<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
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 1-14671
WORONOCO BANCORP, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-3444269
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
31 Court Street, Westfield, Massachusetts 01085
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(413) 568-9141
- --------------------------------------------------------------------------------
(Issuer's telephone number, including area code)
Not Applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changes since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: the Issuer had 5,998,860 shares
of common stock, par value $0.01 per share, outstanding as of May 10, 1999.
<PAGE>
WORONOCO BANCORP, INC.
FORM 10-Q
INDEX
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998........................... 1
Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and 1998........................... 2
Consolidated Statements of Changes in Stockholders' Equity
for the Three Months Ended March 31, 1999 and 1998............. 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1999 and 1998..................... 4
Notes to Unaudited Consolidated Financial Statements........... 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 24
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 25
Item 2. Changes in Securities and Use of Proceeds...................... 25
Item 3. Defaults Upon Senior Securities................................ 25
Item 4. Submission of Matters to a Vote of Security Holders............ 25
Item 5. Other Information ............................................. 25
Item 6. Exhibits and Reports on Form 8-K............................... 26
SIGNATURES................................................................ 27
<PAGE>
Item 1. Financial Statements (unaudited)
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
Unaudited
March 31, December 31,
Assets 1999 1998
----------- ------------
<S> <C> <C>
Cash and due from banks $ 10,024 $ 10,371
Interest-bearing balances 2,292 1,607
Federal funds sold 2,180 --
--------- ---------
Total cash and cash equivalents 14,496 11,978
Securities available for sale 106,116 111,409
Federal Home Loan Bank stock, at cost 5,733 5,648
Loans, net of allowance for loan losses ($2,208 at March 31, 1999
and $2,166 at December 31, 1998) 290,733 284,043
Other real estate owned, net 168 241
Banking premises and equipment, net 8,807 8,290
Accrued interest receivable 1,841 1,748
Net deferred tax asset 2,335 55
Cash surrender value of life insurance 1,957 1,917
Other assets 1,104 1,497
--------- ---------
Total assets $ 433,290 $ 426,826
========= =========
Liabilities and Stockholders' Equity
Deposits $ 273,186 $ 275,041
Federal Home Loan Bank advances 68,358 111,163
Repurchase agreements 116 100
Mortgagors' escrow accounts 1,165 645
Accrued expenses and other liabilities 4,294 4,104
--------- ---------
Total liabilities 347,119 391,053
--------- ---------
Commitments and contingencies
Stockholders' Equity:
Preferred stock ($.01 par value; 2,000,000 shares
authorized; no shares issued and outstanding) -- --
Common stock ($.01 par value; 16,000,000 shares
authorized; shares issued and outstanding:
5,998,860 at March 31, 1999) 60 --
Additional paid-in capital 57,891 --
Unearned compensation - ESOP (4,596) --
Retained earnings 32,412 34,060
Accumulated other comprehensive income - net
unrealized gain on investment securities available
for sale, net of tax effects 404 1,713
--------- ---------
Total stockholders' equity 86,171 35,773
--------- ---------
Total liabilities and stockholders' equity $ 433,290 $ 426,826
========= =========
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
1
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
March 31, March 31,
1999 1998
---------------- ----------------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $5,382 $5,176
Interest and dividends on investment securities:
Interest 1,488 675
Dividends 284 206
Interest on federal funds sold 306 45
Other interest income 14 25
---------------- ----------------
Total interest and dividend income 7,474 6,127
---------------- ----------------
Interest expense:
Interest on deposits 2,386 2,567
Interest on borrowings 1,347 690
---------------- ----------------
Total interest expense 3,733 3,257
---------------- ----------------
Net interest income 3,741 2,870
Provision for loan losses 60 60
---------------- ----------------
Net interest income, after provision for loan losses 3,681 2,810
---------------- ----------------
Other income:
Customer service fees 442 356
Gain on sales and disposition of securities, net 448 205
Other income 29 41
---------------- ----------------
Total other income 919 602
---------------- ----------------
Other expenses:
Salaries and employee benefits 1,399 1,281
Occupancy and equipment 450 359
Marketing 203 226
Professional services 145 105
Data processing 176 157
Deposit insurance 16 16
Contributions 4,445 2
Other general and administrative 450 372
---------------- ----------------
Total other expenses 7,284 2,518
---------------- ----------------
(Loss) income before income taxes (2,684) 894
Income tax (benefit) expense (1,036) 294
---------------- ----------------
Net (loss) income ($1,648) $600
================ ================
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
2
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In Thousands)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Unearned Retained Comprehensive
Stock Capital Compensation Earnings Income Total
---------- ---------- ------------ --------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $ - $ - $ - $ 34,060 $ 1,713 $ 35,773
Issuance of common stock in connection with
Bank's conversion from mutual to stock-
owned savings bank 60 57,891 (4,609) - - 53,342
Decrease in unearned compensation - - 13 - - 13
Comprehensive income:
Net loss - - - (1,648) - (1,648)
Change in net unrealized gain on
investment securities available
for sale, net of tax effects - - - - (1,309) (1,309)
----------
Total comprehensive loss (2,957)
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1999 $60 $57,891 ($4,596) $32,412 $404 $86,171
========== ========== ========== ========== ========== ==========
Balance at December 31, 1997 $ - $ - $ - $ 30,950 $ 2,382 $ 33,332
Comprehensive income:
Net income - - - 600 - 600
Change in net unrealized gain on
investment securities available
for sale, net of tax effects - - - - 407 407
----------
Total comprehensive income 1,007
---------- ---------- ---------- ---------- ---------- ----------
Balance at March 31, 1998 $ - $ - $ - $31,550 $2,789 $34,339
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements.
3
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Unaudited
Three Months Ended
March 31, March 31,
1999 1998
---------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net (loss) income ($1,648) $600
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 60 60
Charitable contribution in the form of equity securities 4,444 -
Net amortization (accretion) of investments 3 (4)
Depreciation and amortization 169 170
Deferred taxes (1,511) -
Gain on sales and disposition of securities, net (448) (205)
Changes in operating assets and liabilities:
Accrued interest receivable (93) (62)
Accrued expenses and other liabilities 190 1,192
Other, net 348 (254)
---------------- -----------------
Net cash provided by operating activities 1,514 1,497
---------------- -----------------
Cash flows from investing activities:
Proceeds from sales of securities available for sale 3,474 2,575
Purchase of securities available for sale (3,673) (7,418)
Proceeds from maturities of securities available for sale 172 200
Principal payments on mortgage-backed investments 3,705 1,994
Purchase of Federal Home Loan Bank stock (85) (482)
Loans originated, net of loan payments received (6,750) (8,022)
Purchases of banking premises and equipment (686) (878)
Net change in other real estate owned 73 10
Loan to fund employee stock ownership plan (4,609) -
---------------- -----------------
Net cash used in investing activities (8,379) (12,021)
---------------- -----------------
Cash flows from financing activities:
Net (decrease) increase in deposits (1,855) 6,604
Net (decrease) increase in borrowings (42,789) 5,671
Net increase (decrease) in escrow 520 649
Net proceeds from initial public offering 53,507 -
---------------- -----------------
Net cash provided by financing activities 9,383 12,924
---------------- -----------------
Net increase in cash & cash equivalents 2,518 2,400
Cash & cash equivalents at beginning of period 11,978 11,686
---------------- -----------------
Cash & cash equivalents at end of period $14,496 $14,086
================ =================
Suplemental cash flow information:
Interest paid on deposits $2,383 $2,567
Interest paid on borrowings 1,431 645
Income taxes paid 107 160
Transfers from loans to other real estate owned - 22
</TABLE>
See accompanying Notes to the Unaudited Consolidated Financial Statements
4
<PAGE>
WORONOCO BANCORP, INC. AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
March 31, 1999
(Dollars in thousands except per share amounts)
1. Consolidated Financial Statements
The Consolidated Financial Statements of Woronoco Bancorp, Inc. and Subsidiaries
(the "Company") included herein are unaudited, and in the opinion of management
all adjustments, consisting only of normal recurring adjustments necessary for a
fair presentation of the financial condition, results of operations and cash
flows, as of and for the periods covered herein, have been made. Certain
information and note disclosures normally included in the Consolidated Financial
Statements have been omitted as they are included in the most recent Securities
and Exchange Commission ("SEC") Form 10-K and accompanying Notes to the
Financial Statements (the "Form 10-K") filed by the Company for the year ended
December 31, 1998. Management believes that the disclosures contained herein are
adequate to make a fair presentation.
These unaudited consolidated financial statements should be read in conjunction
with the Form 10-K.
The results for the three month interim periods covered hereby are not
necessarily indicative of the operating results for a full year.
2. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal years beginning
after June 15, 1999. This Statement standardizes the accounting for derivative
instruments, including derivative instruments embedded in other contracts, by
requiring that an entity recognize those items as assets or liabilities in the
balance sheet and measure them at fair value. In specific circumstances, an
entity may elect to designate a derivative as follows: (1) a hedge of the
exposure to changes in the fair market value of a recognized asset or liability,
or of an unrecognized firm commitment that is attributable to a particular risk;
(2) a hedge of the exposure to variability in the cash flows of a recognized
asset or liability, or of a forecasted transaction, that are attributable to a
particular risk; or (3) a hedge of the foreign currency exposure of an
unrecognized firm commitment, an available-for-sale security, a forecasted
transaction, or a net investment in a foreign operation. This Statement
generally provides for matching the timing of a gain or loss recognition on the
hedging instrument with the recognition of the changes in the fair value of the
hedged asset or liability that are attributable to the hedged risk or the
earnings effect of the hedged forecasted transaction. The Company will adopt the
requirements of this statement during the year ended December 31, 2000, and it
is not expected to have a material impact on the Company.
In October 1998, the FASB issued SFAS No. 134, "Accounting for Mortgage-Backed
Securities Retained after the Securitization of Mortgage Loans Held for Sale by
a Mortgage Banking Enterprise," which is effective for the first fiscal quarter
beginning after December 15, 1998. This statement amends SFAS No. 65,
"Accounting for Certain Mortgage Banking Activities," and SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." This
statement requires mortgage banking enterprises to classify a mortgage-backed
security retained after a securitization of mortgage loans held for sale in
accordance with the provisions of SFAS No. 115. However, a mortgage banking
enterprise must classify as trading any retained mortgage-backed securities that
it commits to sell before or during the securitization process. This statement
was adopted by the Company on January 1, 1999 and did not have a material impact
on its financial condition or results of operations.
3. Earnings Per Share
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
5
<PAGE>
common shares that would have been outstanding if dilutive potential shares had
been issued, as well as any adjustment to income that would result from the
assumed conversion. At March 31, 1999, there were no outstanding stock options.
Earnings per share data is not presented in these financial statements since
shares of common stock were not issued until March 19, 1999.
4. Loan commitments
Outstanding commitments for all loans totaled $6.7 million at March 31, 1999
compared to $10.0 million at December 31, 1998.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations.
----------------------
The following analysis discusses changes in the financial condition and results
of operations at and for the three months ended March 31, 1999 and 1998, and
should be read in conjunction with Woronoco Bancorp, Inc and Subsidiaries' (the
"Company's") Consolidated Financial Statements and the notes thereto, appearing
in Part I, Item 1 of this document.
Forward-Looking Statements
This report contains certain 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 intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identified by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project," or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations of the Company and the subsidiaries include, but are not limited to,
changes in: interest rates, general economic conditions, legislative/regulatory
changes, monetary and fiscal policies of the U.S. Government, including policies
of the U.S. Treasury and the Federal Reserve Board, the quality or composition
of the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles and guidelines. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements. Examples of these assumptions may be found in
the discussion of Management Strategy, Classified Assets, Nonperforming Assets
and Impaired Loans, Provision for Loan Losses, Liquidity and Capital Resources,
Regulatory Capital and Year 2000 Compliance. Further information concerning the
Company and its business, including additional factors that could materially
affect the Company's financial results, is included in the Company's other
filings with the SEC.
The Company does not undertake - and specifically disclaims any obligation - to
publicly release the result of any revisions which may be made to any
forward-looking statements to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.
General
Woronoco Bancorp, Inc. (the "Company") was incorporated in October 1998 under
Delaware law. On March 19, 1999, the Company acquired Woronoco Savings Bank (the
"Bank") as part of the Company's conversion from a Massachusetts-chartered
mutual to stock savings bank (the "Conversion"). The Company acquired the Bank
for 50% of the net proceeds from the conversion. The Company is currently a
savings and loan holding company regulated by the Office of Thrift Supervision
("OTS"). In connection with the Conversion, the Company issued an aggregate of
5,998,860 shares of its common stock of which 5,554,500 shares were sold at a
purchase price of $10 per share in a subscription offering and 444,360 shares
were issued to Woronoco Savings Charitable Foundation, a charitable foundation
established by the Company. The net proceeds resulting from the offering totaled
$53.5 million after deducting expenses.
The Company does not transact any material business other than through its
wholly-owned subsidiary, Woronoco Savings Bank (the "Bank"). The Bank's results
of operations are dependent primarily on net interest income, which is the
difference between the interest income earned on the Bank's interest-earning
assets, such as loans and investments, and the interest expense on its
interest-bearing liabilities, such as deposits and borrowings. The Bank also
generates non-interest income such as gains on securities and loan sales and
service charges and other fees. The Bank's non-interest expenses primarily
consist of employee
7
<PAGE>
compensation and benefits, occupancy and equipment expense, marketing expenses,
data processing, professional services and other general and administrative
expenses. The Bank's results of operations are also significantly affected by
general economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory agencies.
Management Strategy
The Bank operates as a community-oriented savings Bank, offering traditional
deposit and loan products to its customers. In recent years, the Bank's strategy
has been to maintain profitability while managing its capital position and
limiting its credit and interest rate risk exposure. To accomplish these
objectives, the Bank has sought to:
. Emphasize providing superior service and competitive rates to increase
deposits, including commercial accounts
. Control credit risk by emphasizing the origination of single-family,
owner-occupied residential mortgage loans and consumer loans,
consisting primarily of home equity loans and lines of credit
. Invest funds in excess of loan demand primarily in mortgage-backed and
investment grade equity securities
. Control interest rate risk by selectively utilizing off-balance sheet
hedging transactions such as interest rate swaps, caps and floors
. Originate high quality, multi-family and commercial real estate and
commercial business loans which increase the yields earned on its
overall loan portfolio, without incurring unnecessary risk
. Expand its lending and deposit base through the establishment of
full-service Banking offices located inside supermarket/grocery stores
Beginning in 1994, the Bank began opening full-service banking offices in
supermarket/grocery stores operated by the regionally based Big Y Foods, Inc.
Since 1994, the Bank has established four such banking offices. The Bank will
continue to seek attractive opportunities to expand its branching activities
through supermarket facilities as such opportunities arise.
The Bank intends to continue its current operating strategy in an effort to
enhance its long-term profitability while maintaining a reasonable level of
interest rate risk. The Bank also intends to enhance its current operating
strategy by expanding the products and services that it offers, as necessary, to
improve its market share in its primary market area. In this regard, the Bank
has begun to offer new consumer and commercial deposit products and various
other customer improvement services and intends to expand its trust services and
invest in technological enhancements, such as PC Banking, to better serve its
customers in the future. In addition, and consistent with its plan to increase
its loan portfolio, the Bank intends to hire additional loan originators, a
commercial loan officer and an additional credit analyst to assist the loan
department.
Comparison of Financial Condition at March 31, 1999 and December 31, 1998
Total assets increased by $6.5 million, or 1.5%, to $433.3 million at March 31,
1999, from $426.8 million at December 31, 1998 primarily attributable to growth
in net loans. Net loans increased by $6.7 million or 2.4%, to $290.7 million at
March 31, 1999, from $284.0 million at December 31, 1998, as a result of
increased originations of one- to four-family mortgage loans. Proceeds from the
conversion were used to fund asset growth as well as to pay down Federal Home
Loan Bank borrowings.
8
<PAGE>
Investments
The Company generally invests in securities as a method of utilizing funds not
utilized for loan origination activity, as a method of maintaining liquidity at
levels deemed appropriate by management and as a method of managing interest
rate risk and the gap position. The Company maintains an investment portfolio
which consists primarily of mortgage-backed and equity securities. The Company
purchases mortgage-backed securities to (1) achieve positive interest rate
spreads with minimal administrative expense and (2) lower its credit risk as a
result of guarantees provided by Freddie Mac, Fannie Mae, and Ginnie Mae.
Although the Company no longer invests in Real Estate Mortgage Investment
Conduits ("REMICs"), the Company did maintain $7.7 million of such investments
in its securities portfolio at March 31, 1999. Generally, REMICs hold commercial
and/or residential real estate mortgages in trust and issue securities
representing an undivided interest in such mortgages.
Investments in equity securities involve risk as they are not insured or
guaranteed investments and are affected by stock market fluctuations. Such
investments are carried at their market value and can directly affect the
stockholders' equity of the Company. The Company also utilizes, from time to
time, "covered" call options with respect to common stocks as a means to further
supplement its revenues associated with equity investments. Such investment
activity is specifically authorized by both federal and Massachusetts law.
The Company has established an investment portfolio of securities that are
categorized as held-to-maturity, available-for-sale or held-for-trading. The
Company does not currently maintain a portfolio of securities categorized as
held-for-trading or held-to-maturity. At March 31, 1999, the Company's
securities portfolio totaled $106.1 million, or 24.5% of assets, all of which
was categorized as available-for-sale.
The following table sets forth at the dates indicated information regarding the
amortized cost and market values of the Company's investment securities.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
--------------------------------- ----------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
-------------- --------------- -------------- ----------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Equity securities
Preferred stock $ 3,660 $ 3,677 $ 3,754 $ 3,815
Common stock 16,047 16,829 15,438 17,436
Mutual Funds 1,502 1,294 1,524 1,394
------------- ------------- ------------- -------------
Total equity securities 21,209 21,800 20,716 22,645
Mortgage-backed and mortgage-related securities:
FHLMC 4,740 4,824 5,459 5,546
FNMA 29,923 30,222 31,955 32,435
GNMA 42,189 41,551 42,726 42,670
REMICS 7,414 7,719 7,833 8,113
------------- ------------- ------------- -------------
Total mortgage-backed securities 84,266 84,316 87,973 88,764
------------- ------------- ------------- -------------
Total securities (1) $ 105,475 $ 106,116 $ 108,689 $ 111,409
============= ============= ============= =============
</TABLE>
(1) Does not include $5.7 million and $5.6 million of FHLB-Boston stock held in
1999 and 1998.
9
<PAGE>
Lending Activities
Federal and state laws and regulations limit the types of loans that the Company
may originate. The interest rates charged by the Company on loans are affected
principally by the Company's current asset/liability strategy, the demand for
such loans, the supply of money available for lending purposes and the rates
offered by its competitors. These factors are, in turn, affected by general and
economic conditions, monetary policies of the federal government, including the
Federal Reserve Board ("FRB"), legislative tax policies and governmental
budgetary matters.
At March 31, 1999, the Company's total loan portfolio was $293.7 million or
67.8% of total assets. Primarily all loans in the portfolio, with the exception
of home equity loans and lines of credit, are located in the Company's primary
market area.
The following table sets forth the composition of the Company's loan portfolio
in dollar amounts and as a percentage of the respective portfolio at the dates
indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
----------------------------------- -----------------------------------
Percent Percent
Amount of Total Amount of Total
---------------- ---------------- ---------------- ----------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Real estate loans
One- to four-family $163,146 55.56% $157,698 54.95%
Multi-family 25,825 8.79% 22,962 8.00%
Commercial 19,268 6.57% 20,595 7.18%
Construction and development 2,717 0.93% 3,464 1.21%
---------------- ---------------- ---------------- ----------------
Total real estate loans 211,706 71.85% 204,719 71.34%
---------------- ---------------- ---------------- ----------------
Consumer loans
Home equity loans 63,413 21.59% 64,705 22.55%
Automobile 8,996 3.06% 9,460 3.30%
Other 3,439 1.17% 3,454 1.20%
---------------- ---------------- ---------------- ----------------
Total consumer loans 75,848 25.82% 77,619 27.05%
---------------- ---------------- ---------------- ----------------
Commercial loans 6,852 2.33% 4,613 1.61%
---------------- ---------------- ---------------- ----------------
Total loans 293,656 100.00% 286,951 100.00%
================ ================
Less:
Unadvanced loan funds (1) (1,312) (1,453)
Deferred loan origination costs 597 711
Allowance for loan losses (2,208) (2,166)
---------------- ----------------
Net loans $ 290,733 $ 284,043
================ ================
</TABLE>
(1) Includes committed but unadvanced loan amounts.
One- to four-family residential real estate loans increased $5.4 million during
the three months ended March 31, 1999, reflecting new originations offset by
prepayments and amortization of the existing portfolio.
As a result of new originations, total multi-family real estate loans increased
$2.9 million for the quarter ended March 31, 1999.
10
<PAGE>
Classified Assets
Federal regulations and the Company's internal policies require that the Company
utilize an internal asset classification system as a means of reporting problem
and potential problem assets. The Company currently classifies problem and
potential problem assets as "Substandard," "Doubtful" or "Loss" assets. An asset
is considered Substandard if it is inadequately protected by the current net
worth and paying capacity of the obligor or of the collateral pledged, if any.
Substandard assets include those characterized by the distinct possibility that
the Company will sustain some loss if the deficiencies are not corrected. Assets
classified as Doubtful have all of the weaknesses inherent in those classified
Substandard with the added characteristic that the weaknesses present make
collection or liquidation in full, on the basis of currently existing facts,
conditions and values, highly questionable and improbable. Assets classified as
Loss are those considered uncollectible and of such little value that their
continuance as assets, without the establishment of a specific loss reserve, is
not warranted. Assets which do not currently expose the Company to a sufficient
degree of risk to warrant classification in one of the aforementioned categories
but possess weaknesses are required to be designated "Special Mention."
When the Company classifies one or more assets, or portions thereof, as
Substandard or Doubtful, it is required to establish an allowance for possible
loan losses in an amount deemed prudent by management unless the loss of
principal appears to be remote. When the Company classifies one or more assets,
or portions thereof, as Loss, it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified or
to charge off the loan in full.
At March 31, 1999, the Company had $3.2 million, or 0.7%, of assets designated
as Substandard, consisting of 21 one- to four-family loans, four commercial real
estate loans, six multi-family loans, nine home equity lines of credit, twelve
consumer loans and four commercial business loans. At such date, the Company had
no loans classified as Doubtful or Loss. Also, at March 31, 1999, the Company
had $971 thousand or 0.2% of assets designated as Special Mention, consisting of
seven one- to four-family real estate loans, three commercial real estate loans,
one multi-family real estate loan, two home equity lines of credit and three
commercial business loans. At March 31, 1999, all of these classified assets
represented 1.4% of total loans.
At March 31, 1999, the Company had two loans, each with balances of $500
thousand or more, which had been adversely classified or identified as a problem
credit. The first, which is classified as substandard, was restructured in 1994
and is secured by a blanket first mortgage on ten multi-family properties
located in Westfield, Massachusetts. Currently, the borrower provides the
Company with monthly financial statements and the Company actively monitors the
properties' vacancy rates. The borrower is current with respect to payments. The
second loan, which was originally restructured in 1992 and, more recently in
December 1997, is classified as impaired. This loan is secured by an
office/retail building located in Wilbraham, Massachusetts. The borrower is
current with respect to payments. As of March 31, 1999, the aggregate
outstanding carrying balance of these loans was $1.4 million.
Non-performing Assets and Impaired Loans
The following table sets forth information regarding nonaccrual loans, real
estate owned ("REO") and restructured loans. It is the general policy of the
Company to cease accruing interest on loans 90 days or more past due and to
fully reserve for all previously accrued interest. If interest payments on all
nonaccrual loans for the quarters ended March 31, 1999 and 1998 had been made in
accordance with original loan agreements, interest income of $8 thousand and $14
thousand respectively, would have been recognized. On January 1, 1995, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 114
"Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118.
At March 31, 1999, the Company had a $1.2 million recorded investment in
impaired loans which had specific allowances of $290 thousand. At March 31,
1998, there were $1.4 million of impaired loans with specific loan loss
allowances of $290 thousand.
11
<PAGE>
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------------- ----------------
(Dollars in Thousands)
<S> <C> <C>
Non-accruing loans:
Real estate:
One- to four- family $ 51 $ 167
Commercial 60 109
Home equity loans and lines of credit 51 30
Commercial 48 -
---------------- ----------------
Total 210 306
Real estate owned (REO), net (1) 168 241
---------------- ----------------
Total nonperforming assets 378 547
Troubled debt restructurings 765 773
Troubled debt restructurings and ---------------- ----------------
total nonperforming assets $ 1,143 $ 1,320
================ ================
Total nonperforming loans and
troubled debt restructurings as a
percentage of total loans (2) (3) 0.33% 0.38%
Total nonperforming assets and
troubled debt restructurings as a
percentage of total assets (3) 0.26% 0.31%
</TABLE>
(1) Real estate owned balances are shown net of related allowances.
(2) Total loans includes loans, less unadvanced loan funds, plus deferred loan
costs (fees), net.
(3) Nonperforming assets consist of nonperforming loans and REO. Nonperforming
loans consist of nonaccruing loans and all loans 90 days or more past due
and other loans which have been identified by the Company as presenting
uncertainty with respect to the collectibility of interest or principal.
Allowance for Loan Losses
The allowance for loan losses is maintained through provisions for loan losses
based on management's on-going evaluation of the risks inherent in its loan
portfolio in consideration of the trends in its loan portfolio, the national and
regional economies and the real estate market in the Company's primary lending
area. The allowance for loan losses is maintained at an amount management
considers adequate to cover losses in its loan portfolio which are deemed
probable and estimable based on information currently known to management. The
Company's loan loss allowance determinations also incorporate factors and
analyses which consider the potential principal loss associated with the loan,
costs of acquiring the property securing the loan through foreclosure or deed in
lieu thereof, the periods of time involved with the acquisition and sale of such
property, and costs and expenses associated with maintaining and holding the
property until sale.
Management calculates a loan loss allowance sufficiency analysis on a monthly
basis based upon the loan portfolio composition, asset classifications,
loan-to-value ratios, potential impairments in the loan portfolio and other
factors. The analysis is compared to actual losses, peer group comparisons and
economic conditions. Management believes that, based on information available at
March 31, 1999, the Company's allowance for loan losses was sufficient to cover
losses inherent in its loan portfolio at that time. Based upon
12
<PAGE>
the Company's plan to increase its emphasis on non-one- to four-family mortgage
lending, the Company may further increase its allowance for loan losses over
future periods as conditions dictate. However, no assurances can be given that
the Company's level of allowance for loan losses will be sufficient to cover
future loan losses incurred by the Company or that further future adjustments to
the allowance for loan losses will not be necessary if economic and other
conditions differ substantially from the economic and other conditions used by
management to determine the current level of the allowance for loan losses. In
addition, the Federal Deposit Insurance Corporation ("FDIC") and the
Commissioner of Banks for the Commonwealth of Massachusetts ("Commissioner"), as
an integral part of their examination processes, periodically review the
Company's allowance for loan losses. Such agencies may require the Company to
make additional provisions for estimated loan losses based upon judgments
different from those of management.
The following table sets forth activity in the allowance for loan losses for the
periods set forth in the table.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------------
1999 1998
-------------- -------------
(Dollars in Thousands)
<S> <C> <C>
Allowance for loan losses, beginning of period $2,166 $1,952
Charged-off loans:
Real estate 7 -
Commercial - -
Consumer 18 31
-------------- -------------
Total charged-off loans 25 31
Recoveries on loans previously charged-off:
Real estate - -
Commercial - -
Consumer 7 11
-------------- -------------
Total recoveries 7 11
-------------- -------------
Net loans charged off 18 20
Provision for loan losses 60 60
-------------- -------------
Allowance for loan losses, end of period $2,208 $1,992
============== =============
Net loans charged-off to average
interest-earning loans 0.03% 0.03%
Allowance for loan losses to total loans (1) 0.75% 0.73%
Allowance for loan losses to non-performing
loans and troubled debt restructurings (2) 226.46% 184.10%
Net loans charged-off to allowance for loan losses 3.26% 4.02%
Recoveries to charge-offs 28.00% 35.48%
</TABLE>
(1) Total loans includes loans, less unadvanced loan funds, plus deferred loan
costs (fees), net.
(2) Nonperforming loans and troubled debt restructurings consist of all loans 90
days of more past due and other loans which have been identified by the
Bank as presenting uncertainty with respect to the collectibility of
interest or principal.
13
<PAGE>
The following table sets forth the percent of allowance for loan losses to total
allowances and the percent of loans to total loans in each of the categories
listed at the dates indicated. Management believes that the allowance can be
allocated by category only on an approximate basis. These allocations are not
necessarily indicative of future losses and do not restrict the use of the
allowance to absorb losses in any other loan category.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------------------------------- --------------------------------------
Percent of Percent Percent of Percent
Allowance of Loans Allowance of Loans
in each in each in each in each
Category Category Category Category
to Total to Total to Total to Total
Amount Allowance Loans Amount Allowance Loans
----------- ---------- ----------- ----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans $ 1,536 69.56% 72.10% $ 1,543 71.24% 71.34%
Consumer loans 574 26.00% 25.82% 525 24.24% 27.05%
Commercial loans 98 4.44% 2.08% 98 4.52% 1.61%
----------- ---------- ----------- ----------- ---------- -----------
Total allowance for loan losses $ 2,208 100.00% 100.00% $ 2,166 100.00% 100.00%
=========== ========== =========== =========== ========== ===========
</TABLE>
Deposits
The following table sets forth the distribution of deposit accounts for the
periods indicated.
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
--------------------------------- ---------------------------------
Percent Percent
of Total of Total
Balance Deposits Balance Deposits
----------------- ------------- ----------------- ------------
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Demand deposits $ 10,748 3.93% $ 10,382 3.77%
Savings accounts 68,056 24.91% 66,774 24.28%
Money market accounts 28,371 10.39% 27,176 9.88%
NOW accounts 30,634 11.21% 32,305 11.75%
Certificates of deposit 135,377 49.56% 138,404 50.32%
----------------- ------------- ----------------- ------------
Total deposits $ 273,186 100.00% $ 275,041 100.00%
================= ============= ================= ============
</TABLE>
14
<PAGE>
Comparison of Operating Results for the Three Months Ended March 31, 1999 and
1998
General
The Company reported a net loss of $1.6 million for the three months ended March
31, 1999 compared to net income of $600 thousand for the same period in 1998.
The results for the first quarter of 1999 were affected by the Company's
contribution of $4.4 million to fund the Woronoco Savings Charitable Foundation
and the related tax effect of $1.5 million. Excluding these items, the Company
would have earned $1.3 million for the three months ended March 31, 1999
representing an increase of $700 thousand or 114% from the same period last
year. This increase was primarily due to growth in net interest income resulting
from an increase in average interest-earning assets as well as an increase in
gains on sales of securities, offset by an increase in other expenses.
Analysis of Net Interest Income
Net interest income represents the difference between income on interest-earning
assets and expense on interest-bearing liabilities. Net interest income depends
on the relative amounts of interest-earning assets and interest-bearing
liabilities and the interest rate earned or paid on them.
The following table sets forth, for the periods indicated, average balances,
interest income and expense, and yields earned or rates paid on the major
categories of assets and liabilities. The average yields and costs are derived
by dividing income or expense by the average balance of interest-earning assets
or interest-bearing liabilities, respectively, for the periods shown and reflect
annualized yields and costs. Average balances are derived from average daily
balances. The yields and costs include fees which are considered adjustments to
yields. Loan interest and yield data does not include any accrued interest from
nonaccruing loans.
15
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
---------------------------------------------------------------------------------
1999 1998
-------------------------------------- --------------------------------------
Average Average
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
----------- ---------- ----------- ----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets: (1)
Investments:
Mortgage-backed securities $ 86,781 $ 1,488 6.86% $ 39,182 $ 675 6.89%
Equity securities 22,016 229 4.16% 15,911 166 4.17%
FHLB stock 5,706 55 3.86% 2,604 40 6.14%
Loans: (2)
Residential real estate loans 181,839 3,362 7.40% 161,586 3,171 7.85%
Commercial real estate loans 20,891 479 9.17% 20,434 501 9.81%
Consumer loans 77,037 1,412 7.43% 76,938 1,393 7.34%
Commercial loans 7,371 129 7.00% 5,806 111 7.65%
----------- ---------- ----------- ----------
Loans, net 287,138 5,382 7.50% 264,764 5,176 7.82%
Other 41,131 320 3.11% 6,015 70 4.66%
----------- ---------- ----------- ----------
Total interest-earning assets 442,772 7,474 6.75% 328,476 6,127 7.46%
---------- ----------
Noninterest-earning assets 21,159 19,581
----------- -----------
Total assets $ 463,931 $ 348,057
=========== ===========
Interest-bearing liabilities:
Deposits:
Money market accounts $ 27,624 $ 208 3.05% $ 23,002 $ 191 3.37%
Savings accounts (3) 100,748 330 1.33% 65,252 370 2.30%
NOW accounts 31,098 77 1.00% 28,618 66 0.94%
Certificates of deposit 138,028 1,771 5.20% 140,565 1,940 5.60%
----------- ---------- ----------- ----------
Total interest-bearing deposits 297,498 2,386 3.25% 257,437 2,567 4.04%
Borrowings 105,282 1,347 5.12% 48,702 690 5.67%
----------- ---------- ----------- ----------
Total interest-bearing liabilities 402,780 3,733 3.76% 306,139 3,257 4.31%
---------- --------- ---------- ----------
Demand deposits 10,835 6,046
Other noninterest-bearing liabilities 3,046 1,775
----------- -----------
Total liabilities 416,661 313,960
Total stockholders' equity 47,270 34,097
----------- -----------
Total liabilities and stockholders'
equity $ 463,931 $ 348,057
=========== ===========
Net interest-earning assets $ 39,992 $ 22,337
=========== ===========
Net interest income/interest
rate spread (4) $ 3,741 2.99% $ 2,870 3.15%
========== ========= ========== ==========
Net interest margin as a percentage
of interest-earning assets (5) 3.38% 3.49%
========= ==========
Ratio of interest-earning assets
to interest-bearing liabilities 109.93% 107.30%
========= ==========
(1) Includes related assets available-for-sale and unamortized discounts and premiums.
(2) Amount is net of deferred loan origination fees, unadvanced loan funds and allowance for loan losses, and
includes nonaccrual loans. The Company records interest income on nonaccruing loans on a cash basis.
(3) Savings accounts include mortgagors' escrow deposits.
(4) Net interest rate spread represents the difference between the yield on interest-earning assets and the
cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average interest-earning assets.
</TABLE>
Net interest income totaled $3.7 million for the three months ended March 31,
1999 compared to $2.9 million for the same period in 1998, representing an
increase of $871 thousand or 30.4%. This increase was primarily due to a $114.3
million increase in average interest-earning assets offset by an 11 basis points
decrease in the net interest margin.
16
<PAGE>
Interest income increased $1.3 million or 22.0% to $7.5 million for the three
months ended March 31, 1999. This increase was attributable to higher levels of
interest-earning assets offset by lower yields on interest-earning assets.
Interest-earning assets totaled $442.8 million for the quarter ended March 31,
1999 compared to $328.5 million for the same period last year, an increase of
$114.3 million or 34.8%. Average investments increased $53.7 million or 97.5% as
the Company utilized borrowings, in anticipation of receiving conversion
proceeds, to purchase mortgage backed securities. The growth in average
investments also reflects the securitization of $19.1 million of fixed rate
one-to four-family residential mortgage loans in the third quarter of 1998.
Average loans increased $22.4 million or 8.5%, primarily in the residential real
estate portfolio, due to new originations offset by amortization and prepayments
of the existing loan portfolio. Other interest- earning assets increased $35.1
million as a result of higher federal funds sold. The increase in federal funds
sold reflects the temporary savings deposits of investors interested in
acquiring Woronoco Bancorp stock as part of the conversion. Yields on
interest-earning assets declined 71 basis points due to a lower level of
interest rates as well as an increase in lower yielding mortgage backed
securities and federal funds sold balances.
Total interest expense increased $476 thousand or 14.6% to $3.7 million for the
three months ended March 31, 1999 resulting from an increase in interest-bearing
liabilities offset by lower rates paid on such liabilities. Total
interest-bearing liabilities were $402.2 million for the quarter ended March 31,
1999 as compared to $306.1 million for the same period last year, reflecting an
increase of $96.0 million or 31.4%. Average deposits increased $40.1 million or
15.6% primarily due to the temporary savings deposits of investors associated
with the Company's conversion. Average borrowings increased $56.0 million
resulting from management's decision to increase its utilization of borrowings
to fund asset growth. Rates paid on interest-bearing liabilities declined 55
basis points reflecting a lower interest rate environment as well as the effect
of the temporary savings deposits of investors.
17
<PAGE>
The following table presents the extent to which changes in interest rates and
changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company's interest income and interest expense
during the periods indicated. Information is provided in each category with
respect to: (i) changes attributable to changes in volume (changes in volume
multiplied by prior rate); (ii) changes attributable to changes in rate (changes
in rate multiplied by prior volume); and (iii) the net change. The changes
attributable to the combined impact of volume and rate have been allocated
proportionately to the changes due to volume and the changes due to rate.
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 compared to 1998
------------------------------------------------------
Increase (Decrease)
Due to
------------------------------------------------------
Volume Rate Net
---------------- ---------------- ----------------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Mortgage-backed securities $ 816 $ (3) $ 813
Equity securities 64 (1) 63
FHLB stock 30 (15) 15
Loans:
Residential real estate loans 374 (183) 191
Commercial real estate loans 10 (32) (22)
Consumer loans 2 17 19
Commercial loans 27 (9) 18
---------------- ---------------- ----------------
Total loans 413 (207) 206
Other 338 (88) 250
---------------- ---------------- ----------------
Total interest-earning assets $ 1,661 $ (314) $ 1,347
---------------- ---------------- ----------------
Interest-bearing liabilities:
Deposits:
Money market accounts $ 35 $ (18) $ 17
Savings accounts (1) 116 (156) (40)
NOW accounts 6 5 11
Certificates of deposit (33) (136) (169)
---------------- ---------------- ----------------
Total deposits 124 (305) (181)
Borrowings 677 (20) 657
---------------- ---------------- ----------------
Total interest-bearing liabilities 801 (325) 476
---------------- ---------------- ----------------
Increase (decrease) in net interest income $ 860 $ 11 $ 871
---------------- ---------------- ----------------
</TABLE>
(1) Includes interest on mortgagors' escrow deposits.
Provision for Loan Losses
The Company's provision for loan losses totaled $60 thousand for the quarters
ended March 31, 1999 and 1998. Provisions for loan losses are based on
management's on-going evaluation of the risks inherent in its loan portfolio in
consideration of the trends in its loan portfolio, the national and regional
economies and the real estate market in the Company's primary lending area. The
allowance for loan losses is maintained at an amount management considers
adequate to cover losses in its loan portfolio which are deemed probable and
estimable based on information currently known to management.
18
<PAGE>
Other Income
Total other income increased $317 thousand or 52.7% to $919 thousand for the
quarter ended March 31, 1999 compared to $602 thousand in 1998 as a result of
growth in customer service fees and gains on sales of securities. Customer
service fees increased $86 thousand, or 24.2%, reflecting an increase in fees
associated with the Company's larger deposit base as well as higher servicing
income due to the securitization of $19.1 million of residential mortgages in
the third quarter of 1998.
Other Expenses
Total other expense was $7.3 million for the quarter ended March 31, 1999
compared to $2.5 million for the same period in 1998. Excluding the $4.4 million
contribution to the Woronoco Savings Charitable Foundation, other expenses
increased $322 thousand or 12.8% due to increases in salaries and benefits as
well as occupancy and equipment expenses. Salaries and benefits increased $118
thousand or 9.2% and occupancy and equipment expenses increased $91 thousand or
25.3% as a result of the opening of new, full service banking offices in 1998
and 1999. The Company also experienced an increase in salaries and benefits due
to standard wage increases.
Income Taxes
The Company recorded an income tax benefit of $1.0 million for the three months
ended March 31, 1999 compared to income tax expense of $294 thousand for the
same period last year. Excluding the tax affect of $1.5 million related to the
Company's contribution to establish the Woronoco Savings Charitable Foundation,
the Company's total provision for income taxes would have been $475 thousand in
the first quarter of 1999.
Liquidity and Capital Resources
Liquidity and funding strategies are the responsibility of the Asset/Liability
Management Committee (the "ALCO"). The ALCO is responsible for establishing
liquidity targets and implementing strategies to meet desired goals. Liquidity
is measured by the Company's ability to raise cash within 30 days at a
reasonable cost and with a minimum of loss. The Company's primary sources of
funds are deposits, principal and interest payments on loans and investment
securities and borrowings from the FHLB-Boston. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
outflows and mortgage prepayments are greatly influenced by general interest
rates, economic conditions and competition.
The primary investing activities of the Company are the origination of
residential one-to four-family mortgage loans and consumer loans, primarily home
equity loans and lines of credit, and, to a lesser extent, multi-family and
commercial real estate loans, construction and development loans, commercial
business loans, other types of consumer loans and the investment in
mortgage-backed and equity securities. These activities are funded primarily by
principal and interest payments on loans and investment securities, deposit
growth and the utilization of FHLB advances. During the three months ended March
31, 1999, the Company's loan originations totaled $23.8 million. At March 31,
1999, the Company's investments in mortgage-backed and equity securities totaled
$106.1 million. The Company experienced a net decrease in total deposits of $1.9
million for the three months ended March 31, 1999. Deposit flows are affected by
the overall level of interest rates, the interest rates and products offered by
the Company and its local competitors and other factors. The Company closely
monitors its liquidity position on a daily basis. If the Company requires funds
beyond its ability to generate them internally, additional sources of funds are
available through FHLB advances. At March 31, 1999, the Company had $68.4
million of outstanding FHLB borrowings. Although the Company's policies allow
for the use of brokered deposits, the Company does not currently solicit
brokered deposits.
Additionally, in August 1998, the Company completed the securitization
(converting whole loans into mortgage-backed securities) of $19.1 million of 30
year fixed-rate one- to four-family mortgage loans with
19
<PAGE>
Fannie Mae. The loans are serviced as mortgage-backed securities for Fannie Mae.
In addition to resulting in a decrease in loans receivable and a related
increase in mortgage-backed securities, the securitization provides a liquidity
related benefit to the Company in that it adds high quality collateral to the
Company's balance sheet which can be pledged for borrowings in the secondary
market and designates such loans as "available-for-sale" so that the Company
could sell or collateralize such securities.
Outstanding commitments for all loans totaled $6.7 million at March 31, 1999.
Management of the Company anticipates that it will have sufficient funds
available to meet its current loan commitments. Certificates of deposit which
are scheduled to mature in one year or less from March 31, 1999 totaled $112.1
million. The Company relies primarily on competitive rates, customer service,
and long-standing relationships with customers to retain deposits. From time to
time, the Company will also offer competitive special products to its customers
to increase retention and to attract new deposits. Based upon the Company's
experience with deposit retention and current retention strategies, management
believes that, although it is not possible to predict future terms and
conditions upon renewal, a significant portion of such deposits will remain with
the Company.
Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and possibly additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's consolidated financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's 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 Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier I capital (as defined) to risk weighted assets (as
defined) and to average assets (as defined). Management believes, as of March
31, 1999, that the Bank meets all adequacy requirements to which it is subject.
As of March 31, 1999 and December 31, 1998, the most recent notification from
the FDIC categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized, the Bank
must maintain minimum total risk-based, Tier I risk-based and Tier I leverage
ratios as set forth in the following table. There were no conditions or events
since that notification that management believes have changed the Bank's
category.
20
<PAGE>
<TABLE>
<CAPTION>
Minimum
to be Well
Capitalized Under
Minimum for Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------------- -------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ------------- ---------------- --------- ------------ ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of March 31, 1999:
- --------------------
Total Capital to Risk Weighted Assets $ 59,681 23.2% $ 20,580 8.0% $ 25,725 10.0%
Tier 1 Capital to Risk Weighted Assets 57,473 22.3% 10,290 4.0% 15,435 6.0%
Tier 1 Capital to Average Assets 57,473 12.3% 14,036 - 3.0% - 23,393 5.0%
23,393 5.0%
As of December 31, 1998:
- -----------------------
Total Capital to Risk Weighted Assets $ 36,226 13.9% $ 20,898 8.0% $ 26,122 10.0%
Tier 1 Capital to Risk Weighted Assets 34,060 13.0% 10,449 4.0% 15,673 6.0%
Tier 1 Capital to Average Assets 34,060 9.3% 10,929 - 3.0% - 18,215 5.0%
18,215 5.0%
</TABLE>
Year 2000 Compliance
As the Year 2000 approaches, an important business issue has emerged regarding
how existing computer application software programs and operating systems can
accommodate this date value. Many existing application software products are
designed to accommodate only two digits. If not corrected, many computer
applications and systems could fail or create erroneous results by or at the
Year 2000. While the Company maintains an internal computer system for
approximately 20% of its operating functions, the substantial majority of the
Company's data processing is out-sourced to a third party vendor. The Company's
Year 2000 Project Planning Committee has identified potential problems
associated with the Year 2000 issue and has implemented a Year 2000 Action Plan
(the "Y2K Plan") designated to ensure that all software and hardware used in
connection with the Company's business will manage and manipulate data involved
in the transition from 1999 to 2000 without functional or data abnormality and
without inaccurate results related to such data. Currently, 93% of the Company's
internal software, and 97% of its hardware are Year 2000 compliant. The Company
has prepared a critical issues schedule which identifies timelines and
responsibilities for the completion of the remainder. Specifically, the
remaining items consist of the Company's file server, E-mail, safe deposit
billing, voice mail and credit reporting systems. While most of the above items
were completed as of March 31, 1999, the Company's file server, E-mail and voice
mail systems are now scheduled for completion in the second quarter. Our
objective is to have all hardware and software fully year 2000 compliant by June
30, 1999.
The Company recognizes that its ability to be Year 2000 compliant is dependent
upon the cooperation of its vendors and, in particular, its outside third party
data processor. The Company is requiring its computer systems and software
vendors to represent that the products provided are or will be Year 2000
compliant, and has planned a program of testing for compliance. The Company
utilizes these representations from its computer system and software vendors for
the purpose of determining the vendors' Year 2000 readiness. Upon receiving such
representations, the Company then determines the need for replacement of or
remediations to each particular vendor's system. The Company recognizes that its
ability to pursue vendors for possible misrepresentation is limited in
comparison to the disruption that may occur in the Company's business and
operations if a particular vendor is not Year 2000 compliant. Accordingly,
rather than solely relying on representations from its vendors, the Company also
independently tests all available critical vendor applications. The Company has
completed testing of its critical vendors' computer applications and their Year
2000 issues have been corrected. The Company has received representations from
its primary
21
<PAGE>
third party data processing vendor confirming completion of over 97% of that
vendor's internally developed programs. Of the data center's internal programs,
its critical banking related programs are now 100% compliant. Remaining internal
and external programs are presently being converted to be Year 2000 compliant.
The Company began testing the data center's completed programs in April of 1998
and is currently engaged in additional testing of remaining programs. All Year
2000 issues for the Company, including testing, are expected to be addressed and
any problems remedied by June 30, 1999.
The Company has also identified and contacted commercial borrowers that may be
vulnerable to the Year 2000 date change and has also provided brochures to its
customers to make them aware of the Year 2000 issue. The Company has determined
that Year 2000 readiness issues have little or no impact on the Company's one-
to four-family lending relationships. However, the Company views Year 2000
compliance as an integral part of the commercial loan credit analysis and
underwriting process. Therefore, and as warranted by the type and nature of a
particular loan request, the Company reviews and assesses the impact of Year
2000 on an applicant's business and any factors that may limit the applicant's
ability to repay the debt. Additionally, an assessment is made on the potential
effect that vendors, suppliers and customers, who fail to remediate Year 2000
risks, might have on the applicant's business. Based upon the results of the
review and analysis, a determination is then made as to whether or not it is
necessary to require the applicant to develop a formal program to address Year
2000 issues and to report the progress of such a program to the Company. In
situations that warrant formal programs and monitoring, this requirement becomes
a condition of the terms for granting the loan. Additionally, the Company has
completed its efforts to contact and survey all of its existing commercial
borrowers with lending relationships having aggregate exposure exceeding
$500,000. The majority of credits represented by these relationships are
comprised of multi-family and commercial real estate loans. All 32 borrowers in
this category responded to a comprehensive questionnaire either in writing or
via telephone. Based upon the responses and analysis of the type of business
operations that each borrower conducts, the Company concluded that the effect of
Year 2000 issues on these credits does not pose a material risk to the Company.
The Company's operations may also be affected by the Year 2000 compliance of its
significant suppliers and other vendors, including those that provide
non-information and technology systems. With respect to those significant
suppliers and other vendors, information has been gathered to assess their
individual Year 2000 compliance. Over 80% of the those critical suppliers and
vendors contacted have met our expectations concerning their Year 2000
compliance progress. Those vendors that are not Year 2000 compliant and who are
unlikely to achieve Year 2000 compliance, are being replaced according to
established timeframes as identified in the Company's contingency plans. If any
of the Company's significant suppliers or other vendors do not achieve Year 2000
compliance in a timely manner, the Company's business or operations could be
adversely affected. The Company is also preparing a Business Resumption
Contingency Plan for use in the unlikely event of a Year 2000 related failure
affecting any of its core business processes. Various department managers are
assigned the responsibility for developing appropriate contingency plans for the
Company's core business processes. This project is part of a general upgrade to
the Company's existing Business Resumption Policy which is scheduled for
implementation during the 2nd Quarter of 1999. A test plan to validate the
Company's Business Resumption Policy and related Year 2000 contingency plans is
also scheduled to take place in the 2nd quarter of 1999. The Company's most
likely worst case scenario relates to a possible excess amount of withdrawal
requests created by depositor concerns over possible Year 2000 failures.
Accordingly, the Company has implemented a customer awareness program designed
to keep customers well informed of the facts relating to Year 2000 and what the
Company is doing to achieve Year 2000 compliance. Our goal is to continually
reassure customers concerning the safety of their deposits with Woronoco Savings
Bank. Additionally, as part of its Year 2000 contingency planning efforts, the
Company has developed a Cash and Liquidity Contingency Plan. This plan is
designed to enable the Company to forecast and prepare for any unusual customer
cash demands associated with the Year 2000 date change.
The Company has allocated approximately $235,000 from its 1998 and 1999
operating budgets in connection with achieving Year 2000 compliance and, as of
March 31, 1999, has expended approximately $73,000.
22
<PAGE>
Approximately 16% of the $235,000 Year 2000 budget is being used for
remediation. To insure the reliability of the Company's Year 2000 risk and cost
estimates, the Company follows the work program guidelines as provided by the
Federal Financial Institutions Examination Council. These are the same
guidelines used by federal examiners to determine the effectiveness of the Year
2000 efforts by the banks they examine. The Company's Compliance Officer
regularly monitors the Company's Year 2000 progress and the Company's internal
auditor has performed regular audits of the Y2K Plan. In addition, the FDIC
conducts regular Y2K examinations of the Bank. Material costs, if any, that may
arise from the failure to achieve Year 2000 compliance by either the Company's
third party data processing vendor or its significant suppliers and other
vendors is not currently determinable. To the extent that the Company's systems
are not yet fully Year 2000 compliant, there can be no assurance that potential
systems interruptions or the cost necessary to update software would not have a
materially adverse effect on the Company's business, financial condition,
results of operations, cash flows or business prospects. If the Company's
progress towards becoming Year 2000 compliant is deemed inadequate, regulatory
action may be undertaken.
This description of the Company's Year 2000 Action Plan is a "Year 2000
Readiness Disclosure" as defined by the Year 2000 Information and Readiness
Disclosure Act (a U.S. statute enacted on October 19, 1998) and is subject to
the Act's civil liability protections. This "Year 2000 Readiness Disclosure" is
solely intended to inform and does not constitute an explicit or implicit
representation or warranty of any kind.
23
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
There have been no material changes in information regarding quantitative and
qualitative disclosure about market risk from the information presented as of
December 31, 1998 (in the Company's Form 10-K) to March 31, 1999.
24
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
-----------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business. Such
routine legal proceedings, in the aggregate, are believed by management to be
immaterial to the financial condition and results of operations of the Company.
Item 2. Changes in Securities and Use of Proceeds.
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
None.
Item 5. Other Information.
-----------------
None.
25
<PAGE>
Item 6. Exhibits and Reports on Form 8-K (S)249.308 of this Chapter).
------------------------------------------------------------
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
2.1 Amended Plan of Conversion of Woronoco Savings Bank (1)
3.1 Certificate of Incorporation of Woronoco Bancorp, Inc. (1)
3.2 Bylaws of Woronoco Bancorp, Inc. (1)
4.0 Stock Certificate of Woronoco Bancorp, Inc. (1)
10.1 Employment Agreement between Woronoco Bancorp, Inc. and Cornelius D. Mahoney
10.2 Employment Agreement between Woronoco Savings Bank and Cornelius D. Mahoney
10.3 Employment Agreement between Woronoco Bancorp, Inc. and Agostino J. Calheno
10.4 Employment Agreement between Woronoco Savings Bank and Agostino J. Calheno
10.5 Employment Agreement between Woronoco Bancorp, Inc. and Debra L. Murphy
10.6 Employment Agreement between Woronoco Savings Bank and Debra L. Murphy
10.7 Change in Control Agreement between Woronoco Savings Bank and James E. Gardner
10.8 Woronoco Savings Bank Employee Severance Compensation Plan (1)
10.9 Woronoco Savings Bank Supplemental Executive Retirement Plan (1)
27.0 Financial Data Schedule
-------------------------
</TABLE>
(1) Incorporated by reference into this document from the Exhibits
filed with the Registration Statement on Form S-1, and any
amendments thereto, Registration No. 333-67255.
(b) Reports on Form 8-K
None.
26
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities and Exchange
Act, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
WORONOCO BANCORP, INC.
Dated: May 14, 1999 By: /s/ Cornelius D. Mahoney
---------------------------------
Cornelius D. Mahoney
Chairman of the Board, President and
Chief Executive Officer
(principal executive officer)
Dated: May 14, 1999 By: /s/ Debra L. Murphy
---------------------------------
Debra L. Murphy
Senior Vice President and
Chief Financial Officer
(principal financial and accounting officer)
27
<PAGE>
EXHIBIT 10.1
WORONOCO BANCORP, INC.
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of March 19, 1999, by
and between Woronoco Bancorp, Inc. (the "Holding Company"), a corporation
organized under the laws of Delaware, with its principal offices at 31 Court
Street, Westfield, Massachusetts, 01086- 0978 and Cornelius D. Mahoney
("Executive"). Any reference to "Institution" herein shall mean Woronoco Savings
Bank or any successor thereto.
WHEREAS, the Holding Company wishes to assure itself of the services of
Executive for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Holding
Company on a full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of Executive's employment hereunder, Executive agrees
to serve as Chairman of the Board of Directors, President and Chief Executive
Officer of the Holding Company. Executive shall render administrative and
management services to the Holding Company such as are customarily performed by
persons in a similar executive capacity. During said period, Executive also
agrees to serve, if elected, as an officer or director of any subsidiary of the
Holding Company.
2. TERMS.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the date of the execution of this Agreement, the term of this Agreement shall be
extended for one day each day until such time as the board of directors of the
Holding Company (the "Board") or Executive elects not to extend the term of the
Agreement by giving written notice to the other party in accordance with Section
8 of this Agreement, in which case the term of this Agreement shall be fixed and
shall end on the third anniversary of the date of such written notice.
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder, including activities and services related to the
<PAGE>
organization, operation and management of the Holding Company and its direct or
indirect subsidiaries ("Subsidiaries") and participation in community,
professional and civic organizations; provided, however, that, with the approval
of the Board, as evidenced by a resolution of such Board, from time to time,
Executive may serve, or continue to serve, on the boards of directors of, and
hold any other offices or positions in, companies or organizations, which, in
such Board's judgment, will not present any conflict of interest with the
Holding Company or its Subsidiaries, or materially affect the performance of
Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein contained to the contrary,
Executive's employment with the Holding Company may be terminated by the Holding
Company or Executive during the term of this Agreement, subject to the terms and
conditions of this Agreement. However, Executive shall not perform, in any
respect, directly or indirectly, during the pendency of his temporary or
permanent suspension or termination from the Institution, duties and
responsibilities formerly performed at the Institution as part of his duties and
responsibilities as President and Chief Executive Officer of the Holding
Company.
3. COMPENSATION AND REIMBURSEMENT.
(a) The Bank shall pay Executive as compensation a salary of not less
than $215,000 per year ("Base Salary") payable in accordance with the normal
payroll practices of the Bank. Base Salary shall include any amounts of
compensation deferred by Executive under any tax-qualified retirement or welfare
benefit plan or any other deferred compensation arrangement maintained by the
Bank. During the period of this Agreement, Executive's Base Salary shall be
reviewed at least annually; the first such review will be made no later than one
year from the date of this Agreement. Such review shall be conducted by the
Board or by a committee of the Board delegated such responsibility by the Board.
The committee or the Board may increase Executive's Base Salary. Any increase in
Base Salary shall become the "Base Salary" for purposes of this Agreement. In
addition to the Base Salary provided in this Section 3(a), the Holding Company
shall also provide Executive, at no premium cost to Executive, with all such
other benefits as provided uniformly to permanent full-time employees of the
Holding Company and its Subsidiaries.
(b) Executive shall be entitled to participate in an equitable manner
with all other executive officers of the Holding Company in discretionary
bonuses as authorized and declared by the Board to executive employees. No other
compensation provided for in this Agreement shall be deemed a substitute for
Executive's right to participate in such bonuses when and as declared by the
Holding Company Board.
(c) Executive shall be entitled to receive fees for serving as a
director of the Holding Company and/or the Bank or as a member of any committee
as received by other members of the Boards of Directors of the Holding Company
and/or the Bank. Such fees shall be in addition to and not in lieu of any other
remuneration provided under this Agreement.
-2-
<PAGE>
(d) Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Holding Company will
not, without Executive's prior written consent, make any changes in such plans,
arrangements or perquisites which would materially adversely affect Executive's
rights or benefits thereunder; except to the extent such changes are made
applicable to all participants on a non-discriminatory basis. Without limiting
the generality of the foregoing provisions of this Subsection (d), Executive
shall be entitled to participate in or receive benefits under all plans relating
to stock options, restricted stock awards, stock purchases, pension, thrift,
supplemental retirement, profit-sharing, employee stock ownership, group life
insurance, medical and other health and welfare coverage, education, cash or
stock bonuses that are now or hereafter made available by the Holding Company in
the future to its senior executives and key management employees, subject to and
on a basis consistent with the terms, conditions and overall administration of
such plans and arrangements. Nothing paid to Executive under any such plan or
arrangement will be deemed to be in lieu of other compensation to which
Executive is entitled under this Agreement.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during Executive's term of employment under this Agreement, the provisions of
this Section shall apply. As used in this Agreement, an "Event of Termination"
shall mean and include any one or more of the following: (i) the termination by
the Holding Company of Executive's full-time employment hereunder for any reason
other than termination governed by Section 5(a) hereof, or for Cause, as defined
in Section 7 hereof; (ii) Executive's resignation from the Holding Company's
employ, upon, any (A) failure to elect or reelect or to appoint or reappoint
Executive as Chairman of the Board of Directors, President and Chief Executive
Officer, unless consented to by Executive, (B) a material change in Executive's
function, duties, or responsibilities with the Holding Company or its
Subsidiaries, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, unless consented to by Executive, (C) a
relocation of Executive's principal place of employment by more than 25 miles
from its location at the effective date of this Agreement, unless consented to
by Executive, (D) a material reduction in the benefits and perquisites to
Executive from those being provided as of the effective date of this Agreement,
unless consented to by Executive, (E) a liquidation or dissolution of the
Holding Company or the Institution, or (F) breach of this Agreement by the
Holding Company. Upon the occurrence of any event described in clauses (A), (B),
(C), (D), (E) or (F), above, Executive shall have the right to elect to
terminate his employment under this Agreement by resignation upon not less than
sixty (60) days prior written notice given within six full calendar months after
the event giving rise to said right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Holding Company shall be obligated to
pay Executive, or, in the event
-3-
<PAGE>
of his subsequent death, his beneficiary or beneficiaries, or his estate, as the
case may be, an amount equal to the sum of: (i) the Base Salary and bonuses, in
accordance with Sections 3(a) and 3(b), respectively, that would have been paid
to Executive for the remaining term of this Agreement had the Event of
Termination not occurred; plus (ii) the value, as calculated by a recognized
firm customarily performing such valuation, of any stock options which as of the
Date of Termination, have been granted to Executive but are not exercisable by
Executive and the value of any restricted stock awards which have been granted
to Executive, but in which Executive does not have a non-forfeitable or
fully-vested interest as of the Date of Termination; plus (iii) all benefits,
including health insurance in accordance with Section 3(d), that would have been
provided to Executive for the remaining term of the this Agreement had an Event
of Termination not occurred. At the election of Executive, which election is to
be made prior to an Event of Termination, such payments shall be made in a lump
sum. In the event that no election is made, payment to Executive will be made on
a monthly basis in approximately equal installments during the remaining term of
the Agreement. Such payments shall not be reduced in the event Executive obtains
other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Holding Company
will cause to be continued life, medical, dental and disability coverage
substantially equivalent to the coverage maintained by the Holding Company or
its Subsidiaries for Executive prior to his termination at no premium cost to
Executive. Such coverage shall cease upon the expiration of the remaining term
of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" shall mean an
event of a nature that: (i) would be required to be reported in response to Item
1(a) of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (ii) results in a Change in Control of the Bank or the
Holding Company within the meaning of the Change in Bank Control Act and the
Rules and Regulations promulgated by the Federal Deposit Insurance Corporation
("FDIC") at 12 C.F.R. ss. 303.4(a) with respect to the Bank and the Board of
Governors of the Federal Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with
respect to the Holding Company, as in effect on the date hereof; or (iii)
results in a transaction requiring prior FRB approval under the Bank Holding
Company Act of 1956 and the regulations promulgated thereunder by the FRB at 12
C.F.R. ss. 225.11, as in effect on the date hereof except for the Holding
Company's acquisition of the Bank; or (iv) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Bank or the Holding Company
representing 20% or more of the Bank's or the Holding Company's outstanding
securities except for any securities of the Bank purchased by the Holding
Company in connection with the conversion of the Bank to the stock form and any
securities purchased by any tax qualified employee benefit plan of the Bank; or
(B) individuals who constitute the Board of Directors on the date hereof (the
"Incumbent Board")
-4-
<PAGE>
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board; or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Holding Company or similar transaction occurs in which the Bank or
Holding Company is not the resulting entity; or (D) solicitations of
shareholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Bank or
similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to the plan or
transaction are exchanged for or converted into cash or property or securities
not issued by the Bank or the Holding Company shall be distributed; or (E) a
tender offer is made for 20% or more of the voting securities of the Bank or the
Holding Company.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c) and (d), of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to (i) Executive's dismissal, or (ii) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, reduction in the annual compensation or reduction
in benefits or relocation of his principal place of employment by more than 25
miles from its location immediately prior to the change in control, unless such
termination is because of his death or Termination for Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b),
the Holding Company shall pay Executive, or in the event of his subsequent
death, his beneficiary or beneficiaries, or his estate, as the case may be, as
severance pay or liquidated damages, or both, an amount equal to the greater of:
(1) the Base Salary and bonuses, in accordance with Sections 3(a) and 3(b),
respectively, that would have been paid to Executive for the remaining term of
the Agreement had the event described in Subsection (b) of this Section 5 not
occurred, plus the value, as calculated by a recognized firm customarily
performing such valuation, of any stock options which as of the Date of
Termination, have been granted to Executive, but are not exercisable by
Executive and the value of restricted stock awards which have been granted to
Executive, but which Executive does not have a non-forfeitable or fully-vested
interest as of the Date of Termination and all benefits, including health
insurance, in accordance with Section 3(d) that would have been provided to
Executive for the remaining term of this Agreement had the event described in
Subsection (b) of this Section 5 not occurred; or (2) three (3) times
Executive's "Average Annual Compensation" (as defined herein) for the five (5)
most recent taxable years that Executive has been employed by the Holding
Company or such lesser number of years in the event that Executive shall have
been employed by the Holding Company for less than five (5) years. In
determining Executive's "Average Annual Compensation" annual compensation shall
-5-
<PAGE>
include Base Salary and any other taxable income earned by Executive in
connection with his employment with the Bank or Holding Company, including but
not limited to amounts related to the granting, vesting or exercise of
restricted stock awards and stock options, commissions, bonuses, pension and/or
profit sharing plan contributions or benefits (whether or not taxable),
severance payments, retirement payments, directors or committee fees and fringe
benefits paid or to be paid to Executive in any such year and payment of any
expense items without accountability or business purpose or that do not meet the
Internal Revenue Service requirements for deductibility by the Bank. At the
election of Executive, which election is to be made prior to a Change in
Control, such payment shall be made in a lump sum. In the event that no election
is made, payment to Executive will be made on a monthly basis in approximately
equal installments during the remaining term of the Agreement. Such payments
shall not be reduced in the event Executive obtains other employment following
termination of employment.
(d) Upon Executive's entitlement to benefits pursuant to Section 5(b),
the Company will cause to be continued life, medical, dental and disability
coverage substantially equivalent to the coverage maintained by the Institution
for Executive at no premium cost to Executive prior to his severance. Such
coverage and payments shall cease upon the expiration of thirty-six (36) months
following the Change in Control.
6. CHANGE OF CONTROL RELATED PROVISIONS.
In each calendar year that Executive is entitled to receive payments or
benefits under the provisions of this Employment Agreement as well as any other
payment in the nature of compensation made by the Holding Company and the Bank
to (or for the benefit of) Executive, the Holding Company shall determine if an
excess parachute payment (as defined in Section 4999 of the Internal Revenue
Code of 1986, as amended, and any successor provision thereto, (the "Code"))
exists. Such determination shall be made after taking any reductions permitted
pursuant to Section 280G of the Code and the regulations thereunder. Any amount
determined to be an excess parachute payment after taking into account such
reductions shall be hereafter referred to as the "Initial Excess Parachute
Payment". As soon as practicable after a Change in Control, the Initial Excess
Parachute Payment shall be determined. Upon the Date of Termination following a
Change in Control, the Holding Company shall pay Executive, subject to
applicable withholding requirements under applicable state or federal law, an
amount equal to:
(1) twenty (20) percent of the Initial Excess Parachute Payment
(or such other amount equal to the tax imposed under Section
4999 of the Code); and
(2) such additional amount (tax allowance) as may be necessary to
compensate Executive for the payment by Executive of state and
federal income and excise taxes on the payment provided under
Clause (1) and on any payments under this Clause (2). In
computing such tax allowance, the payment to be made under
Clause (1) shall be multiplied by the "gross up percentage"
("GUP"). The GUP shall be determined as follows:
-6-
<PAGE>
Tax Rate
GUP = ------------
1 - Tax Rate
The "Tax Rate" for purposes of computing the GUP shall be the
sum of the highest marginal federal and state income and
employment-related tax rates, including any applicable excise
tax rates, applicable to Executive in the year in which the
payment under Clause (1) is made.
(3) Notwithstanding the foregoing, if it shall subsequently be
determined in a final judicial determination or a final
administrative settlement to which Executive is a party that
the excess parachute payment as defined in Section 4999 of the
Code, reduced as described above, is more than the Initial
Excess Parachute Payment (such different amount being
hereafter referred to as the "Determinative Excess Parachute
Payment") then the Holding Company's independent accountants
shall determine the amount (the "Adjustment Amount") the
Holding Company must pay to Executive in order to put
Executive in the same position as Executive would have been if
the Initial Excess Parachute Payment had been equal to the
Determinative Excess Parachute Payment. In determining the
Adjustment Amount, independent accountants of the Holding
Company shall take into account any and all taxes (including
any penalties and interest) paid by or for Executive or
refunded to Executive or for Executive's benefit. As soon as
practicable after the Adjustment Amount has been so
determined, the Holding Company shall pay the Adjustment
Amount to Executive. In no event however, shall Executive make
any payment under this paragraph to the Holding Company.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, willful misconduct, any breach of fiduciary
duty involving personal profit, intentional failure to perform stated duties,
willful violation of any law, rule, regulation (other than traffic violations or
similar offenses), final cease and desist order or material breach of any
provision of this Agreement. Notwithstanding the foregoing, Executive shall not
be deemed to have been terminated for Cause unless and until there shall have
been delivered to him a Notice of Termination which shall include a copy of a
resolution duly adopted by the affirmative vote of not less than three-fourths
of the members of the Board at a meeting of the Board called and held for that
purpose (after reasonable notice to Executive and an opportunity for him,
together with counsel, to be heard before the Board), finding that in the good
faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
-7-
<PAGE>
any period after Termination for Cause. During the period beginning on the date
of the Notice of Termination for Cause pursuant to Section 8 hereof through the
Date of Termination, stock options granted to Executive under any stock option
plan shall not be exercisable nor shall any unvested awards granted to Executive
under any stock benefit plan of the Institution, the Holding Company or any
subsidiary or affiliate thereof, vest. At the Date of Termination, such stock
options and any such unvested awards shall become null and void and shall not be
exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Holding Company or by Executive
shall be communicated by Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's employment under the
provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, except upon the occurrence of
a Change in Control and voluntary termination by Executive in which case the
Date of Termination shall be the date specified in the Notice, the Date of
Termination shall be the date on which the dispute is finally determined, either
by mutual written agreement of the parties, by a binding arbitration award, or
by a final judgment, order or decree of a court of competent jurisdiction (the
time for appeal therefrom having expired and no appeal having been perfected)
and provided further that the Date of Termination shall be extended by a notice
of dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Holding Company will
continue to pay Executive his full compensation in effect when the notice giving
rise to the dispute was given (including, but not limited to, Base Salary) and
continue him as a participant in all compensation, benefit and insurance plans
in which he was participating when the notice of dispute was given, until the
dispute is finally resolved in accordance with this Agreement. Amounts paid
under this Section are in addition to all other amounts due under this Agreement
and shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration
-8-
<PAGE>
of this Agreement or termination of Executive's employment with the Holding
Company. Executive shall, upon reasonable notice, furnish such information and
assistance to the Holding Company as may reasonably be required by the Holding
Company in connection with any litigation in which it or any of its subsidiaries
or affiliates is, or may become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE.
(a) Upon any termination of Executive's employment hereunder pursuant
to Section 4 hereof, Executive agrees not to compete with the Holding Company or
its Subsidiaries for a period of one (1) year following such termination in any
city, town or county in which Executive's normal business office is located and
the Holding Company or any of its Subsidiaries has an office or has filed an
application for regulatory approval to establish an office, determined as of the
effective date of such termination, except as agreed to pursuant to a resolution
duly adopted by the Board. Executive agrees that during such period and within
said cities, towns and counties, Executive shall not work for or advise, consult
or otherwise serve with, directly or indirectly, any entity whose business
materially competes with the depository, lending or other business activities of
the Holding Company or its Subsidiaries. The parties hereto, recognizing that
irreparable injury will result to the Holding Company or its Subsidiaries, its
business and property in the event of Executive's breach of this Subsection
10(a) agree that in the event of any such breach by Executive, the Holding
Company or its Subsidiaries, will be entitled, in addition to any other remedies
and damages available, to an injunction to restrain the violation hereof by
Executive, Executive's partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits
that in the event of the termination of his employment pursuant to Section 7
hereof, Executive's experience and capabilities are such that Executive can
obtain employment in a business engaged in other lines and/or of a different
nature than the Holding Company or its Subsidiaries, and that the enforcement of
a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Holding Company
or its Subsidiaries from pursuing any other remedies available to the Holding
Company or its Subsidiaries for such breach or threatened breach, including the
recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Holding Company and
its Subsidiaries as it may exist from time to time, is a valuable, special and
unique asset of the business of the Holding Company and its Subsidiaries.
Executive will not, during or after the term of his employment, disclose any
knowledge of the past, present, planned or considered business activities of the
Holding Company and its Subsidiaries thereof to any person, firm, corporation,
or other entity for any reason or purpose whatsoever unless expressly authorized
by the Board of Directors or required by law. Notwithstanding the foregoing,
Executive may disclose any knowledge of banking, financial and/or economic
principles, concepts or ideas which are not solely and exclusively derived from
the business plans and activities of the Holding Company. In the event of a
breach or threatened breach by Executive of the provisions of this Section, the
Holding Company will be entitled to an injunction restraining Executive from
disclosing, in whole or in part, the knowledge of the past, present, planned or
considered business activities of the Holding Company or its Subsidiaries or
from rendering any services to any person, firm, corporation, other entity to
whom such knowledge, in whole or in
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part, has been disclosed or is threatened to be disclosed. Nothing herein will
be construed as prohibiting the Holding Company from pursuing any other remedies
available to the Holding Company for such breach or threatened breach, including
the recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in
cash or check from the general funds of the Holding Company subject to Section
11(b).
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated March 19, 1999,
between Executive and the Institution, such compensation payments and benefits
paid by the Institution will be subtracted from any amount due simultaneously to
Executive under similar provisions of this Agreement. Payments pursuant to this
Agreement and the Institution Agreement shall be allocated in proportion to the
level of activity and the time expended on such activities by Executive as
determined by the Holding Company and the Institution.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Holding Company
or any predecessor of the Holding Company and Executive, except that this
Agreement shall not affect or operate to reduce any benefit or compensation
inuring to Executive of a kind elsewhere provided. No provision of this
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit
of, Executive and the Holding Company and their respective successors and
assigns.
14. MODIFICATION AND WAIVER.
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(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW.
This Agreement shall be governed by the laws of the State of Delaware
without regards to principles of conflicts of law of this state.
18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Institution, in accordance with the rules of
the American Arbitration Association then in effect. Judgment may be entered on
the arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under
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this Agreement.
19. PAYMENT OF LEGAL FEES.
All reasonable legal fees paid or incurred by Executive pursuant to any
dispute or question of interpretation relating to this Agreement shall be paid
or reimbursed by the Holding Company, if Executive is successful pursuant to a
legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
(a) The Holding Company shall provide Executive (including his heirs,
executors and administrators) with coverage under a standard directors' and
officers' liability insurance policy at its expense and shall indemnify
Executive (and his heirs, executors and administrators) to the fullest extent
permitted under Delaware law against all expenses and liabilities reasonably
incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director
or officer of the Holding Company (whether or not he continues to be a director
or officer at the time of incurring such expenses or liabilities), such expenses
and liabilities to include, but not be limited to, judgments, court costs and
attorneys' fees and the cost of reasonable settlements.
(b) Any payments made to Executive pursuant to this Section are subject
to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and 12 C.F.R.
Part 359 and any rules or regulations promulgated thereunder.
21. SUCCESSOR TO THE HOLDING COMPANY.
The Holding Company shall require any successor or assignee, whether
direct or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution or the Holding
Company, expressly and unconditionally to assume and agree to perform the
Holding Company's obligations under this Agreement, in the same manner and to
the same extent that the Holding Company would be required to perform if no such
succession or assignment had taken place.
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SIGNATURES
IN WITNESS WHEREOF, Woronoco Bancorp, Inc. has caused this Agreement to
be executed and its seal to be affixed hereunto by its duly authorized officer
and its directors, and Executive has signed this Agreement, on the 13th day of
May, 1999.
ATTEST: WORONOCO BANCORP, INC.
/s/ Terry J. Bennett By: /s/ Francis J. Ehrhardt
- ------------------------------ ---------------------------------
Terry J. Bennett Francis J. Ehrhardt
Corporate Secretary For the Entire Board of Directors
[SEAL]
WITNESS: EXECUTIVE
/s/ Terry J. Bennett By: /s/ Cornelius D. Mahoney
- ------------------------------ ---------------------------------
Terry J. Bennett Cornelius D. Mahoney
Corporate Secretary
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EXHIBIT 10.2
WORONOCO SAVINGS BANK
EMPLOYMENT AGREEMENT
This AGREEMENT ("Agreement") is made effective as of March 19, 1999, by
and among Woronoco Savings Bank (the "Bank"), a Massachusetts-chartered savings
bank, with its principal administrative office at 31 Court Street, Westfield,
Massachusetts, 01086-0978, Woronoco Bancorp, Inc., a corporation organized under
the laws of the State of Delaware, the holding company for the Bank (the
"Holding Company"), and Cornelius D. Mahoney ("Executive").
WHEREAS, the Bank wishes to assure itself of the services of Executive
for the period provided in this Agreement; and
WHEREAS, Executive is willing to serve in the employ of the Bank on a
full-time basis for said period.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. POSITION AND RESPONSIBILITIES.
During the period of his employment hereunder, Executive agrees to
serve as Chairman of the Board of Directors, President and Chief Executive
Officer of the Bank. Executive shall render administrative and management
services to the Bank such as are customarily performed by persons situated in a
similar executive capacity. During said period, Executive also agrees to serve,
if elected, as an officer and director of the Holding Company or any subsidiary
of the Bank.
2. TERMS AND DUTIES.
(a) The period of Executive's employment under this Agreement shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement, and continuing on each anniversary
thereafter, the disinterested members of the board of directors of the Bank
("Board") may extend the Agreement an additional year such that the remaining
term of the Agreement shall be three (3) years, unless Executive elects not to
extend the term of this Agreement by giving written notice in accordance with
Section 8 of this Agreement. Executive shall abstain from any vote regarding an
extension of the term of this Agreement. The Board will review the Agreement and
Executive's performance annually for purposes of determining whether to extend
the Agreement and the rationale and results thereof shall be included in the
minutes of the Board's meeting. The Board shall give notice to Executive as soon
as possible after such review as to whether the Agreement is to be extended.
<PAGE>
(b) During the period of Executive's employment hereunder, except for
periods of absence occasioned by illness, reasonable vacation periods, and
reasonable leaves of absence, Executive shall devote substantially all his
business time, attention, skill, and efforts to the faithful performance of his
duties hereunder including activities and services related to the organization,
operation and management of the Bank and participation in community and civic
organizations; provided, however, that, with the approval of the Board, as
evidenced by a resolution of such Board, from time to time, Executive may serve,
or continue to serve, on the boards of directors of, and hold any other offices
or positions in, companies or organizations, which, in such Board's judgment,
will not present any conflict of interest with the Bank, or materially affect
the performance of Executive's duties pursuant to this Agreement.
(c) Notwithstanding anything herein to the contrary, Executive's
employment with the Bank may be terminated by the Bank or Executive during the
term of this Agreement, subject to the terms and conditions of this Agreement.
3. COMPENSATION AND REIMBURSEMENT.
Executive shall receive compensation and reimbursement under this
Agreement, as follows:
(a) The Bank shall pay Executive as compensation a salary of not less
than $215,000 per year ("Base Salary") payable in accordance with the normal
payroll practices of the Bank. Base Salary shall include any amounts of
compensation deferred by Executive under any tax-qualified retirement or welfare
benefit plan or any other deferred compensation arrangement maintained by the
Bank. During the period of this Agreement, Executive's Base Salary shall be
reviewed at least annually with the Board making its first review no later than
one year from the date of this Agreement. Such review shall be conducted by the
Board or by a committee of the Board, delegated such responsibility by the
Board. The committee or the Board may increase Executive's Base Salary at any
time during this Agreement and the resulting annual salary attributable to such
increase shall become the "Base Salary" for purposes of this Agreement. In
addition to the Base Salary provided in this Section 3(a), the Bank shall also
provide Executive, at no premium cost to Executive, with all such other benefits
as are provided uniformly to permanent full-time employees of the Bank.
(b) Executive shall be entitled to participate in an equitable manner
with all other executive officers of the Bank in discretionary bonuses as
authorized and declared by the Board to executive employees. No other
compensation provided for in this Agreement shall be deemed a substitute for
Executive's right to participate in such bonuses when and as declared by the
Board.
(c) Executive shall be entitled to receive fees for serving as a
director of the Holding Company and/or the Bank or as a member of any committee
as received by other members of the Boards of Directors of the Holding Company
and/or the Bank. Such fees shall be in addition to and not in lieu of any other
remuneration provided for under this Agreement.
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(d) Executive shall be entitled to participate in any employee benefit
plans, arrangements and perquisites substantially equivalent to those in which
Executive was participating or otherwise deriving benefit from immediately prior
to the beginning of the term of this Agreement, and the Bank will not, without
Executive's prior written consent, make any changes in such plans, arrangements
or perquisites which would materially adversely affect Executive's rights or
benefits thereunder; except to the extent such changes are made applicable to
all participants on a non-discriminatory basis. Without limiting the generality
of the foregoing provisions of this Subsection (d), Executive shall be entitled
to participate in or receive benefits under all plans relating to stock options,
restricted stock awards, stock purchases, pension, thrift, supplemental
retirement, profit-sharing, employee stock ownership, group life insurance,
medical and other health and welfare coverage, education, cash or stock bonuses
that are now or hereafter made available by the Bank in the future to its senior
executives and key management employees, subject to and on a basis consistent
with the terms, conditions and overall administration of such plans and
arrangements. Nothing paid to Executive under any such plan or arrangement will
be deemed to be in lieu of other compensation to which Executive is entitled
under this Agreement.
(e) In addition to the Base Salary provided for by paragraph (a) of
this Section 3 and other compensation and benefits provided for by paragraphs
(b), (c) and (d) of this Section 3, the Bank shall pay or reimburse Executive
for all reasonable travel and other reasonable expenses incurred by Executive
performing his obligations under this Agreement and may provide such additional
compensation in such form and such amounts as the Board may from time to time
determine.
4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION.
(a) Upon the occurrence of an Event of Termination (as herein defined)
during the Executive's term of employment under this Agreement, the provisions
of this Section shall apply. As used in this Agreement, an "Event of
Termination" shall mean and include any one or more of the following: (i) the
termination by the Bank or the Holding Company of Executive's full-time
employment hereunder for any reason other than a termination governed by Section
5(a) hereof, or Termination for Cause, as defined in Section 7 hereof; (ii)
Executive's resignation from the Bank's employ upon any (A) failure to elect or
reelect or to appoint or reappoint Executive as Chairman of the Board of
Directors, President and Chief Executive Officer, unless consented to by
Executive, (B) a material change in Executive's function, duties, or
responsibilities, which change would cause Executive's position to become one of
lesser responsibility, importance, or scope from the position and attributes
thereof described in Section 1, above, unless consented to by Executive, (C) a
relocation of Executive's principal place of employment by more than 25 miles
from its location at the effective date of this Agreement, unless consented to
by Executive, (D) a material reduction in the benefits and perquisites to
Executive from those being provided as of the effective date of this Agreement,
unless consented to by Executive, (E) a liquidation or dissolution of the Bank
or Holding Company, or (F) breach of this Agreement by the Bank. Upon the
occurrence of any event described in clauses (A), (B), (C), (D), (E) or (F),
above, Executive shall have the right to elect to terminate his employment
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under this Agreement by resignation upon not less than sixty (60) days prior
written notice given within six full months after the event giving rise to said
right to elect.
(b) Upon the occurrence of an Event of Termination, on the Date of
Termination, as defined in Section 8, the Bank shall be obligated to pay
Executive, or, in the event of his subsequent death, his beneficiary or
beneficiaries, or his estate, as the case may be an amount equal to the sum of:
(i) the Base Salary and bonuses, in accordance with Sections 3(a) and 3(b),
respectively, that would have been paid to Executive for the remaining term of
this Agreement had the Event of Termination not occurred; plus (ii) the value,
as calculated by a recognized firm customarily performing such valuation, of any
stock options, which, as of the Date of Termination, have been granted to
Executive but are not exercisable by Executive and the value of any restricted
stock awards which have been granted to Executive, but in which Executive does
not have a non-forfeitable or fully-vested interest as of the Date of
Termination; plus (iii) all benefits, including health insurance in accordance
with Section 3(d), that would have been provided to Executive for the remaining
term of the this Agreement had an Event of Termination not occurred; provided,
--------
however, that any payments pursuant to this subsection and subsection 4(c),
- -------
below, shall not, in the aggregate, exceed three (3) times Executive's average
annual compensation (as defined in Section 5(a) of this Agreement) for the five
(5) most recent taxable years that Executive has been employed by the Bank or
such lesser number of years in the event that Executive shall have been employed
by the Bank for less than five (5) years. In the event the Bank is not in
compliance with its minimum capital requirements or if such payments pursuant to
this subsection (b) would cause the Bank's capital to be reduced below its
minimum regulatory capital requirements, such payments shall be deferred until
such time as the Bank or successor thereto is in capital compliance. At the
election of Executive, which election is to be made prior to an Event of
Termination, such payments shall be made in a lump sum as of Executive's Date of
Termination. In the event that no election is made, payment to Executive will be
made on a monthly basis in approximately equal installments during the remaining
term of the Agreement. Such payments shall not be reduced in the event Executive
obtains other employment following termination of employment.
(c) Upon the occurrence of an Event of Termination, the Bank will cause
to be continued life, medical, dental and disability coverage substantially
identical to the coverage maintained by the Bank or the Holding Company for
Executive prior to his termination at no premium cost to Executive, except to
the extent such coverage may be changed in its application to all Bank or
Holding Company employees. Such coverage shall cease upon the expiration of the
remaining term of this Agreement.
5. CHANGE IN CONTROL.
(a) For purposes of this Agreement, a "Change in Control" shall mean an
event of a nature that: (i) would be required to be reported in response to Item
1(a) of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (ii) results in a Change in Control of the Bank or the
Holding Company within the meaning of the Change in Bank Control Act and the
Rules and
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Regulations promulgated by the Federal Deposit Insurance Corporation ("FDIC") at
12 C.F.R. ss. 303.4(a) with respect to the Bank and the Board of Governors of
the Federal Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with respect to
the Holding Company, as in effect on the date hereof; or (iii) results in a
transaction requiring prior FRB approval under the Bank Holding Company Act of
1956 and the regulations promulgated thereunder by the FRB at 12 C.F.R. ss.
225.11, as in effect on the date hereof except for the Holding Company's
acquisition of the Bank; or (iv) without limitation such a Change in Control
shall be deemed to have occurred at such time as (A) any "person" (as the term
is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Bank or the Holding Company representing 20%
or more of the Bank's or the Holding Company's outstanding securities except for
any securities of the Bank purchased by the Holding Company in connection with
the conversion of the Bank to the stock form and any securities purchased by any
tax qualified employee benefit plan of the Bank; or (B) individuals who
constitute the Board of Directors on the date hereof (the "Incumbent Board")
cease for any reason to constitute at least a majority thereof, provided that
any person becoming a director subsequent to the date hereof whose election was
approved by a vote of at least three-quarters of the directors comprising the
Incumbent Board, or whose nomination for election by the Holding Company's
stockholders was approved by the same Nominating Committee serving under an
Incumbent Board, shall be, for purposes of this clause (B), considered as though
he were a member of the Incumbent Board; or (C) a plan of reorganization,
merger, consolidation, sale of all or substantially all the assets of the Bank
or the Holding Company or similar transaction occurs in which the Bank or
Holding Company is not the resulting entity; or (D) solicitations of
shareholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Bank or
similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to the plan or
transaction are exchanged for or converted into cash or property or securities
not issued by the Bank or the Holding Company shall be distributed; or (E) a
tender offer is made for 20% or more of the voting securities of the Bank or the
Holding Company.
(b) If a Change in Control has occurred pursuant to Section 5(a) or the
Board has determined that a Change in Control has occurred, Executive shall be
entitled to the benefits provided in paragraphs (c), and (d) of this Section 5
upon his subsequent termination of employment at any time during the term of
this Agreement due to: (1) Executive's dismissal or (2) Executive's voluntary
resignation following any demotion, loss of title, office or significant
authority or responsibility, material reduction in annual compensation or
benefits or relocation of his principal place of employment by more than 25
miles from its location immediately prior to the Change in Control, unless such
termination is because of his death, disability, retirement or Termination for
Cause.
(c) Upon Executive's entitlement to benefits pursuant to Section 5(b),
the Bank shall pay Executive, or in the event of his subsequent death, his
beneficiary or beneficiaries, or his estate, as the case may be, an amount equal
to the greater of: (1) the Base Salary and bonuses in accordance with Sections
3(a) and 3(b), respectively, that would have been paid to Executive for
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the payments due for the remaining term of the Agreement had the event described
in Subsection (b) of this Section 5 not occurred, plus the value, as calculated
by a recognized firm customarily performing such valuation, of any stock
options, which, as of the Date of Termination, have been granted to Executive,
but are not exercisable by Executive and the value of restricted stock awards or
related rights which have been granted to Executive, but which Executive does
not have a non-forfeitable or fully-vested interest as of the Date of
Termination and all benefits, including health insurance, in accordance with
Section 3(d) that would have been provided to Executive for the remaining term
of this Agreement had the event described in Subsection (b) of this Section 5
not occurred; or (2) three (3) times Executive's "Average Annual Compensation"
(as defined herein) for the five (5) most recent taxable years that Executive
has been employed by the Bank or such lesser number of years in the event that
Executive shall have been employed by the Bank for less than five (5) years. In
determining Executive's "Average Annual Compensation" annual compensation shall
include Base Salary and any other taxable income earned by Executive in
connection with employment with the Bank or Holding Company, including but not
limited to, amounts related to granting, vesting or exercise of restricted stock
awards and stock options, commissions, bonuses, pension and/or profit sharing
plan contributions or benefits (whether or not taxable), severance payments,
retirement benefits, directors or committee fees and fringe benefits paid or to
be paid to Executive in any such year and payment of any expense items without
accountability or business purpose or that do not meet the Internal Revenue
Service requirements for deductibility by the Bank; provided, however, that any
payment under this provision and subsection 5(d) below shall not exceed three
(3) times Executive's Average Annual Compensation over a five (5) year period.
In the event the Bank is not in compliance with its minimum capital requirements
or if such payments would cause the Bank's capital to be reduced below its
minimum regulatory capital requirements, such payments shall be deferred until
such time as the Bank or successor thereto is in capital compliance. At the
election of Executive, which election is to be made prior to a Change in
Control, such payment shall be made in a lump sum as of Executive's Date of
Termination. In the event that no election is made, payment to Executive will be
made in approximately equal installments on a monthly basis over a period of
thirty-six (36) months following Executive's termination. Such payments shall
not be reduced in the event Executive obtains other employment following
termination of employment.
(d) Upon Executive's entitlement to benefits pursuant to Section 5(b),
the Bank will cause to be continued life, medical, dental and disability
coverage substantially identical to the coverage maintained by the Bank for
Executive prior to his severance at no premium cost to Executive, except to the
extent that such coverage may be changed in its application for all Bank
employees on a non-discriminatory basis. Such coverage and payments shall cease
upon the expiration of thirty-six (36) months following the Date of Termination.
6. CHANGE OF CONTROL RELATED PROVISIONS
Notwithstanding the provisions of Section 5, in no event shall the
aggregate payments or benefits to be made or afforded to Executive under said
paragraphs (the "Termination Benefits") constitute an "excess parachute payment"
under Section 280G of the Internal Revenue Code of
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1986, as amended, or any successor thereto, and in order to avoid such a result,
Termination Benefits will be reduced, if necessary, to an amount (the "Non-
Triggering Amount"), the value of which is one dollar ($1.00) less than an
amount equal to three (3) times Executive's "base amount", as determined in
accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by Section 5 shall be determined
by Executive.
7. TERMINATION FOR CAUSE.
The term "Termination for Cause" shall mean termination because of
Executive's personal dishonesty, incompetence, willful misconduct, any breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or final cease-and-desist order or material
breach of any provision of this Agreement. Notwithstanding the foregoing,
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after the Date of Termination for Cause. During the period beginning
on the date of the Notice of Termination for Cause pursuant to Section 8 hereof
through the Date of Termination for Cause, stock options and related limited
rights granted to Executive under any stock option plan shall not be exercisable
nor shall any unvested awards granted to Executive under any stock benefit plan
of the Bank, the Holding Company or any subsidiary or affiliate thereof, vest.
At the Date of Termination for Cause, such stock options and related limited
rights and any unvested awards shall become null and void and shall not be
exercisable by or delivered to Executive at any time subsequent to such
Termination for Cause.
8. NOTICE.
(a) Any purported termination by the Bank or by Executive shall be
communicated by Notice of Termination to the other party hereto. For purposes of
this Agreement, a "Notice of Termination" shall mean a written notice which
shall indicate the specific termination provision in this Agreement relied upon
and shall set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's employment under the provision so
indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the case of a Termination for Cause, shall not be less
than thirty days from the date such Notice of Termination is given.).
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(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and,
provided further, that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, in the event Executive is
terminated for reasons other than Termination for Cause, the Bank will continue
to pay Executive his Base Salary in effect when the notice giving rise to the
dispute was given until the earlier of: 1) the resolution of the dispute in
accordance with this Agreement or 2) the expiration of the remaining term of
this Agreement as determined as of the Date of Termination. Amounts paid under
this Section are in addition to all other amounts due under this Agreement and
shall not be offset against or reduce any other amounts due under this
Agreement.
9. POST-TERMINATION OBLIGATIONS.
All payments and benefits to Executive under this Agreement shall be
subject to Executive's compliance with this Section 9 for one (1) full year
after the earlier of the expiration of this Agreement or termination of
Executive's employment with the Bank. Executive shall, upon reasonable notice,
furnish such information and assistance to the Bank as may reasonably be
required by the Bank in connection with any litigation in which it or any of its
subsidiaries or affiliates is, or may become, a party.
10. NON-COMPETITION AND NON-DISCLOSURE OF BANK BUSINESS.
(a) Upon any termination of Executive's employment hereunder pursuant
to Section 4 hereof, Executive agrees not to compete with the Bank for a period
of one (1) year following such termination in any city, town or county in which
Executive's normal business office is located and the Bank has an office or has
filed an application for regulatory approval to establish an office, determined
as of the effective date of such termination, except as agreed to pursuant to a
resolution duly adopted by the Board. Executive agrees that during such period
and within said cities, towns and counties, Executive shall not work for or
advise, consult or otherwise serve with, directly or indirectly, any entity
whose business materially competes with the depository, lending or other
business activities of the Bank. The parties hereto, recognizing that
irreparable injury will result to the Bank, its business and property in the
event of Executive's breach of this Subsection 10(a) agree that in the event of
any such breach by Executive, the Bank, will be entitled, in addition to any
other remedies and damages available, to an injunction to restrain the violation
hereof by Executive, Executive's partners, agents, servants, employees and all
persons acting for or under the direction of Executive. Nothing herein will be
construed as prohibiting the Bank from pursuing any other remedies available to
the Bank for such breach or threatened breach, including the recovery of damages
from Executive.
-8-
<PAGE>
(b) Executive recognizes and acknowledges that the knowledge of the
business activities and plans for business activities of the Bank and affiliates
thereof, as it may exist from time to time, is a valuable, special and unique
asset of the business of the Bank. Executive will not, during or after the term
of his employment, disclose any knowledge of the past, present, planned or
considered business activities of the Bank or affiliates thereof to any person,
firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking,
financial and/or economic principles, concepts or ideas which are not solely and
exclusively derived from the business plans and activities of the Bank. Further,
Executive may disclose information regarding the business activities of the Bank
to the Massachusetts Commissioner of Banks and the Federal Deposit Insurance
Corporation ("FDIC") pursuant to a formal regulatory request. In the event of a
breach or threatened breach by Executive of the provisions of this Section, the
Bank will be entitled to an injunction restraining Executive from disclosing, in
whole or in part, the knowledge of the past, present, planned or considered
business activities of the Bank or affiliates thereof, or from rendering any
services to any person, firm, corporation or other entity to whom such
knowledge, in whole or in part, has been disclosed or is threatened to be
disclosed. Nothing herein will be construed as prohibiting the Bank from
pursuing any other remedies available to the Bank for such breach or threatened
breach, including the recovery of damages from Executive.
11. SOURCE OF PAYMENTS.
(a) All payments provided in this Agreement shall be timely paid in
cash or check from the general funds of the Bank. The Holding Company, however,
unconditionally guarantees payment and provision of all amounts and benefits due
hereunder to Executive and, if such amounts and benefits due from the Bank are
not timely paid or provided by the Bank, such amounts and benefits shall be paid
or provided by the Holding Company.
(b) Notwithstanding any provision herein to the contrary, to the extent
that payments and benefits, as provided by this Agreement, are paid to or
received by Executive under the Employment Agreement dated March 19, 1999,
between Executive and the Holding Company, such compensation payments and
benefits paid by the Holding Company will be subtracted from any amounts due
simultaneously to Executive under similar provisions of this Agreement. Payments
pursuant to this Agreement and the Holding Company Agreement shall be allocated
in proportion to the services rendered and time expended on such activities by
Executive as determined by the Holding Company and the Bank.
12. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS.
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior employment agreement between the Bank or any
predecessor of the Bank and Executive, except that this Agreement shall not
affect or operate to reduce any benefit or compensation inuring to Executive of
a kind elsewhere provided. No provision of this
-9-
<PAGE>
Agreement shall be interpreted to mean that Executive is subject to receiving
fewer benefits than those available to him without reference to this Agreement.
13. NO ATTACHMENT.
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive and the Bank and their respective successors and assigns.
14. MODIFICATION AND WAIVER.
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future as to any act other than that specifically
waived.
15. SEVERABILITY.
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
16. HEADINGS FOR REFERENCE ONLY.
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement.
17. GOVERNING LAW.
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the Commonwealth of Massachusetts
applicable to contracts entered into and to be performed entirely within the
Commonwealth of Massachusetts.
-10-
<PAGE>
18. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Bank, in accordance with the rules of the
American Arbitration Association then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that
Executive shall be entitled to seek specific performance of his right to be paid
until the Date of Termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
In the event any dispute or controversy arising under or in connection
with Executive's termination is resolved in favor of Executive, whether by
judgment, arbitration or settlement, Executive shall be entitled to the payment
of all back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
19. PAYMENT OF COSTS AND LEGAL FEES.
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Bank if Executive is successful on the merits
pursuant to a legal judgment, arbitration or settlement.
20. INDEMNIFICATION.
(a) The Bank shall provide Executive (including his heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) as permitted under federal law against all
expenses and liabilities reasonably incurred by him in connection with or
arising out of any action, suit or proceeding in which he may be involved by
reason of his having been a director or officer of the Bank (whether or not he
continues to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
(b) Any payments made to Executive pursuant to this Section are subject
to and conditioned upon compliance with 12 U.S.C. Section 1828(k), 12 C.F.R.
Part 359 and 12 C.F.R. Section 545.121 and any rules or regulations promulgated
thereunder.
21. SUCCESSOR TO THE BANK.
The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank or
-11-
<PAGE>
the Holding Company, expressly and unconditionally to assume and agree to
perform the Bank's obligations under this Agreement, in the same manner and to
the same extent that the Bank would be required to perform if no such succession
or assignment had taken place.
-12-
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Woronoco Savings Bank and Woronoco Bancorp, Inc.
have caused this Agreement to be executed and their seals to be affixed hereunto
by their duly authorized officers and directors, and Executive has signed this
Agreement, on the 13th day of May, 1999.
ATTEST: WORONOCO SAVINGS BANK
/s/ Terry J. Bennett By: /s/ Francis J. Ehrhardt
- ----------------------------- -----------------------------------
Terry J. Bennett Francis J. Ehrhardt
Corporate Secretary For the Entire Board of Directors
[SEAL]
ATTEST: WORONOCO BANCORP, INC.
/s/ Terry J. Bennett By: /s/ Francis J. Ehrhardt
- ----------------------------- -----------------------------------
Terry J. Bennett Francis J. Ehrhardt
Corporate Secretary For the Entire Board of Directors
[SEAL]
WITNESS: EXECUTIVE
/s/ Terry J. Bennett /s/ Cornelius D. Mahoney
- ----------------------------- ---------------------------------------
Terry J. Bennett Cornelius D. Mahoney
Corporate Secretary
-13-
<PAGE>
EXHIBIT 10.3
Mr. Calheno's Employment Agreement is the same as the Employment
Agreement in Exhibit 10.1, which is incorporated herein by reference except as
to: (i) the name of the signatory, which is Agostino J. Calheno; (ii) the
signatory for the Company, which is Cornelius D. Mahoney; (iii) the position in
Section 1, which is Senior Vice President; and (iv) the amount of the base
salary in Section 3(a), which is $115,000.
<PAGE>
EXHIBIT 10.4
Mr. Calheno's Employment Agreement is the same as the Employment
Agreement in Exhibit 10.2, which is incorporated herein by reference except as
to: (i) the name of the signatory, which is Agostino J. Calheno; (ii) the
position in Section 1, which is Senior Vice President; (iii) the signatory for
the Company, which is Cornelius D. Mahoney; (iv) the guarantor for the Company,
which is Cornelius D. Mahoney; and (v) the amount of the base salary in Section
3(a), which is $115,000.
<PAGE>
EXHIBIT 10.5
Ms. Murphy's Employment Agreement is the same as the Employment
Agreement in Exhibit 10.1, which is incorporated herein by reference except as
to: (i) the name of the signatory, which is Debra L. Murphy; (ii) the signatory
for the Company, which is Cornelius D. Mahoney; (iii) the position in Section 1,
which is Senior Vice President and Chief Financial Officer; and (iv) the amount
of the base salary in Section 3(a), which is $115,000.
<PAGE>
EXHIBIT 10.6
Ms. Murphy's Employment Agreement is the same as the Employment
Agreement in Exhibit 10.2, which is incorporated herein by reference except as
to: (i) the name of the signatory, which is Debra L. Murphy; (ii) the position
in Section 1, which is Senior Vice President and Treasurer; (iii) the signatory
for the Company, which is Cornelius D. Mahoney; (iv) the guarantor for the
Company, which is Cornelius D. Mahoney; and (v) the amount of the base salary in
Section 3(a), which is $115,000.
<PAGE>
EXHIBIT 10.7
WORONOCO SAVINGS BANK CHANGE IN
CONTROL AGREEMENT
This AGREEMENT is made effective as of March 19, 1999, by and among
Woronoco Savings Bank (the "Institution" or the "Bank"), a
Massachusetts-chartered savings bank, with its principal administrative office
at 31 Court Street, Westfield, Massachusetts, 01086-0978, James E. Gardner
("Executive"), and Woronoco Bancorp, Inc. (the "Holding Company"), a corporation
organized under the laws of the State of Delaware which is the holding company
of the Institution.
WHEREAS, the Institution recognizes the substantial contribution
Executive has made to the Institution and wishes to protect Executive's position
therewith for the period provided in this Agreement; and
WHEREAS, Executive has agreed to serve in the employ of the
Institution.
NOW, THEREFORE, in consideration of the contribution and
responsibilities of Executive, and upon the other terms and conditions
hereinafter provided, the parties hereto agree as follows:
1. TERM OF AGREEMENT.
-----------------
The term of this Change in Control Agreement (the "Agreement") shall be
deemed to have commenced as of the date first above written and shall continue
for a period of thirty-six (36) full calendar months thereafter. Commencing on
the first anniversary date of this Agreement and continuing at each anniversary
date thereafter, the Board of Directors of the Institution ("Board") may extend
the Agreement for an additional year. The Board will review the Agreement and
Executive's performance annually for purposes of determining whether to extend
the Agreement, and the results thereof shall be included in the minutes of the
Board's meeting.
2. CHANGE IN CONTROL.
-----------------
(a) Upon the occurrence of a Change in Control of the Institution or
the Holding Company (as herein defined) followed at any time during the term of
this Agreement by the termination of Executive's employment, other than for
Cause, as defined in Section 2(c) hereof, the provisions of Section 3 shall
apply. Upon the occurrence of a Change in Control, Executive shall have the
right to elect to voluntarily terminate his employment at any time during the
term of this Agreement following any demotion, loss of title, office or
significant authority, reduction in his annual compensation or benefits, or
relocation of his principal place of employment by more than 25 miles from its
location immediately prior to the Change in Control; provided, however, the
Executive may consent in writing to any such demotion, loss, reduction or
<PAGE>
relocation. The effect of any written consent of the Executive under this
Section 2 (a) shall be strictly limited to the terms specified in such written
consent.
(b) For purposes of this Agreement, a "Change in Control" shall mean an
event of a nature that: (i) would be required to be reported in response to Item
1(a) of the current report on Form 8-K, as in effect on the date hereof,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the
"Exchange Act"); or (ii) results in a Change in Control of the Bank or the
Holding Company within the meaning of the Change in Bank Control Act and the
Rules and Regulations promulgated by the Federal Deposit Insurance Corporation
("FDIC") at 12 C.F.R. ss. 303.4(a) with respect to the Bank and the Board of
Governors of the Federal Reserve System ("FRB") at 12 C.F.R. ss. 225.41(b) with
respect to the Holding Company, as in effect on the date hereof; or (iii)
results in a transaction requiring prior FRB approval under the Bank Holding
Company Act of 1956 and the regulations promulgated thereunder by the FRB at 12
C.F.R. ss. 225.11, as in effect on the date hereof except for the Holding
Company's acquisition of the Bank; or (iv) without limitation such a Change in
Control shall be deemed to have occurred at such time as (A) any "person" (as
the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Bank or the Holding Company
representing 20% or more of the Bank's or the Holding Company's outstanding
securities except for any securities of the Bank purchased by the Holding
Company in connection with the conversion of the Bank to the stock form and any
securities purchased by any tax qualified employee benefit plan of the Bank; or
(B) individuals who constitute the Board of Directors on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the date
hereof whose election was approved by a vote of at least three-quarters of the
directors comprising the Incumbent Board, or whose nomination for election by
the Holding Company's stockholders was approved by the same Nominating Committee
serving under an Incumbent Board, shall be, for purposes of this clause (B),
considered as though he were a member of the Incumbent Board; or (C) a plan of
reorganization, merger, consolidation, sale of all or substantially all the
assets of the Bank or the Holding Company or similar transaction occurs in which
the Bank or Holding Company is not the resulting entity; or (D) solicitations of
shareholders of the Holding Company, by someone other than the current
management of the Holding Company, seeking stockholder approval of a plan of
reorganization, merger or consolidation of the Holding Company or Bank or
similar transaction with one or more corporations as a result of which the
outstanding shares of the class of securities then subject to the plan or
transaction are exchanged for or converted into cash or property or securities
not issued by the Bank or the Holding Company shall be distributed; or (E) a
tender offer is made for 20% or more of the voting securities of the Bank or the
Holding Company.
(c) Executive shall not receive termination benefits pursuant to
Section 3 hereof upon Termination for Cause. The term "Termination for Cause"
shall mean termination because of Executive's personal dishonesty, willful
misconduct, any breach of fiduciary duty involving personal profit, intentional
failure to perform stated duties, willful violation of any law, rule or
regulation (other than traffic violations or similar offenses) or final
cease-and-desist order or material breach of any provision of this Agreement.
Notwithstanding the foregoing,
2
<PAGE>
Executive shall not be deemed to have been Terminated for Cause unless and until
there shall have been delivered to him a Notice of Termination which shall
include a copy of a resolution duly adopted by the affirmative vote of not less
than a majority of the members of the Board at a meeting of the Board called and
held for that purpose (after reasonable notice to Executive and an opportunity
for him, together with counsel, to be heard before the Board), finding that in
the good faith opinion of the Board, Executive was guilty of conduct justifying
Termination for Cause and specifying the particulars thereof in detail.
Executive shall not have the right to receive compensation or other benefits for
any period after Termination for Cause. During the period beginning on the date
of the Notice of Termination for Cause pursuant to Section 4 hereof through the
Date of Termination, stock options granted to Executive under any stock option
plan shall not be exercisable nor shall any unvested stock awards granted to
Executive under any stock benefit plan of the Institution, the Holding Company
or any subsidiary or affiliate thereof vest. At the Date of Termination, such
stock options and such unvested stock awards shall become null and void and
shall not be exercisable by or delivered to Executive at any time subsequent to
such Date of Termination for Cause.
3. TERMINATION BENEFITS.
--------------------
(a) Upon the occurrence of a Change in Control, followed at any time
during the term of this Agreement by termination of the Executive's employment
due to: (1) Executive's dismissal or (2) Executive's voluntary termination
pursuant to Section 2(a), unless such termination is due to Termination for
Cause, the Institution and the Holding Company shall pay Executive, or in the
event of his subsequent death, his beneficiary or beneficiaries, or his estate,
as the case may be, a sum equal to three (3) times Executive's "Average Annual
Compensation" (as defined herein) for the five most recent taxable years that
Executive has been employed by the Institution or such lesser number of years in
the event that Executive shall have been employed by the Institution for less
than five years, such "Average Annual Compensation" shall include all taxable
income paid by the Bank, including but not limited to any base salary, bonuses,
and commissions paid or to be paid to Executive, as well as contributions on
Executive's behalf to any pension and/or profit sharing plan, severance
payments, retirement payments, directors or committee fees and fringe benefits
paid or to be paid to the Executive in any such year. At the election of
Executive, which election is to be made prior to a Change in Control, such
payment shall be made in a lump sum. In the event that no election is made,
payment to Executive will be made on a monthly basis in approximately equal
installments during the remaining term of this Agreement.
(b) Upon the occurrence of a Change in Control of the Institution or
the Holding Company followed at any time during the term of this Agreement by
Executive's voluntary or involuntary termination of employment, other than for
Termination for Cause, the Institution shall cause to be continued life, medical
and disability coverage substantially identical to the coverage maintained by
the Institution or Holding Company for Executive prior to his severance, except
to the extent such coverage may be changed in its application to all Institution
or Holding Company employees on a nondiscriminatory basis. Such coverage and
payments shall cease upon the expiration of thirty-six (36) full calendar months
from the Date of Termination.
3
<PAGE>
(c) Notwithstanding the preceding paragraphs of this Section 3, in no
event shall the aggregate payments or benefits to be made or afforded to
Executive under said paragraphs (the "Termination Benefits") constitute an
"excess parachute payment" under Section 280G of the Internal Revenue Code of
1986, as amended, or any successor thereto, and in order to avoid such a result
Termination Benefits will be reduced, if necessary, to an amount (the
"Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an
amount equal to three (3) times Executive's "base amount," as determined in
accordance with said Section 280G. The allocation of the reduction required
hereby among the Termination Benefits provided by the preceding paragraphs of
this Section 3 shall be determined by Executive.
4. NOTICE OF TERMINATION.
---------------------
(a) Any purported termination by the Institution or by Executive in
connection with a Change in Control shall be communicated by Notice of
Termination to the other party hereto. For purposes of this Agreement, a "Notice
of Termination" shall mean a written notice which shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of Executive's employment under the provision so indicated.
(b) "Date of Termination" shall mean the date specified in the Notice
of Termination (which, in the instance of Termination for Cause, shall not be
less than thirty (30) days from the date such Notice of Termination is given).
(c) If, within thirty (30) days after any Notice of Termination is
given, the party receiving such Notice of Termination notifies the other party
that a dispute exists concerning the termination, the Date of Termination shall
be the date on which the dispute is finally determined, either by mutual written
agreement of the parties, by a binding arbitration award, or by a final
judgment, order or decree of a court of competent jurisdiction (the time for
appeal therefrom having expired and no appeal having been perfected) and
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute in connection with a Change in
Control, in the event that the Executive is terminated for reasons other than
Termination for Cause, the Institution will continue to pay Executive his full
compensation in effect when the notice giving rise to the dispute was given
(including, but not limited to his annual salary) and continue him as a
participant in all compensation, benefit and insurance plans in which he was
participating when the notice of dispute was given, until the earlier of: (1)
the resolution of the dispute in accordance with this Agreement; or (2) the
expiration of the remaining term of this Agreement as determined as of the Date
of Termination.
5. SOURCE OF PAYMENTS.
------------------
It is intended by the parties hereto that all payments provided in this
Agreement shall be paid in cash or check from the general funds of the
Institution. Further, the Holding Company
4
<PAGE>
guarantees such payment and provision of all amounts and benefits due hereunder
to Executive and, if such amounts and benefits due from the Institution are not
timely paid or provided by the Institution, such amounts and benefits shall be
paid or provided by the Holding Company.
6. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFIT PLANS.
-----------------------------------------------------
This Agreement contains the entire understanding between the parties
hereto and supersedes any prior agreement between the Institution and Executive,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to Executive of a kind elsewhere provided. No provision of
this Agreement shall be interpreted to mean that Executive is subject to
receiving fewer benefits than those available to him without reference to this
Agreement.
Nothing in this Agreement shall confer upon Executive the right to
continue in the employ of Institution or shall impose on the Institution any
obligation to employ or retain Executive in its employ for any period.
7. NO ATTACHMENT.
-------------
(a) Except as required by law, no right to receive payments under this
Agreement shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect any such action shall be null,
void, and of no effect.
(b) This Agreement shall be binding upon, and inure to the benefit of,
Executive, the Institution and their respective successors and assigns.
8. MODIFICATION AND WAIVER.
-----------------------
(a) This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto.
(b) No term or condition of this Agreement shall be deemed to have been
waived, nor shall there be any estoppel against the enforcement of any provision
of this Agreement, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver
unless specifically stated therein, and each such waiver shall operate only as
to the specific term or condition waived and shall not constitute a waiver of
such term or condition for the future or as to any act other than that
specifically waived.
9. REQUIRED REGULATORY PROVISIONS.
------------------------------
5
<PAGE>
Any payments made to Executive pursuant to this Agreement, or
otherwise, are subject to and conditioned upon compliance with 12 U.S.C.
ss.1828(k), 12 C.F.R. Part 359 and 12 C.F.R. Section 545.121 and any rules and
regulations promulgated thereunder.
10. SEVERABILITY.
------------
If, for any reason, any provision of this Agreement, or any part of any
provision, is held invalid, such invalidity shall not affect any other provision
of this Agreement or any part of such provision not held so invalid, and each
such other provision and part thereof shall to the full extent consistent with
law continue in full force and effect.
11. HEADINGS FOR REFERENCE ONLY.
---------------------------
The headings of sections and paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this Agreement. In addition, references to the
masculine shall apply equally to the feminine.
12. GOVERNING LAW.
-------------
The validity, interpretation, performance and enforcement of this
Agreement shall be governed by the laws of the Commonwealth of Massachusetts
applicable to contracts entered into and to be performed entirely within the
Commonwealth of Massachusetts.
13. ARBITRATION.
-----------
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty
(50) miles from the location of the Institution's main office, in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction;
provided, however, that Executive shall be entitled to seek specific performance
of his right to be paid until the Date of Termination during the pendency of any
dispute or controversy arising under or in connection with this Agreement.
14. PAYMENT OF COSTS AND LEGAL FEES.
-------------------------------
All reasonable costs and legal fees paid or incurred by Executive
pursuant to any dispute or question of interpretation relating to this Agreement
shall be paid or reimbursed by the Institution (which payments are guaranteed by
the Holding Company pursuant to Section 5 hereof) if Executive is successful on
the merits pursuant to a legal judgment, arbitration or settlement.
15. INDEMNIFICATION.
---------------
6
<PAGE>
(a) The Bank shall provide Executive (including his heirs, executors
and administrators) with coverage under a standard directors' and officers'
liability insurance policy at its expense and shall indemnify Executive (and his
heirs, executors and administrators) as permitted under federal law against all
expenses and liabilities reasonably incurred by him in connection with or
arising out of any action, suit or proceeding in which he may be involved by
reason of his having been a director or officer of the Bank (whether or not he
continues to be a director or officer at the time of incurring such expenses or
liabilities), such expenses and liabilities to include, but not be limited to,
judgments, court costs and attorneys' fees and the cost of reasonable
settlements.
(b) Any payments made to Executive pursuant to this Section are subject
to and conditioned upon compliance with 12 U.S.C. Section 1828(k), 12 C.F.R.
Part 359 and 12 C.F.R. Section 545.121 and any rules or regulations promulgated
thereunder.
16. SUCCESSOR TO THE INSTITUTION.
----------------------------
The Institution shall require any successor or assignee, whether direct
or indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Institution, expressly and
unconditionally to assume and agree to perform the Institution's obligations
under this Agreement, in the same manner and to the same extent that the
Institution would be required to perform if no such succession or assignment had
taken place.
7
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, Woronoco Savings Bank and Woronoco Bancorp, Inc.
have caused this Agreement to be executed by their duly authorized officers, and
Executive has signed this Agreement, on the 12th day of May, 1999.
ATTEST: WORONOCO SAVINGS BANK
/s/ Terry J. Bennett By: /s/ Cornelius D. Mahoney
- ------------------------ ---------------------------------
Terry J. Bennett Cornelius D. Mahoney
Corporate Secretary For the Entire Board of Directors
SEAL
ATTEST: WORONOCO BANCORP, INC.
/s/ Terry J. Bennett By: /s/ Cornelius D. Mahoney
- ------------------------ ---------------------------------
Terry J. Bennett Cornelius D. Mahoney
Corporate Secretary For the Entire Board of Directors
SEAL
WITNESS: EXECUTIVE
/s/ Terry J. Bennett /s/ James E. Gardner
- ------------------------ ---------------------------------
Terry J. Bennett James E. Gardner
Corporate Secretary
8
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Financial Statements of Woronoco Savings Bank for the year ended
December 31, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001072886
<NAME> WORONOCO BANCORP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-1-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1
<CASH> 10,024
<INT-BEARING-DEPOSITS> 2,292
<FED-FUNDS-SOLD> 2,180
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 111,849
<INVESTMENTS-CARRYING> 111,208
<INVESTMENTS-MARKET> 111,849
<LOANS> 290,733
<ALLOWANCE> (2,208)
<TOTAL-ASSETS> 433,290
<DEPOSITS> 273,186
<SHORT-TERM> 67,106
<LIABILITIES-OTHER> 5,459
<LONG-TERM> 1,368
0
0
<COMMON> 60
<OTHER-SE> 86,111
<TOTAL-LIABILITIES-AND-EQUITY> 433,290
<INTEREST-LOAN> 5,382
<INTEREST-INVEST> 1,772
<INTEREST-OTHER> 14
<INTEREST-TOTAL> 7,474
<INTEREST-DEPOSIT> 2,386
<INTEREST-EXPENSE> 3,733
<INTEREST-INCOME-NET> 3,741
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 448
<EXPENSE-OTHER> 7,284
<INCOME-PRETAX> (2,684)
<INCOME-PRE-EXTRAORDINARY> (2,684)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,648)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 6.75
<LOANS-NON> 210
<LOANS-PAST> 0
<LOANS-TROUBLED> 765
<LOANS-PROBLEM> 3,200
<ALLOWANCE-OPEN> 2,166
<CHARGE-OFFS> 25
<RECOVERIES> 7
<ALLOWANCE-CLOSE> 2,208
<ALLOWANCE-DOMESTIC> 2,208
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
