of service in
one twelve-month period beginning with such employee's date of employment, or
any anniversary thereof, becomes eligible to participate in the plan. The Bank
may choose to match a portion of the employees' contributions. During the years
ended December 31, 1997, 1996 and 1995, the Bank made matching contributions
equal to twenty-five percent (25%) of the first six percent (6%) of annual
compensation contributed to the plan. For the years ended December 31, 1997,
1996 and 1995, expense attributable to the Plan amounted to $77,000, $69,000 and
$75,000, respectively.
Incentive Plan
The Bank has an executive incentive plan whereby all management executives are
eligible to receive a bonus, proportionate to their respective salary, if the
Bank meets or exceeds certain base standards. The structure of the plan is
reviewed on an annual basis by a designated committee, and performance goals are
then established. Incentive compensation expense amounted to $166,000, $101,000
and $181,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
Executive Supplemental Benefit Agreement
The Company has entered into supplemental executive retirement agreements with
its President that are designed to provide benefits lost under defined benefit
plans and to increase overall retirement benefits. The present value of future
benefits is being accrued over the term of employment. Supplemental compensation
expense for the years ended December 31, 1997, 1996 and 1995 amounted to
$99,000, $36,000 and $42,000, respectively.
13. STOCK OPTION PLANS
The Company has stock option plans, for the benefit of directors, officers and
full-time employees, covering 736,000 shares of common stock under the Medford
Savings Bank 1986 Stock Option Plan (the options under which have all been
granted) and 200,000 shares of common stock under the Medford Bancorp, Inc.
Stock Option Plan. Both "Incentive Stock Options" and "Non-qualified Stock
Options" may be granted under the plans, with a maximum option term of ten
years. Under the terms of the plans, stock options may be granted as determined
appropriate by the Compensation and Options Committee of the Board of Directors,
and will have an exercise price equal to, or in excess of, the fair market value
of a share of common stock of the Company on the date the option is granted. The
Company applies APB Opinion 25 and related interpretations in accounting for the
plans. (See Note 1.) The plans also permit the inclusion of stock appreciation
rights ("SARs") in any option granted which would permit the optionee to
surrender an option (or portion thereof) for cancellation and to receive cash or
common stock equal to the excess, if any, of the then fair market value of the
common stock subject to such option or portion thereof over the option exercise
price. No SARs have been granted to date.
53
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLANS (continued)
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method prescribed by SFAS No. 123, the Company's net
income and earnings per share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1997 1996 1995
------------- ------------ -------------
(In thousands, except per share data)
<S> <C> <C> <C>
Net income:
As reported $ 11,390 $ 10,429 $ 9,423
Pro forma 11,044 10,351 9,391
Basic earnings per share:
As reported $ 2.51 $ 2.31 $ 2.14
Pro forma 2.43 2.29 2.13
Diluted earnings per share:
As reported $ 2.39 $ 2.21 $ 2.02
Pro forma 2.32 2.19 2.02
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
Years Ended December 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Dividend yield 3.7% 3.7% 3.7%
Expected life 10 years 10 years 10 years
Expected volatility 59% 66% 66%
Risk-free interest rate 5.7% 6.6% 6.9%
54
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLANS (concluded)
Stock option activity under the plans is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------------------------------------------------------
1997 1996 1995
-------------------------- --------------------------- ------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Amount Price Amount Price Amount Price
----------- ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Shares under option:
Outstanding at beginning of year $ 354,176 $ 10.42 $ 453,634 $ 8.90 $ 482,034 $ 8.71
Granted 33,000 36.76 12,000 22.13 6,000 18.09
Cancelled -- -- -- -- (7,000) 17.38
Exercised (6,500) 5.19 (111,458) 5.48 (27,400) 5.47
--------- --------- ---------
Outstanding at end of year 380,676 12.81 354,176 10.42 453,634 8.90
========= ========= =========
Exercisable at end of year 344,076 9.78 315,299 9.33 377,980 7.35
========= ========= =========
Weighted average fair value of
options granted during the year $ 17.48 $ 10.72 $ 8.79
========= ========= =========
</TABLE>
Information pertaining to options outstanding at December 31, 1997 is as
follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- --------------- ------------- ----------- -------------- -----------
<S> <C> <C> <C> <C> <C>
$5.19 - $6.13 148,200 3.1 years $ 5.26 148,200 $ 5.26
$7.63 - $10.88 90,886 4.7 9.50 90,886 9.50
$12.25 - $14.44 16,000 6.1 13.99 15,100 13.96
$17.25 - $19.44 77,590 6.6 18.83 77,590 18.83
$20.75 - $24.88 18,000 8.6 22.38 12,300 21.98
$25.75 - $39.50 30,000 9.9 38.13 -- --
------- -------
Outstanding at end of year 380,676 5.1 years $12.81 344,076 $ 9.78
======= =======
</TABLE>
14. EMPLOYEES' STOCK OWNERSHIP PLAN
The Company has an Employees' Stock Ownership Plan ("ESOP") for the benefit of
each employee that has reached the age of 21 and has completed at least 500
hours of service with the Company in the previous twelve-month period. The
Company may contribute to the ESOP cash or shares of common stock as voted by
the Board of Directors, not to exceed the maximum amount deductible for federal
income tax purposes. At December 31, 1997, the ESOP held 250,245 shares, all of
which have been allocated to participants. Dividends on all shares held by the
ESOP are allocated to participants on a pro rata basis. There were no
contributions to the ESOP for the years ended December 31, 1997, 1996 or 1995.
55
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires
disclosures of estimated fair values of all financial instruments where it is
practicable to estimate such values. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. Accordingly, the derived fair value estimates cannot be substantiated by
comparison to independent markets and, in many cases, could not be realized in
immediate settlement of the instrument. Statement No. 107 excludes certain
financial instruments and all non-financial instruments from its disclosure
requirements. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amounts of cash and short-term
instruments approximate fair values.
Investment securities: Fair values for investment securities, excluding Federal
Home Loan Bank of Boston stock, are based on quoted market prices. The carrying
values of restricted equity securities approximate fair value based on the
redemption provisions of the Federal Home Loan Bank of Boston.
Loans: For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values. Fair values for
other loans (e.g., commercial real estate and investment property, mortgage
loans, commercial and industrial 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. Fair values for non-performing
loans are estimated using discounted cash flow analyses or underlying collateral
values, where applicable.
Deposits: The fair values disclosed for non-certificate accounts are, by
definition, equal to the amount payable on demand at the reporting date which is
the carrying amount. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities on time deposits.
Borrowings: The carrying amounts of short-term borrowings maturing within 90
days approximate their fair values. Fair values of other borrowings are
estimated using discounted cash flow analyses based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest: The carrying amounts of accrued interest approximate fair
value.
Off-balance-sheet instruments: Fair values for off-balance-sheet lending
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing, and are not material.
56
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded)
The estimated fair values, and related carrying amounts, of the Company's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1997 1996
------------------------ -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 16,180 $ 16,180 $ 16,429 $ 16,429
Investment securities available for sale 402,723 402,723 268,379 268,379
Investment securities held to maturity 103,823 104,102 150,591 150,846
Restricted equity securities 6,782 6,782 5,996 5,996
Loans, net 570,844 575,045 560,855 558,971
Accrued interest receivable 9,472 9,472 9,291 9,291
Financial liabilities:
Deposits 821,706 822,449 792,141 791,875
Short-term borrowings 95,670 95,670 80,817 80,817
Long-term debt 110,109 110,293 67,647 67,997
Accrued interest payable 995 995 851 851
</TABLE>
57
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
Financial information pertaining only to Medford Bancorp, Inc. is as follows:
BALANCE SHEET
December 31,
1997
------------------
(In thousands)
Assets
Short-term investments with Medford Savings Bank $ 7,028
Investment in common stock of Medford Savings Bank 94,481
Due from Medford Savings Bank 1,650
--------
Total assets $103,159
========
Liabilities and Stockholders' Equity
Accrued expenses $ 14
Other liabilities 1,635
--------
Total liabilities 1,649
--------
Stockholders' equity:
Serial preferred stock --
Common stock 2,271
Additional paid-in capital 28,977
Retained earnings 70,262
--------
Total stockholders' equity 101,510
--------
Total liabilities and stockholders' equity $103,159
========
58
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (continued)
STATEMENT OF INCOME
Year Ended
December 31, 1997
-------------------
(In thousands)
Interest on short-term investments with Medford Savings Bank $ 30
Operating expenses 6
-------
Income before income taxes and equity in
undistributed net income of Medford Savings Bank 24
Applicable income tax provision 10
-------
14
Equity in undistributed net income of Medford Savings Bank 11,376
-------
Net income $11,390
=======
STATEMENT OF CASH FLOWS
Year Ended
December 31, 1997
-------------------
(In thousands)
Cash flows from operating activities:
Net income $ 11,390
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of
Medford Savings Bank (11,376)
Increase in accrued expenses 14
--------
Net cash provided by operating activities 28
--------
Cash flows from financing activities:
Dividend from Medford Savings Bank at date of reorganization 7,000
--------
Net cash provided by financing activities 7,000
--------
Net increase in cash and cash equivalents 7,028
Cash and cash equivalents, beginning of period --
--------
Cash and cash equivalents, end of period $ 7,028
========
59
<PAGE>
MEDFORD BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. QUARTERLY DATA (UNAUDITED)
A summary of consolidated operating results on a quarterly basis is as follows:
<TABLE>
<CAPTION>
Year Ended December 31, 1997
--------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $ 19,464 $ 19,114 $ 18,586 $ 18,168
Interest expense (10,883) (10,585) (10,133) (9,748)
-------- -------- -------- --------
Net interest income 8,581 8,529 8,453 8,420
Provision for loan losses -- -- (50) (75)
-------- -------- -------- --------
Net interest income, after provision for loan losses 8,581 8,529 8,403 8,345
Other income 789 764 1,288 1,001
Operating expenses (5,068) (4,797) (4,567) (4,622)
-------- -------- -------- --------
Income before income taxes 4,302 4,496 5,124 4,724
Provision for income taxes (1,545) (1,786) (2,032) (1,893)
-------- -------- -------- --------
Net income $ 2,757 $ 2,710 $ 3,092 $ 2,831
======== ======== ======== ========
Earnings per share:
Basic $ 0.61 $ 0.60 $ 0.68 $ 0.62
======== ======== ======== ========
Diluted $ 0.58 $ 0.57 $ 0.65 $ 0.60
======== ======== ======== ========
<CAPTION>
Year Ended December 31, 1996
--------------------------------------------------------
Fourth Third Second First
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Interest and dividend income $ 17,764 $ 17,139 $ 16,992 $ 16,816
Interest expense (9,598) (9,091) (8,979) (8,794)
-------- -------- -------- --------
Net interest income 8,166 8,048 8,013 8,022
Provision for loan losses (20) (45) (90) (60)
-------- -------- -------- --------
Net interest income, after provision for loan losses 8,146 8,003 7,923 7,962
Other income 920 742 759 894
Operating expenses (4,549) (4,595) (4,514) (4,417)
-------- -------- -------- --------
Income before income taxes 4,517 4,150 4,168 4,439
Provision for income taxes (1,825) (1,646) (1,632) (1,742)
-------- -------- -------- --------
Net income $ 2,692 $ 2,504 $ 2,536 $ 2,697
======== ======== ======== ========
Earnings per share:
Basic $ 0.59 $ 0.55 $ 0.56 $ 0.60
======== ======== ======== ========
Diluted $ 0.57 $ 0.53 $ 0.54 $ 0.57
======== ======== ======== ========
</TABLE>
60
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
With the exception of certain information regarding the executive officers of
the Company and the Bank, the response to this item is incorporated by reference
from the discussion under the captions "Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
the Annual Meeting of Stockholders to be held on April 27, 1998 (the "Proxy
Statement"), to be filed with the SEC pursuant to Regulation 14A of the Exchange
Act Rules.
Information regarding the executive officers of the Company and the Bank is
contained in Item I of Part I to this Report under the caption "Executive
Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the discussion under
the captions "Executive Compensation" and "The Board of Directors, its
Committees and Compensation" in the Company's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference from the discussion under
the caption "Ownership by Management and Other Stockholders" in the Company's
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the discussion under
the caption "Relationships and Transactions with the Company" in the Company's
Proxy Statement.
61
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Contents:
(1) Financial Statements: All financial statements are included in Item
8 of Part II to this Report.
(2) Financial Statement Schedules: All financial statement schedules
have been omitted because they are not required, not applicable or
are included in the consolidated financial statements or related
notes.
(3) Exhibits:
EXHIBIT INDEX
Exhibit Description
- ------- -----------
2.1 Plan of Reorganization and Acquisition dated as of July 29, 1997
between the Company and the Bank (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K filed with the SEC on November
26, 1997, and incorporated herein by reference)
3.1 Articles of Organization of the Company (filed as Exhibit 3.1 to the
Company's Current Report on Form 8-K filed with the SEC on November
26, 1997, and incorporated herein by reference)
3.2 Amended and Restated By-laws of the Company
4.1 Specimen certificate for shares of Common Stock of the Company
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K
filed with the SEC on November 26, 1997, and incorporated herein by
reference)
4.2 Articles IV, VI(A), VI(C), VI(I)-(J) of Articles of Organization of
the Company (see Exhibit 3. 1)
4.3 Articles II and V of the By-laws of the Company (see Exhibit 3.2)
4.4 Amended and Restated Shareholder Rights Agreement, dated November
26, 1997, between Medford Bancorp, Inc. and State Street Bank and
Trust Company, as Rights Agent (filed as Exhibit 10. 1 to the
Company's Current Report on Form 8-K filed with the SEC on November
26, 1997, and incorporated herein by reference)
10.1 Amended and Restated Employment Agreement with Arthur H. Meehan
10.2 Amended and Restated Special Termination Agreement with Arthur H.
Meehan
10.3 Amended and Restated Special Termination Agreement with Phillip W.
Wong
10.4 Amended and Restated Special Termination Agreement with George A.
Bargamian
10.5 Amended and Restated Special Termination Agreement with Eric B. Loth
10.6 Amended and Restated Special Termination Agreement with William F.
Rivers
10.7 Supplemental Executive Retirement Plan and Corresponding Adoption
Agreement with Arthur H. Meehan
10.8 Executive Supplemental Benefit Agreement with Arthur H. Meehan
10.9 Deferred Investment Plan for Outside Directors (filed as Exhibit 4.4
to the Company's Registration Statement on Form S-8 filed with the
SEC on December 24, 1997, and incorporated herein by reference)
10.10 First Amendment to Deferred Investment Plan for Outside Directors
(filed as Exhibit 4.5 to the Company's Registration Statement on
Form S-8 filed with the SEC on December 24, 1997, and incorporated
herein by reference)
62
<PAGE>
10.11 Medford Savings Bank 1986 Stock Option Plan (filed as Exhibit 4.4 to
the Company's Registration Statement on Form S-8 filed with the SEC
on November 26, 1997, and incorporated herein by reference)
10.12 Medford Bancorp, Inc. Stock Option Plan (filed as Exhibit 4.5 to the
Company's Registration Statement on Form S-8 filed with the SEC on
November 26, 1997, and incorporated herein by reference)
10.13 Discretionary Bonus Plan (not set forth in a formal document -- a
description of the plan is contained in both the Proxy Statement to
be filed with the SEC, and incorporated herein by reference, under
the caption "Compensation Committee Report on Executive
Compensation" and in the "Notes to Consolidated Financial
Statements" under the caption "Employee Benefit Plans -- Incentive
Plan" in Item 8 to this Report)
11 Statement Regarding Computation of Per Share Earnings -- As the
Company does not have any debt securities registered under Section
12 of the Securities and Exchange Act of 1934, no ratio of earnings
to fixed charges appears in this Report.
12 Statement Regarding Computation of Ratios -- Such computation can
be clearly determined from the material contained in this Report.
21 Subsidiaries of the Company -- The Company has one direct
subsidiary: Medford Savings Bank, a Massachusetts-chartered savings
bank in stock form. Medford Savings Bank has one subsidiary: Medford
Securities Corporation, a Massachusetts corporation.
23 Consent of Wolf & Company, P.C. as independent certified public
accountants
27 Financial Data Schedule
(b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K with
the SEC on November 26, 1997, in connection with the Reorganization.
63
<PAGE>
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MEDFORD BANCORP, INC.
By: /s/ Arthur H. Meehan
----------------------------
Arthur H. Meehan
Chairman, President, Chief
Executive Officer
and Director
Date: March 5, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ Arthur H. Meehan Chairman, President, Chief March 5, 1998
- ---------------------------- Executive Officer and Director
Arthur H. Meehan
/s/ Phillip W. Wong Senior Vice President March 5, 1998
- ---------------------------- and Chief Financial Officer
Phillip W. Wong
/s/ Edward D. Brickley Director March 5, 1998
- ----------------------------
Edward D. Brickley
- ---------------------------- Director March 5, 1998
David L. Burke
- ---------------------------- Director March 5, 1998
Paul J. Crowley
- ---------------------------- Director March 5, 1998
Mary L. Doherty
/s/ Edward J. Gaffey Director March 5, 1998
- ----------------------------
Edward J. Gaffey
/s/ Andrew D. Guthrie, Jr. Director March 5, 1998
- ----------------------------
Andrew D. Guthrie, Jr.
/s/ Robert A. Havern, III Director March 5, 1998
- ----------------------------
Robert A. Havern, III
- ---------------------------- Clerk and Director March 5, 1998
Eugene R. Murray
/s/ Francis D. Pizzella Director March 5, 1998
- ----------------------------
Francis D. Pizzella
64
AMENDED AND RESTATED
BY-LAWS
OF
MEDFORD BANCORP, INC.
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
Organization...........................................................1
ARTICLE II
Stockholders...........................................................1
SECTION 1. Annual Meeting.............................................1
SECTION 2. Matters to be Considered at the Annual Meeting.............1
SECTION 3. Special Meeting............................................4
SECTION 4. Notice of Meetings; Adjournments...........................4
SECTION 5. Quorum.....................................................5
SECTION 6. Voting and Proxies.........................................5
SECTION 7. Action at Meeting..........................................5
ARTICLE III
Directors..............................................................6
SECTION 1. Powers.....................................................6
SECTION 2. Composition and Term.......................................6
SECTION 3. Director Nominations.......................................6
SECTION 4. Qualification..............................................9
SECTION 5. Resignation................................................9
SECTION 6. Removal....................................................9
SECTION 7. Vacancies..................................................9
SECTION 8. Compensation...............................................9
SECTION 9. Regular Meetings...........................................9
SECTION 10. Special Meetings..........................................9
SECTION 11. Notice of Meetings.......................................10
SECTION 12. Quorum...................................................10
SECTION 13. Action at a Meeting......................................10
SECTION 14. Action by Consent........................................10
SECTION 15. Presumption of Assent....................................11
SECTION 16. Committees...............................................11
SECTION 17. Manner of Participation..................................11
(i)
<PAGE>
Page
----
ARTICLE IV
Officers..............................................................12
SECTION 1. Enumeration...............................................12
SECTION 2. Election..................................................12
SECTION 3. Qualification.............................................12
SECTION 4. Tenure....................................................12
SECTION 5. Removal...................................................12
SECTION 6. Absence or Disability.....................................13
SECTION 7. Vacancies.................................................13
SECTION 8. Chief Executive Officer...................................13
SECTION 9. Chairman and Vice Chairman of the Board...................13
SECTION 10. President................................................13
SECTION 11. Vice Presidents, Treasurer and Other Officers............13
SECTION 12. Clerk and Assistant Clerks...............................13
ARTICLE V
Capital Stock.........................................................14
SECTION 1. Certificates of Stock.....................................14
SECTION 2. Transfers.................................................14
SECTION 3. Record Holders............................................14
SECTION 4. Record Date...............................................14
SECTION 5. Replacement of Certificates...............................15
SECTION 6. Issuance of Capital Stock.................................15
SECTION 7. Dividends.................................................15
ARTICLE VI
Indemnification.......................................................15
SECTION 1. Definitions...............................................15
SECTION 2. Officers..................................................16
SECTION 3. Non-Officer Employees.....................................16
SECTION 4. Service at the Request or Direction of the Company........16
SECTION 5. Good Faith................................................16
SECTION 6. Prior to Final Disposition................................17
SECTION 7. Insurance.................................................17
SECTION 8. Other Indemnification Rights..............................17
ARTICLE VII
Miscellaneous Provisions..............................................17
(ii)
<PAGE>
Page
----
SECTION 1. Amendment of By-laws......................................17
SECTION 2. Fiscal Year...............................................17
SECTION 3. Seal......................................................17
SECTION 4. Execution of Instruments..................................17
SECTION 5. Voting of Securities......................................18
SECTION 6. Inapplicability of Control Share Provisions...............18
SECTION 7. Articles..................................................18
(iii)
<PAGE>
AMENDED AND RESTATED BY-LAWS
OF
MEDFORD BANCORP, INC.
ARTICLE I
Organization
The name of this corporation is "Medford Bancorp, Inc." (the "Company").
The main office of the Company shall be in the City of Medford, Massachusetts,
or such other location as the Board of Directors may designate, subject to
applicable law. The Company shall conduct the business of a bank holding company
subject to the Bank Holding Company Act of 1956, as amended, and shall have and
may exercise all the powers, privileges and authority, whether expressed or
implied, now or hereafter conferred by applicable law.
ARTICLE II
Stockholders
SECTION 1. Annual Meeting. The annual meeting of the stockholders (the
"Annual Meeting") for the election of Directors and such other business as may
properly come before the Annual Meeting shall be held on the last Monday in
April at 10:00 a.m. at the main office of the Company in Medford, Massachusetts,
unless a different hour, date or place within Massachusetts (or if permitted by
law, elsewhere in the United States) is fixed by the Company's Board of
Directors (the "Board"), the Chairman of the Board, if one is elected, or the
President, consistent with the requirements of Massachusetts law. If no Annual
Meeting has been held on the date fixed as above provided, a special meeting in
lieu thereof may be held and such special meeting shall be treated for all
purposes as an Annual Meeting.
SECTION 2. Matters to be Considered at the Annual Meeting. The purposes
for which the Annual Meeting is to be held, in addition to those prescribed by
law, by the Articles of Organization (the "Articles") or by these By-laws (the
"By-laws"), may be specified by the Board of Directors, the Chairman of the
Board or the President.
At any Annual Meeting or any special meeting in lieu of Annual Meeting,
only such new business shall be conducted, and only such additional proposals
shall be acted upon, as shall have been properly brought before such Annual
Meeting. To be considered as properly brought before an Annual Meeting, business
must be: (a) specified in the notice of meeting; (b) otherwise properly brought
before the meeting by, or at the direction of, the Board of Directors (unless at
the time of such action there is an Interested Stockholder, in which case the
affirmative vote of a majority of the Continuing Directors then in office shall
also be
<PAGE>
required); or (c) otherwise properly brought before the Annual Meeting by or on
behalf of any stockholder of record who (i) shall have been a stockholder of
record at the time of the giving of notice as provided in this Section 2; (ii)
shall continue to be a stockholder of record on the record date for such Annual
Meeting and on the Annual Meeting date; and (iii) shall be entitled to vote at
such Annual Meeting.
In addition to any other applicable requirements, for business to be
properly brought before an Annual Meeting by a stockholder of record of any
shares of capital stock entitled to vote at such Annual Meeting, such
stockholder shall: (i) give timely notice as required by this Section 2 to the
Clerk of the Company; and (ii) be present at such meeting, either in person or
by a representative. For the first Annual Meeting following the effective date
of these ByLaws, to be timely, a stockholder's notice must be delivered to, or
mailed and received at, the principal executive offices of the Company not less
than 75 days nor more than 120 days prior to the scheduled Annual Meeting,
regardless of any postponements, deferrals or adjournments of that meeting to a
later date; provided, however, that if less than 70 days' notice or prior public
disclosure of the date of the scheduled Annual Meeting is given or made, notice
by the stockholder to be timely must be so received not later than the close of
business on the 10th day following the earlier of (a) the day on which such
notice of the date of the scheduled Annual Meeting was mailed, or (b) the day on
which public disclosure was made.
For all subsequent Annual Meetings, a stockholder's notice shall be timely
if delivered to, or mailed to and received by, the Company at its principal
executive office not less than seventy-five (75) days nor more than one hundred
twenty (120) days prior to the anniversary date of the immediately preceding
Annual Meeting (the "Anniversary Date"); provided, however, that in the event
the Annual Meeting is scheduled to be held on a date more than thirty (30) days
before the Anniversary Date or more than sixty (60) days after the Anniversary
Date, a stockholder's notice shall be timely if delivered to, or mailed to and
received by, the Company at its principal executive office not later than the
close of business on the later of (a) the 75th day prior to the scheduled date
of such Annual Meeting, or (b) the 15th day following the day on which public
disclosure of the date of such Annual Meeting is first made by the Company.
For purposes of these By-laws, "public disclosure" shall mean: (i)
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service; (ii) a report or other document filed
publicly with the Securities and Exchange Commission (including, without
limitation, a Form 8-K ); or (iii) a letter or report sent to stockholders of
record of the Company at the time of the mailing of such letter or report.
A stockholder's notice to the Clerk shall set forth as to each matter
proposed to be brought before an Annual Meeting: (i) a brief description of the
business the stockholder desires to bring before such Annual Meeting and the
reasons for conducting such business at such Annual Meeting; (ii) the name and
address, as they appear on the Company's stock transfer books, of the
stockholder proposing such business; (iii) the class and number of shares
2
<PAGE>
of the Company's capital stock beneficially owned by the stockholder proposing
such business; (iv) the names and addresses of the beneficial owners, if any, of
any capital stock of the Company registered in such stockholder's name on such
books, and the class and number of shares of the Company's capital stock
beneficially owned by such beneficial owners; (v) the names and addresses of
other stockholders known by the stockholder proposing such business to support
such proposal, and the class and number of shares of the Company's capital stock
beneficially owned by such other stockholders; and (vi) any material interest of
the stockholder proposing to bring such business before such meeting (or any
other stockholders known to be supporting such proposal) in such proposal.
The Board of Directors may reject any stockholder proposal not timely made
in accordance with the terms of this Section 2. If the Board of Directors or a
designated committee thereof determines that any stockholder proposal was not
made in a timely fashion in accordance with the provisions of this Section 2 or
that the information provided in a stockholder's notice does not satisfy the
information requirements of this Section 2 in any material respect, such
stockholder proposal shall not be presented for action at the Annual Meeting in
question. The Clerk of the Company shall notify a stockholder in writing whether
his or her proposal has been made in accordance with the time and informational
requirements of this Section 2.
Notwithstanding the procedure set forth in the above paragraph, if neither
the Board of Directors nor such committee makes a determination as to the
validity of any stockholder proposal in the manner set forth above, the
presiding officer of the Annual Meeting shall determine whether the stockholder
proposal was made in accordance with the time and informational requirements of
this Section 2. If the presiding officer determines that any stockholder
proposal was not made in a timely fashion in accordance with the provisions of
this Section 2 or that the information provided in a stockholder's notice does
not satisfy the information requirements of this Section 2 in any material
respect, such proposal shall not be presented for action at the Annual Meeting
in question. If the Board of Directors, a designated committee thereof or the
presiding officer determines that a stockholder proposal was made in accordance
with the time and informational requirements of this Section 2, the presiding
officer shall so declare at the Annual Meeting and ballots shall be provided for
use at the Annual Meeting with respect to such proposal. If there is an
Interested Stockholder at the time, any determinations to be made by the Board
of Directors or a designated committee thereof pursuant to the provisions of
this Section 2, shall also require the concurrence of a majority of the
Continuing Directors then in office.
Notwithstanding the foregoing provisions of this By-Law, a stockholder
shall also comply with all applicable regulations of the Securities and Exchange
Commission set forth in the Securities Exchange Act of 1934, as amended, with
respect to the matters set forth in this By-Law, and nothing in this By-Law
shall be deemed to affect any rights of stockholders to request inclusion of
proposals in the Company's proxy statement pursuant to such regulations.
3
<PAGE>
As used in these By-laws, the terms "Interested Stockholder" and
"Continuing Director" shall have the same respective meanings assigned to them
in the Articles. Any determination of beneficial ownership of securities under
these By-laws shall be made in the manner specified in the Articles.
SECTION 3. Special Meeting. Special meetings of the stockholders for any
purpose or purposes may be called at any time only by the Chairman of the Board,
if one is elected, the President or by a majority of the Directors then in
office; provided however, that if there is an Interested Stockholder, any such
call shall also require the affirmative vote of a majority of the Continuing
Directors then in office. Only those matters set forth in the call of the
special meeting may be considered or acted upon at such special meeting, unless
otherwise provided by law.
SECTION 4. Notice of Meetings; Adjournments. A written notice of the
place, time and date of all annual and special meetings of stockholders shall be
given by the Clerk or Assistant Clerk (or other person authorized by these
By-laws or by law) not less than ten (10) days nor more than sixty (60) days
before the date on which the meeting is to be held to each stockholder entitled
to vote at such meeting by mailing it addressed to such stockholder at the
address of such stockholder as it appears on the stock transfer books of the
Company. Such notice shall be deemed to be delivered when deposited in the mail
so addressed with postage pre-paid.
Notice of an annual or special meeting of stockholders need not be given
to a stockholder if a written waiver of notice is executed before or after such
meeting by such stockholder or such stockholder's authorized attorney, if
communication with such stockholder is unlawful, or if such stockholder attends
such meeting, unless such attendance was for the express purpose of objecting at
the beginning of the meeting to the transaction of any business because the
meeting was not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any annual or special meeting of stockholders
need be specified in any written waiver of notice. A written waiver of notice,
executed before or after a meeting by a stockholder or by an authorized
attorney, shall be deemed equivalent to notice of the meeting.
When any annual or special meeting of stockholders is adjourned to another
hour, date or place, notice need not be given of the adjourned meeting other
than an announcement at the meeting at which the adjournment is taken of the
hour, date and place to which the meeting is adjourned; provided, however, that
if the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, notice of the
adjourned meeting shall be given as in the case of the original meeting to each
stockholder of record entitled to vote thereat.
The Chairman of the Board, if one is elected, shall preside at all
stockholder meetings and shall have the power, among other things, to adjourn
such meeting at any time and from time to time, subject to Section 5 of this
Article II. If a Chairman of the Board is not elected
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or is absent, the Vice Chairman shall preside at all stockholder meetings. If
both the Chairman and the Vice Chairman of the Board are not elected or are
absent, the President shall preside at all stockholder meetings.
SECTION 5. Quorum. The holders of a majority in interest of all stock
issued, outstanding and entitled to vote, represented in person or by proxy,
shall constitute a quorum at a meeting of stockholders; but if less than a
quorum is present at a meeting, a majority in interest of the stockholders
present or the presiding officer may adjourn the meeting from time to time, and
the meeting may be held as adjourned without further notice, except as provided
in Section 4 of this Article II. At such adjourned meeting at which a quorum is
present, any business may be transacted which might have been transacted at the
meeting as originally noticed. The stockholders present at a duly constituted
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
SECTION 6. Voting and Proxies. Stockholders shall have one (1) vote for
each share of common stock entitled to vote owned by them of record according to
the books of the Company and a proportionate vote for a fractional share, unless
otherwise provided by law or by the Articles. Stockholders may vote either in
person or by written proxy dated not more than six (6) months before the meeting
named therein. Proxies shall be filed with the Clerk of the meeting, or of any
adjournment thereof, before being voted. Except as otherwise limited therein,
proxies shall entitle the persons authorized thereby to vote at any adjournment
of such meeting, but they shall not be valid after final adjournment of such
meeting. A proxy with respect to stock held in the name of two (2) or more
persons shall be valid if executed by or on behalf of any one of them unless at
or prior to the exercise of the proxy the Company receives a specific written
notice to the contrary from any one of them. A proxy purporting to be executed
by or on behalf of a stockholder shall be deemed valid unless challenged at or
prior to its exercise, and the burden of proving invalidity shall rest on the
challenger.
SECTION 7. Action at Meeting. When a quorum is present, any matter before
any annual or special meeting of stockholders shall be decided by vote of the
holders of a majority of the shares of stock voting on such matter, except where
a larger vote is required by law, by the Articles or by these By-laws. Any
election by stockholders shall be determined by a plurality of the votes cast,
except where a larger vote is required by law, by the Articles or by these
By-laws.
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ARTICLE III
Directors
SECTION 1. Powers. The business and affairs of the Company shall be
managed by a Board of Directors.
SECTION 2. Composition and Term. The Board of Directors shall be composed
of: those persons who are elected as Directors from time to time as provided
herein. The Board of Directors shall consist of not fewer than seven (7) and not
more than twenty-five (25) individuals and shall be divided into three (3)
classes, such classes to be as nearly equal in number as possible. One of such
classes of Directors shall be elected annually by the stockholders. Subject to
the foregoing requirements and applicable law, the Board of Directors may from
time to time fix the number of Directors and their respective classifications;
provided, however, that if at the time of such action there is an Interested
Stockholder such action shall in addition require a majority vote of the
Continuing Directors then in office. Up to two (2) additional Directors may be
elected by vote of a majority of the Directors then in office. Except as
otherwise provided in accordance with these By-laws, the members of each class
shall be elected for a term of three (3) years and until their successors are
elected and qualified.
SECTION 3. Director Nominations. Nominations of candidates for election as
directors of the Company at any Annual Meeting may be made only (a) by, or at
the direction of, a majority of the Board of Directors (unless at the time of
such action there is an Interested Stockholder, in which case the affirmative
vote of a majority of the Continuing Directors then in office shall also be
required), or (b) by or on behalf of any stockholder of record who (i) shall
have been a stockholder of record at the time of the giving of notice as
provided in this Section 3, (ii) shall continue to be a stockholder of record on
the record date for such Annual Meeting and on the Annual Meeting date, and
(iii) shall be entitled to vote at such Annual Meeting. Any stockholder who has
complied with the timing, informational and other requirements set forth in this
Section 3 and who seeks to make such a nomination, or his, her or its
representative, must be present in person at the Annual Meeting. Only persons
nominated in accordance with the procedures set forth in this Section 3 shall be
eligible for election as directors at an Annual Meeting.
Nominations, other than those made by, or at the direction of, the Board of
Directors (or by the Continuing Directors, if required), shall be made pursuant
to timely notice in writing to the Clerk of the Company as set forth in this
Section 3. For the first Annual Meeting following the effective date of these
By-Laws, to be timely, a stockholder's notice must be delivered to, or mailed
and received at, the principal executive offices of the Company not less than
seventy-five (75) days nor more than one hundred twenty (120) days prior to the
scheduled Annual Meeting, regardless of any postponements, deferrals or
adjournments of that meeting to a later date; provided, however, that if less
than seventy (70) days' notice or prior
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public disclosure of the date of the scheduled Annual Meeting is given or made,
notice by the stockholder to be timely must be so received not later than the
close of business on the tenth day following the earlier of (a) the day on which
such notice of the date of the scheduled Annual Meeting was mailed, or (b) the
day on which public disclosure was made.
For all subsequent Annual Meetings, a stockholder's notice shall be timely
if delivered to, or mailed to and received by, the Company at its principal
executive office not less than seventy-five (75) days nor more than one hundred
twenty (120) days prior to the Anniversary Date; provided, however, that in the
event the Annual Meeting is scheduled to be held on a date more than 30 days
before the Anniversary Date or more than sixty (60) days after the Anniversary
Date, a stockholder's notice shall be timely if delivered to, or mailed and
received by, the Company at its principal executive office not later than the
close of business on the later of (a) the 75th day prior to the scheduled date
of such Annual Meeting, or (b) the 15th day following the day on which public
disclosure of the date of such Annual Meeting is first made by the Company.
A stockholder's notice to the Clerk shall set forth as to each person whom
the stockholder proposes to nominate for election or re-election as a director:
(i) the name, age, business address and residence address of such person; (ii)
the principal occupation or employment of such person; (iii) the class and
number of shares of the Company's capital stock which are beneficially owned by
such person on the date of such stockholder notice; (iv) the consent of each
nominee to serve as a director if elected; and (v) any other information
relating to such person that is required to be disclosed in solicitations of
proxies with respect to nominees for election as directors, pursuant to Section
14 of the Securities Exchange Act of 1934, as amended, and Regulation 14A and
Schedule 14A promulgated thereunder by the Securities and Exchange Commission. A
stockholder's notice to the Clerk shall further set forth as to the stockholder
giving such notice: (i) the name and address, as they appear on the Company's
stock transfer books, of such stockholder and of the beneficial owners (if any)
of the Company's capital stock registered in such stockholder's name and the
name and address of other stockholders known by such stockholder to be
supporting such nominee(s); (ii) the class and number of shares of the Company's
capital stock which are held of record, beneficially owned or represented by
proxy by such stockholder and by any other stockholders known by such
stockholder to be supporting such nominee(s) on the record date for the Annual
Meeting in question (if such date shall then have been made publicly available)
and on the date of such stockholder's notice; and (iii) a description of all
arrangements or understandings between such stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by such stockholder.
The Board of Directors may reject any nomination by a stockholder not
timely made in accordance with the requirements of this Section 3. If the Board
of Directors or a designated committee thereof determines that the information
provided in a stockholder's notice does not satisfy the time and informational
requirements of this Section 3 in any material respect, then
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the Board of Directors may reject such stockholder's nomination. The Clerk of
the Company shall notify a stockholder in writing whether his or her nomination
has been made in accordance with the time and informational requirements of this
Section 3.
Notwithstanding the procedures set forth in the above paragraph, if neither
the Board of Directors nor such committee makes a determination as to whether a
stockholder nomination was made in accordance with the provisions of this
Section 3, the presiding officer of the Annual Meeting shall determine whether a
nomination was made in accordance with the time and informational requirements
of this Section 3. If the presiding officer determines that any stockholder
nomination was not made in a timely fashion in accordance with the provisions of
this Section 3 or that the information provided in a stockholder's notice does
not satisfy the informational requirements of this Section 3 in any material
respect, such stockholder's nomination shall not be considered at the Annual
Meeting in question. If the Board of Directors, a designated committee thereof
or the presiding officer determines that a stockholder nomination was made in
accordance with the requirements of this Section 3, the presiding officer shall
so declare at the Annual Meeting and ballots shall be provided for use at the
meeting with respect to such nominee. If there is an Interested Stockholder at
the time, any determinations to be made by the Board of Directors or a
designated committee thereof pursuant to the provisions of this Section 3, shall
also require the concurrence of a majority of the Continuing Directors then in
office.
Notwithstanding anything to the contrary in the second sentence of the
second paragraph of this Section 3 or the third paragraph of this Section 3, in
the event that the number of directors to be elected to the Board of Directors
of the Company is increased and there is no public disclosure by the Company
naming all of the nominees for director or specifying the size of the increased
Board of Directors at least seventy-five (75) days prior to the Anniversary
Date, a stockholder's notice required by this Section 3 shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if (i) with respect only to the first Annual Meeting following the
effective date of these By-Laws, such notice shall be delivered to, or mailed
and received by the Company at its principal executive office not later than the
close of business on the tenth day following the day on which such public
announcement is first made by the Company; and (ii) for all subsequent Annual
Meetings, such notice shall be delivered to, or mailed to and received by, the
Company at its principal executive office not later than the close of business
on the 15th day following the day on which such public announcement is first
made by the Company.
No person shall be elected by the stockholders as a Director of the Company
unless nominated in accordance with the procedures set forth in this Section 3.
Election of Directors at an Annual Meeting need not be by written ballot, unless
otherwise provided by the Board of Directors or presiding officer at such Annual
Meeting. If written ballots are to be used, ballots bearing the names of all the
persons who have been nominated for election as Directors at the Annual Meeting
in accordance with the procedures set forth in this Section shall be provided
for use at the Annual Meeting.
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SECTION 4. Qualification. Each Director shall have such qualifications as
are required by applicable law. Unless waived by a vote of the Board of
Directors, no person shall serve as a Director after reaching the age of
seventy-two (72) years.
SECTION 5. Resignation. Any Director may resign at any time by written
notice to the Chief Executive Officer. A resignation shall be effective upon
receipt, unless the resignation otherwise provides.
SECTION 6. Removal. Any Director may be removed from office as provided in
the Articles.
SECTION 7. Vacancies. Any and all vacancies occurring on the Board of
Directors, however occurring, including, without limitation, as a result of a
Director reaching the age of seventy-two (72) or by reason of an increase in the
size of the Board of Directors, or the death, resignation, disqualification or
removal of a Director, shall be filled solely by the affirmative vote of a
majority of the remaining Directors then in office, even if less than a quorum
of the Board of Directors, unless there is an Interested Stockholder in which
case such vacancy shall be filled solely by the affirmative vote of a majority
of the Continuing Directors then in office. Any Director appointed in accordance
with the preceding sentence shall hold office for the remainder of the full term
of the class of Directors in which the new directorship was created or the
vacancy occurred and until such Director's successor shall have been duly
elected and qualified or until his or her earlier resignation or removal. When
the number of Directors is increased or decreased, the Board of Directors shall
determine the class or classes to which the increased or decreased number of
Directors shall be apportioned; provided, however, that no decrease in the
number of Directors shall shorten the term of any incumbent Director.
SECTION 8. Compensation. The members of the Board of Directors and the
members of standing or special committees shall receive such compensation as the
Board of Directors may determine.
SECTION 9. Regular Meetings. A regular meeting of the Board of Directors
shall be held without other notice than this By-law on the same date and at the
same place as the Annual Meeting following such meeting of stockholders. The
Board of Directors may provide the hour, date and place for the holding of
regular meetings by resolution without other notice than such resolution. The
Board of Directors shall meet in each calendar quarter at a place or places
fixed from time to time by the Board of Directors, the Chairman of the Board, if
one is elected, or the President.
SECTION 10. Special Meetings. Special meetings of the Board of Directors
may be called by or at the request of a majority of the Directors, the Chairman
of the Board, if one is elected, or the President. The person or persons
authorized to call special meetings of the Board of Directors may fix the hour,
date and place for holding a special meeting.
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SECTION 11. Notice of Meetings. Notice of the hour, date and place of all
special meetings of the Board of Directors shall be given to each Director by
the Clerk or Assistant Clerk, or in the case of the death, absence, incapacity
or refusal of such persons, by the officer or one of the Directors calling the
meeting. Notice of any special meeting of the Board of Directors shall be given
to each Director in person, or by telephone, or sent to his or her business or
home address as shown in the Company's records by telegram, telecopier,
facsimile or similar method at least twenty-four (24) hours in advance of the
meeting or by written notice mailed to his or her business or home address at
least forty-eight (48) hours in advance of such meeting. Such notice shall be
deemed to be delivered when hand delivered to such address, read to such
Director by telephone, deposited in the mail so addressed, with postage thereon
prepaid if mailed, delivered to the telegraph company if sent by telegram, or
confirmed as the date and time of receipt if sent by telecopier, facsimile or
similar method. When any Board of Directors' meeting, either regular or special,
is adjourned for thirty (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 hour, date or place of any meeting adjourned for less
than thirty (30) days or of the business to be transacted thereat, other than an
announcement at the meeting at which such adjournment is taken of the hour, date
and place to which the meeting is adjourned. A written waiver of notice executed
before or after a meeting by a Director and filed with the records of the
meeting shall be deemed to be equivalent to notice of the meeting. 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 such 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 12. Quorum. A majority of the number of Directors then in office
shall constitute a quorum for the transaction of business at any meeting of the
Board of Directors, but if less than a quorum is present at a meeting, a
majority of the Directors present may adjourn the meeting from time to time, and
the meeting may be held as adjourned without further notice, except as provided
in Section 11 of this Article III. Any business which might have been transacted
at the meeting as originally noticed may be transacted at such adjourned meeting
at which a quorum is present.
SECTION 13. Action at a Meeting. 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 otherwise prescribed by law, by the Articles or by these
By-laws.
SECTION 14. Action by Consent. Any action required or permitted to be taken
by the Board of Directors at any 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. Such written consents shall be filed with the records of the
meetings of the Board of Directors and shall be treated for all purposes as a
vote at a meeting of the Board of Directors.
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SECTION 15. Presumption of Assent. A Director of the Company who is present
at a meeting of the Board of Directors at which action on any Company 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 shall file a written dissent to such action with the person acting as the
Clerk of the meeting before the adjournment thereof or shall forward such
dissent by registered mail to the Clerk of the Company within five (5) 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 16. Committees. The Board of Directors shall elect from its number
not fewer than three (3) members to serve as an Executive Committee and may
elect other committees from its number. It may delegate to the Executive
Committee or such other committees some or all of its powers except those which
by law, by the Articles or by these By-laws may not be delegated. Except as the
Board of Directors may otherwise determine, any such committee may make rules
for the conduct of its business, but unless otherwise provided by the Board of
Directors or in such rules, its business shall be conducted so far as possible
in the same manner as is provided by these By-laws for the Board of Directors.
All members of such committees shall hold such offices at the pleasure of the
Board of Directors. The Board of Directors may abolish any such committee at any
time, subject to applicable law. Any committee to which the Board of Directors
delegates any of its powers or duties shall keep records of its meetings and
shall report its action to the Board of Directors. The Board of Directors shall
have power to rescind any action of any committee, but no such rescission shall
have retroactive effect. With the approval of the Board of Directors, the Chief
Executive Officer may appoint such other committees consisting of such Directors
as the Chief Executive Officer shall select. Any recommendations of such
committees appointed by the Chief Executive Officer shall be submitted to the
Board of Directors.
SECTION 17. Manner of Participation. Members of the Board of Directors or
of committees elected by the Board pursuant to Section 16 of this Article III
may participate in meetings of the Board 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 but shall not constitute attendance for the purpose of compensation
pursuant to Section 8 of this Article III, unless the Board of Directors by
resolution so provides.
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ARTICLE IV
Officers
SECTION 1. Enumeration. The officers of the Company shall consist of a
President, a Treasurer, a Clerk and such other officers, including, without
limitation, a Chairman of the Board, a Vice Chairman of the Board, a Secretary
and one or more Vice Presidents, Assistant Vice Presidents, Assistant Treasurers
and Assistant Clerks as the Board of Directors may determine to be necessary for
the management of the Company.
SECTION 2. Election. The President, Treasurer and Clerk shall be elected
annually by the Board of Directors at its first meeting following the Annual
Meeting. Other officers shall be elected by the Board of Directors and serve at
its pleasure.
SECTION 3. Qualification. Any two (2) or more offices may be held by any
person. The President shall be a Director. Any officer may be required by the
Board of Directors to give bond for the faithful performance of his or her
duties in such amount and with such sureties as the Board of Directors may
determine.
SECTION 4. Tenure. Except as otherwise provided by law, by the Articles, or
by these By-laws, the President shall hold office until the first meeting of the
Board of Directors following the next Annual Meeting of the stockholders and
until his or her respective successors are chosen and qualified; the Clerk shall
hold office until the next Annual Meeting of stockholders and until his or her
successor is chosen and qualified; and all other officers shall hold office
until their respective successors are elected by the Board of Directors. The
Chief Executive Officer may resign at any time by written notice to the Board of
Directors or the Clerk. Any other officer may resign at any time by written
notice to the Chief Executive Officer. Such resignation shall be effective upon
receipt unless the resignation otherwise provides. Election or appointment of an
officer, employee or agent shall not of itself create contract rights. The Board
of Directors may, however, authorize the Company to enter into an employment
contract with any officer in accordance with law, but no such contract right
shall impair the right of the Board of Directors to remove any officer at any
time in accordance with Section 5 of this Article IV.
SECTION 5. Removal. Except as otherwise provided by law, the Board of
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the entire number of Directors then in office; provided,
however, that, if at the time of such removal there is an Interested
Stockholder, the affirmative vote of a majority of the Continuing Directors then
in office shall instead be required. Any such removal, other than for cause,
shall be without prejudice to the contract rights, if any, of the persons
involved. Any officer may be removed for cause only after reasonable notice and
opportunity to be heard by the Board of Directors.
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SECTION 6. Absence or Disability. In the event of the absence or disability
of any officer, the Board of Directors may designate another officer to act
temporarily in place of such absent or disabled officer.
SECTION 7. Vacancies. Any vacancy in any office may be filled for the
unexpired portion of the term by the Board of Directors.
SECTION 8. Chief Executive Officer. The President shall be the Chief
Executive Officer, unless the Board of Directors shall elect a Chairman of the
Board and designate such Chairman to be the Chief Executive Officer. The Chief
Executive Officer shall, subject to the direction of the Board of Directors,
have general supervision and control of the Company's business.
SECTION 9. Chairman and Vice Chairman of the Board. The Chairman of the
Board shall preside at all meetings of the Board of Directors. If a Chairman of
the Board is not elected or is absent, the Vice Chairman, if one is elected,
shall preside at all meetings of the Board of Directors. If both the Chairman
and the Vice Chairman of the Board are not elected or are absent, the President
shall preside at all meetings of the Board of Directors. The Chairman of the
Board shall have such other powers and shall perform such other duties as the
Board of Directors may from time to time designate. If the Chairman of the Board
is not the Chief Executive Officer, he shall also have such powers and perform
such duties as the Chief Executive Officer may from time to time designate.
SECTION 10. President. If neither a Chairman of the Board nor a Vice
Chairman of the Board are elected or are present, the President shall preside at
all meetings of the Board of Directors and of the stockholders. If the President
is not the Chief Executive Officer, he shall have such powers and perform such
duties as the Chief Executive Officer may from time to time designate.
SECTION 11. Vice Presidents, Treasurer and Other Officers. Any Vice
President, or Assistant Vice President, any Treasurer or Assistant Treasurer and
any other officers whose powers and duties are not otherwise specifically
provided for herein shall have such powers and shall perform such duties as the
Chief Executive Officer may from time to time designate.
SECTION 12. Clerk and Assistant Clerks. The Clerk shall keep a record of
the meetings of stockholders. If a Secretary is not elected or is absent, the
Clerk shall keep a record of the meetings of the Board of Directors. In the
absence of the Clerk, an Assistant Clerk, if one is elected, shall perform the
Clerk's duties. Otherwise a Temporary Clerk designated by the person presiding
at the meeting shall perform the Clerk's duties.
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ARTICLE V
Capital Stock
SECTION 1. Certificates of Stock. Unless otherwise provided by the Board of
Directors, each stockholder shall be entitled to a certificate representing the
capital stock of the Company in such form as may from time to time be prescribed
by the Board of Directors. Such certificate shall be signed by the President or
a Vice President and by the Treasurer or an Assistant Treasurer. Such signatures
may be facsimile if the certificate is signed by a transfer agent or by a
registrar, other than a Director, officer or employee of the Company. In case
any officer who has signed or whose facsimile signature has been placed on such
certificate shall have ceased to be such officer before such certificate is
issued, it may be issued by the Company with the same effect as if he were such
officer at the time of its issue. Every certificate for shares of stock which
are subject to any restriction on transfer and every certificate issued when the
Company is authorized to issue more than one class or series of stock shall
contain such legend with respect thereto as is required by law.
SECTION 2. Transfers. Subject to any restrictions on transfer and unless
otherwise provided by the Board of Directors, shares of stock may be transferred
on the books of the Company by the surrender to the Company or its transfer
agent of the certificate therefor properly endorsed or accompanied by a written
assignment and power of attorney properly executed, with transfer stamps (if
necessary) affixed, and with such proof of the authenticity of signature as the
Company or its transfer agent, if one is appointed, may reasonably require.
SECTION 3. Record Holders. Except as otherwise required by law, by the
Articles or by these By-laws, the Company shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote, regardless
of any transfer, pledge or other disposition of such stock, until the shares
have been transferred on the books of the Company in accordance with the
requirements of these By-laws.
It shall be the duty of each stockholder to notify the Company of his or
her address and any changes thereto.
SECTION 4. Record Date. The Board of Directors may fix in advance a time of
not more than sixty (60) days before the date of any meeting of the
stockholders, the date for the payment of any dividend or the making of any
distribution to stockholders or the last day on which the consent or dissent of
stockholders may be effectively expressed for any purpose, as the record date
for determining the stockholders having the right to notice of and to vote at
such meeting, and any adjournment thereof, or the right to receive such dividend
or distribution or the right to give such consent or dissent. In such case, only
stockholders of record on such record date shall have such right,
notwithstanding any transfer of stock on the books of the Company after the
record date. Without fixing such record date, the Board of
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Directors may for any of such purposes close the transfer books for all or any
part of such period.
If no record date is fixed and the transfer books are not closed, (a) the
record date for determining stockholders having the right to notice of or to
vote at a meeting of stockholders shall be the close of business on the day next
preceding the day on which notice is given, and (b) the record date for
determining stockholders for any other purpose shall be the close of business on
the date on which the Board of Directors acts with respect thereto.
SECTION 5. Replacement of Certificates. In case of the alleged loss,
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
SECTION 6. Issuance of Capital Stock. Except as provided by law, the Board
of Directors shall have the authority to issue or reserve for issue from time to
time the whole or any part of the capital stock of the Company which may be
authorized from time to time, to such persons or organizations, for such
consideration, whether cash, property, services or expenses and on such terms as
the Board of Directors may determine, including, without limitation, the
granting of options, warrants or conversion or other rights to subscribe to said
capital stock.
SECTION 7. Dividends. Subject to applicable law, the Articles and these
By-laws, the Board of Directors may from time to time declare, and the Company
may pay, dividends on outstanding shares of its capital stock.
ARTICLE VI
Indemnification
SECTION 1. Definitions. For purposes of this Article: (a) "Officer" means
any person who serves or has served as a Director of the Company or in any other
office filled by election or appointment by the stockholders or the Board of
Directors and any heirs or personal representatives of such person; (b)
"Non-Officer Employee" means any person who serves or has served as an employee
of the Company, but who is not or was not an Officer, and any heirs or personal
representatives of such person; (c) "Proceeding" means any action, suit or
proceeding, civil or criminal, brought or threatened in or before any court,
tribunal administrative or legislative body or agency and any claim which could
be the subject of a Proceeding; and (d) "Expenses" means any liability fixed by
a judgment, order, decree or award in a Proceeding, any amount reasonably paid
in settlement of a Proceeding and any professional fees or other disbursements
reasonably incurred in a Proceeding.
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SECTION 2. Officers. Except as provided in Sections 4 and 5 of this Article
VI, each Officer of the Company shall be indemnified by the Company against all
Expenses incurred by such Officer in connection with any Proceedings in which
such Officer is involved as a result of serving or having served (a) as an
Officer or employee of the Company; (b) as a director, officer or employee of
any wholly owned subsidiary of the Company; or (c) in any capacity with any
other corporation, organization, partnership, joint venture, trust or other
entity at the request or direction of the Company.
SECTION 3. Non-Officer Employees. Except as provided in Sections 4 and 5 of
this Article VI, each Non-Officer Employee of the Company may, in the discretion
of the Board of Directors, be indemnified against any or all Expenses incurred
by such Non-Officer Employee in connection with any Proceeding in which such
Non-Officer Employee is involved as a result of serving or having served (a) as
a Non-Officer Employee of the Company; (b) as a director, officer or employee of
any wholly owned subsidiary of the Company; or (c) in any capacity with any
other corporation, organization, partnership, joint venture, trust or other
entity at the request or direction of the Company.
SECTION 4. Service at the Request or Direction of the Company. No
indemnification shall be provided to an Officer or Non-Officer Employee with
respect to serving or having served in any of the capacities described in
Section 2(c) or 3(c) above unless the following two conditions are met: (a) such
service was requested or directed in each specific case by vote of the Board of
Directors prior to the occurrence of the event to which the indemnification
relates, and (b) the Company maintains insurance coverage for the type of
indemnification sought. In no event shall the Company be liable for
indemnification under Section 2(c) or 3(c) above for any amount in excess of the
proceeds of insurance received with respect to such coverage as the Company in
its discretion may elect to carry. The Company may but shall not be required to
maintain insurance coverage with respect to indemnification under Section 2(c)
or 3(c) above. Notwithstanding any other provision of this Section 4, but
subject to Section 5 of this Article VI, the Board of Directors may provide an
Officer or Non-Officer Employee with indemnification under Section 2(c) or 3(c)
above as to a specific Proceeding even if one or both of the two conditions
specified in this Section 4 have not been met and even if the amount of the
indemnification exceeds the amount of the proceeds of any insurance which the
Company may have elected to carry, provided that the Board of Directors in its
discretion determines it to be in the best interests of the Company to do so.
SECTION 5. Good Faith. No indemnification shall be provided to an Officer
or to a Non-Officer Employee with respect to a matter as to which such person
shall have been adjudicated in any Proceeding not to have acted in good faith in
the reasonable belief that the action of such person was in the best interests
of the Company. In the event that a Proceeding is compromised or settled so as
to impose any liability or obligation upon an Officer or Non-Officer Employee,
no indemnification shall be provided to said Officer or Non-Officer Employee
with respect to a matter if there be a determination that with respect to such
matter such person did not act in good faith in the reasonable belief that the
action of such person was
16
<PAGE>
in the best interests of the Company. The determination shall be made by a
majority vote of those Directors who are not involved in such Proceeding.
However, if more than half of the Directors are involved in such Proceeding, the
determination shall be made by a majority vote of a committee of three
disinterested Directors chosen by the disinterested Directors at a regular or
special meeting. If there are fewer than three (3) disinterested Directors, the
determination shall be based upon the opinion of the Company's regular outside
counsel.
SECTION 6. Prior to Final Disposition. Unless otherwise provided by the
Board of Directors or by the committee pursuant to the procedure specified in
Section 5 of this Article VI, any indemnification provided for under this
Article VI shall include payment by the Company of Expenses incurred in
defending a Proceeding in advance of the final disposition of such Proceeding
upon receipt of an undertaking by the Officer or Non-Officer Employee seeking
indemnification to repay such payment if such Officer or Non-Officer Employee
shall be adjudicated or determined to be not entitled to indemnification under
this Article VI.
SECTION 7. Insurance. The Company may purchase and maintain insurance to
protect itself and any Officer or Non-Officer Employee against any liability of
any character asserted against or incurred by the Company or any such Officer or
Non-Officer Employee, or arising out of any such status, whether or not the
Company would have the power to indemnify such person against such liability by
law or under the provisions of this Article VI.
SECTION 8. Other Indemnification Rights. Nothing in this Article VI shall
limit any lawful rights to indemnification existing independently of this
Article VI.
ARTICLE VII
Miscellaneous Provisions
SECTION 1. Amendment of By-laws. These By-laws may be adopted, altered,
amended, changed or repealed as provided in the Articles.
SECTION 2. Fiscal Year. Except as otherwise determined by the Board of
Directors, the fiscal year of the Company shall be the twelve (12) months ending
December 31, or on such other date as may be required by law.
SECTION 3. Seal. The Board of Directors shall have power to adopt and alter
the seal of the Company.
SECTION 4. Execution of Instruments. All deeds, leases, transfers,
contracts, bonds, notes and other obligations to be entered into by the Company
in the ordinary course of its business without Board of Directors' action may be
executed on behalf of the Company by the Chairman of the Board, if one is
elected, the President, the Treasurer or any other officer,
17
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employee or agent of the Company as the Board of Directors or the Executive
Committee may authorize.
SECTION 5. Voting of Securities. Unless otherwise provided by the Board of
Directors, the Chairman of the Board, if one is elected, the President or the
Treasurer may waive notice of and act on behalf of the Company, or appoint
another person or persons to act as proxy or attorney in fact for the Company
with or without discretionary power and/or power of substitution, at any meeting
of stockholders or shareholders of any other organization, any of whose
securities are held by the Company.
SECTION 6. Inapplicability of Control Share Provisions. The provisions of
Chapter 110D of the Massachusetts Business Corporation Law, as the same may be
amended from time to time, shall not apply to control share acquisitions (as
such term in defined in such chapter) of the Company.
SECTION 7. Articles. All references in these By-laws to the Articles shall
be deemed to refer to the Articles of the Company, as amended and in effect from
time to time.
18
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
AMENDED AND RESTATED AGREEMENT made as of the twenty-sixth day of
November, 1997, by and among Medford Savings Bank, a Massachusetts savings bank
with its main office in Medford, Massachusetts (the "Bank"), Medford Bancorp,
Inc., a Massachusetts corporation (the "Company") and Arthur H. Meehan of Dover,
Massachusetts (the "Executive").
WITNESSETH
WHEREAS, the parties hereto desire to provide for the Executive's
employment by the Bank and the Company;
NOW THEREFORE, in consideration of the mutual covenants contained herein,
the Bank, the Company and the Executive agree as follows:
1. Employment. The Bank and the Company agree to employ the Executive and
the Executive agrees to continue in the employ of the Bank and the Company on
the terms and conditions hereinafter set forth.
2. Capacity. The Executive shall serve each of the Bank and the Company as
its Chairman, President and Chief Executive Officer, subject to his election by
their respective Boards of Directors. In this capacity the Executive shall,
subject to the respective By-laws of the Bank and the Company and to the
direction of their respective Boards of Directors, have responsibility for the
general supervision and management of the Bank's and the Company's respective
businesses.
3. Effective Date and Term. The commencement date (the "Commencement
Date") of this Agreement shall be the date upon which the parties hereto execute
this Agreement. Subject to the provisions of Section 6, the term of the
Executive's employment hereunder shall be for three years from the Commencement
Date, and shall terminate on April 27, 2000; provided, however, that the
termination date shall be extended automatically for periods of one year
commencing on April 27, 1998, and on each subsequent anniversary of such date
thereafter, unless either the Executive gives written notice to the Company and
the Bank or the Company and the Bank gives written notice to the Executive,
prior to the date of any such anniversary, of such party's election not to
extend the term of this Agreement. The last day of such term, as so extended
from time to time, is herein sometimes referred to as the "Expiration Date."
4. Compensation and Benefits. The regular compensation and benefits
payable to the Executive under this Agreement shall be as follows:
(a) Salary. For all services rendered by the Executive under this
Agreement, the Bank or the Company shall pay the Executive a salary at the
rate of $380,000 per year, subject to increase from time to time in
accordance with the usual practice of the Bank and the Company with
respect to review of compensation of their senior
<PAGE>
executives, provided, however, that the Executive's salary shall be
increased annually by a percentage amount equal to at least the percentage
increase during the immediately preceding twelve months in the Consumer
Price Index (All Items) for all Urban Consumers for the Boston,
Massachusetts area, as published by the Bureau of Labor Statistics, or if
such Index is not available, the U.S. Government Index which is the most
similar thereto. The Executive's salary shall be payable in periodic
installments in accordance with the Bank's and the Company's usual
practice for its senior executives.
(b) Regular Benefits. The Executive shall also be entitled to
participate in any and all employee benefit plans, medical insurance
plans, life insurance plans, disability income plans, retirement plans,
bonus incentive plans and other benefit plans from time to time in effect
for senior executives of the Bank and the Company. Such participation
shall be subject to (i) the terms of the applicable plan documents, (ii)
generally applicable Bank and Company policies and (iii) the discretion of
the Board of Directors of the Bank and the Company or any administrative
or other committee provided for in or contemplated by such plan. In
addition, the Executive shall be entitled to receive benefits which are
the same or substantially similar to those which are currently being
provided to the Executive by the Bank and the Company, including without
limitation use of an automobile appropriate for his position and
membership in a country club or similar organization of his choice
suitable for business entertainment.
(c) Business Expenses. The Bank or the Company shall reimburse the
Executive for all reasonable travel and other business expenses incurred
by him in the performance of his duties and responsibilities, subject to
such reasonable requirements with respect to substantiation and
documentation as may be specified by the Bank or the Company.
(d) Vacation. The Executive shall be entitled to not less than six
weeks of vacation per year, to be taken at such times and intervals as
shall be determined by the Executive with the approval of the Bank and the
Company, which approval shall not be unreasonably withheld.
5. Extent of Service. During his employment with either the Bank or the
Company, the Executive shall, subject to the direction and supervision of their
respective Boards of Directors, devote his full business time, best efforts and
business judgment, skill and knowledge to the advancement of the Bank's and the
Company's interests and to the discharge of his duties and responsibilities
hereunder. He shall not engage in any other business activity, except as may be
approved by the Boards of Directors; provided, however, that nothing herein
shall be construed as preventing the Executive from:
(a) investing his assets in a manner not prohibited by Section 8(a)
hereof, and in such form or manner as shall not require any material
services on his part in the
2
<PAGE>
operations or affairs of the companies or other entities in which such
investments are made;
(b) serving on the board of directors of any company, subject to the
prohibitions set forth in Section 8(a) and provided that he shall not be
required to render any material services with respect to the operations or
affairs of any such company; or
(c) engaging in religious, charitable or other community or
non-profit activities which do not impair his ability to fulfill his
duties and responsibilities under this Agreement.
6. Termination and Termination Benefits. Notwithstanding the provisions of
Section 3, the Executive's employment hereunder shall terminate under the
following circumstances:
(a) Death. In the event of the Executive's death during the
Executive's employment hereunder, the Executive's employment shall
terminate on the date of his death; provided, however, that the Bank or
the Company. shall continue to pay an amount equal to the Executive's
salary to the Executive's beneficiary designated in writing to the Bank or
the Company prior to his death (or to his estate, if he fails to make such
designation) for a period of six months after the date of the Executive's
death, at the salary rate in effect on the date of his death, without the
increase provided for in Section 4(a), said payments to be made on the
same periodic dates as salary payments would have been made to the
Executive had he not died.
(b) Termination for Cause. The Executive's employment with the Bank
and the Company may be terminated without further liability on the part of
the Bank or the Company effective immediately, by a two-thirds vote of all
of the members of the Board of Directors of the Company and a two-thirds
vote of all of the members of the Board of Directors of the Bank for cause
by written notice to the Executive setting forth in reasonable detail the
nature of such cause. Only the following shall constitute "cause" for such
termination:
(i) Deliberate dishonesty of the Executive with respect to the Bank
or the Company or any subsidiary or affiliate thereof.
(ii) Conviction of the Executive of a crime involving moral
turpitude.
(iii) Gross and willful failure to perform a substantial portion of
his duties and responsibilities hereunder, which failure continues
for more than thirty days after written notice given to the
Executive pursuant to a two-thirds vote of all of the members of the
Board of Directors of the Company and a two-thirds vote of
3
<PAGE>
all of the members of the Board of Directors of the Bank, such vote
to set forth in reasonable detail the nature of such failure.
(c) Termination by the Executive. The Executive's employment with
the Bank and the Company may be terminated, effective immediately, by the
Executive by written notice to the Board of Directors of the Company and
the Bank in the event of the following:
(i) Failure of the Board of Directors of the Bank or the Company, as
the case may be, to elect the Executive to the offices of Chairman,
President and Chief Executive Officer of the Bank or the Company, as
the case may be, or to continue the Executive in such offices; or
(ii) Failure by the Bank or the Company to comply with the
provisions of Section 4(a) or a material breach by the Bank or the
Company of any other provision of this Agreement.
(d) Termination Without Cause. The Executive's employment with the
Bank and the Company may be terminated without cause by a two-thirds vote
of all of the members of the Board of Director of the Company and a
two-thirds vote of all of the members of the Board of Directors of the
Bank on written notice to the Executive.
(e) Certain Termination Benefits. In the event of termination
pursuant to Sections 6(c) or (d), the Executive shall be entitled to the
following benefits:
(i) For the period subsequent to the date of termination until the
Expiration Date, the Bank or the Company shall continue to pay the
Executive a salary at the rate in effect on the date of termination,
with increases as provided in Section 4(a).
(ii) For the period subsequent to the date of termination until the
Expiration Date, the Executive shall continue to receive all
benefits described in Section 4(b) existing on the date of
termination (except for any cash bonus plans which shall be
pro-rated through the date of termination). For purposes of
application of such benefits, the Executive shall be treated as if
he had remained in the employ of the Bank and the Company with an
annual salary at the rate in effect on the date of termination, with
increases as provided in Section 4(a), and service credits will
continue to accrue during such period as if the Executive had
remained in the employ of the Bank and the Company.
(iii) If, in spite of the provisions of Section 6(e)(ii) above,
benefits or service credits under any benefit plan shall not be
payable or provided under any such plan to the Executive, or to the
Executive's dependents, beneficiaries or estate, because the
Executive is no longer deemed to be an employee of the Bank and
4
<PAGE>
the Company, the Bank or the Company itself shall pay or provide for
payment of such benefits and service credits for such benefits to
the Executive, or to the Executive's dependents, beneficiaries or
estate.
(f) Set-off. The Bank or the Company shall be entitled to set off
against any cash compensation to be provided to the Executive under
Section 6(e)(i) above one-half of the amount of any cash compensation
received by the Executive from other employment during the period in which
the Executive receives cash compensation under Section 6(e)(i). The
Executive shall inform the Company of any such amounts of cash
compensation and shall refund to the Bank or the Company, as the case may
be, any amounts which the Bank or the Company, as the case may be, has
paid which exceed the amounts due from the Bank or the Company, as the
case may be, after application of the set-off provided for in this
paragraph. Notwithstanding the foregoing and any other provision of this
Agreement, the Executive shall be under no obligation to seek or accept
any employment after termination of employment with the Bank and the
Company for any reason.
7. Disability. If, due to physical or mental illness, the Executive shall
be disabled so as to be unable to perform substantially all of his duties and
responsibilities hereunder, the Boards of Directors of the Company and the Bank,
as the case may be, may designate another executive to act in his place with
respect to the Company and the Bank, as the case may be, during the period of
such disability.
Notwithstanding any such designation, the Executive shall continue to
receive his full salary and benefits under Section 4 of this Agreement from
either the Bank or the Company until he becomes eligible for disability income
under the Bank's or the Company's disability income plan. While receiving
disability income payments under such plan, the Executive shall not receive any
salary under Section 4(a), but shall continue to participate in those benefit
plans of the Bank and the Company in which the Executive was otherwise
participating and to receive other benefits as specified in Section 4 until the
Expiration Date. In the absence of a disability income plan at the time of such
disability, the Bank or the Company shall pay the Executive benefits equal to
those the Executive would have received if the Bank's and the Company's current
disability income plan were in effect at such time. If any question shall arise
as to whether during any period the Executive was disabled so as to be unable to
perform substantially all of his duties and responsibilities hereunder due to
physical or mental illness, the Executive may, and at the request of the Bank or
the Company will, submit to the Bank or the Company, as the case may be, a
certification in reasonable detail by a physician selected by the Executive or
his guardian to whom the Bank or the Company, as the case may be has no
reasonable objection as to whether the Executive was so disabled and such
certification shall for the purposes of this Agreement be conclusive of the
issue. If such question shall arise and the Executive shall fail to submit such
certification, the Bank's or the Company's determination, as the case may be, of
such issue shall be binding on the Executive.
8. Noncompetition and Confidential Information.
5
<PAGE>
(a) Noncompetition. During
(i) a period of one year following the date of termination of
the Executive's employment with the Bank and the Company (x) by the
Executive as a result of his election not to extend pursuant to
Section 3 or (y) by the Bank and the Company for cause pursuant to
Section 6(b) hereof or (z) by the Executive in the event that such
termination constitutes a material breach by the Executive of any of
the provisions of this Agreement, and
(ii) the period during which the Bank or the Company would be
required to provide benefits to the Executive pursuant to Section
6(e)(i)-(iii) hereof
the Executive will not, directly or indirectly, whether as owner, partner,
shareholder, consultant, agent, employee, co-venturer or otherwise, or
through any Person (as defined in Section 11), compete in the Bank's or
the Company's market area (defined as that portion of Massachusetts
bounded to the west and north by Interstate 95 and to the south by
Interstate 90) with the banking or any other business conducted by the
Bank or the Company during the period of his employment with either the
Bank or the Company, nor will he attempt to hire any employee of the Bank
or the Company, assist in such hiring by any other Person, encourage any
such employee to terminate his or her relationship with the Bank or the
Company, or solicit or encourage any customer of the Bank or the Company
to terminate its relationship with the Bank or the Company or to conduct
with any other person any business or activity which such customer
conducts or could conduct with the Bank or the Company.
(b) Confidential Information. The Executive will not disclose to any
other Person (except as required by applicable law or in connection with
the performance of his duties and responsibilities hereunder), or use for
his own benefit or gain, any confidential information of the Bank or the
Company obtained by him incident to his employment with the Bank and the
Company. The term "confidential information" includes, without limitation,
financial information, business plans, prospects and opportunities (such
as lending relationships, financial product developments, or possible
acquisitions or dispositions of businesses or facilities) which have been
discussed or considered by the Bank's or the Company's management but does
not include any information which has become part of the public domain by
means other than the Executive's non-observance of his obligations
hereunder.
(c) Relief; Interpretation. The Executive agrees that the Bank or
the Company, either jointly or individually, shall be entitled to
injunctive relief for any breach by him of the covenants contained in
Sections 8(a) or 8(b). In the event that any provision of this Section 8
shall be determined by any court of competent jurisdiction to be
unenforceable by reason of its being extended over too great a period of
time, too large a geographic area, or too great a range of activities, it
shall be interpreted to extend only over the maximum period of time,
geographic area, or range of activities as to
6
<PAGE>
which it may be enforceable. For purposes of this Section 8, the term
"Bank" shall mean the Bank and any of its subsidiaries and affiliates and
the term Company shall mean the Company and any of its subsidiaries
(except the Bank).
9. Allocation of Obligations. The Bank and the Company shall allocate
among themselves which party shall be responsible for paying the salary and
other benefits required to be paid by Sections 4, 6(a), 6(e), 7 and 13 of this
Agreement. The payment by either party of such salary and other benefits shall
satisfy the obligations of the non-paying party under such Sections. Both the
Bank and the Company shall be jointly and severally liable in the event of a
failure by both parties to pay such salary and other benefits.
10. Conflicting Agreements. The Executive hereby represents and warrants
that the execution of this Agreement and the performance of his obligations
hereunder will not breach or be in conflict with any other agreement to which he
is a party or is bound, and that he is not now subject to any covenants against
competition or similar covenants which would affect the performance of his
obligations hereunder.
11. Definition of "Person". For purposes of this Agreement, the term
"Person" shall mean an individual, a corporation, an association, a partnership,
an estate, a trust and any other entity or organization.
12. Withholding. All payments made by the Bank or the Company under this
Agreement shall be net of any tax or other amounts required to be withheld by
the Bank or the Company under applicable law.
13. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of the Commonwealth of Massachusetts by three
arbitrators, one of whom shall be appointed by the Company, one by the Executive
and the third by the first two arbitrators. If the first two arbitrators cannot
agree on the appointment of a third arbitrator, then the third arbitrator shall
be appointed by the American Arbitration Association in the City of Boston. Such
arbitration shall be conducted in the City of Boston in accordance with the
rules of the American Arbitration Association, except with respect to the
selection of arbitrators which shall be as provided in this Section 13. Judgment
upon the award rendered by the arbitrators may be entered in any court having
jurisdiction thereof. In the event that it shall be necessary or desirable for
the Executive to retain legal counsel and/or incur other costs and expenses in
connection with the enforcement of any or all of the Executive's rights under
this Agreement, the Bank or the Company shall pay (or the Executive shall be
entitled to recover from the Bank or the Company, as the case may be) the
Executive's reasonable attorneys' fees and other reasonable costs and expenses
in connection with the enforcement of said rights (including the enforcement of
any arbitration award in court) regardless of the final outcome, unless and to
the extent the arbitrators shall determine that under the circumstances recovery
by the Executive of all or a part of any such fees and costs and expenses would
be unjust.
7
<PAGE>
14. Assignment; Successors and Assigns, etc. Neither the Bank, the Company
or the Executive may make any assignment of this Agreement or any interest
herein, by operation of law or otherwise, without the prior written consent of
the other party; provided, however, that the Bank or the Company may assign its
rights under this Agreement without the consent of the Executive in the event
the Bank or the Company shall hereafter effect a reorganization, consolidate
with or merge into any other Person, or transfer all or substantially all of its
properties or assets to any other Person. This Agreement shall inure to the
benefit of and be binding upon the Bank, the Company and the Executive, their
respective successors, executors, administrators, heirs and permitted assigns.
In the event of the Executive's death prior to the completion by the Bank or the
Company of all payments due him under this Agreement, the Bank or the Company
shall continue such payments to the Executive's beneficiary designated in
writing to the Bank or the Company prior to his death (or to his estate, if he
fails to make such designation).
15. Enforceability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
16. Waiver. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any beach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
17. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the Bank
and the Company or, in the case of the Bank, at its main office, attention of
the Clerk or, in the case of the Company, at its principal place of business,
attention of the Clerk.
18. Amendment. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by a duly authorized representative of
the Executive Committee of each of the Boards of Directors of the Company and
the Bank.
19. Governing Law. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of the Commonwealth of
Massachusetts.
8
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Bank, by its duly authorized officer, by the Company, by its
duly authorized officer and by the Executive, as of the date first above
written.
ATTEST: MEDFORD SAVINGS BANK
/s/ Eugene R. Murray By: /s/ Arthur H. Meehan
- ---------------------- --------------------------------
Clerk Title: Chairman, President and Chief
Executive Officer
-----------------------------
[Seal]
ATTEST: MEDFORD BANCORP, INC.
/s/ Eugene R. Murray By: /s/ Arthur H. Meehan
- ---------------------- --------------------------------
Secretary Title: Chairman, President and Chief
Executive Officer
-----------------------------
[Seal]
WITNESS:
/s/ Eugene R. Murray /s/ Arthur H. Meehan
- ---------------------- ------------------------------------
Arthur H. Meehan
9
AMENDED AND RESTATED SPECIAL TERMINATION AGREEMENT
AMENDED AND RESTATED AGREEMENT made as of the twenty-sixth day of
November, 1997 by and among Medford Savings Bank a Massachusetts savings bank
with its main office in Medford, Massachusetts (the "Bank"), Medford Bancorp,
Inc. a Massachusetts corporation (the "Company") (the Bank and the Company shall
be hereinafter collectively referred to as the "Employers"), and Arthur H.
Meehan of Dover, Massachusetts (the "Executive").
1. Purpose. In order to allow the Executive to consider the prospect of a
Change in Control (as defined in Section 2) in an objective manner and in
consideration of the services to be rendered by the Executive to the Employers
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged by the Employers, the Employers are willing to provide,
subject to the terms of this Agreement, consequences of a Terminating Event (as
defined in Section 3) occurring subsequent to a Change in Control.
2. Change in Control. A "Change in Control" shall be deemed to have
occurred in any one of the following events:
(i) if there has occurred a change in control of either the
Company or the Bank which the Company would be required to report in
response to Item 1 (or, in the case of the Bank, Item 2) of Form 8-K
promulgated under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), or, if such regulation is no longer in effect, any
regulations promulgated by the Securities and Exchange Commission,
pursuant to the 1934 Act, which are intended to serve similar purposes;
(ii) when any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is
defined in Rule 13d-3 promulgated under the 1934 Act), directly or
indirectly, of securities of the Company or the Bank representing
twenty-five percent (25%) or more of the total number of votes that may be
cast for the election of directors of the Company or the Bank, as the case
may be;
(iii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who are
Continuing Directors (as hereinafter defined) cease for any reason to
constitute at least a majority of the Board of Directors of the Company or
the Bank. For this purpose, a "Continuing Director" shall mean (a) an
individual who was a director of the Company or the Bank at the beginning
of such period or (b) any new director (other than a director designated
by a person who has entered into an agreement with the Company or the Bank
to effect a transaction described in clause (ii), (iv) or (v) of this
Section 2) whose election by the Board or nomination for election by the
Company's or the Bank's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors of the Company or the Bank, as
appropriate, then still in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved;
<PAGE>
(iv) the stockholders of the Company approve a merger or
consolidation of the Company or the Bank with any other corporation or
bank, other than (a) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 80% of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation or (b) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than 30% of the combined
voting power of the Company's then outstanding securities; or
(v) the stockholders of the Company or the Bank approve a plan of
complete liquidation of the Company or the Bank or an agreement for the
sale or disposition by the Company or the Bank of all or substantially all
of the Company's or the Bank's assets.
(vi) Notwithstanding the foregoing, no Change in Control shall be
deemed to occur by virtue of the Bank becoming a subsidiary of the
Company.
3. Terminating Event. A "Terminating Event" shall mean
(a) termination by either of the Employers of the employment of the
Executive with either of the Employers for any reason other than (i) death, (ii)
deliberate dishonesty of the Executive with respect to the Bank or the Company
or any subsidiary or affiliate of either, or (iii) conviction of the Executive
of a crime involving moral turpitude, or
(b) resignation of the Executive from the employ of both of the Employers,
while the Executive is not receiving payments or benefits from either of the
Employers by reason of the Executive's disability, subsequent to the occurrence
of any of the following events:
(i) a significant change in the nature or scope of the Executive's
responsibilities, authorities, powers, functions or duties from the
responsibilities, authorities, powers, functions or duties exercised by
the Executive immediately prior to the Change in Control; or
(ii) a determination by the Executive that, as a result of a Change in
Control, he is unable to exercise the responsibilities, authorities,
powers, functions or duties exercised by the Executive immediately prior
to such Change in Control; or
(iii) a reduction in the Executive's annual base salary as in effect on
the date hereof or as the same may be increased from time to time except
for across-the-board salary reductions similarly affecting all management
personnel of the Employers and all management personnel of any person in
control of the Employers; or
2
<PAGE>
(iv) the failure by the Employers to pay to the Executive any portion of
his current compensation or to pay to the Executive any portion of an
installment of deferred compensation under any deferred compensation
program of the Employers within seven (7) days of the date such
compensation is due; or
(v) the failure by the Employers to continue in effect any material
compensation, incentive, bonus or benefit plan in which the Executive
participates immediately prior to the Change in Control, unless an
equitable arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan, or the failure by the
Employers to continue the Executive's participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable,
both in terms of the amount of benefits provided and the level of the
Executive's participation relative to other participants, as existed at
the time of the Change in Control; or
(vi) the failure by the Employers to continue to provide the Executive
with benefits substantially similar to those available to the Executive
under any of the life insurance, medical, health and accident, or
disability plans or any other material benefit plans in which the
Executive was participating at the time of the change in Control, or the
taking of any action by the Employers which would directly or indirectly
materially reduce any of such benefits, or the failure by the Employers to
provide the Executive with the number of paid vacation days to which the
Executive is entitled on the basis of years of service with the Employers
in accordance with the Employers' normal vacation policy in effect at the
time of the Change in Control; or
(vii) the failure of the Employers to obtain a satisfactory agreement from
any successors to assume and agree to perform this Agreement.
4. Severance Payment. In the event a Terminating Event occurs within three
(3) years after a Change in Control, the Employers shall pay to the Executive an
aggregate amount equal to (x) three times the "base amount" (as defined in
Section 280 G(b)(3) of the Internal Revenue Code of 1986, as amended (the
"Code")) applicable to the Executive, less (y) One Dollar ($1.00), payable in
one lump-sum payment on the date of termination.
5. Limitation on Benefits.
(a) It is the intention of the Executive and of the Employers that no
payments by the Employers to or for the benefit of the Executive under this
Agreement or any other agreement or plan pursuant to which he is entitled to
receive payments or benefits shall be non-deductible to the Employers by reason
of the operation of Section 280G of the Code relating to parachute payments.
Accordingly, and notwithstanding any other provision of this Agreement or any
such agreement or plan, if by reason of the operation of said Section 280G, any
such payments exceed the amount which can be deducted by the Bank, such payments
shall be reduced to the maximum amount which can be deducted by the Employers.
To the extent that payments exceeding such maximum deductible amount have been
made to or for the benefit of the Executive, such excess payments shall be
refunded to the Employers with interest thereon at the applicable Federal Rate
3
<PAGE>
determined under Section 1274(d) of the Code, compounded annually, or at such
other rate as may be required in order than no such payments shall be
non-deductible to the Employers by reason of the operation of said Section 280G.
To the extent that there is more than one method of reducing the payments to
bring them within the limitations of said Section 280G, the Executive shall
determine which method shall be followed, provided that if the Executive fails
to make such determination within forty-five days after the Employers have sent
him written notice of the need for such reduction, the Employers may determine
the method of such reduction in their sole discretion.
(b) If any dispute between the Employers and the Executive as to any of
the amounts to be determined under this Section 5, or the method of calculating
such amounts, cannot be resolved by the Employers and the Executive, either the
Employers or the Executive after giving three days written notice to the other,
may refer the dispute to a partner in the Boston office of a firm of independent
certified public accountants selected jointly by the Employers and the
Executive. The determination of such partner as to the amount to be determined
under Section 5(a) and the method of calculating such amounts shall be final and
binding on both the Employers and the Executive. The Employers shall bear the
costs of any such determination.
6. Employment Status. This Agreement is not an agreement for the
employment of the Executive and shall confer no rights on the Executive except
as herein expressly provided.
7. Term. This Agreement shall take effect as of the date hereof and shall
terminate upon the earlier of (a) the termination by the Employers of the
employment of the Executive because of death, deliberate dishonesty of the
Executive with respect to the Bank or the Company or any subsidiary or affiliate
of either, or conviction of the Executive of a crime involving moral turpitude,
(b) the resignation or termination of the Executive for any reason prior to a
Change in Control, or (c) the resignation of the Executive after a Change in
Control for any reason other than the occurrence of any of the events enumerated
in Section 3(b)(i)-(vii) of this Agreement.
8. Withholding. All payments made by the Employers under this Agreement
shall be net of any tax or other amounts required to be withheld by the
Employers under applicable law.
9. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of the Commonwealth of Massachusetts by three
arbitrators, one of whom shall be appointed by the Employers, one by the
Executive and the third by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators which shall be as provided in this
Section 9. Judgment upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. In the event that it shall be necessary
or desirable for the Executive to retain legal counsel and/or incur other costs
and expenses in connection with the enforcement of any or all of the Executive's
rights under this Agreement, the Employers shall pay (or the Executive shall be
entitled to recover from the Employers, as the case may be) the Executive's
4
<PAGE>
reasonable attorneys' fees and other reasonable costs and expenses in connection
with the enforcement of said rights (including the enforcement of any
arbitration award in court) regardless of the final outcome, unless and to the
extent the arbitrators shall determine that under the circumstances recovery by
the Executive of all or a part of any such fees and costs and expenses would be
unjust. This provision shall not apply to Section 5(b), except in the event that
the Employers and the Executive cannot agree on the selection of the accounting
partner described in said Section.
10. Allocation of Obligations. The Bank and the Company shall allocate
among themselves which party shall be responsible for paying the severance
payments and other benefits directed by this Agreement. The payment by either
party of such severance payments and other benefits shall satisfy the
obligations of the non-paying party under this Agreement. Both the Bank and the
Company shall be jointly liable in the event of a failure by both parties to pay
such severance payments and other benefits.
11. Assignment; Prior Agreements. Neither the Employers nor the Executive
may make any assignment of this Agreement or any interest herein, by operation
of law or otherwise, without the prior written consent of the other party, and
without such consent any attempted transfer shall be null and void and of no
effect. This Agreement shall inure to the benefit of and be binding upon the
Employers and the Executive, their respective successors, executors,
administrators, heirs and permitted assigns. In the event of the Executive's
death prior to the completion by the Bank of all payments due him under this
Agreement, the Employers shall continue such payments to the Executive's
beneficiary designated in writing to the Employers prior to his death (or to his
estate, if he fails to make such designation). This Agreement supersedes any
prior agreement covering the subject matter hereof.
12. Enforceability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
13. Waiver. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
14. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the Bank,
or, in the case of the Employers, at both of their main offices, attention of
the Board of Directors.
5
<PAGE>
15. Election of Remedies. An election by the Executive to resign after a
Change in Control under the provisions of this Agreement shall not constitute a
breach by the Executive of any employment agreement between the Employers and
the Executive and shall not be deemed a voluntary termination of employment by
the Executive for the purpose of interpreting the provisions of any of the
Employers' benefit plans, programs or policies. Nothing in this Agreement shall
be construed to limit the rights of the Executive under any employment agreement
he may then have with the Employers; provided, however, that if there is a
Terminating Event under Section 3 hereof, the Executive may elect either to
receive the severance payment provided under Section 4 or such termination
benefits as he may under any such employment agreement, but may not elect to
receive both.
16. Amendment. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by duly authorized representatives of
each of the Employers.
17. Governing Law. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of the Commonwealth of
Massachusetts.
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Bank, by its duly authorized officer, by the Company, by its
duly authorized officer, and by the Executive, as of the date first above
written.
WITNESS:
/s/ Gregory J. Lyons /s/ Arthur H. Meehan
- ------------------------ ------------------------------
Arthur H. Meehan
ATTEST: MEDFORD SAVINGS BANK
Eugene R. Murray By: /s/ Arthur H. Meehan
- ------------------------ --------------------------
Clerk Title: Chairman, President and
Chief Executive Officer
-----------------------
[Seal]
ATTEST: MEDFORD BANCORP, INC.
Eugene R. Murray By: /s/ Arthur H. Meehan
- ------------------------ --------------------------
Clerk Title: Chairman, President and
Chief Executive Officer
-----------------------
[Seal]
7
AMENDED AND RESTATED SPECIAL TERMINATION AGREEMENT
AMENDED AND RESTATED AGREEMENT made as of the twenty-sixth day of
November, 1997 by and among Medford Savings Bank a Massachusetts savings bank
with its main office in Medford, Massachusetts (the "Bank"), Medford Bancorp,
Inc. a Massachusetts corporation (the "Company") (the Bank and the Company shall
be hereinafter collectively referred to as the "Employers"), and Phillip W. Wong
of Medway, Massachusetts (the "Executive").
1. Purpose. In order to allow the Executive to consider the prospect of a
Change in Control (as defined in Section 2) in an objective manner and in
consideration of the services to be rendered by the Executive to the Employers
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged by the Employers, the Employers are willing to provide,
subject to the terms of this Agreement, consequences of a Terminating Event (as
defined in Section 3) occurring subsequent to a Change in Control.
2. Change in Control. A "Change in Control" shall be deemed to have
occurred in any one of the following events:
(i) if there has occurred a change in control of either the
Company or the Bank which the Company would be required to report in
response to Item 1 (or, in the case of the Bank, Item 2) of Form 8-K
promulgated under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), or, if such regulation is no longer in effect, any
regulations promulgated by the Securities and Exchange Commission,
pursuant to the 1934 Act, which are intended to serve similar purposes;
(ii) when any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is
defined in Rule 13d-3 promulgated under the 1934 Act), directly or
indirectly, of securities of the Company or the Bank representing
twenty-five percent (25%) or more of the total number of votes that may be
cast for the election of directors of the Company or the Bank, as the case
may be;
(iii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who are
Continuing Directors (as hereinafter defined) cease for any reason to
constitute at least a majority of the Board of Directors of the Company or
the Bank. For this purpose, a "Continuing Director" shall mean (a) an
individual who was a director of the Company or the Bank at the beginning
of such period or (b) any new director (other than a director designated
by a person who has entered into an agreement with the Company or the Bank
to effect a transaction described in clause (ii), (iv) or (v) of this
Section 2) whose election by the Board or nomination for election by the
Company's or the Bank's stockholders was approved by a vote of at least
two-thirds (2/3) of the directors of the Company or the Bank, as
appropriate, then still in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved;
<PAGE>
(iv) the stockholders of the Company approve a merger or
consolidation of the Company or the Bank with any other corporation or
bank, other than (a) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 80% of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or
consolidation or (b) a merger or consolidation effected to implement a
recapitalization of the Company (or similar transaction) in which no
"person" (as hereinabove defined) acquires more than 30% of the combined
voting power of the Company's then outstanding securities; or
(v) the stockholders of the Company or the Bank approve a plan of
complete liquidation of the Company or the Bank or an agreement for the
sale or disposition by the Company or the Bank of all or substantially all
of the Company's or the Bank's assets.
(vi) Notwithstanding the foregoing, no Change in Control shall be
deemed to occur by virtue of the Bank becoming a subsidiary of the
Company.
3. Terminating Event. A "Terminating Event" shall mean
(a) termination by either of the Employers of the employment of the
Executive with either of the Employers for any reason other than (i) death, (ii)
deliberate dishonesty of the Executive with respect to the Bank or the Company
or any subsidiary or affiliate of either, or (iii) conviction of the Executive
of a crime involving moral turpitude, or
(b) resignation of the Executive from the employ of both of the Employers,
while the Executive is not receiving payments or benefits from either of the
Employers by reason of the Executive's disability, subsequent to the occurrence
of any of the following events:
(i) a significant change in the nature or scope of the Executive's
responsibilities, authorities, powers, functions or duties from the
responsibilities, authorities, powers, functions or duties exercised by
the Executive immediately prior to the Change in Control; or
(ii) a determination by the Executive that, as a result of a Change in
Control, he is unable to exercise the responsibilities, authorities,
powers, functions or duties exercised by the Executive immediately prior
to such Change in Control; or
(iii) a reduction in the Executive's annual base salary as in effect on
the date hereof or as the same may be increased from time to time except
for across-the-board salary reductions similarly affecting all management
personnel of the Employers and all management personnel of any person in
control of the Employers; or
2
<PAGE>
(iv) the failure by the Employers to pay to the Executive any portion of
his current compensation or to pay to the Executive any portion of an
installment of deferred compensation under any deferred compensation
program of the Employers within seven (7) days of the date such
compensation is due; or
(v) the failure by the Employers to continue in effect any material
compensation, incentive, bonus or benefit plan in which the Executive
participates immediately prior to the Change in Control, unless an
equitable arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan, or the failure by the
Employers to continue the Executive's participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable,
both in terms of the amount of benefits provided and the level of the
Executive's participation relative to other participants, as existed at
the time of the Change in Control; or
(vi) the failure by the Employers to continue to provide the Executive
with benefits substantially similar to those available to the Executive
under any of the life insurance, medical, health and accident, or
disability plans or any other material benefit plans in which the
Executive was participating at the time of the change in Control, or the
taking of any action by the Employers which would directly or indirectly
materially reduce any of such benefits, or the failure by the Employers to
provide the Executive with the number of paid vacation days to which the
Executive is entitled on the basis of years of service with the Employers
in accordance with the Employers' normal vacation policy in effect at the
time of the Change in Control; or
(vii) the failure of the Employers to obtain a satisfactory agreement from
any successors to assume and agree to perform this Agreement.
4. Severance Payment. In the event a Terminating Event occurs within three
(3) years after a Change in Control, the Employers shall pay to the Executive an
aggregate amount equal to (x) two times the "base amount" (as defined in Section
280 G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code"))
applicable to the Executive, less (y) One Dollar ($1.00), payable in one
lump-sum payment on the date of termination.
5. Limitation on Benefits.
(a) It is the intention of the Executive and of the Employers that no
payments by the Employers to or for the benefit of the Executive under this
Agreement or any other agreement or plan pursuant to which he is entitled to
receive payments or benefits shall be non-deductible to the Employers by reason
of the operation of Section 280G of the Code relating to parachute payments.
Accordingly, and notwithstanding any other provision of this Agreement or any
such agreement or plan, if by reason of the operation of said Section 280G, any
such payments exceed the amount which can be deducted by the Employers, such
payments shall be reduced to the maximum amount which can be deducted by the
Employers. To the extent that payments exceeding such maximum deductible amount
have been made to or for the benefit of the Executive, such excess payments
shall be refunded to the Employers with interest thereon at the
3
<PAGE>
applicable Federal Rate determined under Section 1274(d) of the Code, compounded
annually, or at such other rate as may be required in order than no such
payments shall be non-deductible to the Employers by reason of the operation of
said Section 280G. To the extent that there is more than one method of reducing
the payments to bring them within the limitations of said Section 280G, the
Executive shall determine which method shall be followed, provided that if the
Executive fails to make such determination within forty-five days after the
Employers have sent him written notice of the need for such reduction, the
Employers may determine the method of such reduction in their sole discretion.
(b) If any dispute between the Employers and the Executive as to any of
the amounts to be determined under this Section 5, or the method of calculating
such amounts, cannot be resolved by the Employers and the Executive, either the
Employers or the Executive after giving three days written notice to the other,
may refer the dispute to a partner in the Boston office of a firm of independent
certified public accountants selected jointly by the Employers and the
Executive. The determination of such partner as to the amount to be determined
under Section 5(a) and the method of calculating such amounts shall be final and
binding on both the Employers and the Executive. The Employers shall bear the
costs of any such determination.
6. Employment Status. This Agreement is not an agreement for the
employment of the Executive and shall confer no rights on the Executive except
as herein expressly provided.
7. Term. This Agreement shall take effect as of the date hereof and shall
terminate upon the earlier of (a) the termination by the Employers of the
employment of the Executive because of death, deliberate dishonesty of the
Executive with respect to the Bank or the Company or any subsidiary or affiliate
of either, or conviction of the Executive of a crime involving moral turpitude,
(b) the resignation or termination of the Executive for any reason prior to a
Change in Control, or (c) the resignation of the Executive after a Change in
Control for any reason other than the occurrence of any of the events enumerated
in Section 3(b)(i)-(vii) of this Agreement.
8. Withholding. All payments made by the Employers under this Agreement
shall be net of any tax or other amounts required to be withheld by the
Employers under applicable law.
9. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of the Commonwealth of Massachusetts by three
arbitrators, one of whom shall be appointed by the Employers, one by the
Executive and the third by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators which shall be as provided in this
Section 9. Judgment upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. In the event that it shall be necessary
or desirable for the Executive to retain legal counsel and/or incur other costs
and expenses in connection with the enforcement of any or all of the Executive's
rights under this Agreement, the Employers shall pay (or the Executive shall be
entitled to recover from the Employers, as the case may be) the Executive's
4
<PAGE>
reasonable attorneys' fees and other reasonable costs and expenses in connection
with the enforcement of said rights (including the enforcement of any
arbitration award in court) regardless of the final outcome, unless and to the
extent the arbitrators shall determine that under the circumstances recovery by
the Executive of all or a part of any such fees and costs and expenses would be
unjust. This provision shall not apply to Section 5(b), except in the event that
the Employers and the Executive cannot agree on the selection of the accounting
partner described in said Section.
10. Allocation of Obligations. The Bank and the Company shall allocate
among themselves which party shall be responsible for paying the severance
payments and other benefits directed by this Agreement. The payment by either
party of such severance payments and other benefits shall satisfy the
obligations of the non-paying party under this Agreement. Both the Bank and the
Company shall be jointly liable in the event of a failure by both parties to pay
such severance payments and other benefits.
11. Assignment; Prior Agreements. Neither the Employers nor the Executive
may make any assignment of this Agreement or any interest herein, by operation
of law or otherwise, without the prior written consent of the other party, and
without such consent any attempted transfer shall be null and void and of no
effect. This Agreement shall inure to the benefit of and be binding upon the
Employers and the Executive, their respective successors, executors,
administrators, heirs and permitted assigns. In the event of the Executive's
death prior to the completion by the Bank of all payments due him under this
Agreement, the Employers shall continue such payments to the Executive's
beneficiary designated in writing to the Employers prior to his death (or to his
estate, if he fails to make such designation). This Agreement supersedes any
prior agreement covering the subject matter hereof.
12. Enforceability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
13. Waiver. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.
14. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the Bank,
or, in the case of the Employers, at both of their main offices, attention of
the Board of Directors.
5
<PAGE>
15. Election of Remedies. An election by the Executive to resign after a
Change in Control under the provisions of this Agreement shall not constitute a
breach by the Executive of any employment agreement between the Employers and
the Executive and shall not be deemed a voluntary termination of employment by
the Executive for the purpose of interpreting the provisions of any of the
Employers' benefit plans, programs or policies. Nothing in this Agreement shall
be construed to limit the rights of the Executive under any employment agreement
he may then have with the Employers; provided, however, that if there is a
Terminating Event under Section 3 hereof, the Executive may elect either to
receive the severance payment provided under Section 4 or such termination
benefits as he may under any such employment agreement, but may not elect to
receive both.
16. Amendment. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by duly authorized representatives of
each of the Employers.
17. Governing Law. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of the Commonwealth of
Massachusetts.
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by the Bank, by its duly authorized officer, by the Company, by its
duly authorized officer, and by the Executive, as of the date first above
written.
WITNESS:
/s/ Gregory J. Lyons /s/ Phillip W. Wong
- ------------------------ ------------------------------
Phillip W. Wong
ATTEST: MEDFORD SAVINGS BANK
Eugene R. Murray By: /s/ Arthur H. Meehan
- ------------------------ --------------------------
Clerk Title: Chairman, President and
Chief Executive Officer
-----------------------
[Seal]
ATTEST: MEDFORD BANCORP, INC.
Eugene R. Murray By: /s/ Arthur H. Meehan
- ------------------------ --------------------------
Clerk Title: Chairman, President and
Chief Executive Officer
-----------------------
[Seal]
7
AMENDED AND RESTATED SPECIAL TERMINATION AGREEMENT
AMENDED AND RESTATED AGREEMENT this twenty-sixth day of November, 1997 by
and between Medford Savings Bank (the "Bank") a savings bank with its main
office in Medford, Massachusetts, which Bank will be a wholly-owned subsidiary
of Medford Bancorp, Inc. (the "Company") a Massachusetts corporation, and George
A. Bargamian of Boston, Massachusetts (the "Executive").
1. Purpose. In order to allow the Executive to consider the prospect of a
Change in Control (as defined in Section 2) in an objective manner and in
consideration of the services to be rendered by the Executive to the Bank and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by the Bank, the Bank is willing to provide, subject to the
terms of this Agreement, certain severance benefits to protect the Executive
from the consequences of a Terminating Event (as defined in Section 3) occurring
subsequent to a Change in Control.
2. Change in Control. A "Change in Control" shall be deemed to have
occurred in any one of the following events:
(i) if there has occurred a change in control of either the Company
or the Bank which the Company would be required to report in response to
Item 1 (or, in the case of the Bank, Item 2) of Form 8-K promulgated under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if
such regulation is no longer in effect, any regulations promulgated by the
Securities and Exchange Commission, pursuant to the 1934 Act, which are
intended to serve similar purposes;
(ii) when any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is
defined in Rule 13d-3 promulgated under the 1934 Act), directly or
indirectly, of securities of the Company or the Bank representing
twenty-five percent (25%) or more of the total number of votes that may be
cast for the election of directors of the Company or the Bank, as the case
may be;
(iii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who are
Continuing Directors (as hereinafter defined) cease for any reason to
constitute at least a majority of the Board of Directors of the Company or
the Bank. For this purpose, a "Continuing Director" shall mean (a) an
individual who was a director of the Company or the Bank at the beginning
of such period or (b) any new director (other than a director designated by
a person who has entered into an agreement with the Company or the Bank to
effect a transaction described in clause (ii), (iv) or (v) of this Section
2) whose election by the Board or nomination for election by the Company's
or the Bank's stockholders was approved by a
1
<PAGE>
vote of at least two-thirds (2/3) of the directors of the Company or the
Bank, as appropriate, then still in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved;
(iv) the stockholders of the Company approve a merger or
consolidation of the Company or the Bank with any other corporation or
bank, other than (a) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 80% of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation
or (b) a merger or consolidation effected to implement a recapitalization
of the Company (or similar transaction) in which no "person" (as
hereinabove defined) acquires more than 30% of the combined voting power of
the Company's then outstanding securities; or
(v) the stockholders of the Company or the Bank approve a plan of
complete liquidation of the Company or the Bank or an agreement for the
sale or disposition by the Company or the Bank of all or substantially all
of the Company's or the Bank's assets.
(vi) Notwithstanding the foregoing, no Change in Control shall be
deemed to occur by virtue of the Bank becoming a subsidiary of the Company.
3. Terminating Event. A "Terminating Event" shall mean
(a) termination by the Bank of the employment of the Executive with the
Bank for any reason other than (i) death, (ii) deliberate dishonesty of the
Executive with respect to the Bank or the Company or any subsidiary or affiliate
of either, or (iii) conviction of the Executive of a crime involving moral
turpitude, or
(b) resignation of the Executive from the employ of the Bank, while the
Executive is not receiving payments or benefits from the Bank by reason of the
Executive's disability, subsequent to the occurrence of any of the following
events:
(i) a significant change in the nature or scope of the Executive's
responsibilities, authorities, powers, functions or duties from the
responsibilities, authorities, powers, functions or duties exercised by the
Executive immediately prior to the Change in Control; or
(ii) a determination by the Executive that, as a result of a Change
in Control, he is unable to exercise the responsibilities, authorities,
powers, functions or duties exercised by the Executive immediately prior to
such Change in Control; or
(iii) a reduction in the Executive's annual base salary as in effect
on the date
2
<PAGE>
hereof or as the same may be increased from time to time except for
across-the-board salary reductions similarly affecting all management
personnel of the Bank and the Company and all management personnel of any
person in control of the Bank and the Company; or
(iv) the failure by the Bank or the Company to pay to the Executive
any portion of his current compensation or to pay to the Executive any
portion of an installment of deferred compensation under any deferred
compensation program of the Bank or the Company within seven (7) days of
the date such compensation is due; or
(v) the failure by the Bank or the Company to continue in effect
any material compensation, incentive, bonus or benefit plan in which the
Executive participates immediately prior to the Change in Control, unless
an equitable arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan, or the failure by the Bank
or the Company to continue the Executive's participation therein (or in
such substitute or alternative plan) on a basis not materially less
favorable, in terms of both the amount of benefits provided and the level
of the Executive's participation relative to other participants, as existed
at the time of the Change in Control; or
(vi) the failure by the Bank or the Company to continue to provide
the Executive with benefits substantially similar to those available to the
Executive under any of the life insurance, medical, health and accident, or
disability plans or any other material benefit plans in which the Executive
was participating at the time of the Change in Control, or the taking of
any action by the Bank or the Company which would directly or indirectly
materially reduce any of such benefits, or the failure by the Bank to
provide the Executive with the number of paid vacation days to which the
Executive is entitled on the basis of years of service with the Bank in
accordance with the Bank's normal vacation policy in effect at the time of
the Change in Control; or
(vii) the failure of the Bank to obtain a satisfactory agreement from
any successor to assume and agree to perform this Agreement.
4. Severance Payment. In the event a Terminating Event occurs within three
(3) years after a Change in Control, the Bank shall pay to the Executive an
aggregate amount equal to (x) two times the "base amount" (as defined in Section
280 G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code"))
applicable to the Executive, less (y) One Dollar ($1.00), payable in one
lump-sum payment on the date of termination.
5. Limitation on Benefits.
(a) It is the intention of the Executive and of the Bank that no payments
by the Bank to or for the benefit of the Executive under this Agreement or any
other agreement or plan pursuant to which he is entitled to receive payments or
benefits shall be non-deductible to the
3
<PAGE>
Bank by reason of the operation of Section 280G of the Code relating to
parachute payments. Accordingly, and notwithstanding any other provision of this
Agreement or any such agreement or plan, if by reason of the operation of said
Section 280G, any such payments exceed the amount which can be deducted by the
Bank, such payments shall be reduced to the maximum amount which can be deducted
by the Bank. To the extent that payments exceeding such maximum deductible
amount have been made to or for the benefit of the Executive, such excess
payments shall be refunded to the Bank with interest thereon at the applicable
Federal Rate determined under Section 1274(d) of the Code, compounded annually,
or at such other rate as may be required in order that no such payments shall be
non-deductible to the Bank by reason of the operation of said Section 280G. To
the extent that there is more than one method of reducing the payments to bring
them within the limitations of said Section 280G, the Executive shall determine
which method shall be followed, provided that if the Executive fails to make
such determination within forty-five days after the Bank has sent him written
notice of the need for such reduction, the Bank may determine the method of such
reduction in its sole discretion.
(b) If any dispute between the Bank and the Executive as to any of the
amounts to be determined under this Section 5, or the method of calculating such
amounts, cannot be resolved by the Bank and the Executive, either the Bank or
the Executive after giving three days written notice to the other, may refer the
dispute to a partner in the Boston office of a firm of independent certified
public accountants selected jointly by the Bank and the Executive. The
determination of such partner as to the amount to be determined under Section
5(a) and the method of calculating such amounts shall be final and binding on
both the Bank and the Executive. The Bank shall bear the costs of any such
determination.
6. Employment Status. This Agreement is not an agreement for the employment
of the Executive and shall confer no rights on the Executive except as herein
expressly provided.
7. Term. This Agreement shall take effect on as of the date hereof and
shall terminate upon the earlier of (a) the termination by the Bank of the
employment of the Executive because of death, deliberate dishonesty of the
Executive with respect to the Bank or the Company or any subsidiary or affiliate
of either, or conviction of the Executive of a crime involving moral turpitude,
(b) the resignation or termination of the Executive for any reason prior to a
Change in Control, or (c) the resignation of the Executive after a Change in
Control for any reason other than the occurrence of any of the events enumerated
in Section 3(b)(i)-(vii) of this Agreement.
8. Withholding. All payments made by the Bank under this Agreement shall be
net of any tax or other amounts required to be withheld by the Bank under
applicable law.
9. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of the Commonwealth of Massachusetts by three
arbitrators, one of whom shall be appointed by the Bank, one by the Executive
and the third by the first two arbitrators. If the first two
4
<PAGE>
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators which shall be as provided in this
Section 9. Judgment upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. In the event that it shall be necessary
or desirable for the Executive to retain legal counsel and/or incur other costs
and expenses in connection with the enforcement of any or all of the Executive's
rights under this Agreement, the Bank shall pay (or the Executive shall be
entitled to recover from the Bank, as the case may be) the Executive's
reasonable attorneys' fees and other reasonable costs and expenses in connection
with the enforcement of said rights (including the enforcement of any
arbitration award in court) regardless of the final outcome, unless and to the
extent the arbitrators shall determine that under the circumstances recovery by
the Executive of all or a part of any such fees and costs and expenses would be
unjust. This provision shall not apply to Section 5(b), except in the event that
the Bank and the Executive cannot agree on the selection of the accounting
partner described in said Section.
10. Assignment; Prior Agreements. Neither the Bank nor the Executive may make
any assignment of this Agreement or any interest herein, by operation of law or
otherwise, without the prior written consent of the other party and without such
consent any attempted transfer shall be null and void and of no effect. This
Agreement shall inure to the benefit of and be binding upon the Bank and the
Executive, their respective successors, executors, administrators, heirs and
permitted assigns. In the event of the Executive's death prior to the completion
by the Bank of all payments due him under this Agreement, the Bank shall
continue such payments to the Executive's beneficiary designated in writing to
the Bank prior to his death (or to his estate, if he fails to make such
designation). This Agreement supersedes any prior agreement covering the subject
matter hereof.
11. Enforceability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
12. Waiver. No waiver of any provision hereof shall be effective unless made
in writing and signed by the waiving party. The failure of any party to require
the performance of any term or obligation of this Agreement, or the waiver by
any party of any breach of this Agreement, shall not prevent any subsequent
enforcement of such term or obligation or be deemed a waiver of any subsequent
breach.
13. Notices. Any notices, requests, demands and other communications provided
for by this Agreement shall be sufficient if in writing and delivered in person
or sent by registered
5
<PAGE>
or certified mail, postage prepaid, to the Executive at the last address the
Executive has filed in writing with the Bank or, in the case of the Bank, at the
Bank's main office, attention of the Board of Directors.
14. Election of Remedies. An election by the Executive to resign after a
Change in Control under the provisions of this Agreement shall not constitute a
breach by the Executive of any employment agreement between the Bank and the
Executive and shall not be deemed a voluntary termination of employment by the
Executive for the purpose of interpreting the provisions of any of the Bank's
benefit plans, programs or policies. Nothing in this Agreement shall be
construed to limit the rights of the Executive under any employment agreement he
may then have with the Bank; provided, however, that if there is a Terminating
Event under Section 3 hereof, the Executive may elect either to receive the
severance payment provided under Section 4 or such termination benefits as he
may have under any such employment agreement, but may not elect to receive both.
15. Amendment. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by a duly authorized representative of
the Bank.
16. Governing Law. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of the Commonwealth of
Massachusetts.
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Bank, by its duly authorized officer, and by the Executive, as of the
date first above written.
WITNESS:
/s/ Phillip W. Wong /s/ George Bargamian
- ---------------------- ------------------------------
George A. Bargamian
ATTEST: MEDFORD SAVINGS BANK
/s/ Eugene R. Murray By: /s/ Arthur H. Meehan
- ---------------------- --------------------------
Clerk Title: Chairman, President and Chief
Executive Officer
-----------------------
[Seal]
7
AMENDED AND RESTATED SPECIAL TERMINATION AGREEMENT
AMENDED AND RESTATED AGREEMENT this twenty-sixth day of November, 1997 by
and between Medford Savings Bank (the "Bank") a savings bank with its main
office in Medford, Massachusetts, which Bank will be a wholly-owned subsidiary
of Medford Bancorp, Inc. (the "Company") a Massachusetts corporation, and Eric
B. Loth of North Andover, Massachusetts (the "Executive").
1. Purpose. In order to allow the Executive to consider the prospect of a
Change in Control (as defined in Section 2) in an objective manner and in
consideration of the services to be rendered by the Executive to the Bank and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by the Bank, the Bank is willing to provide, subject to the
terms of this Agreement, certain severance benefits to protect the Executive
from the consequences of a Terminating Event (as defined in Section 3) occurring
subsequent to a Change in Control.
2. Change in Control. A "Change in Control" shall be deemed to have
occurred in any one of the following events:
(i) if there has occurred a change in control of either the Company
or the Bank which the Company would be required to report in response to
Item 1 (or, in the case of the Bank, Item 2) of Form 8-K promulgated under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if
such regulation is no longer in effect, any regulations promulgated by the
Securities and Exchange Commission, pursuant to the 1934 Act, which are
intended to serve similar purposes;
(ii) when any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is
defined in Rule 13d-3 promulgated under the 1934 Act), directly or
indirectly, of securities of the Company or the Bank representing
twenty-five percent (25%) or more of the total number of votes that may be
cast for the election of directors of the Company or the Bank, as the case
may be;
(iii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who are
Continuing Directors (as hereinafter defined) cease for any reason to
constitute at least a majority of the Board of Directors of the Company or
the Bank. For this purpose, a "Continuing Director" shall mean (a) an
individual who was a director of the Company or the Bank at the beginning
of such period or (b) any new director (other than a director designated by
a person who has entered into an agreement with the Company or the Bank to
effect a transaction described in clause (ii), (iv) or (v) of this Section
2) whose election by the Board or nomination for election by the Company's
or the Bank's stockholders was approved by a
1
<PAGE>
vote of at least two-thirds (2/3) of the directors of the Company or the
Bank, as appropriate, then still in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved;
(iv) the stockholders of the Company approve a merger or
consolidation of the Company or the Bank with any other corporation or
bank, other than (a) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 80% of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation
or (b) a merger or consolidation effected to implement a recapitalization
of the Company (or similar transaction) in which no "person" (as
hereinabove defined) acquires more than 30% of the combined voting power of
the Company's then outstanding securities; or
(v) the stockholders of the Company or the Bank approve a plan of
complete liquidation of the Company or the Bank or an agreement for the
sale or disposition by the Company or the Bank of all or substantially all
of the Company's or the Bank's assets.
(vi) Notwithstanding the foregoing, no Change in Control shall be
deemed to occur by virtue of the Bank becoming a subsidiary of the Company.
3. Terminating Event. A "Terminating Event" shall mean
(a) termination by the Bank of the employment of the Executive with the
Bank for any reason other than (i) death, (ii) deliberate dishonesty of the
Executive with respect to the Bank or the Company or any subsidiary or affiliate
of either, or (iii) conviction of the Executive of a crime involving moral
turpitude, or
(b) resignation of the Executive from the employ of the Bank, while the
Executive is not receiving payments or benefits from the Bank by reason of the
Executive's disability, subsequent to the occurrence of any of the following
events:
(i) a significant change in the nature or scope of the Executive's
responsibilities, authorities, powers, functions or duties from the
responsibilities, authorities, powers, functions or duties exercised by the
Executive immediately prior to the Change in Control; or
(ii) a determination by the Executive that, as a result of a Change
in Control, he is unable to exercise the responsibilities, authorities,
powers, functions or duties exercised by the Executive immediately prior to
such Change in Control; or
(iii) a reduction in the Executive's annual base salary as in effect
on the date
2
<PAGE>
hereof or as the same may be increased from time to time except for
across-the-board salary reductions similarly affecting all management
personnel of the Bank and the Company and all management personnel of any
person in control of the Bank and the Company; or
(iv) the failure by the Bank or the Company to pay to the Executive
any portion of his current compensation or to pay to the Executive any
portion of an installment of deferred compensation under any deferred
compensation program of the Bank or the Company within seven (7) days of
the date such compensation is due; or
(v) the failure by the Bank or the Company to continue in effect
any material compensation, incentive, bonus or benefit plan in which the
Executive participates immediately prior to the Change in Control, unless
an equitable arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan, or the failure by the Bank
or the Company to continue the Executive's participation therein (or in
such substitute or alternative plan) on a basis not materially less
favorable, in terms of both the amount of benefits provided and the level
of the Executive's participation relative to other participants, as existed
at the time of the Change in Control; or
(vi) the failure by the Bank or the Company to continue to provide
the Executive with benefits substantially similar to those available to the
Executive under any of the life insurance, medical, health and accident, or
disability plans or any other material benefit plans in which the Executive
was participating at the time of the Change in Control, or the taking of
any action by the Bank or the Company which would directly or indirectly
materially reduce any of such benefits, or the failure by the Bank to
provide the Executive with the number of paid vacation days to which the
Executive is entitled on the basis of years of service with the Bank in
accordance with the Bank's normal vacation policy in effect at the time of
the Change in Control; or
(vii) the failure of the Bank to obtain a satisfactory agreement from
any successor to assume and agree to perform this Agreement.
4. Severance Payment. In the event a Terminating Event occurs within three
(3) years after a Change in Control, the Bank shall pay to the Executive an
aggregate amount equal to (x) two times the "base amount" (as defined in Section
280 G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code"))
applicable to the Executive, less (y) One Dollar ($1.00), payable in one
lump-sum payment on the date of termination.
5. Limitation on Benefits.
(a) It is the intention of the Executive and of the Bank that no payments
by the Bank to or for the benefit of the Executive under this Agreement or any
other agreement or plan pursuant to which he is entitled to receive payments or
benefits shall be non-deductible to the
3
<PAGE>
Bank by reason of the operation of Section 280G of the Code relating to
parachute payments. Accordingly, and notwithstanding any other provision of this
Agreement or any such agreement or plan, if by reason of the operation of said
Section 280G, any such payments exceed the amount which can be deducted by the
Bank, such payments shall be reduced to the maximum amount which can be deducted
by the Bank. To the extent that payments exceeding such maximum deductible
amount have been made to or for the benefit of the Executive, such excess
payments shall be refunded to the Bank with interest thereon at the applicable
Federal Rate determined under Section 1274(d) of the Code, compounded annually,
or at such other rate as may be required in order that no such payments shall be
non-deductible to the Bank by reason of the operation of said Section 280G. To
the extent that there is more than one method of reducing the payments to bring
them within the limitations of said Section 280G, the Executive shall determine
which method shall be followed, provided that if the Executive fails to make
such determination within forty-five days after the Bank has sent him written
notice of the need for such reduction, the Bank may determine the method of such
reduction in its sole discretion.
(b) If any dispute between the Bank and the Executive as to any of the
amounts to be determined under this Section 5, or the method of calculating such
amounts, cannot be resolved by the Bank and the Executive, either the Bank or
the Executive after giving three days written notice to the other, may refer the
dispute to a partner in the Boston office of a firm of independent certified
public accountants selected jointly by the Bank and the Executive. The
determination of such partner as to the amount to be determined under Section
5(a) and the method of calculating such amounts shall be final and binding on
both the Bank and the Executive. The Bank shall bear the costs of any such
determination.
6. Employment Status. This Agreement is not an agreement for the employment
of the Executive and shall confer no rights on the Executive except as herein
expressly provided.
7. Term. This Agreement shall take effect on as of the date hereof and
shall terminate upon the earlier of (a) the termination by the Bank of the
employment of the Executive because of death, deliberate dishonesty of the
Executive with respect to the Bank or the Company or any subsidiary or affiliate
of either, or conviction of the Executive of a crime involving moral turpitude,
(b) the resignation or termination of the Executive for any reason prior to a
Change in Control, or (c) the resignation of the Executive after a Change in
Control for any reason other than the occurrence of any of the events enumerated
in Section 3(b)(i)-(vii) of this Agreement.
8. Withholding. All payments made by the Bank under this Agreement shall be
net of any tax or other amounts required to be withheld by the Bank under
applicable law.
9. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of the Commonwealth of Massachusetts by three
arbitrators, one of whom shall be appointed by the Bank, one by the Executive
and the third by the first two arbitrators. If the first two
4
<PAGE>
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators which shall be as provided in this
Section 9. Judgment upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. In the event that it shall be necessary
or desirable for the Executive to retain legal counsel and/or incur other costs
and expenses in connection with the enforcement of any or all of the Executive's
rights under this Agreement, the Bank shall pay (or the Executive shall be
entitled to recover from the Bank, as the case may be) the Executive's
reasonable attorneys' fees and other reasonable costs and expenses in connection
with the enforcement of said rights (including the enforcement of any
arbitration award in court) regardless of the final outcome, unless and to the
extent the arbitrators shall determine that under the circumstances recovery by
the Executive of all or a part of any such fees and costs and expenses would be
unjust. This provision shall not apply to Section 5(b), except in the event that
the Bank and the Executive cannot agree on the selection of the accounting
partner described in said Section.
10. Assignment; Prior Agreements. Neither the Bank nor the Executive may make
any assignment of this Agreement or any interest herein, by operation of law or
otherwise, without the prior written consent of the other party and without such
consent any attempted transfer shall be null and void and of no effect. This
Agreement shall inure to the benefit of and be binding upon the Bank and the
Executive, their respective successors, executors, administrators, heirs and
permitted assigns. In the event of the Executive's death prior to the completion
by the Bank of all payments due him under this Agreement, the Bank shall
continue such payments to the Executive's beneficiary designated in writing to
the Bank prior to his death (or to his estate, if he fails to make such
designation). This Agreement supersedes any prior agreement covering the subject
matter hereof.
11. Enforceability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
12. Waiver. No waiver of any provision hereof shall be effective unless made
in writing and signed by the waiving party. The failure of any party to require
the performance of any term or obligation of this Agreement, or the waiver by
any party of any breach of this Agreement, shall not prevent any subsequent
enforcement of such term or obligation or be deemed a waiver of any subsequent
breach.
13. Notices. Any notices, requests, demands and other communications provided
for by this Agreement shall be sufficient if in writing and delivered in person
or sent by registered
5
<PAGE>
or certified mail, postage prepaid, to the Executive at the last address the
Executive has filed in writing with the Bank or, in the case of the Bank, at the
Bank's main office, attention of the Board of Directors.
14. Election of Remedies. An election by the Executive to resign after a
Change in Control under the provisions of this Agreement shall not constitute a
breach by the Executive of any employment agreement between the Bank and the
Executive and shall not be deemed a voluntary termination of employment by the
Executive for the purpose of interpreting the provisions of any of the Bank's
benefit plans, programs or policies. Nothing in this Agreement shall be
construed to limit the rights of the Executive under any employment agreement he
may then have with the Bank; provided, however, that if there is a Terminating
Event under Section 3 hereof, the Executive may elect either to receive the
severance payment provided under Section 4 or such termination benefits as he
may have under any such employment agreement, but may not elect to receive both.
15. Amendment. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by a duly authorized representative of
the Bank.
16. Governing Law. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of the Commonwealth of
Massachusetts.
6
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Bank, by its duly authorized officer, and by the Executive, as of the
date first above written.
WITNESS:
/s/ Phillip W. Wong /s/ Eric B. Loth
- ------------------------ ---------------------------------
Eric B. Loth
ATTEST: MEDFORD SAVINGS BANK
/s/ Eugene R. Murray By: /s/ Arthur H. Meehan
- ------------------------ ---------------------------------
Clerk Title: Chairman, President and Chief
Executive Officer
--------------------------
[Seal]
7
AMENDED AND RESTATED SPECIAL TERMINATION AGREEMENT
AMENDED AND RESTATED AGREEMENT this twenty-sixth day of November, 1997 by
and between Medford Savings Bank (the "Bank") a savings bank with its main
office in Medford, Massachusetts, which Bank will be a wholly-owned subsidiary
of Medford Bancorp, Inc. (the "Company") a Massachusetts corporation, and
William F. Rivers of Reading, Massachusetts (the "Executive").
1. Purpose. In order to allow the Executive to consider the prospect of a
Change in Control (as defined in Section 2) in an objective manner and in
consideration of the services to be rendered by the Executive to the Bank and
other good and valuable consideration, the receipt and sufficiency of which is
hereby acknowledged by the Bank, the Bank is willing to provide, subject to the
terms of this Agreement, certain severance benefits to protect the Executive
from the consequences of a Terminating Event (as defined in Section 3) occurring
subsequent to a Change in Control.
2. Change in Control. A "Change in Control" shall be deemed to have
occurred in any one of the following events:
(i) if there has occurred a change in control of either the Company
or the Bank which the Company would be required to report in response to
Item 1 (or, in the case of the Bank, Item 2) of Form 8-K promulgated under
the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if
such regulation is no longer in effect, any regulations promulgated by the
Securities and Exchange Commission, pursuant to the 1934 Act, which are
intended to serve similar purposes;
(ii) when any "person" (as such term is used in Sections 13(d) and
14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is
defined in Rule 13d-3 promulgated under the 1934 Act), directly or
indirectly, of securities of the Company or the Bank representing
twenty-five percent (25%) or more of the total number of votes that may be
cast for the election of directors of the Company or the Bank, as the case
may be;
(iii) during any period of two consecutive years (not including any
period prior to the execution of this Agreement), individuals who are
Continuing Directors (as hereinafter defined) cease for any reason to
constitute at least a majority of the Board of Directors of the Company or
the Bank. For this purpose, a "Continuing Director" shall mean (a) an
individual who was a director of the Company or the Bank at the beginning
of such period or (b) any new director (other than a director designated by
a person who has entered into an agreement with the Company or the Bank to
effect a transaction described in clause (ii), (iv) or (v) of this Section
2) whose election by the Board or nomination for election by the Company's
or the Bank's stockholders was approved by a
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vote of at least two-thirds (2/3) of the directors of the Company or the
Bank, as appropriate, then still in office who either were directors at the
beginning of such period or whose election or nomination for election was
previously so approved;
(iv) the stockholders of the Company approve a merger or
consolidation of the Company or the Bank with any other corporation or
bank, other than (a) a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 80% of
the combined voting power of the voting securities of the Company or such
surviving entity outstanding immediately after such merger or consolidation
or (b) a merger or consolidation effected to implement a recapitalization
of the Company (or similar transaction) in which no "person" (as
hereinabove defined) acquires more than 30% of the combined voting power of
the Company's then outstanding securities; or
(v) the stockholders of the Company or the Bank approve a plan of
complete liquidation of the Company or the Bank or an agreement for the
sale or disposition by the Company or the Bank of all or substantially all
of the Company's or the Bank's assets.
(vi) Notwithstanding the foregoing, no Change in Control shall be
deemed to occur by virtue of the Bank becoming a subsidiary of the Company.
3. Terminating Event. A "Terminating Event" shall mean
(a) termination by the Bank of the employment of the Executive with the
Bank for any reason other than (i) death, (ii) deliberate dishonesty of the
Executive with respect to the Bank or the Company or any subsidiary or affiliate
of either, or (iii) conviction of the Executive of a crime involving moral
turpitude, or
(b) resignation of the Executive from the employ of the Bank, while the
Executive is not receiving payments or benefits from the Bank by reason of the
Executive's disability, subsequent to the occurrence of any of the following
events:
(i) a significant change in the nature or scope of the Executive's
responsibilities, authorities, powers, functions or duties from the
responsibilities, authorities, powers, functions or duties exercised by the
Executive immediately prior to the Change in Control; or
(ii) a determination by the Executive that, as a result of a Change
in Control, he is unable to exercise the responsibilities, authorities,
powers, functions or duties exercised by the Executive immediately prior to
such Change in Control; or
(iii) a reduction in the Executive's annual base salary as in effect
on the date
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hereof or as the same may be increased from time to time except for
across-the-board salary reductions similarly affecting all management
personnel of the Bank and the Company and all management personnel of any
person in control of the Bank and the Company; or
(iv) the failure by the Bank or the Company to pay to the Executive
any portion of his current compensation or to pay to the Executive any
portion of an installment of deferred compensation under any deferred
compensation program of the Bank or the Company within seven (7) days of
the date such compensation is due; or
(v) the failure by the Bank or the Company to continue in effect
any material compensation, incentive, bonus or benefit plan in which the
Executive participates immediately prior to the Change in Control, unless
an equitable arrangement (embodied in an ongoing substitute or alternative
plan) has been made with respect to such plan, or the failure by the Bank
or the Company to continue the Executive's participation therein (or in
such substitute or alternative plan) on a basis not materially less
favorable, in terms of both the amount of benefits provided and the level
of the Executive's participation relative to other participants, as existed
at the time of the Change in Control; or
(vi) the failure by the Bank or the Company to continue to provide
the Executive with benefits substantially similar to those available to the
Executive under any of the life insurance, medical, health and accident, or
disability plans or any other material benefit plans in which the Executive
was participating at the time of the Change in Control, or the taking of
any action by the Bank or the Company which would directly or indirectly
materially reduce any of such benefits, or the failure by the Bank to
provide the Executive with the number of paid vacation days to which the
Executive is entitled on the basis of years of service with the Bank in
accordance with the Bank's normal vacation policy in effect at the time of
the Change in Control; or
(vii) the failure of the Bank to obtain a satisfactory agreement from
any successor to assume and agree to perform this Agreement.
4. Severance Payment. In the event a Terminating Event occurs within three
(3) years after a Change in Control, the Bank shall pay to the Executive an
aggregate amount equal to (x) two times the "base amount" (as defined in Section
280 G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code"))
applicable to the Executive, less (y) One Dollar ($1.00), payable in one
lump-sum payment on the date of termination.
5. Limitation on Benefits.
(a) It is the intention of the Executive and of the Bank that no payments
by the Bank to or for the benefit of the Executive under this Agreement or any
other agreement or plan pursuant to which he is entitled to receive payments or
benefits shall be non-deductible to the
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Bank by reason of the operation of Section 280G of the Code relating to
parachute payments. Accordingly, and notwithstanding any other provision of this
Agreement or any such agreement or plan, if by reason of the operation of said
Section 280G, any such payments exceed the amount which can be deducted by the
Bank, such payments shall be reduced to the maximum amount which can be deducted
by the Bank. To the extent that payments exceeding such maximum deductible
amount have been made to or for the benefit of the Executive, such excess
payments shall be refunded to the Bank with interest thereon at the applicable
Federal Rate determined under Section 1274(d) of the Code, compounded annually,
or at such other rate as may be required in order that no such payments shall be
non-deductible to the Bank by reason of the operation of said Section 280G. To
the extent that there is more than one method of reducing the payments to bring
them within the limitations of said Section 280G, the Executive shall determine
which method shall be followed, provided that if the Executive fails to make
such determination within forty-five days after the Bank has sent him written
notice of the need for such reduction, the Bank may determine the method of such
reduction in its sole discretion.
(b) If any dispute between the Bank and the Executive as to any of the
amounts to be determined under this Section 5, or the method of calculating such
amounts, cannot be resolved by the Bank and the Executive, either the Bank or
the Executive after giving three days written notice to the other, may refer the
dispute to a partner in the Boston office of a firm of independent certified
public accountants selected jointly by the Bank and the Executive. The
determination of such partner as to the amount to be determined under Section
5(a) and the method of calculating such amounts shall be final and binding on
both the Bank and the Executive. The Bank shall bear the costs of any such
determination.
6. Employment Status. This Agreement is not an agreement for the employment
of the Executive and shall confer no rights on the Executive except as herein
expressly provided.
7. Term. This Agreement shall take effect on as of the date hereof and
shall terminate upon the earlier of (a) the termination by the Bank of the
employment of the Executive because of death, deliberate dishonesty of the
Executive with respect to the Bank or the Company or any subsidiary or affiliate
of either, or conviction of the Executive of a crime involving moral turpitude,
(b) the resignation or termination of the Executive for any reason prior to a
Change in Control, or (c) the resignation of the Executive after a Change in
Control for any reason other than the occurrence of any of the events enumerated
in Section 3(b)(i)-(vii) of this Agreement.
8. Withholding. All payments made by the Bank under this Agreement shall be
net of any tax or other amounts required to be withheld by the Bank under
applicable law.
9. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of the Commonwealth of Massachusetts by three
arbitrators, one of whom shall be appointed by the Bank, one by the Executive
and the third by the first two arbitrators. If the first two
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<PAGE>
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators which shall be as provided in this
Section 9. Judgment upon the award rendered by the arbitrators may be entered in
any court having jurisdiction thereof. In the event that it shall be necessary
or desirable for the Executive to retain legal counsel and/or incur other costs
and expenses in connection with the enforcement of any or all of the Executive's
rights under this Agreement, the Bank shall pay (or the Executive shall be
entitled to recover from the Bank, as the case may be) the Executive's
reasonable attorneys' fees and other reasonable costs and expenses in connection
with the enforcement of said rights (including the enforcement of any
arbitration award in court) regardless of the final outcome, unless and to the
extent the arbitrators shall determine that under the circumstances recovery by
the Executive of all or a part of any such fees and costs and expenses would be
unjust. This provision shall not apply to Section 5(b), except in the event that
the Bank and the Executive cannot agree on the selection of the accounting
partner described in said Section.
10. Assignment; Prior Agreements. Neither the Bank nor the Executive may make
any assignment of this Agreement or any interest herein, by operation of law or
otherwise, without the prior written consent of the other party and without such
consent any attempted transfer shall be null and void and of no effect. This
Agreement shall inure to the benefit of and be binding upon the Bank and the
Executive, their respective successors, executors, administrators, heirs and
permitted assigns. In the event of the Executive's death prior to the completion
by the Bank of all payments due him under this Agreement, the Bank shall
continue such payments to the Executive's beneficiary designated in writing to
the Bank prior to his death (or to his estate, if he fails to make such
designation). This Agreement supersedes any prior agreement covering the subject
matter hereof.
11. Enforceability. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
12. Waiver. No waiver of any provision hereof shall be effective unless made
in writing and signed by the waiving party. The failure of any party to require
the performance of any term or obligation of this Agreement, or the waiver by
any party of any breach of this Agreement, shall not prevent any subsequent
enforcement of such term or obligation or be deemed a waiver of any subsequent
breach.
13. Notices. Any notices, requests, demands and other communications provided
for by this Agreement shall be sufficient if in writing and delivered in person
or sent by registered
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or certified mail, postage prepaid, to the Executive at the last address the
Executive has filed in writing with the Bank or, in the case of the Bank, at the
Bank's main office, attention of the Board of Directors.
14. Election of Remedies. An election by the Executive to resign after a
Change in Control under the provisions of this Agreement shall not constitute a
breach by the Executive of any employment agreement between the Bank and the
Executive and shall not be deemed a voluntary termination of employment by the
Executive for the purpose of interpreting the provisions of any of the Bank's
benefit plans, programs or policies. Nothing in this Agreement shall be
construed to limit the rights of the Executive under any employment agreement he
may then have with the Bank; provided, however, that if there is a Terminating
Event under Section 3 hereof, the Executive may elect either to receive the
severance payment provided under Section 4 or such termination benefits as he
may have under any such employment agreement, but may not elect to receive both.
15. Amendment. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by a duly authorized representative of
the Bank.
16. Governing Law. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of the Commonwealth of
Massachusetts.
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IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Bank, by its duly authorized officer, and by the Executive, as of the
date first above written.
WITNESS:
/s/ Gregory J. Lyons /s/ William F. Rivers
- ---------------------- ------------------------------
William F. Rivers
ATTEST: MEDFORD SAVINGS BANK
Eugene R. Murray By: /s/ Arthur H. Meehan
- ---------------------- --------------------------
Clerk Title: Chairman, President and
Chief Executive Officer
-----------------------
[Seal]
7
================================================================================
MEDFORD
SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
================================================================================
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
BASIC PLAN DOCUMENT
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
1.1 Actuarial Equivalent 1
1.2 Average Compensation 1
1.3 Beneficiary 1
1.4 Board 1
1.5 Compensation 1
1.6 Construction of Contract 1
1.7 Disability 1
1.8 Early Retirement Age 1
1.9 Election 1
1.10 Employee 1
1.11 Employer 1
1.12 Entry Date 1
1.13 IRC 1
1.14 Normal Form of Benefit 1
1.15 Normal Retirement Age 2
1.16 Normal Retirement Benefit 2
1.17 Participant 2
1.18 Plan 2
1.19 Plan Administrator 2
1.20 Plan Year 2
1.21 Retirement Date 2
1.22 Social Security Benefit 2
1.23 Termination Date 2
1.24 Vested Benefit 2
1.25 Years of Service 2
ARTICLE II
BENEFITS
2.1 Accrued Benefit 3
2.2 Automatic Pension 3
2.3 Optional Forms of Payment 3
2.4 Payment of the Accrued Benefit 3
2.5 Early Retirement Benefit 3
2.6 Late Retirement Benefit 3
2.7 Termination of Employment Benefit 3
2.8 Denial of Benefits 3
<PAGE>
ARTICLE III
DEATH BENEFITS
3.1 Death Benefit 4
3.2 Designation of Beneficiary 4
3.3 Death of Participant After Retirement or Termination of 4
Employment
ARTICLE IV
DISABILITY BENEFITS
4.1 Disability Benefits 5
4.2 Return to Work 5
ARTICLE V
FUNDING
5.1 Investment 6
ARTICLE VI
MISCELLANEOUS
6.1 Alienability 7
6.2 Amendment by Employer 7
6.3 Expenses 7
6.4 Limitation 7
6.5 Change of Control 7
6.6 Violation of Agreement 8
6.7 For Cause Clause 8
6.8 Non-Compete Clause 8
----------------------------
ADOPTION AGREEMENT
APPENDIX A Supplemental Executive Retirement Plan Agreement
APPENDIX B Change of Beneficiary Form
APPENDIX C Application for Plan Benefits
APPENDIX D Sample ERISA Department of Labor Statement
APPENDIX E Sample Votes of Board
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
BASIC PLAN DOCUMENT
ARTICLE I
DEFINITIONS
1.1 Actuarial Equivalent means any benefit under this Plan which, at any time,
has the same present value as a straight life annuity commencing at Normal
Retirement Age based on 6 percent interest and the 1971 Individual Annuity
Mortality Table for males set back 3 years, discounted to the payment
commencement date by 7 percent, or by interest rates and mortality
specified in Section 2.3 of Article II, if applicable.
1.2 Average Compensation means the average of the Participant's highest 3
consecutive Plan Years Compensation prior to his Retirement Date unless
otherwise elected in Section A3 of the Adoption Agreement.
1.3 Beneficiary shall mean the person or persons designated by the Participant
to receive benefits under the Plan after the death of the Participant.
1.4 Board shall mean the Board of Directors of the Employer.
1.5 Compensation means the definition elected in Section A3 of the Adoption
Agreement.
1.6 Construction of Contract shall be made without regard to the gender or
whether words are used in the singular or plural unless the context
requires such interpretation.
1.7 Disability means the Participant's entitlement to Social Security
disability income benefits.
1.8 Early Retirement Age is the earliest of the ages elected in Section A4(b)
of the Adoption Agreement.
1.9 Election means a written instrument executed by a Participant and filed
with the Plan Administrator on or before its effective date, exercising
one or more rights under this Plan.
1.10 Employee shall mean each current or future Employee of the Employer who is
a member of a select group of management or otherwise highly compensated
personnel as determined by the Board.
1.11 Employer means the Medford Savings Bank, its successors and assigns, any
subsidiary or affiliated organizations authorized by the Board to
participate in this Plan with respect to their Employees, and any
organization into which the Employer may be merged or consolidated or to
which all or substantially all of its assets may be transferred.
1.12 Entry Date means the date that an Employee satisfies the eligibility
requirements set in Section A5 of the Adoption Agreement.
1.13 IRC means the Internal Revenue Code of 1986 and the appropriate section
thereof is designated by the numbers following IRC.
1.14 Normal Form of Benefit means an annuity payable for the life of the
Participant ceasing at his death.
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1.15 Normal Retirement Age means the age elected in Section A4(a) of the
Adoption Agreement.
1.16 Normal Retirement Benefit means the Accrued Benefit payable to the
Participant upon separation from service at Normal Retirement Age under
the Plan.
1.17 Participant means an Employee who has satisfied the eligibility
requirements contained in Section A5 of the Adoption Agreement.
Participation will commence on the Employee's Entry Date. A terminated
Employee who has a Vested Benefit or a Beneficiary entitled to benefits
hereunder is an Inactive Participant.
1.18 Plan means the Employer's Supplemental Executive Retirement Plan.
1.19 Plan Administrator shall mean the individual designated by the Board to
administer the Plan.
1.20 Plan Year means the period specified in Section A2 of the Adoption
Agreement.
1.21 Retirement Date means the date that payment of a Participant's Accrued
Benefit commences which shall be the first day of the month following
Normal Retirement Age unless the Participant elects a different Retirement
Date with the consent of the Employer.
1.22 Social Security Benefit means the monthly old age insurance benefit the
Participant is first entitled to receive at his Social Security Retirement
Age. Prior to his Social Security Retirement Age it will be assumed that
the Participant will continue to earn the same annual Compensation which
is in effect for him and that the Social Security law will not change
thereafter, and by using his actual salary history, if available, or by
estimating his prior Compensation using a 5% salary scale projected
backwards.
1.23 Termination Date means the date a Participant ceases to be an Employee.
1.24 Vested Benefit means an Accrued Benefit which is non-forfeitable. An
Accrued Benefit derived from Employer Contributions is 100% vested at the
earliest of the Participant's Early Retirement Age, or at an earlier
mandatory Retirement Age enforced by the Employer, or at his Disability or
his death and prior thereto as set in Section A7 of the Adoption
Agreement.
1.25 Years of Service shall be defined as elected in Section A6 of the Adoption
Agreement.
2
<PAGE>
ARTICLE II
BENEFITS
2.1 Accrued Benefit means the benefit derived from Employer contributions that
a Participant will begin to receive at Normal Retirement Age, as elected
in A8 of the Adoption Agreement. For purposes of determining the amount of
benefits payable under any qualified plan of the Employer, benefits
attributable to Employee contributions, shall not be considered.
2.2 Automatic Pension means a straight life annuity for a Participant who is
not married on the Retirement Date and an actuarially equivalent joint &
survivor annuity for a Participant who is married on the Retirement Date.
2.3 Optional Forms of Payment. In lieu of the Automatic Pension, the
Participant may elect, any time prior to the date specified in Section 2.5
below, Actuarial Equivalent Optional Forms of Payment as provided in
Sections A9, A11 and A12 of the Adoption Agreement.
Lump sum payments of the defined benefit portion of the Accrued Benefit
shall be based on the mortality table and interest rates in Section 1.1.
2.4 Payment of the Accrued Benefit shall begin effective with the first day of
the month next following termination of employment and, unless the
Participant elects otherwise and with the written approval of the Board,
no later than 60 days after the later of the last day of the Plan Year in
which the Participant:
a) attains Normal Retirement Age; or
b) terminates his service with the Employer.
2.5 Early Retirement Benefit. The amount payable to a Participant who
terminates employment after attaining Early Retirement Age but before
Normal Retirement Age is the Actuarial Equivalent of the Participant's
Accrued Benefit payable at Normal Retirement Age. The Early Retirement
Benefit is payable as provided in Sections 2.2 and 2.3 of the Plan.
2.6 Late Retirement Benefit. The amount payable to a Participant who continues
working after Normal Retirement Age is the Participant's Accrued Benefit
upon retirement. The Late Retirement Benefit is payable as provided in
Sections 2.2 and 2.3 of this Plan.
2.7 Termination of Employment Benefit. The amount payable at the Termination
Date to a Participant who terminates employment prior to Early Retirement
Age and satisfies the Vesting requirement in A7 of the Adoption Agreement
is the Actuarial Equivalent of the Accrued Benefit payable at Normal
Retirement Age. The Termination of Employment Benefit is payable as
provided in Sections 2.2 and 2.3 of this Plan.
2.8 Denial of Benefits. The Plan Administrator shall give a written
explanation to the Participant, setting forth the specific reasons for the
denial of any benefit.
3
<PAGE>
ARTICLE III
DEATH BENEFITS
3.1 Death Benefit. If a Participant dies prior to his Retirement Date, his
designated Beneficiary will be paid, commencing on the first day of the
month next following the Participant's death, (i) the Actuarial Equivalent
value of his Accrued Benefit on the day he died, payable under any
Optional Form of Payment provided in Section A9 of the Adoption Agreement.
If a Beneficiary dies prior to receiving all benefits available under the
Optional Form of Payment, the remaining benefits shall be made to the
person or persons named by the Beneficiary to receive the benefits payable
under such Optional Form of Payment or to the Beneficiary's estate if no
such person is named. If the Participant is not survived by a named
Beneficiary, or if the Board is in doubt as to the effective status of a
Beneficiary designation, then the Death Benefit provided by this Section
3.1 shall be paid to the Participant's estate in one lump sum.
3.1 Designation of Beneficiary. The Participant shall have the right to
designate a Beneficiary, including a contingent beneficiary, entitled to
receive the benefits payable under Section 3.1 in the event of his death.
Such designation shall be made in writing and delivered to the Board. The
Participant may change such designation from time to time and may revoke
such designation.
3.3 Death of Participant After Retirement or Termination of Employment. Upon
the death of the Participant after retirement or other termination of
employment, no benefits will be payable to the Participant's Beneficiary
or any other person so designated by the Participant unless the Automatic
Pension or Optional Form of Payment in effect or elected under Section 2.3
or 2.4 of this Plan provides a death benefit.
4
<PAGE>
ARTICLE IV
DISABILITY BENEFITS
4.1 Disability Benefits. If the Participant is unable to continue in the
employ of the Employer by reason of Disability, the Participant shall be
entitled to receive a Disability Benefit, in lieu of all other benefits
under the Plan, commencing on the first day of the month next following
such determination of Disability, payable in monthly installments, in an
amount equal to the amount elected in A10 of the Adoption Agreement.
Distribution may be in any form provided in A11 of the Adoption Agreement.
4.2 Return to Work. In the event the Participant returns to work after
receiving Disability Benefits, Disability Benefits shall cease and the
Participant shall continue in this Plan as though such disability had not
occurred. Accrued benefits payable under the Plan thereafter shall be
determined on the basis of the Participant's total Years of Service and
shall be adjusted to take into account the Actuarial Equivalent of the
Disability Benefits, if any, previously paid to the Participant.
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<PAGE>
ARTICLE V
FUNDING
5.1 Investment. All payments of amounts under the Plan shall be paid from the
general funds of the Employer and no special or separate fund shall
necessarily be established and no other segregation of assets shall
necessarily be made to assure the payment of such amounts. Neither
Participants nor their beneficiaries or estates shall have any right,
title, or interest whatever in or to any investments, including any
"Applicable Policy", which the Employer may make to aid it in meeting its
obligation hereunder. To the extent that any person acquires any right to
receive payments from the Employer under the Plan, such right shall be no
greater than the right of an unsecured general creditor of the Employer.
Notwithstanding the foregoing, nothing in the Plan document shall preclude
the Employer from contributing to or making Plan payments from a Rabbi
Trust, as elected in the Adoption Agreement.
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<PAGE>
ARTICLE VI
MISCELLANEOUS
6.1 Alienability. The right of a Participant to receive any amount credited to
the Participant under the Plan shall not be transferable or assignable by
the Participant. No person shall be entitled to anticipate any payment by
assignment, alienation, sale, pledge, encumbrance or transfer in any form
or manner prior to actual or constructive receipt thereof.
6.2 Amendment by Employer. The Employer may amend the Adoption Agreement by
selecting any of its elective provisions. The amendment may not reduce the
Accrued Benefit as elected in A8 of the Adoption Agreement. Any such
amendment shall be delivered to the Participants and Beneficiaries and to
the Plan Administrator.
6.3 Expenses. The Employer will pay all Expenses of the Plan.
6.4 Limitation. The establishment of this Plan, or the payment of benefits,
shall not give any Participant or Employee any legal or equitable right
against the Employer. This Plan shall not give any Participant or Employee
the right to be retained in the service of the Employer.
This Plan shall be governed by, and shall be construed and interpreted in
accordance with, applicable federal law and with the laws of the
Commonwealth of Massachusetts.
The Accrued Benefit of any individual under the Plan shall be reduced by
the amount, if any, by which the cash value or the death proceeds under
any Applicable Policy maintained by the Employer with respect to such
individual's benefits is reduced as a result of any misstatement or other
action or omission by the Participant to which such Applicable Policy
relates or by any such other individual.
In the event that any one or more of the provisions of this Plan shall be
held to be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be
affected or impaired thereby and the invalidated provision shall be
automatically amended to the extent necessary to make it valid consistent
with the intent of the Employer hereunder.
6.5 Change of Control. A Participant shall be immediately vested in the total
amount credited to his Accrued Benefit in the event of a change of control
of the Employer, and such amount will be immediately distributable to the
Participant. A change of control for this purpose shall be deemed to occur
upon the purchase or other acquisition by any person, entity, or group of
persons, within the meaning of section 13(d) or 14(d) of the Securities
Exchange Act of 1934 ("Act"), or any comparable successor provisions, of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Act) of 50 percent or more of either the outstanding shares of common
stock or the combined voting power of the Employer's then outstanding
voting securities entitled to vote generally, or the approval by the
stockholders of the Employer of a reorganization, merger, or
consolidation, in each case, with respect to which persons who were
stockholders of the Employer immediately prior to such reorganization,
merger, or consolidation, do not immediately thereafter, own more than 50
percent of the combined voting power entitled to vote generally in the
election of directors of the reorganized, merged, or consolidated
Employer's then outstanding securities, or a liquidation or dissolution of
the Employer of the sale
7
<PAGE>
of all or substantially all of the Employer's assets.
6.6 Violation of Agreement. In the event that the Participant violates any of
the terms of this Plan, the Employer, in addition to any other rights
which it may have, shall be relieved of the liability to make any further
payments under the Plan to, or on behalf of, the Participant and shall
have the right to specifically enforce this Plan by proceedings in equity.
6.7 For Cause Clause. As elected in Section A13(a) of the Adoption Agreement,
all of a Participant's benefits under this Plan will be forfeited if the
Participant's employment is terminated for cause. The Corporation shall
have "cause" to terminate the Participant's employment hereunder because
of the Participant's personal dishonesty, incompetence, willful
misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of any
law, rule or regulation involving moral turpitude or final cease and
desist order, or material breach of any provision of this Agreement. For
purposes of this Section, no act or failure to act on the Participant's
part will be considered "willful" unless done, or admitted to be done, by
him in bad faith and without reasonable belief that his action or omission
was in the best interests of the Employer; provided that any act or
omission to act by the Participant in reliance upon an opinion of counsel
to the Employer shall not be deemed to be willful. Notwithstanding the
foregoing, the Participant shall not be deemed to have been terminated for
cause unless and until there shall have been delivered to him a copy of a
certification by the Clerk of the Corporation that three-fourths (3/4) of
the entire Board of Directors of the Employer found in good faith that the
Participant was guilty of conduct which is deemed to be Cause as defined
above and specifying the particulars thereof, after reasonable notice to
the Participant and an opportunity for him together with his counsel, to
be heard before such majority.
6.8 Non-Compete Clause. If the Non-Compete Clause is elected in Section A
13(b) of the Adoption Agreement, the Participant must not violate the
terms of this Section 6.8.
After becoming a Participant in this Plan, and for the period after
termination of employment with the Employer as elected in Section A13(b)
of the Adoption Agreement, the Participant may not be an employee or
consultant of, or hold any other position with, or directly or indirectly
assist, any bank in connection with any banking activities by said bank in
the same county where the Participant's Employer has a branch; nor will
the Participant attempt to hire any employee of the Employer, assist in
such hiring by any other person or entity, encourage any such employee to
terminate his or her relationship with the Employer, or solicit or
encourage any customer of the Employer to terminate its relationship with
the Employer or to conduct with any other person or entity any business or
activity which such customer conducts or could conduct with the Employer;
provided, however, that nothing herein shall prohibit the Participant from
owning up to 2% of the shares of common stock of any bank whose shares are
publicly traded on a national securities exchange or in the
over-the-counter market.
8
<PAGE>
MEDFORD SAVINGS BANK
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
ADOPTION AGREEMENT
The undersigned Employer adopts this Plan for the exclusive benefit of its
eligible employees and beneficiaries to provide retirement and pre-retirement
benefits.
The Plan shall operate in accordance with the Basic Plan Document and the
Adoption Agreement provisions as elected.
Medford Savings Bank
PLAN NAME: Supplemental Executive Retirement Plan
--------------------------------------
EMPLOYER NAME: Medford Savings Bank
--------------------------------------
FEDERAL IDENTIFICATION NUMBER: 04-1609330
--------------------------------------
PLAN ADMINISTRATOR: Phillip W. Wong, S.V.P.
--------------------------------------
A1. EFFECTIVE DATE OF PLAN: 11-01-94
--------------
A2. PLAN YEAR:
a) The Plan Year is the calendar year.
------
x b) The Plan Year is a 12 month period beginning on 11-01 .
------ -------------
A3. COMPENSATION AND AVERAGE COMPENSATION:
a) COMPENSATION
x 1) Reported W-2 earnings.
------
2) As defined in IRC 415(c)(3).
------ (elect 1) or 2))
3) Compensation as defined in 1) or 2) shall exclude bonuses.
------
4) Including ____ not including ____ amounts contributed pursuant
------ to a Salary Reduction Agreement and which is not included in
the participant's gross income under IRC 125, 402(a)(8),
402(H) or 403(b).
Compensation as elected means Compensation which is actually
paid to a Participant during the Plan Year and earned from the
Participant's Entry Date.
b) AVERAGE COMPENSATION is _______________________________________________
(If left blank, the definition of Average Compensation in Plan Section 1.2
shall apply.)
A4. DATES:
a) NORMAL RETIREMENT AGE IS 65 .
-----
b) EARLY RETIREMENT AGE IS 62 .
-----
AA1
<PAGE>
A5. ELIGIBILITY
a) Class of employees (i.e., Exec. V.P. and above/employees
----- earning over $150,000 or IRC 401(a)(17)). (please define)
---------------------------------------------------------
---------------------------------------------------------
x b) Individuals by name. (please define)
-----
Arthur H. Meehan
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
c) Other, (please define)
-----
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
A6. YEARS OF SERVICE
x a) Same as SBERA Pension Plan.
-----
b) Same as SBERA Defined Contribution Plan.
-----
c) Other
-----
---------------------------------------------------------
---------------------------------------------------------
A7. VESTING
a) Minimum Age of 60 .
--------
b) Minimum years of service of 3 .
-------
A8. BENEFITS (select all applicable formulas)
x a) Make up benefits which will be lost under defined benefit
----- plans due to the reduction in the IRC 401(a)(17) compensation
ceiling to $150,000 effective 11/1/94. (The amount lost will
be computed by applying the IRC 401(a)(17) cost of living
adjustment as a percentage, compounded each year, to the IRC
401(a)(17) limit effective 12/31/93).
b) Make up benefits lost under defined benefit plans due to all
----- IRC 401(a)(17) compensation ceilings. (Includes compensation
in excess of $200,000 for plan years beginning in 1989 and in
excess of $150,000 for plan years beginning in 1994; i.e.
there is no limit on the compensation used.)
c) Make up all benefits which will be lost under defined
----- contribution plans due to the reduction in the IRC 401(a)(17)
compensation ceiling to $150,000 effective 1/1/94. (The amount
lost will be computed by applying the IRC 401(a)(17) cost of
living adjustment as a percentage, compounded each year, to
the IRC 401(a)(17) limit effective 12/31/93.)
AA2
<PAGE>
d) Make up benefits lost under defined contribution plans due to
----- all IRC 401(a)(17) compensation ceilings. (Includes
compensation in excess of $200,000 for plan years beginning in
1989 and in excess of $150,000 for plan years beginning in
1994; i.e. there is no limit on the compensation used.)
e) Allow different benefit formulas (please define - for example,
----- Normal Retirement Benefit of ____% of Final Average
Compensation times Years of Service offset by Accrued Benefit
under the defined benefit plan and further offset by ____% of
the Participant's Social Security Benefit.)
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
A9. DISTRIBUTION OPTIONS AT DEATH AND AT EARLY, NORMAL AND LATE RETIREMENT
(select desired options)
a) Lump Sum
-----
b) Annual Installments over ______ (specify options) years
-----
c) Life Annuity
-----
x d) Joint and 100 % (specify options) Survivor Annuity
-----
A10. DISABILITY RETIREMENT BENEFIT
x a) Accrued Benefit (unreduced for early commencement)
-----
b) Actuarially Equivalent Accrued Benefit (reduced for early
----- commencement)
c) Accrued Benefit with payment deferred to _______________
-----
d) None
-----
e) Other
-----
---------------------------------------------------------
---------------------------------------------------------
---------------------------------------------------------
A11. DISTRIBUTION OPTIONS AT DISABILITY RETIREMENT (select desired options)
a) Lump Sum
-----
b) Annual Installments over ______ (specify options) years
-----
c) Life Annuity
-----
x d) Joint and 100 % (specify option) Survivor Annuity
-----
e) No Distribution
-----
A12. DISTRIBUTION OPTIONS DUE TO TERMINATION OF EMPLOYMENT, IF VESTED
(select desired options)
a) Lump Sum
-----
b) Annual Installments over ______ (specify options) years
-----
c) Life Annuity
-----
x d) Joint and 100 % (specify option) Survivor Annuity
-----
AA3
<PAGE>
A13. FORFEITURE CLAUSE
x a) For cause
-----
b) Non-compete clause within the Commonwealth of Massachusetts
----- which shall be applicable for years after the Participant
terminates employment with the Employer.
A14. CONTROLLING STATE LAW
The laws of The Commonwealth of Massachusetts shall control this Plan.
Employer:
Medford Savings Bank
------------------------------
FID # 04-1609330
------------------------
January 1, 1995 BY: /s/ William Rivers
- ------------------- --------------------------
AA4
<PAGE>
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT
I hereby acknowledge that, as an Employee, I have been offered an opportunity to
participate in the Supplemental Executive Retirement Plan (the "Plan") providing
the Supplemental Benefits specified in Section A8 of the Adoption Agreement
(which Plan and Adoption Agreement are attached hereto and made a part hereof),
and that I hereby elect to participate in the Plan.
I further acknowledge that neither the Employer nor any of its subsidiaries,
affiliated companies, employees or agents has any responsibility or liability
whatsoever for any changes which I may make in personal plans or programs as a
result of my decision to participate in the Plan and I recognize that the
Employer has the right to terminate, amend or modify the Plan at any time.
I here designate as Primary Beneficiary under the Plan:
Jeanne M. Meehan
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
I hereby designate as Secondary Beneficiary under the Plan:
Arthur H. Meehan Family Trust
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
I understand that Beneficiary means the Primary Beneficiary if the Primary
Beneficiary survives me, and the Secondary Beneficiary if the Primary
Beneficiary does not survive me and means my estate if neither the Primary
Beneficiary nor the Secondary Beneficiary survives me. I reserve the right
to change the Primary and/or Secondary Beneficiary from time to time in
the manner as required by the Plan, and I agree that no change in
Beneficiary shall be effective unless received by the Employer while I am
living and until acknowledged in writing by the Employer.
Notices to me (Participant) shall be sent as follows:
Name Arthur H. Meehan
---------------------------------------------------------------------
Street Address or
Post Office Box No. 5 Fox Run Road
------------------------------------------------------
City and State Dover, MA Zip Code 02030
--------------------------------------- ------
1
<PAGE>
IN WITNESS WHEREOF, the Employer and I have executed this acceptance as of the
1st day of January , 1995.
EMPLOYEE:
/s/ Arthur H. Meehan
-----------------------------
(Signature)
Arthur H. Meehan
-----------------------------
(Type or Print Name Under Signature)
ACCEPTED
Medford Savings Bank
-------------------------------
By: /s/ William Rivers
-------------------------------
Authorized Signature
2
EXECUTIVE SUPPLEMENTAL BENEFIT AGREEMENT
This agreement, made and entered into this 28th day of October 1997 by
Medford Savings Bank, a banking corporation organized and existing under the
laws of the Commonwealth of Massachusetts hereinafter called the Bank, and
Arthur H. Meehan of Dover, Massachusetts hereinafter called the Executive.
WHEREAS, the Executive has been and is now serving the Bank as Chairman,
President and Chief Executive Officer; and
WHEREAS, it is the opinion of the Board of Directors that the Executive's
services to the Bank constitute an invaluable contribution to the general
welfare of the Bank and in bringing it to its present status of operating
efficiency and its high regard in the banking business; and
WHEREAS, the experience of the Executive, his knowledge of the affairs of
the Bank, his reputation and contacts in the banking industry are so valuable
that assurance of his continued services is essential for the future growth and
profits of the Bank and it is in the best interests of the Bank to arrange terms
of continued employment for the Executive so as to reasonably assure his
remaining in the employment of the Bank during his lifetime or until his age of
retirement; and
WHEREAS, it is the desire of the Bank that the Executive's services be
retained as herein provided; and
WHEREAS, The Executive is willing to continue in the employ of the Bank
provided the Bank agrees to pay to him or is beneficiaries certain benefits in
accordance with the terms and conditions hereinafter set forth;
NOW THEREFORE, in consideration of services performed in the past and to
be performed in the future as well as of the mutual promises and covenants
herein contained, it is agreed as follows:
ARTICLE ONE
1.01 Employment. The Bank agrees to employ the Executive as Chief Executive
Officer. The Executive will continue in the employ of the Bank in such capacity
and with such duties and responsibilities as may be assigned to him, and with
such compensation as may be determined from time to time by the Board of
Directors of the Bank.
1
<PAGE>
The Executive agrees to devote his full time and attention exclusively to the
business and affairs of the Bank, except during vacation periods and to use his
best efforts to furnish faithful and satisfactory services to the Bank. The
Executive further agrees that during the period of his employment pursuant to
this Agreement, he will not have any other business affiliations without the
approval of the Board of Directors of the Bank.
The supplemental benefits provided by this Agreement are granted by the Bank as
a fringe benefit to the Executive and are not part of any salary reduction plan
or an arrangement deferring a bonus or a salary increase. The Executive has no
option to take any current payment or bonus in lieu of salary continuation
benefits.
ARTICLE TWO
2.01 Retirement Benefit. If the Executive shall continue in the employment of
the Bank until he attains the age of sixty-five (65), which is hereby
established to be September 23, 2000, he may retire from active daily employment
as of the first day of the month next following attainment of age 65, or upon
such later date as may be mutually agreed upon by the Executive and the Bank
The Bank agrees that upon such retirement it will pay to the Executive the sum
of seventy thousand ($70,000.) dollars, hereinafter called the "Annual Payment",
on the first day of the month following such retirement and will pay a like sum
on each annual anniversary of said date to the Executive during his lifetime for
fifteen years until he shall receive fifteen (15) Annual Payments subject to the
conditions and limitations hereinafter set forth.
2.02 Retirement Death Benefit. The Bank agrees that if the Executive shall so
retire, but shall die before receiving the fifteen (15) Annual Payments, it will
continue to make such Annual Payments annually to such individual or individuals
as the Executive shall have designated in a writing, filed with the Bank, until
the expiration of the fifteen (15) years from the date of such retirement. In
the absence of any effective designation of beneficiary any such amounts
becoming due and payable after the death of the Executive shall be paid to his
duly qualified executor or administrator.
ARTICLE THREE
3.01 Consulting Services. It is mutually agreed that during the fifteen (15)
year period following retirement from active daily employment, the Executive
shall, from time to time, at the request of the Bank, be available at reasonable
times and places as are mutually agreed upon, to render services to the senior
executives of the Bank in an advisory or consulting capacity.
2
<PAGE>
The Executive shall not be required to travel from whatever place he may then be
living or staying for the purposes of such consultation unless all expenses
incurred by him shall forthwith be paid by the Bank.
It shall not be considered a breach of this condition if the Executive is unable
to consult or advise because of a mental or physical disability.
In furnishing such consultative or advisory services, the Executive shall not be
an employee of the Bank, but shall act in the capacity of an independent
contractor.
3.02 Competitive Service. During the said fifteen (15) year period following
retirement from active daily employment, the Executive shall not become a
director, officer or employee of any banking institution within an area of 25
miles from the City of Medford, unless the Bank has first consented thereto in
writing.
3.03 Forfeiture. The payments provided under Article Two are conditioned upon
the Executive fulfilling the Requirements of Article Three and in the event the
Executive shall at any time materially breach the said requirements, the Board
of Directors of the Bank may, by a Resolution at any regular or special meeting,
suspend or eliminate payment during the period of such breach.
ARTICLE FOUR
4.01 Death Prior to Retirement. In the event the Executive should die while
actively employed by the Bank, the Bank will pay each Annual Payment in twelve
equal monthly installments of fifty-eight hundred thirty-four $5834.) dollars
each for a period of fifteen (15) years to such individual or individuals as the
Executive may have designated in a writing, filed with the Bank. The said
monthly payment shall begin the first of the month following the month of the
decease of the Executive. In the absence of any effective designation of
beneficiary any such amounts becoming due and payable upon the death of the
Executive shall be payable to his duly qualified executor or administrator.
ARTICLE FIVE
5.01 Disability Prior to Retirement. In the event the Executive shall, during
the period of active daily employment prior to termination of his employment
with the Bank, become permanently and totally disabled, mentally or physically,
which disability renders him unable to perform his duties in a manner
satisfactory to the Bank, the Bank by a Resolution adopted at any regular or
special meeting of its Board of Directors may terminate the active daily
employment of the Executive.
If the date of the adoption of such Resolution is on or after September 23, 2000
the provisions of Article Two shall immediately be effective. If the date of
such Resolution
3
<PAGE>
is prior to September 23, 2000 the obligations of the Bank to pay the benefits
provided in Articles Two and Four shall cease. In lieu of the payments provided
in said Articles the Bank shall pay to the Executive one hundred (100%) percent
of his then annual salary payable in equal monthly installments beginning on the
first day of the month following the Board Resolution and continuing for a
period up to September 23, 2000 at which time the provisions of Article Two
shall be effective. The disability payments payable hereunder shall be reduced
by any amounts payable under the Bank's Long Term Disability Income policy. If
the Executive should die after commencement of such disability payments but
prior to September 23, 2000, the provisions of Article Four shall then be
effective.
ARTICLE SIX
6.01 Voluntary Termination of Service or Discharge. In the event that the
Executive shall voluntarily resign or otherwise voluntarily terminate his
employment with the Bank, become totally disabled, die or be discharged for
actions inimical to the Bank's interests, which shall be in the sole discretion
of the Board of Directors,prior to September 23, 2000, the Annual Payments
effective under Article Two, Four and Five shall be reduced in accordance with
the vesting provisions detailed in section 6.03.
6.02 Other Termination of Service. The Bank reserves the right to terminate the
employment of the Executive at any time prior to retirement. In the event that
the employment of the Executive shall terminate prior to September 23, 2000,
other than by his voluntary action, his disability, his death or his discharge
for actions inimical to the Bank's interests, the Annual Payments effective
under Article Two, Four and Five shall be paid in full without the reduction
specified in Section 6.03.
6.03 Vesting Percentage Schedule. The Annual Payments defined under Articles
Two, Four and Five shall be reduced in the event of termination under section
6.01 in accordance with the vesting schedule detailed herein. The Annual Payment
due under such circumstances shall be adjusted by determining the maximum Annual
Payment due with 100% vesting and multiplying this Annual Payment by the
appropriate percentage given the number of completed years of contract service
and Article 6.01.
Vesting Percentage Schedule
Completed Contract Years of Service Percentage Vesting
1 (9/23/98) 33 1/3%
2 (9/23/99) 66 2/3%
3 (9/23/2000) 100%
4
<PAGE>
ARTICLE SEVEN
7.01 Alienability. Neither the Executive, his widow, nor any other beneficiary
under this Agreement shall have the power or right to transfer, assign,
anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in
advance any of the benefits payable hereunder, nor shall any of said benefits be
subject to seizure for the payment of any debts, judgments, alimony or separate
maintenance, owed by the Executive or his beneficiary or any of them, or be
transferable by operation of law in the event of bankruptcy, insolvency, or
otherwise. In the event the Executive or any beneficiary attempts assignment,
commutation, hypothecation, transfer or disposal of the benefits hereunder the
Bank's liabilities hereunder shall forthwith cease and terminate.
ARTICLE EIGHT
8.01 Participation in other Plans. Nothing contained herein shall be construed
to alter, abridge, or in any manner affect the rights and privileges of the
Executive to participate in and be covered by any Pension, Profit Sharing, 401K,
Group insurance, Bonus or any similar employee plans which the Bank may now or
hereafter have.
ARTICLE NINE
9.01 Funding. The Bank reserves the absolute right at its sole and exclusive
discretion, either to fund the obligations of the Bank hereunder or to refrain
from funding the same, and to determine the extent, nature and method of such
funding. Should the Bank elect to fund this Agreement, in whole or in part,
through the medium of life insurance or annuities, or both, the Bank shall be
the owner and beneficiary of any such policies. The Bank reserves the absolute
right, in its sole discretion, to terminate such life insurance or annuities, as
well as any other funding program, at anytime, either in whole or in part. At no
time shall the Executive be deemed to have any right, title or interest in or to
any specified asset or assets of the Bank, including, but not by way of
restriction, any insurance or annuity contract or contracts or the proceeds
therefrom. Any such policy shall not in any way be considered to be security for
the performance of the Bank's obligations hereunder. It shall be, and remain, a
general unpledged, unrestricted asset of the Bank.
If the Bank purchases a life insurance or annuity policy on the life of the
Executive, he agrees to sign any papers that my be required for that purpose and
to undergo any medical examination or tests which may be necessary.
5
<PAGE>
9.02 This Article shall not be construed as giving the Executive or his
beneficiary any greater rights than those of any other unsecured creditor of the
Bank.
ARTICLE TEN
10.01 Reorganization. The Bank shall not merge or consolidate into or with
another Bank, or reorganize, or sell substantially all of its assets to another
bank, corporation, firm, or person unless and until such succeeding or
continuing bank, corporation, firm or person agrees to assume and discharge all
of the obligations of the Bank hereunder.
ARTICLE ELEVEN
11.01 Benefits and Burdens. This Agreement shall be binding upon and inure to
the benefit of the Executive and his personal representatives, and the Bank, and
any successor organization which shall succeed to substantially all of its
assets and business.
ARTICLE TWELVE
12.01 Communications. Any notice or communication required of either party with
respect to this Agreement shall be made in writing and may either be delivered
personally or sent first class mail to the Bank at 29 High Street, Medford, MA
02155 and to the Executive at the address as maintained on the payroll or other
accounting records of the Bank. Each party shall have the right by written
notice to change the place to which notices shall be sent.
ARTICLE THIRTEEN
13.01 Not a Contract of Employment. This Agreement shall not be deemed to
constitute a contract of employment between the parties hereto, nor shall any
provision hereof restrict the right of the Bank to discharge the Executive, or
restrict the right of the Executive to terminate his employment with the Bank.
ARTICLE FOURTEEN
14.01 Claims Procedure. In the event that benefits under this Agreement are not
paid to the Executive (or his beneficiary in the case of the Executive's death),
and such person feels entitled to receive them, a claim shall be made in writing
to the Plan Administrator within sixty (60) days from the date payments are not
made. Such claim shall be reviewed by the Plan Administrator and the Bank. If
the claim is denied, in full or in part, the Plan Administrator shall provide a
written notice within ninety (90) days setting forth the specific reasons for
denial, specific reference to the provisions of this Agreement upon which the
denial is based, and additional material or information
6
<PAGE>
necessary to perfect the claim, if any. A claim shall be deemed denied if the
Plan Administrator does not provide the required written notice within the said
ninety (90) day period. Also, such written notice shall indicate the steps to be
taken if a review of the denial is desired.
If a claim is denied and a review is desired, the Executive (or his beneficiary
in the case of the Executive's death), shall notify the Plan Administrator in
writing within sixty (60) days of receipt of the denial or deemed denial. In
requesting a review, the Executive or is beneficiary may review this Agreement
or any document relating to it and submit any written issues and comments he or
she may feel appropriate. The Plan Administrator shall then review the claim and
provide a written decision within sixty (60) days. This decision likewise shall
state the specific reasons for the decision and shall include reference to
specific provisions of this Agreement on which the decision is based.
For purposes of implementing this claims procedure (but not for any other
purpose) the Chief Financial Officer of the Bank is hereby designated as the
Plan Administrator of this Agreement.
ARTICLE FIFTEEN
15.01 Administrative Clause. Any payment required to be made pursuant to this
Agreement to a person who is under a legal disability at the time such payment
is due may be made by the Bank to or for the benefit of such person in such of
the following ways as the Bank shall determine; (a) directly to the person
entitled to the payment; (b) to the legal representative of such person; (c) to
some near relative of such person to be used for the person's benefit; (d)
directly in payment of expenses of support, maintenance or education of such
person. Any such payment of the Bank shall, to the extent thereof, be a complete
discharge of any liability under this Agreement with respect to such payment.
The Bank shall not be required to see to the application by any third party of
any payments made pursuant to this Article.
ARTICLE SIXTEEN
16.01 Marital Deduction Provision. If the Executive designates his spouse to
receive payments to be made hereunder after his death, she shall have the right
to direct that as to the distribution of the sums, if any, payable after her
death the Bank shall pay any such sums to such person or persons or to her own
estate as she appoints and directs by a written direction filed with the Bank
during her lifetime or by her last will and testament specifically referring to
this power of appointment. To the extent that the Executive's spouse does not
effectively exercise the power of appointment any such sums shall upon her death
be distributed to her estate.
7
<PAGE>
ARTICLE SEVENTEEN
17.01 Arbitration. In the event of any dispute, controversy or misunderstanding
between the parties hereto, which may directly or indirectly concern or involve
any of the terms, covenants or conditions hereof, the parties agree that such
controversy shall be settled by arbitration in the City of Medford in accordance
with the Rules of American Arbitration Association. One arbitrator shall be
named by the each party involved in the dispute and then an additional
arbitrator shall be named by the arbitrators so chosen. Judgment upon the award
rendered by the arbitrators may be entered in any court having jurisdiction
thereof. The costs of the arbitration shall be borne by the party or parties
designated by the arbitrators.
IN WITNESS WHEREOF, the Bank has caused this Agreement to be duly executed by
its Chief Financial Officer and its Corporate seal affixed, duly attested by its
Secretary, and the Executive has hereunto set his hand and seal on the day and
year first written above.
Medford Savings Bank
/s/ Phillip W. Wong
--------------------------
Chief Financial Officer
/s/ Arthur H. Meehan
---------------------------
Executive
ATTEST:
/s/ Eugene R. Murray
- -------------------------
Secretary
/s/ Mary L. Martel
- -------------------------
Witness
8
[LOGO]
Medford Bancorp, Inc.
ANNUAL REPORT
1997
<PAGE>
[LOGO]
Medford Bancorp, Inc.
ARLINGTON
ROUTE 60 & MYSTIC
VALLEY PARKWAY
781-393-6355
BELMONT
4 HILL ROAD, CORNER
OF BRIGHTON ST.
617-393-6320
BURLINGTON
258 CAMBRIDGE ST.
781-272-5700
MALDEN
MALDEN CENTER
399 MAIN ST.
781-393-6386
BROADWAY
44 BROADWAY
781-393-6334
MAPLEWOOD
28 LEBANON ST.
781-393-6329
OAK GROVE
876 MAIN ST.
781-393-6326
WEST SIDE
443 CHARLES ST.
781-393-6337
MEDFORD
MAIN OFFICE
29 HIGH ST.
781-395-7700
LOAN CENTER
5 HIGH ST.
781-395-7700
HAINES SQUARE
257 SPRING ST.
781-393-6380
SOUTH MEDFORD
448 MAIN ST.
781-393-6340
WELLINGTON
499 RIVERSIDE AVE.
781-393-6350
WEST MEDFORD
501 HIGH ST.
781-393-6344
NORTH READING
80 MAIN ST.
978-664-5581
WALTHAM
695 MAIN ST.
781-647-4848
WILMINGTON
240 MAIN ST.
978-658-9134
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996
TOTAL ASSETS $1,135,572 $1,039,098
INVESTMENTS 513,418 424,966
NET LOANS 570,844 560,855
DEPOSITS 821,706 792,141
BORROWINGS 205,779 148,464
NET INCOME 11,390 10,429
STOCKHOLDERS' EQUITY 101,510 92,521
SHARES OUTSTANDING 4,541,148 4,534,648
PER COMMON SHARE:
BASIC EARNINGS $ 2.51 $ 2.31
DILUTED EARNINGS 2.39 2.21
BOOK VALUE 22.35 20.40
CASH DIVIDENDS DECLARED .90 .83
FINANCIAL RATIOS:
RETURN ON AVERAGE ASSETS 1.05% 1.05%
RETURN ON AVERAGE EQUITY 11.81 11.72
STOCKHOLDERS' EQUITY TO ASSETS 8.94 8.90
NET INTEREST RATE SPREAD 2.84 3.00
NET YIELD ON AVERAGE EARNING ASSETS 3.26 3.39
EMPLOYEES (AT YEAR END), FULL-TIME EQUIVALENT 252 255
SHAREHOLDERS OF RECORD 1,187 1,221
- --------------------------------------------------------------------------------
ANNUAL MEETING
The Annual Meeting of Shareholders will be held April 27, 1998 at 10 a.m. at
Medford Bank, 5 High Street, Suite 202, Medford, Massachusetts.
CORPORATE INFORMATION
Medford Bancorp, Inc.
Medford Bank
29 High Street, Medford, MA 02155
781-395-7700
ACCESSING INFORMATION
Additional copies of this Annual Report and Form 10-K may be obtained without
charge by writing to the Company's Shareholder Relations Department. These
reports are also available to the public on request as required by the
Securities and Exchange Commission (SEC). These statements have not been
reviewed or confirmed for accuracy of relevance by the SEC.
<PAGE>
1997 ANNUAL REPORT [LOGO]
DEAR SHAREHOLDERS
- --------------------------------------------------------------------------------
MEDFORD BANCORP'S STRONG FINANCIAL PERFORMANCE FOR 1997, WITH RECORD-LEVEL
EARNINGS FOR THE SEVENTH CONSECUTIVE YEAR, AFFIRMS OUR STRATEGIC DIRECTION TO
REMAIN AN INDEPENDENT COMMUNITY BANK AND DELIVER VALUE TO OUR SHAREHOLDERS.
[PHOTO OMITTED]
(FROM LEFT TO RIGHT)
(FIRST ROW)
PHILLIP W. WONG,
EXECUTIVE VICE PRESIDENT
CHIEF FINANCIAL OFFICER
ARTHUR H. MEEHAN,
CHAIRMAN, PRESIDENT AND CEO
GEORGE A. BARGAMIAN,
SENIOR VICE PRESIDENT
RETAIL BANKING
(SECOND ROW)
WILLIAM F. RIVERS,
SENIOR VICE PRESIDENT
ADMINISTRATION
MONA BISHLAWI,
SENIOR VICE PRESIDENT
CONTROLLER
ERIC B. LOTH,
SENIOR VICE PRESIDENT
SENIOR LENDING OFFICER
In 1997, we formed Medford Bancorp, Inc. as the holding company for Medford
Bank. The holding company affords us greater control in managing capital and
positions us well for possible business opportunities.
With assets in excess of $1 billion, our financial performance has continually
improved as evidenced in the financial statements of recent years. For the year
ended December 31, 1997, we reported consolidated net income of $11,390,000.
This represents an increase of $961,000 or 9.2% when compared to net income of
$10,429,000 for 1996. With continued earnings growth, our shareholders' equity
has exceeded $100 million. Dividends declared in 1997 totaled 90 cents per
share, which is an increase of 8.4% from 83 cents in 1996. Book value has
increased to $22.35 per share from a level of $20.40 in the prior year. Basic
earnings per share were $2.51 ($2.39 on a diluted basis), an increase of twenty
cents per share when compared to basic earnings per share of $2.31 ($2.21 on a
diluted basis) for the previous year. Return on stockholders' equity increased
to 11.81% and return on assets remained at 1.05%.
Effectively managing net interest income, the Bank's largest component of
operating income, is a crucial element to our success. Managing interest rates
and credit risks, as we grow the level of interest earning assets in all rate
environments, represents management's most integral challenge. Equally important
to our success is our vigorous emphasis on tight cost control. We have achieved
an efficiency ratio of 48.6% which gives us a distinct operating advantage over
most of our peer group.
We operate in an intensely competitive financial services industry. However,
there remain great opportunities and potential for a community bank given the
changing competitive landscape. We expect consolidation to continue throughout
1998, which will afford the Bank the opportunity to exploit the
disintermediation of customers from acquired or merged institutions. As an
independent community bank, we are well positioned to meet the financial needs
of these customers.
1
<PAGE>
[LOGO] SHAREHOLDERS LETTER
PEOPLE YOU KNOW
EXPERIENCE YOU TRUST
- --------------------------------------------------------------------------------
The driving force behind our balance sheet is not size, but profitability. We
critically assess all lines of business and carefully develop new business which
will favorably impact earnings while simultaneously providing good value and
service to our customers. During 1997, we were successful in growing core
deposit balances bolstered in part by the success of our packaged ComboPlus
account and our DDA accounts. We retained our dominant market share of 49.6% in
Medford and 42.3% in Malden, and continue to strengthen market share in other
Middlesex County communities.
We strive to maintain good credit quality in our loan portfolio. Non-performing
loans are at the lowest level in recent years at .15% of total assets. The
reserve for loan loss is $6.7 million, providing a coverage ratio of 390% to
non-performing loans. Over time, the prudent guidelines used in growing the loan
portfolio give us a position of strength and should produce more consistent
results during any future economic shifts.
Our strategic focus, guided by an alert management team with attention to
interest risk management, credit quality and low operating expenses, will serve
the Bank well and continue to make us a leading community bank in Middlesex
County. We also continue to look for new branch opportunities in our market
areas to strengthen our franchise.
During 1997, Phillip Wong was promoted to executive vice president and Mona
Bishlawi was promoted to senior vice president. We also recognized the talents
and contributions of many of our employees with a number of promotions during
the year, including eight new officers.
In closing, the hard work and dedication given by all employees is greatly
appreciated. Our achievements and the successes that we have enjoyed as a
community bank are a direct result of their concerted efforts. I thank all
Medford Bank employees and thank you, our shareholders, for your continued
confidence and support.
/s/ Arthur H. Meehan
Arthur H. Meehan
Chairman of the Board
President and Chief Executive Officer
[The following tables were originally bar charts in the printed materials.]
STOCK PRICE (YEAR END)
1997 $39.25
1996 $25.75
1995 $21.50
BOOK VALUE (YEAR END)
1997 $22.35
1996 $20.40
1995 $19.46
BASIC EARNINGS PER SHARE
1997 $2.51
1996 $2.31
1995 $2.14
CASH DIVIDENDS DECLARED
1997 $0.90
1996 $0.83
1995 $0.71
2
<PAGE>
1997 ANNUAL REPORT [LOGO]
THE YEAR IN REVIEW
- --------------------------------------------------------------------------------
DEPOSIT MIX AS OF
DECEMBER 31, 1997
(IN THOUSANDS)
[PIE CHART OMITTED]
TERM CDS $392,802 47.80%
SAVINGS $254,741 31.00%
DEMAND &
OFFICIAL CHECKS $103,564 12.61%
MONEY MARKET $70,599 8.59%
COMMUNITY BANKING-BUILDING THE FUTURE
As a leading community bank, we remain focused on meeting the financial needs of
local residents and businesses. We understand that how we do business is just as
important as the products and services we offer; delivery of quality service is
a source of pride.
EMPHASIZING CUSTOMER SERVICE
We pay attention to the details that are important to customers. Whether it is a
significant investment as with our recent conversion to a new data processor, or
a smaller measure such as installing a new ATM for our Arlington branch
customers, our steadfast commitment to customer service is evident.
Our retail employee training program incorporates this philosophy by instilling
the importance of quality service. We continually monitor our service level with
the assistance of an outside firm. Consistently, we rate above peer institutions
on a direct comparison.
As mentioned, our computer conversion has firmly set the foundation to provide
greater enhancements to our service delivery system and has enabled us to
improve our product offerings. Throughout 1997, we experienced the benefits of
teller and platform automation with streamlined transaction processing. This
translates into faster, more efficient service for customers conducting business
at branch offices. We have also strengthened our non-branch banking options. Our
Call Center, with toll-free access, provides customers the opportunity to open
accounts without making a special trip to the bank. And usage of InfoLine, our
24-hour automated telephone banking system which enables customers to check
balances, transfer funds etc., has increased significantly, to more than 4,000
calls per week.
Venturing into cyberspace, we introduced our new web site and also advertised on
the Internet. Consumers now have the convenience of obtaining information with
just a few clicks of a mouse. Also available at our site, www.medfordbank.com,
are special product offerings.
Last year we announced plans to build our 17th branch office in Tewksbury. The
transfer of the property from the seller was delayed for a prolonged period of
time while the seller resolved administrative issues. We are pleased that
construction plans are now underway and we anticipate the grand opening in the
summer of 1998. The Tewksbury location complements our franchise well and we see
excellent potential to develop new retail and commercial business. We plan to
seek other opportunities to open new branches and to further extend our network
in markets with growth potential.
RETAIL PRODUCT OFFERINGS
The popularity of our Freedom 55 mature market program and our Club For Kids is
a testament to our strength as a community bank. The Freedom 55 program rewards
our high balance deposit customers who qualify with free membership. Membership
benefits include a package of free and discounted bank services, group-rate
travel opportunities and free seminars on a variety of topics. Members eagerly
await the planned cruise to Hawaii in the fall of 1998. Our Club For Kids
program is available to all children when they open their first savings account
with as little as one dollar. We have continued our partnership with the State's
Savings Makes Cents program bringing our Club For Kids and savings education
into six elementary schools.
Meeting the financial needs of our customers keeps new product development in
the forefront. Recent new product introductions include our
3
<PAGE>
[LOGO] THE YEAR IN REVIEW
WE WILL CONTINUE TO EXPLORE SERVICE AND PRODUCT ENHANCEMENTS WHICH WILL ENABLE
US TO MEET FUTURE CUSTOMER NEEDS AND WE WILL BUILD UPON OUR SUCCESS WHILE
PRESERVING OUR HERITAGE AS A COMMUNITY-FOCUSED INSTITUTION.
- --------------------------------------------------------------------------------
Workplace Partner Program, a packaged account with exceptional value which is
offered as a banking benefit to employees of local businesses. In addition, our
recently introduced debit card offers customers more convenience.
LENDING ACTIVITIES
Investing in our communities in the form of mortgage and business loans is good
for the local economy.
The growth of our residential mortgage portfolio represents our success as a top
mortgage provider. We hold dominant mortgage market share, ranking number one in
total dollar volume, in the cities of Medford and Malden and number two overall
in our defined primary market area. We originated $104.6 million in one to four
family mortgage loans including refinanced loans and loans originated for sale,
surpassing the 1996 origination volume of $86.8 million.
We introduced a successful preapproval program in 1997, expanding our product
offering. Our first-time home buyer program and our selection of fixed and
variable rate products are also well-received. With the addition of three new
originators, we now have eight representatives serving our lending territory.
Many new families now enjoy the rewards of home ownership made possible with a
Medford Bank loan.
The potential to generate new business through our commercial lending division
remains strong. One of our strengths in the marketplace is our responsiveness to
local businesses. We are a financial partner that is committed to providing a
high level of service to small and medium sized businesses. We are ideally
positioned to meet the needs of these businesses by providing commercial and
industrial, commercial real estate and asset-based loans.
During 1997, we maintained high credit quality and achieved modest growth in the
commercial loan portfolio. This growth is due in part to our new asset-based
lending activities and our commercial real estate division. Asset-based lending,
established in 1996, gives us greater capacity to serve this segment of the
business market by providing $1 to $4 million asset-based lines of credit. With
a favorable climate for commercial real estate, new construction is more robust.
We provided construction financing for a range of projects including many single
family residential sub-divisions and much larger scale projects such as Eagle's
Landing, an age 55 and older community with 176 residential units, a club house
and golf course in Tewksbury.
LOOKING AHEAD
We acquired the property situated between our Main Office and Loan Center
buildings on High Street in Medford. We are currently considering options for
this property that will enable us to enhance our headquarters. Our Medford
Square real estate holdings now extend from Bradlee Road to the start of Forest
Street, giving us a substantial presence.
As the year 2000 approaches, we are diligent in addressing computer and systems
issues. We formed a task force in 1997 with key members from operations,
systems, compliance, auditing and senior management. We developed an action
plan, with testing scheduled to begin later this year, to ensure that all
systems will function properly for the year 2000.
We will continue to explore service and product enhancements which will enable
us to meet future customer needs and we will build upon our success while
preserving our heritage as a community-focused institution.
LOAN MIX AS OF
DECEMBER 31, 1997
(IN THOUSANDS)
[PIE CHART OMITTED]
RESIDENTIAL MORTGAGES $390,608 67.63%
COMMERCIAL MORTGAGES $124,094 21.49%
SECOND MORTGAGES/
EQUITY LINES $23,714 4.10%
COMMERCIAL LOANS $14,952 2.59%
CONSUMER LOANS $12,931 2.24%
CONSTRUCTION MORTGAGES $11,278 1.95%
4
<PAGE>
DIRECTORS
Arthur H. Meehan*
Chairman of the Board,
President and Chief Executive
Officer Medford Bank
Edward D. Brickley
Manager of Corporate International
Accounting at Polaroid Corporation
Cambridge, MA (Retired)
David L. Burke
President and Treasurer, Boston
Steel & Manufacturing Co.
Malden, MA
Paul J. Crowley*
President, CSC Consulting Group
Cambridge, MA (Retired)
Mary Lou Doherty
Assistant Principal,
Medford School System (Retired)
Edward J. Gaffey*
President, Country Way Associates
Belmont, MA
Andrew D. Guthrie, Jr., M.D.
Physician, President of
Mistick Pediatrics Associates (Retired)
Robert A. Havern, III
Attorney, Arlington, MA
Member of State Legislature of
Commonwealth of Massachusetts
Eugene R. Murray*
Underwriting Manager of the
Boston Office of Cigna
Special Risk Facility (Retired)
Francis D. Pizzella*
Attorney and President of The
Savings Bank Life Insurance
Company of Massachusetts,
President of The Savings Bank
Employees Retirement Association (Retired)
*Member of Executive Committee
OFFICERS OF
MEDFORD BANK
Arthur H. Meehan**
Chairman, President and
Chief Executive Officer
Vincent Gargano
Vice President,
Strategic Planning
and Risk Management
Paula M. McNabb
Assistant Vice President,
CRA/Compliance Officer
**Officer of Medford Bancorp, Inc.
ADMINISTRATION
William F. Rivers
Senior Vice President
Joan P. Cronholm
Vice President,
Loan Operations Officer
Jane M. Griffin
Vice President,
Director of Human Resources
David L. Korp
Vice President,
Operations Officer
J. Thomas Mitchell
Deposit Operations Officer
Charles E. Samour
Security Officer
Joanne Teixeira
Checking Operations Officer
FINANCE
Phillip W. Wong**
Executive Vice President,
Chief Financial Officer
Mona Bishlawi
Senior Vice President,
Controller
Jane E. Cybulski
Vice President,
Investment/ALCO Officer
Mary E. Auterio
Assistant Vice President,
Assistant Controller
Martin J. Heneghan
Senior Audit Officer
Christine Panno-West
Finance Officer
**Officer of Medford Bancorp, Inc.
LENDING
Eric B. Loth
Senior Vice President
David E. Boudreau
Vice President,
Commercial Loan Officer
Robert S. Kaminer
Vice President,
Commercial Real Estate Loans
Richard P. Lane
Vice President,
Commercial Loan Officer
Anthony R. Visco
Vice President,
Residential Lending
Anne M. Barry
Assistant Vice President,
Mortgage Representative
Donald L. Cullen
Assistant Vice President,
Collections Officer
Mary Ann Devlin
Assistant Vice President,
Real Estate Officer
Kim S. Foster
Assistant Vice President,
Commercial Loan Officer
Joanne M. Franco
Assistant Vice President,
Senior Credit Officer
Harold L. Goldsmith
Assistant Vice President,
Mortgage Representative
Charles M. Byron
Education Loan Officer
Judith A. Cogan
Credit Officer
RETAIL
George A. Bargamian
Senior Vice President
Anne M. Gelineau McGann
Vice President,
Pension Officer
Kenneth E. Peterson
Vice President,
Branch Administrator
Elizabeth J. Stodolski
Vice President,
Marketing Director
Anna Beaudoin
Assistant Vice President,
Retail Systems Administrator
Cheryl A. Cannon
Assistant Vice President,
Regional Manager
Linda A. Iacono
Assistant Vice President,
Regional Manager
Kathleen M. Beasley
Branch Officer,
Regional Manager
Michael W. Chabre
Branch Officer
Judith A. Gilligan
Branch Officer
Stephanie M. Tiernan
Branch Officer
Rosanna Natola
Officer,
Retail Systems & Training
[LOGO]
Medford Bancorp, Inc.
<PAGE>
[LOGO]
Medford Bancorp, Inc.
PEOPLE YOU KNOW.
EXPERIENCE YOU TRUST.
781-395-7700
SHAREHOLDER
INFORMATION
The Company's common stock trades on the Nasdaq Stock Market under the symbol
MDBK. The stock is listed under various abbreviations in the Wall Street Journal
and other newspapers. There were 1,187 shareholders of record as of December 31,
1997.
QUARTERLY STOCK PERFORMANCE
The following tabulation shows the range of price quotations per share as
reported by Nasdaq for the periods indicated:
1997 High Low
- -----------------------------------
First Quarter $29.75 $24.50
Second Quarter $30.50 $24.75
Third Quarter $36.00 $29.25
Fourth Quarter $42.00 $34.00
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Stockholders may obtain a detailed brochure of the plan by writing to the
Company's Shareholder Relations Department.
TRANSFER AGENT
Contact our stock transfer agent directly for assistance regarding: change of
address; transfer of stock certificates; replacement of lost, stolen, or
destroyed certificates or dividend checks; elimination of duplicate mailing.
Boston EquiServe
P.O. Box 8200
Boston, MA 02266-8200
(800) 426-5523
LEGAL COUNSEL
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
(617) 570-1000
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
Wolf & Company, P.C.
One International Place
Boston, MA 02110
(617) 439-9700
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement
Number 333-41161 (dated November 26, 1997, on Form S-8), Registration Statement
Number 333-43271 (dated December 24, 1997, on Form S-8), and Registration
Statement Number 333-43273 (dated December 24, 1997, on Form S-8) of our report
dated January 21, 1998, on the consolidated financial statements of Medford
Bancorp, Inc. and subsidiaries, appearing in the Annual Report on Form 10-K of
Medford Bancorp, Inc. for the year ended December 31, 1997.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
March 20, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from Medford
Bancorp, Inc. year-to-date financial information for the twelve months ended
December 31, 1997 and is qualified in its entirety by reference to such Form
10-K.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,376
<INT-BEARING-DEPOSITS> 2
<FED-FUNDS-SOLD> 2,802
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 402,723
<INVESTMENTS-CARRYING> 103,823
<INVESTMENTS-MARKET> 0
<LOANS> 577,577
<ALLOWANCE> (6,733)
<TOTAL-ASSETS> 1,135,572
<DEPOSITS> 821,706
<SHORT-TERM> 95,670
<LIABILITIES-OTHER> 6,577
<LONG-TERM> 110,109
0
0
<COMMON> 2,271
<OTHER-SE> 99,239
<TOTAL-LIABILITIES-AND-EQUITY> 1,135,572
<INTEREST-LOAN> 46,213
<INTEREST-INVEST> 28,914
<INTEREST-OTHER> 205
<INTEREST-TOTAL> 75,332
<INTEREST-DEPOSIT> 31,328
<INTEREST-EXPENSE> 41,349
<INTEREST-INCOME-NET> 33,983
<LOAN-LOSSES> 125
<SECURITIES-GAINS> 835
<EXPENSE-OTHER> 19,054
<INCOME-PRETAX> 18,646
<INCOME-PRE-EXTRAORDINARY> 18,646
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,390
<EPS-PRIMARY> 2.51
<EPS-DILUTED> 2.39
<YIELD-ACTUAL> 7.23
<LOANS-NON> 1,726
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 7,231
<CHARGE-OFFS> 831
<RECOVERIES> 208
<ALLOWANCE-CLOSE> 6,733
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
