-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NauJxgkVwfqJSF16/h46oUQSzcjOoaPsmIDKjIDwzRc53RdNO0ZHA9XOdnnHmBFR NlSbYcOebnwW2cULvE/w8g== 0001005477-98-000834.txt : 19980324 0001005477-98-000834.hdr.sgml : 19980324 ACCESSION NUMBER: 0001005477-98-000834 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980323 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDFORD BANCORP INC CENTRAL INDEX KEY: 0001049895 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036] IRS NUMBER: 043384928 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23435 FILM NUMBER: 98570834 BUSINESS ADDRESS: STREET 1: 29 HIGH ST CITY: MEDFORD STATE: MA ZIP: 02155 BUSINESS PHONE: 6173957700 MAIL ADDRESS: STREET 1: 29 HIGH ST CITY: MEDFORD STATE: MA ZIP: 02155 10-K 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) |x| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 0001049895 Medford Bancorp, Inc. (Exact name of registrant as specified in its charter) Massachusetts 04-3384928 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 29 High Street Medford, Massachusetts 02155 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code: (781) 395-7700 ------------------ Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.50 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment of this Form 10-K. |X| The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price on March 3, 1998, on the NASDAQ National Market was $197,894,463. Although directors and executive officers of the registrant were assumed to be "affiliates" of the registrant for the purposes of this calculation, this classification is not to be interpreted as an admission of such status. As of March 3, 1998, 4,549,298 shares of the registrant's common stock were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Medford Bancorp, Inc. Definitive Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 1998 are incorporated by reference into Parts I and III of this Form 10-K. PART I ITEM 1. BUSINESS General Medford Bancorp Inc., (the "Company") was organized by Medford Savings Bank (the "Bank") for the purpose of reorganizing the Bank into a holding company structure. The Company acquired 100% of the outstanding shares of the Bank's common stock in a 1:1 exchange of the Company's common stock. This reorganization became effective on November 26, 1997 whereupon the Bank became a wholly-owned subsidiary of the Company and the Bank's former stockholders became stockholders of the Company (the "Reorganization"). Established as a Massachusetts savings bank in 1869, the Bank converted from mutual to stock form on March 18, 1986 and issued 3,680,000 shares of common stock. The Bank is principally engaged in the business of attracting deposits from the general public, originating residential and commercial real estate mortgages, consumer and commercial loans, and investing in securities on a continuous basis. For a detailed description of the Company's business and financial information, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this report. The Bank is headquartered in Medford, Massachusetts, which is located approximately seven miles north of downtown Boston. The Bank principally offers its products and services through a network of sixteen banking offices located in Medford, Malden, Arlington, Belmont, Burlington, North Reading, Waltham, and Wilmington. The Bank's primary market area includes these communities as well as other cities and towns in Middlesex County and the surrounding area north of Boston. The Bank presently has one wholly-owned subsidiary, Medford Securities Corporation ("MSC"), which became operational on March 1, 1995. MSC engages exclusively in the buying, selling, dealing in, and holding of securities. Supervision and Regulation General. The Company is a Massachusetts corporation and a bank holding company subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") pursuant to the Bank Holding Company Act of 1956, as amended, and files with the Federal Reserve Board an annual report and such additional reports as the Federal Reserve Board may require. The Company is also subject to the jurisdiction of the Massachusetts Commissioner of Banks. As a bank holding company, the Company's activities are limited to the business of banking and activities closely related or incidental to banking. The Company may not directly or indirectly acquire the ownership or control of more than 5 percent of any class of voting shares or substantially all of the assets of any company that is not engaged in activities closely related to banking and also generally must provide notice to or obtain approval of the Federal Reserve Board in connection with any such acquisition. As a Massachusetts-chartered savings bank, the Bank is subject to comprehensive regulation and examination by the Federal Deposit Insurance Corporation (the "FDIC") which insures its deposits to the maximum extent permitted by law, and by the Commissioner of Banks of the Commonwealth of Massachusetts (the "Commissioner"). The Bank is also subject to certain requirements established by the Federal Reserve Board and is a member of the Federal Home Loan Bank of Boston. Federal Deposit Insurance Corporation. The FDIC insures the Bank's deposit accounts to the $100,000 maximum per separately insured account. As a state-chartered, FDIC-insured nonmember savings bank, the Bank is subject to regulation, examination, and supervision by the FDIC and to reporting requirements of the FDIC. The FDIC has adopted requirements setting minimum standards for capital adequacy. Pursuant to FDIC requirements, the Bank must maintain a Tier 1 capital to risk-weighted assets ratio of 4.00% and a total capital to risk-weighted assets ratio of 8.00%. The FDIC also imposes a leverage capital ratio of at least 3.00% for the most highly rated banks and a leverage capital ratio between 4.00% and 5.00% for other banks. The Bank exceeded all applicable requirements at December 31, 1997. Furthermore, under the capital standards established pursuant to the FDIC Improvement Act of 1991 ("FDICIA"), the Bank is currently well-capitalized. Federal Home Loan Bank System. The Federal Home Loan Bank System functions as a reserve credit source for its member financial institutions and is governed by the Federal Housing Finance Board ("FHFB"). The Bank is a voluntary member of the Federal Home Loan Bank of Boston ("FHLBB"). Members of the FHLBB are required to own capital stock that is directly proportionate to the member's home mortgage loans and borrowings from the FHLBB outstanding from time to time. FHLBB advances must be secured by specific types of collateral and may be obtained only for the purpose of providing funds for residential housing finance. 1 Federal Reserve Board Regulations. Regulation D promulgated by the Federal Reserve Board requires all depository institutions, including the Bank, to maintain reserves against its transaction accounts (generally, demand deposits, NOW accounts and certain other types of accounts that permit payments or transfer to third parties) or non-personal time deposits (generally, money market deposit accounts or other savings deposits held by corporations or other depositors that are not natural persons, and certain other types of time deposits), subject to certain exemptions. Because required reserves must be maintained in the form of either vault cash, a non-interest bearing account at a Federal Reserve Bank or a pass-through account as defined by the Federal Reserve Board, the effect of this reserve requirement is to reduce the amount of the institution's interest-bearing assets. Massachusetts Commissioner of Banks. The Bank is also subject to regulation, examination and supervision by the Commissioner and to the reporting requirements promulgated by the Commissioner. Massachusetts statutes and regulations govern, among other things, investment powers, lending powers, deposit activities, maintenance of surplus and reserve accounts, the distribution of earnings, the payment of dividends, issuance of capital stock, branching, acquisitions and mergers and consolidation. Any Massachusetts bank that does not operate in accordance with the regulations, policies and directives of the Commissioner may be subject to sanctions for noncompliance. The Commissioner may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the Bank's business in a manner which is unsafe, unsound or contrary to the depositor's interest, or been negligent in the performance of their duties. In response to a Massachusetts law enacted in 1996, in 1997 the Commissioner finalized rules that give Massachusetts banks, and their subsidiaries, many powers equivalent to those of national banks. The Commissioner also has adopted procedures expediting branching by strongly capitalized banks. Depositors Insurance Fund. All Massachusetts-chartered savings banks are required to be members of the Depositors Insurance Fund ("DIF"), a corporation created by the Commonwealth of Massachusetts for the purpose of insuring savings bank deposits not covered by federal deposit insurance. To the extent the Bank's deposit accounts are not insured by federal insurance, such deposits are insured by the DIF. Federal Deposit Insurance Corporation Improvement Act of 1991. FDICIA made extensive changes to the federal banking laws. Among other things, FDICIA requires federal bank regulatory agencies to take prompt corrective action to address the problems of, and imposes significant restrictions on, under-capitalized banks. With certain exceptions, FDICIA prohibits state banks from making equity investments and engaging, as principals, in activities which are not permissible for national banks, such as insurance underwriting. FDICIA required banks to divest any impermissible equity investments by December 19, 1996. FDICIA also amends federal statutes governing extensions of credit to directors, executive officers and principal shareholders of banks, savings associations and their holding companies, limits the aggregate amount of depository institutions' loans to insiders to the amount of the institution's unimpaired capital and surplus, restricts depository institutions that are not well-capitalized from accepting brokered deposits without an express waiver from the FDIC, and imposes certain advance notice requirements before closing a branch office. Pursuant to the FDICIA, the FDIC has adopted a framework of risk-based deposit insurance assessments that take into account different categories and concentrations of bank assets and liabilities. In late 1997, the FDIC proposed to revise its regulations relating to FDICIA to generally ease the ability of state nonmember banks and their subsidiaries to engage in certain activities not permissible for a national bank, such as real estate development. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("Riegle-Neal"), different types of interstate transactions and activities are permitted. Interstate transactions and activities provided for under the law include: (i) bank holding company acquisitions of separately held banks in a state other than a bank holding company's home state; (ii) mergers between banks with different home states, including consolidations of affiliated banks; (iii) establishment of interstate branches either de novo or by branch acquisition; and (iv) affiliate banks acting as agents for one another for certain banking functions without being considered a "branch". In general, subject to certain limitations, nationwide interstate acquisitions are now permissible, irrespective of state law limitations other than limitations related to deposit concentrations and bank age requirements. Interstate mergers also are permissible. Affiliated banks may act as agents for one another. Each of the transactions and activities must be approved by the appropriate federal bank regulator, with separate and specific criteria established for each category. In 1996, Massachusetts enacted interstate banking laws in response to Riegle-Neal. The laws permit, subject to certain deposit and other limitations, interstate acquisitions, mergers and branching on a reciprocal basis. The new interstate banking law is likely to make it easier for out-of-state institutions to attempt to purchase or otherwise acquire or to compete with the Bank in Massachusetts, and similarly makes it easier for Massachusetts banks to compete outside the state. Financial Modernization. Various federal legislative proposals are pending to "modernize" the nation's financial system. Although the proposals vary, most generally would allow for some mixing of banking and commerce and generally would repeal most laws limiting the ability of banks and securities companies to be affiliated. 2 Federal Securities Laws. Upon consummation of the Reorganization, the reporting obligations of the Bank under the Securities Exchange Act of 1934 (the "Exchange Act"), as administered by the FDIC, were replaced with substantially identical obligations of the Company under the Exchange Act, as administered by the Securities and Exchange Commission (the "SEC"). Pursuant to the Exchange Act, the Company files annual, quarterly, and periodic reports with the SEC. The Company is also subject to the insider trading requirements of Sections 16(a) and 16(b) of the Exchange Act, as administered by the SEC. In connection with the Reorganization, the Bank deregistered the Bank's common stock under the Exchange Act. Other Activities The Bank owns stock in The Savings Bank Life Insurance Company of Massachusetts ("SBLI"). The Bank sells life insurance and tax-deferred annuities and sold over $1.7 million in SBLI annuities in 1997, making it the top seller of this product in Massachusetts. The Bank provides safe deposit services at nine of its branches. The Bank originates 30-year, fixed-rate, residential 1-4 family loans in correspondent relationships with third parties such as Plymouth Mortgage Company and Chase Manhattan Mortgage Corporation, whereby the Bank originates loans in exchange for an origination fee. Competition The Company faces substantial competition for loan origination and for the attraction and retention of deposits. Competition for loan origination arises primarily from commercial banks, other thrift institutions, credit unions and mortgage companies. The Company competes for loans on the basis of product variety and flexibility, competitive interest rates and fees, service quality and convenience. Competition for the attraction and retention of deposits arises primarily from commercial banks, other thrift institutions, and credit unions having presence within and around the market area served by the Bank's main office and its community branch and ATM network. There are approximately 200 of these financial institutions in the Bank's market area. In addition, the Company competes with regional and national firms which offer stocks, bonds, mutual funds and other investment alternatives to the general public. The Company competes on its ability to satisfy such requirements of savers and investors as product alternatives, competitive rates, liquidity, service quality, convenience, and safety against loss of principal and earnings. Management believes that the Company's emphasis on personal service and convenience, coupled with active involvement within the communities it serves, contribute to its ability to compete successfully. Employees As of December 31, 1997, the Bank employed 215 full-time staff, including 41 officers, and 82 part-time staff. None of the Bank's employees is represented by a labor union. The Company has no officers or employees separate from the Bank. Executive Officers of the Company and Bank The executive officers of the Company and/or the Bank, their positions with the Company and/or the Bank and their ages as of February 28, 1998 are as follows: Name Age Position Arthur H. Meehan [62] President and Chief Executive Officer of the Company and the Bank; Chairman of the Board of Directors of the Company and the Bank Phillip W. Wong [48] Senior Vice President, Chief Financial Officer and Treasurer of the Company; Executive Vice President and Chief Financial Officer of the Bank George A. Bargamian [49] Senior Vice President of the Bank (Retail) 3 Name Age Position Mona Bishlawi [37] Senior Vice President of the Bank (Finance) Eric B. Loth [55] Senior Vice President of the Bank (Lending) William F. Rivers [42] Senior Vice President of the Bank (Administration) Arthur H Meehan. Mr. Meehan commenced his employment with the Bank in February 1992. Prior to this date, Mr. Meehan served as Executive Vice President of the Bank of New England Corporation. Phillip W. Wong. Mr. Wong commenced his employment with the Bank as Senior Vice President in December 1992 and was promoted to Executive Vice President in 1997. Prior to this date, Mr. Wong served as Chief Financial Officer of Guaranty-First Trust Co. in Waltham, Massachusetts. George A. Bargamian. Mr. Bargamian was hired by the Bank as Director of Marketing in 1988, and was promoted to Vice President and Senior Vice President of the Bank during 1988. Mr. Bargamian formerly served as Assistant Vice President of Marketing for First Mutual of Boston. Mona Bishlawi. Ms. Bishlawi commenced her employment with the Bank as Controller in 1993, served as Vice President from 1994-1997, and was promoted to Senior Vice President in 1997. Ms. Bishlawi formerly served as Assistant Vice President and Assistant Controller at Eastern Bank Corporation in Lynn, Massachusetts. Eric B. Loth. Mr. Loth commenced his employment with the Bank as Senior Vice President in August 1994. Prior to this date, Mr. Loth served as Vice President of Lending at Sterling Bank in Waltham, Massachusetts. William F. Rivers. Mr. Rivers commenced his employment with the Bank in January 1974, served as Assistant Treasurer from 1980-1985, Vice President from 1985-1988, and was promoted to Senior Vice President in 1988. ITEM 2. PROPERTIES All of the Bank's branches located in Medford (except for the West Medford branch), the branch located in Arlington, and the Malden Center, Maplewood and Oak Grove branches located in Malden are owned by the Bank. All other branches are leased from unrelated third parties. The Company also owns a building that houses the Company's finance department, which is currently available for sale. The Company also owns an office building currently housing the Company's lending and certain administrative offices. Additional space in this building is leased to third parties, and the remainder is available for the Bank's expansion needs. In 1997, the Bank purchased an office building located between the main branch office in Medford and the lending and administrative office building. The Company also purchased a tract of land in the City of Tewksbury with plans to construct a new branch office. Subject to the foregoing, the Company believes that its properties are adequate for its present needs. The Bank has also acquired properties through foreclosure, which are presently being marketed by local real estate brokers or the Company's lending staff. ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings to which the Company is a party or to which any of its property is subject, although the Company is a party to ordinary routine litigation incidental to its business. 4 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 16, 1997, a special meeting of the stockholders of the Bank (the "Special Meeting") was held to consider and vote upon the Reorganization. A brief description of the vote and the results of the vote are incorporated herein by reference to the Bank's proxy statement for the Special Meeting and the Bank's Current Report on Form F-3, respectively, filed as exhibits to the Company's Current Report on Form 8-K filed with the SEC on November 26, 1997. 5 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Company's (and, prior to the Reorganization, the Bank's) common stock is quoted on the NASDAQ National Market System under the symbol "MDBK". The following table sets forth cash dividends declared on common stock and the high and low closing prices for the quarters indicated. All prices set forth below are based on information provided by the National Association of Securities Dealers, Inc. Common Stock Sale Prices ------------------------ Dividends Declared High Low Per Share ---- --- --------- 1997 1st quarter $29 3/4 $24 1/2 $0.18 2nd quarter 30 1/2 24 3/4 0.18 3rd quarter 36 29 1/4 0.18 4th quarter 42 34 0.36 1996 1st quarter $24 1/4 $20 $0.17 2nd quarter 23 1/4 19 3/4 0.17 3rd quarter 24 1/2 20 3/4 0.17 4th quarter 27 23 0.32 At March 2, 1998, according to the Company's transfer agent, the Company had approximately 1,182 record holders of its common stock. The number of holders of record does not reflect the number of persons or entities who or which held their stock in nominee or "street" name through various brokerage firms or other entities. The declaration of future dividends to the Company's stockholders is subject to future operating results, financial conditions, tax and legal considerations and other factors, such as the Bank's ability to declare and pay dividends to the Company. As the principal asset of the Company, the Bank currently provides the only source of payment of dividends by the Company. FDICIA limits the ability of undercapitalized insured banks to pay dividends. Moreover, under Massachusetts law, a stock-form savings bank may pay dividends only out of its net profits and only to the extent such dividends do not impair the Bank's capital and surplus accounts. Provided that the Bank can meet these requirements, Massachusetts law permits a bank to distribute net profits as a dividend so long as, after such distribution, either (i) the Bank's capital and surplus accounts equal at least 10% of its deposit liabilities or (ii) the Bank's surplus account equals 100% of its capital account, subject to certain exceptions. Under Federal Reserve Board and FDIC regulations, the Company and the Bank would be prohibited from declaring dividends, if among other things, they were not in compliance with applicable regulatory capital requirements. If there is no surplus, dividends may be paid out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Funds held by the Company are available for various corporate uses, including the payment of future dividends. 6 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
At December 31, ------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA Total assets $1,135,572 $1,039,098 $ 955,933 $ 915,055 $ 831,939 Investment securities 513,418 424,966 363,599 332,248 294,390 Loans, net 570,844 560,855 529,424 523,125 478,632 Deposits 821,706 792,141 791,851 791,780 735,753 Stockholders' equity 101,510 92,521 86,076 76,363 71,352 Book value per share 22.35 20.40 19.46 17.37 16.45 Stockholders' equity to total assets 8.94% 8.90% 9.00% 8.35% 8.58% Number of offices 16 16 16 15 12 - ------------------------------------------------------------------------------------------------------------------------------------ Years Ended December 31, ------------------------------------------------------------------------------- (Dollars in thousands, except per share data) 1997 1996 1995 1994 1993 ---------- ---------- ---------- ---------- ---------- STATEMENT OF OPERATIONS DATA Interest and dividend income $ 75,332 $ 68,711 $ 64,405 $ 55,401 $ 55,868 Interest expense 41,349 36,462 32,724 24,523 25,642 ---------- ---------- ---------- ---------- ---------- Net interest income 33,983 32,249 31,681 30,878 30,226 ---------- ---------- ---------- ---------- ---------- Provision for loan losses 125 215 772 583 2,110 Other income: Gain (loss) on investment securities, net 835 413 96 (65) 753 All other income 3,007 2,902 3,050 2,960 2,383 ---------- ---------- ---------- ---------- ---------- Total other income 3,842 3,315 3,146 2,895 3,136 ---------- ---------- ---------- ---------- ---------- Operating expenses 19,054 18,075 18,169 19,645 19,418 ---------- ---------- ---------- ---------- ---------- Income before income taxes 18,646 17,274 15,886 13,545 11,834 Provision for income taxes 7,256 6,845 6,463 5,292 4,665 ---------- ---------- ---------- ---------- ---------- Net income $ 11,390 $ 10,429 $ 9,423 $ 8,253 $ 7,169 ========== ========== ========== ========== ========== Basic earnings per share $ 2.51 $ 2.31 $ 2.14 $ 1.89 $ 1.66 ========== ========== ========== ========== ========== Diluted earnings per share $ 2.39 $ 2.21 $ 2.02 $ 1.78 $ 1.57 ========== ========== ========== ========== ========== Cash dividends declared per share $ 0.90 $ 0.83 $ 0.71 $ 0.62 $ 0.50 ========== ========== ========== ========== ========== SELECTED RATIOS Return on average assets 1.05% 1.05% 1.01% 0.95% 0.87% Return on average equity 11.81 11.72 11.52 11.14 10.21 Average equity to average assets 8.91 8.98 8.75 8.53 8.49 Weighted average rate spread 2.84 3.00 3.20 3.50 3.64 Net yield on average earning assets 3.26 3.39 3.54 3.74 3.86 Dividend payout ratio - basic earnings per share 35.86 35.93 33.18 32.80 30.12 - ------------------------------------------------------------------------------------------------------------------------------------
On May 6, 1994, the Bank acquired certain assets and assumed certain liabilities of the former Commercial Bank and Trust Company ("CBTC"). 7 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-K contains certain statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company's actual results could differ materially from those projected in the forward-looking statements as a result, among other factors, of changes in general, national or regional economic conditions, changes in loan default and charge-off rates, reductions in deposit levels necessitating increased borrowing to fund loans and investments, changes in interest rates, and changes in the assumptions used in making such forward-looking statements. The following discussion should be read in conjunction with the accompanying consolidated financial statements and selected consolidated financial data included within this report. Given that the Company's principal activity currently is ownership of the Bank, for ease of reference, the term "Company' in this Item generally will refer to the investments and activities of the Company and the Bank, except where otherwise noted. GENERAL The Company's net income is primarily attributable to its level of net interest income, which represents the difference between interest and dividend income earned on earning assets and interest paid on deposits and other borrowed money. The main components of the Company's earning assets are loans, investment securities and short-term investments. Interest-bearing deposits include NOW, savings, money market and term certificates of deposit. The net interest income performance of the Company is significantly affected by general economic conditions, by the Company's corporate strategies, its asset/liability management, tactical programs and by the policies of regulatory authorities. Sources of non-interest income such as loan servicing fees, gains/losses on sales of investment securities and other fees derived from various banking services contribute positively to the Company's results. The principal operating expenses of the Bank are salaries and employee benefits, occupancy and equipment expenses, data processing expenses, deposit insurance premiums, amortization of intangibles, advertising and marketing and other general and administrative expenses. In 1996, the Company invested approximately $1.7 million in the purchase and installation of a new loan and deposit processing system. The one-time expenses charged to operations in 1996 to convert to the new system were approximately $378,000. The Company achieved record net income of $11.4 million for 1997, an increase of $961,000, or 9.2% compared to net income of $10.4 million for 1996. Earnings per share for 1997 were $2.51 ($2.39 on a diluted basis) compared with $2.31 ($2.21 on a diluted basis) for 1996, an increase of 20 cents or 8.7% compared to the previous year. At December 31, 1997, total assets were $1.1 billion, an increase of 9.3% from the prior year. Total loans increased 1.7% to $577.6 million at December 31, 1997. The Bank sold $11.1 million of education loans in the second quarter of 1997 and $20.5 million of residential loans in the fourth quarter of 1997. Excluding the loan sales, loan growth was approximately 7.0%. Investment securities increased 20.8% to $513.4 million at December 31, 1997. Total deposits increased 3.7% to $821.7 million, and borrowed funds increased 38.6% to $205.8 million. Stockholders' equity increased 9.7% to $101.5 million at December 31, 1997, representing a book value of $22.35 per share, up from $20.40 at December 31, 1996. The capital to assets ratio was 8.94%, exceeding all regulatory requirements. FINANCIAL CONDITION Investment Portfolio The investment policy of the Company is structured to provide an adequate level of liquidity in order to meet anticipated deposit outflows, normal working capital needs and expansion of the loan portfolio within guidelines approved by the Board of Directors, while earning market returns. Accordingly, the majority of investments are in shorter-term government, agency, or high-quality (rated "A" or better) corporate securities. Investment bonds purchased generally have maturities or call dates within three years or less. Although the emphasis on short-term and medium-term investments reduces the overall yield, this strategy is in accordance with the Company's desire to minimize interest rate risk. 8 Investment securities increased 20.8% from $425.0 million at December 31, 1996 to $513.4 million at December 31, 1997. The increase was primarily in mortgage-backed securities and corporate bonds designated as "available for sale". During 1997, the Company implemented a strategy using the investment portfolio to increase earning assets and generate higher levels of interest income. In order to increase the overall yield of the investment portfolio, the strategy also included a program of replacing U.S. Government and federal agencies as they matured or were sold with mortgage-backed securities and corporate bonds. At December 31, 1996, 53% of the investment portfolio was in U.S. Government and federal agencies, while mortgage-backed securities represented 7%. At December 31, 1997, U.S. Government and federal agencies were reduced to 37% of total investment securities, and mortgage-backed securities were increased to 24%. The mortgage-backed securities pools added to this portfolio throughout 1997 consisted primarily of fixed-rate, low-coupon, government-backed securities that have limited extension or contraction risk. Consideration is given to the underlying collateral, the impact of rising or falling rates on the average life of these securities and other factors associated with the Bank's investment policies and strategies. Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and reflected at amortized cost. All other marketable investment securities are classified as "available for sale" and reflected on the balance sheet at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. As of December 31, 1997, the net unrealized gain on investments classified as "available for sale" was $2,156,000 and the net unrealized gain on investments classified as "held to maturity" was $279,000. In November 1995, the Financial Accounting Standards Board issued guidance allowing a one-time reassessment of an entity's investment classifications during the period November 15, 1995 to December 31, 1995. As a result, the amortized cost of securities held to maturity that were transferred to available for sale amounted to $26,987,000 and the related unrealized loss amounted to $206,000. In addition, the Bank also held limited amounts of equity securities subject to the investment limitations imposed by FDICIA and the Commissioner. The following table sets forth certain information concerning the investment portfolio at carrying value: At December 31, ------------------------------ 1997 1996 1995 -------- -------- -------- (In thousands) Investment securities: Debt securities: U.S. Government and federal agency $190,579 $224,519 $193,106 Mortgage-backed securities 122,447 27,814 32,780 State and municipal -- 89 232 Corporate bonds 185,859 159,892 126,545 Equity securities 14,533 12,652 10,936 -------- -------- -------- Total investment securities $513,418 $424,966 $363,599 ======== ======== ======== 9 The following table sets forth the maturity distribution of debt securities (excluding mortgage-backed securities) at carrying value, with related weighted average yields:
At December 31, 1997 --------------------------------------------------------------------------------- Weighted Weighted Weighted Within Average Over 1 Year Average Over 5 Years Average 1 Year Yield to 5 Years Yield to 10 Years Yield --------- ----------- ------------ ------------ ------------ ----------- (Dollars in thousands) U.S. Government and federal agency $ 60,918 5.85% $ 34,134 6.16% $ -- --% Other 54,878 5.97 218,451 6.00 8,057 5.95 --------- ------------ ----------- $ 115,796 5.91% $ 252,585 6.02% $ 8,057 5.95% ========= ============ ===========
Loan Portfolio The Company offers a variety of lending products, including fixed-rate and adjustable-rate residential mortgages, equity lines of credit, fixed-rate and adjustable-rate commercial mortgages, construction loans, consumer loans, education loans, and commercial business loans. As a portfolio lender, the Company generally retains all newly originated loans. From time to time, the Company originates and retains 30-year, fixed-rate residential loans. More frequently, however, the 30-year, fixed-rate residential loan is generally offered whereby the Bank originates the loan for a correspondent and collects an origination fee. During the fourth quarter of 1997, the Company originated and retained $4.1 million of 30-year, fixed-rate residential loans in order to improve the yield on residential loans. Real estate and commercial loan originations are initiated by the Bank's officers and lending personnel from a number of sources including referrals from realtors, builders, attorneys, and customers. Direct mail to existing and potential customers is used to solicit other loan services. Advertising media is also used to promote loans. The Bank employs on-the-road originators and pays them commissions for loan originations. Applications for residential and consumer loans are accepted at all of the Bank's locations and are referred to the main office for processing. The Company has lending policies in place which are intended to control credit risk inherent in the origination and retention of loans in portfolio. Among other considerations, these policies delineate the Bank's geographic market region, and establish credit procedures and acceptable loan-to-value ratios for all loans. Additional specific policies are in effect for commercial and commercial real estate loans. Loans increased modestly in 1997 as the Bank sold $11.1 million of education loans in the second quarter, and $20.5 million of residential loans in the fourth quarter. Excluding the loan sales, loan growth was approximately 7.0%. It is the Bank's intention to sell education loans in the repayment stage as conditions warrant. The increase in loans is primarily in residential, construction, and commercial asset-based loans. All other loan categories remained fairly stable from December 31, 1996 as new loan originations replaced amortization and payoffs. The Company expects continued intense competition for loans within its geographic region despite improvement in the regional economy. Within this framework, management has intensified marketing efforts for residential loans and asset-based lending. 10 Composition of portfolio. The following table shows the composition of the loan portfolio by type of loan:
At December 31, ------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (In thousands) Commercial loans $ 14,941 $ 11,014 $ 9,075 $ 10,270 $ 9,991 Loans secured by real estate: Residential * 389,593 380,627 353,172 350,013 308,895 Construction loans, net of unadvanced funds 11,278 8,719 8,591 7,577 2,541 Commercial 124,094 123,158 125,771 125,190 127,550 Second mortgages 1,539 1,928 2,175 2,441 3,087 Equity lines of credit 22,146 21,169 20,819 20,080 18,943 Consumer loans 12,931 20,548 16,710 14,396 13,942 --------- --------- --------- --------- --------- 576,522 567,163 536,313 529,967 484,949 Add: Net premium on loans acquired 270 354 504 648 833 Net deferred origination costs (fees) 785 569 73 49 (143) Less: Allowance for loan losses (6,733) (7,231) (7,466) (7,539) (7,007) --------- --------- --------- --------- --------- Loans, net $ 570,844 $ 560,855 $ 529,424 $ 523,125 $ 478,632 ========= ========= ========= ========= =========
* Residential first mortgages represent qualified collateral under a blanket lien securing FHLBB borrowings. See "Borrowings" for a more detailed explanation of this lien. The following table presents the maturity distribution of commercial and construction loans at December 31, 1997: Maturities ---------------------------------------------------------- 1 Year Over 1 Year Over or Less to 5 Years 5 Years Total ----------- -------------- ----------- ----------- (In thousands) Commercial loans $ 9,907 $ 4,341 $ 693 $ 14,941 Construction loans 4,807 2,422 4,049 11,278 Generally, construction loans provide for payments of interest only during the construction period, and then payments of principal and interest throughout the life of the loans. In all cases, these loans have adjustable interest rates. Commercial loans with maturities of over one year will be subject to interest rate adjustment or maturity according to the following schedule: Scheduled Maturity or Rate Adjustment -------------------------------------------- Over 1 Year Over to 5 Years 5 Years Total ------------- ----------- ------------ (In thousands) Predetermined rates $ 1,106 $ -- $ 1,106 Adjustable rates 3,235 693 3,928 ------------- ----------- ------------ $ 4,341 $ 693 $ 5,034 ============= =========== ============ 11 Non-performing Assets It is the Bank's general policy to discontinue the accrual of interest on loans over 90 days past due. Interest accrual ceases, and all previously accrued but unpaid interest is reversed, when a loan is placed on non-accrual status. At the option of management, a loan may be placed on non-accrual status prior to being 90 days past due if the collection of future interest and principal is, in the opinion of management, doubtful. On January 1, 1995, the Bank adopted Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of a Loan." Under this Statement, a loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. All of the Bank's loans which have been identified as impaired have been measured by the fair value of existing collateral. When impaired loans become 90 days or more delinquent, they are generally maintained on non-accrual status whereby interest income is recognized only when received. The restatement of previously issued financial statements to conform with SFAS No. 114 is expressly prohibited. The Bank does not apply SFAS No. 114 to individual consumer loans which are collectively evaluated for impairment. The following table sets forth information with respect to non-accrual loans, restructured loans and foreclosed real estate at the dates indicated. The Bank did not have any loans 90 days or more past due and still accruing at the dates indicated.
At December 31, ------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (In thousands) Impaired loans accounted for on a non-accrual basis $ 1,726 $ 2,752 $ 4,239 $ n/a $ n/a Other loans accounted for on a non-accrual basis -- 687 82 1,740 2,229 Troubled debt restructurings n/a n/a n/a 829 2,082 Foreclosed real estate 48 276 350 1,444 2,763 ------- ------- ------- ------- ------- $ 1,774 $ 3,715 $ 4,671 $ 4,013 $ 7,074 ======= ======= ======= ======= =======
At December 31, 1997, all loans on non-accrual status were considered impaired. At December 31, 1996, $687,000 of loans were 90 days or more past due but were not considered impaired. Management expected the two commercial real estate borrowers involved to resume scheduled payments of principal and interest in accordance with the contractual terms of the loan agreements. The balance of in-substance foreclosures that would have been restated and classified as impaired loans in accordance with SFAS No. 114 at December 31, 1994 was $302,000. The increase in non-accrual loans in 1995 was primarily attributable to the death of a commercial real estate borrower. Subsequent to the borrower's death, the debt was assumed by a new borrower and loan performance resumed. Loans accounted for on a non-accrual basis at December 31, 1997 had gross interest income of $406,000 that would have been recorded during 1997 if the loans had remained current in accordance with original terms. The amount of interest income on such loans that was included in net income for the period was $85,000. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged through the statement of income. Assessing the adequacy of the allowance for loan losses involves substantial uncertainties and is based on management's evaluation of the amount required to absorb estimated losses inherent in the loan portfolio after weighing various factors. Among the factors that management considers are the quality of specific loans, risk characteristics of the loan portfolio, level of non-performing loans, current economic conditions, trends in delinquency and charge-offs and collateral value of the underlying security. Ultimate losses may vary significantly from current estimates. Quarterly reviews of the loan portfolio are performed to identify loans for which specific allowance allocations are considered prudent. After specific allocations are made, a review is made to determine whether the remaining unallocated portion of the allowance is adequate to cover possible unidentified loan losses. 12 The Bank recorded a provision for loan losses for the year ended December 31, 1997 of $125,000, compared with $215,000 for the year ended December 31, 1996. At December 31, 1997, the allowance for loan losses totaled $6.7 million or 390% of non-accrual loans at that date, compared with $7.2 million or 210.3% of non-accrual loans at December 31, 1996. Non-accrual loans at December 31, 1997 were $1.7 million or 0.30% of total net loans, compared with $3.4 million or 0.61% of total net loans at December 31, 1996. An analysis of the allowance for loan losses is presented in the following table:
At December 31, ------------------------------------------------------- 1997 1996 1995 1994 1993 ------- ------- ------- ------- ------- (In thousands) Allowance for loan losses, beginning of year $ 7,231 $ 7,466 $ 7,539 $ 7,007 $ 6,649 ------- ------- ------- ------- ------- Loans charged-off --- Residential real estate (38) (64) (66) (267) (406) --- Commercial real estate (720) (656) (884) -- (1,329) --- Consumer (42) (89) (28) (34) (28) --- Commercial (31) (21) (100) (8) (227) Recoveries --- Residential real estate 26 7 104 218 4 --- Commercial real estate 147 348 102 35 229 --- Consumer 25 8 10 5 5 --- Commercial 10 17 17 -- -- ------- ------- ------- ------- ------- Net charge-offs (623) (450) (845) (51) (1,752) ------- ------- ------- ------- ------- Provision for loan losses, charged to operations 125 215 772 583 2,110 ------- ------- ------- ------- ------- Allowance for loan losses, end of year $ 6,733 $ 7,231 $ 7,466 $ 7,539 $ 7,007 ======= ======= ======= ======= ======= Ratio of net charge-offs to average loans 0.11% 0.08% 0.16% 0.01% 0.37% ======= ======= ======= ======= =======
An analysis of the allocation of the allowance for loan losses is presented in the following table:
At December 31, ---------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ----------------- ----------------- ----------------- ----------------- ----------------- Percent Percent Percent Percent Percent of Loans of Loans of Loans of Loans of Loans to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in thousands) Residential real estate $1,067 71.73% $1,179 71.23% $1,036 70.17% $2,669 70.29% $2,397 68.24% Commercial real estate 5,220 21.49 5,711 21.68 6,118 23.43 4,553 23.62 4,444 26.30 Construction 169 1.95 131 1.53 129 1.60 114 1.43 22 0.52 Consumer 48 2.24 44 3.62 47 3.11 49 2.72 44 2.88 Commercial 229 2.59 166 1.94 136 1.69 154 1.94 100 2.06 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Total $6,733 100.00% $7,231 100.00% $7,466 100.00% $7,539 100.00% $7,007 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ====== ======
While management considers the allowance for loan losses to be adequate at December 31, 1997, there is no assurance that additional charge-offs and provisions will not be necessary in 1998. The provision for loan losses during 1998 will depend primarily on market conditions and the Bank's actual experience. Loan Concentrations Other than the focus of the Bank's lending activities to its market area, the Bank does not have a concentration of loans exceeding 10% of total loans at the end of 1997. 13 Deposits Deposits historically have been the Bank's primary source of funds. The Bank offers a wide variety of deposit programs to attract both short-term and long-term deposits from individuals, partnerships and corporations, non-profits and municipalities. Deposit products include regular savings accounts, NOW accounts, money market deposit accounts, individual retirement accounts, term certificates, and retail and commercial demand deposit accounts. The Bank also solicits corporate and municipal jumbo term deposits. The Bank's Retail Banking Division places emphasis on sales of its products and quality of service to attract and retain customers. Management measures the sales performance of platform personnel in terms of cross-sales of additional products above the primary product which the customer requests. Platform personnel are evaluated in part, based on a cross-sell ratio which is the total number of these additional products sold to a customer divided by the number of customers. For 1997 this cross-sell ratio was 1.96, meaning for each customer "buying" one product, the customer was "sold" a total of 1.96 products, or approximately two products per customer. The Bank utilizes products and services such as its FREEDOM 55(TM) mature market program targeted to particular market segments to attract depositors interested in long-term savings and to create multiple account relationships with these depositors. Management believes that the customers attracted to these programs have an increased sense of loyalty to the Bank, and accordingly, the funds deposited into these programs are less volatile than other deposits. While deposit flows are by nature unpredictable, management controls the Bank's deposit growth through selective pricing and sales oriented marketing programs. The low interest rate environment, coupled with continued strength in the stock market and mutual funds continue to present management with the challenge of attracting and retaining deposits. To maintain stable deposit rates and manage interest rate risk, the Bank's strategy has been to grow deposit levels through selective promotions. To increase core deposits, the Bank continues to promote its "ComboPlus" account which combines a statement savings account and checking account into one convenient account offered at a competitive rate which exceeds the regular statement and passbook savings account rates. This account type has contributed to the increase in savings and demand deposits. Total deposits increased $29.6 million or 3.7% to $821.7 million at December 31, 1997 from $792.1 million at December 31, 1996. When compared to the prior year, demand deposits increased 10.1% while NOW deposits decreased 2.4%. Savings and money market deposits increased 3.0% and term certificates increased 4.6%. In previous years, the Bank experienced disintermediation from regular savings deposits and money market deposits to term certificates. In 1997, the response to a flat yield curve by customers of the Bank has been an increase in more liquid and shorter term deposit products. The following table indicates the balances in various deposit accounts at the end of each reported period: At December 31, ---------------------------------- 1997 1996 1995 --------- --------- --------- (In thousands) Demand accounts $ 44,196 $ 40,124 $ 36,427 NOW accounts 59,368 60,839 63,248 Savings and money market accounts 325,340 315,771 314,813 Term certificates 392,802 375,407 377,363 --------- --------- --------- $ 821,706 $ 792,141 $ 791,851 ========= ========= ========= 14 The following table sets forth the average deposits of the Bank with related average rates paid during each reported period:
1997 1996 1995 ---------------------- ----------------------- ----------------------- Average Rate Average Rate Average Rate Balance Paid Balance Paid Balance Paid ---------- ---------- ---------- ----------- ---------- ---------- (Dollars in thousands) Demand accounts $ 35,210 --% $ 30,935 --% $ 25,752 --% NOW accounts 59,485 1.00 61,317 1.10 62,178 1.47 Savings and money market deposits 322,079 2.96 316,498 2.80 334,739 2.68 Term certificates 391,204 5.42 378,680 5.52 357,031 5.32
Included in term certificates of deposit are certificates having balances of $100,000 or more. At December 31, 1997, such term certificates had the following maturities: At December 31, 1997 - --------------------------------------------------------------------------- 3 Months Over 3 Months Over 6 Months Over or Less to 6 Months to 12 Months 12 Months Total - ------------ --------------- ----------------- ------------ ----------- (In thousands) $ 19,265 $ 6,335 $ 9,158 $ 19,036 $ 53,794 Borrowed Funds The Bank is a voluntary member of the FHLBB. As such, the Bank may borrow up to its qualified collateral, as defined by the FHLBB. The Bank has selectively borrowed funds from the FHLBB to fund purchases of loans or large loan originations in addition to purchases of mortgage-backed securities. Short-term borrowings typically fund purchases or originations of one-year adjustable-rate loans, or are used to meet the Bank's daily liquidity needs. Long-term debt typically funds purchases of three-year adjustable-rate residential mortgage loans or the origination of certain commercial real estate loans. The Bank also enters into repurchase or reverse repurchase agreements with a number of authorized brokers as an alternative source of funds. Securities sold under agreements to repurchase are borrowings that mature within one year and are secured by U.S. government obligations. Total borrowed funds increased to $205.8 million at December 31, 1997 from $148.5 million at December 31, 1996, reflecting management's decision to utilize borrowings as a supplement to current deposit activity levels. The Bank took advantage of relatively low interest rates to increase long-term borrowings which were employed to fund the increase in the residential loan portfolio and purchases of mortgage-backed securities. 15 The following table presents, by category, the borrowings of the Bank for the reported periods:
At December 31, -------------------------------- 1997 1996 1995 -------- -------- -------- (Dollars in thousands) Short-term borrowings: FHLBB advances $ -- $ 30,000 $ 20,000 Federal Reserve Bank of Boston advances 2,059 1,233 -- Securities sold under agreements to repurchase 93,611 49,584 20,281 -------- -------- -------- Total short-term borrowings $ 95,670 $ 80,817 $ 40,281 ======== ======== ======== Weighted average rate 5.72% 5.82% 5.92% Average balance of short-term borrowings during the year $ 70,417 $ 49,123 $ 34,594 Weighted average rate paid on short-term borrowings during the year 5.53% 5.37% 6.17% Maximum amount outstanding at any month-end during the year $ 99,593 $ 80,817 $ 42,406 Long-term debt: FHLBB advances $110,109 $ 67,647 $ 32,147 ======== ======== ======== Weighted average rate 6.02% 6.10% 6.19% Average balance of long-term debt during the year $ 98,972 $ 55,276 $ 29,307 Weighed average rate paid on long-term debt during the year 6.19% 6.14% 5.88% Maximum amount outstanding at any month-end during the year $115,156 $ 68,647 $ 32,147
Stockholders' Equity The Bank's capital to assets ratio was 8.94% at December 31, 1997, compared to 8.90% at December 31, 1996. The Bank's capital ratios at December 31, 1997 and 1996 exceeded all regulatory requirements. Book value at December 31, 1997 was $22.35 per share, compared with $20.40 per share at December 31, 1996. (See "Liquidity and Capital Resources.") 16 RESULTS OF OPERATIONS General In 1997, the Company reported consolidated net income of $11.4 million or $2.51 basic earnings per share, as compared to net income of $10.4 million or $2.31 per share in 1996 and net income of $9.4 million or $2.14 per share in 1995. Diluted earnings per share were $2.39, $2.21 and $2.02 for 1997, 1996 and 1995, respectively. Consolidated net income in 1997 increased 9% over 1996 and consolidated net income in 1996 increased 11% over 1995. Diluted earnings per share in 1997 increased 8% over 1996 and diluted earnings per share in 1996 increased 9% over 1995. The Company's return on assets was 1.05% for 1997 and 1996, as compared to 1.01% in 1995. The return on equity increased to 11.81% in 1997 from 11.72% in 1996 and 11.52% in 1995. The increased earnings for 1997 when compared to 1996 reflect a $1.7 million increase in net interest income due to higher average earning assets, a reduction in the provision for loan losses of $90,000 due to positive credit quality trends, and an increase in net gains on the sale of securities and loans amounting to $719,000. Service fees from transaction accounts and other income decreased $192,000 from the prior year, as customers shifted to lower cost products. Total operating expenses increased $979,000 from the prior year. Included in the increase were one-time expenses of approximately $200,000 related to the formation of the holding company, and $260,000 applicable to tax filing matters. In 1996, the Company incurred $378,000 of one-time expenses concurrent with the purchase and installation of a new loan and deposit system. The increase in earnings in 1996 when compared to 1995 reflects an increase in net interest income, a reduction in the provision for loan losses, and an increase in net gains on the sales of investment securities. "Core" operating expenses, which are defined to exclude net gains and losses from foreclosed real estate and one-time expenses decreased $806,000 between 1996 and 1995. The reduction is attributed to the virtual elimination in 1996 of deposit insurance expense and on-going cost control. A total of $1.7 million was invested in 1996 on the installation of a new system that is represented by hardware and software which was capitalized. Net Interest Income Net interest income was $34.0 million in 1997; an increase of $1.7 million or 5.4% from $32.2 million in 1996, and an increase of $2.3 million or 7.3% from $31.7 million in 1995. Average earning assets in 1997 increased $91.3 million as compared to $81.3 million of increased interest-bearing liabilities; the difference resulting from higher demand deposits and capital. As a result, the excess of earning assets to interest-bearing liabilities increased 11.2% to $99.9 million from the $89.8 million in 1996. In addition, the Bank improved its average earning assets to average assets ratio to 96.2%, up from 96.0% in the prior year. The earnings on this excess flow directly to interest income. The flattening of the yield curve in 1997 has compressed the net interest margin and spread. As a result, changes in the mix of earning assets and higher funding costs reduced the net interest margin in 1997 to 3.26% from 3.39% in 1996 and 3.54% in 1995. The Company's most integral challenge is managing net interest income. Management continued to maintain a stable net interest margin by closely monitoring the behavior of the loan portfolio under varying market rate environments in order to maximize the yield on earning assets. During 1997, average loan balances represented 53.2% of average assets. This compares with 54.9% in 1996, and 57.4% in 1995. The average investment securities balance was 43.0% of average assets in 1997 as compared to 41.1% in 1996 and 38.1% in 1995. As the percentage of loans to assets decreases and the percentage of investments to assets increases, the net interest margin declines as loans are typically a higher yielding asset than the types of securities in which the Bank generally invests. Management closely monitors funding costs, and utilizes borrowings as an alternative to deposits when pricing or availability is more advantageous. The average deposits balance represented 82.0%, and average borrowings represented 18.0%, of total interest bearing liabilities in 1997 as compared to 87.9% and 12.1%, respectively, in 1996, and 92.2% and 7.8%, respectively, in 1995. The increased reliance on borrowings in 1997 resulted in a higher cost of funds, thereby reducing the net interest margin. 17 Interest and Dividend Income Interest and dividend income totalled $75.3 million for 1997; an increase of $6.6 million or 9.6% from 1996. Interest and dividend income totalled $68.7 million for 1996; an increase of $4.3 million or 6.7% from 1995. The weighted average yield on earning assets was 7.23% in 1997 and 1996, compared to 7.20% in 1995. Interest income on loans increased 6.3% or $2.8 million to $46.2 million in 1997 primarily as the result of increases in the average loans outstanding and a modest increase in the average yield on loans to 8.02%. Increased residential 1-4 family loan volume contributed $2.3 million of additional interest income. The average yield on residential 1-4 family loans remained flat at 7.50% when compared with 1996. Interest income on commercial loans increased $417,000 as a result of asset-based loan volume. In addition, the yield on commercial loans improved 9 basis points to 9.62% in 1997 as asset-based loans typically command a higher rate. Commercial real estate loans contributed $97,000 of additional interest income in 1997. Included in interest income from commercial real estate loans in 1996 was $251,000 which related to recoveries that had been charged-off in a prior period. Interest income on consumer loans increased a modest $16,000 from the prior year primarily due to the sale of $11.1 million in education loans in the second quarter of 1997. Interest income on investments was $29.1 million in 1997 compared with $25.3 million in 1996. The $58.6 million increase in the average balance of investment securities, principally in higher yielding corporate bonds and mortgage-backed securities, contributed $3.8 million of additional interest income. Investing in higher yielding instruments increased the yield on investments by 5 basis points to 6.25% in 1997. Interest income on loans was $43.5 million in 1996 compared with $42.7 million in 1995, as modest increases in average loans outstanding and yield combined to generate $774,000 in additional interest income on loans. Interest income on residential 1-4 family loans increased $248,000 in 1996 compared to 1995 levels as loan volume increased. The yield on residential loans remained stable from year to year at approximately 7.50%. Interest income on commercial real estate loans increased $393,000 from 1995 levels; $251,000 of which related to recoveries that had been charged-off in a prior period. The remaining increase is attributable to the upward repricing of adjustable-rate loans. Interest income on consumer loans increased $154,000 in 1996; primarily as a result of growth in student loan volume. The increases were offset by a decrease in interest income on commercial loans of $21,000 as the yield on loans declined. As in 1995, the Bank elected not to price loan products aggressively, thereby generating only a modest increase in volume. The overall yield on loans increased from 7.94% in 1995 to 7.99% in 1996. Interest income on investments was $25.3 million in 1996 compared with $21.7 million in 1995. The increase of $49.4 million in the average balance of investments in 1996 coupled with an increase in the yield on investments contributed an additional $3.5 million in interest income. During 1996, the Bank increased its investment in U.S. government and agency obligations and corporate bonds with the intent to generate additional interest income. The weighted average yield on investment securities, including short-term investments, increased to 6.20% in 1996 from 6.09% in 1995, reflecting the purchase of additional investment securities and the reinvestment of proceeds from maturities and sales at higher yields. Interest Expense Interest expense was $41.3 million in 1997, up $4.9 million or 13.4% from 1996. Interest expense was $36.5 million in 1996, an increase of $3.3 million or 11.4% from 1995. The cost of funds increased to 4.39% in 1997 compared with 4.23% in 1996 and 4.00% in 1995 principally as a result of the increased reliance on borrowed funds. Interest expense on deposits was $31.3 million in 1997, compared with $30.4 million in 1996. Average interest-bearing deposits increased $16.3 million resulting in an increase in interest expense of $895,000. The Company continues to focus on increasing certain core deposit accounts. As a result, pricing strategies were implemented raising certain core deposit product rates while lowering term certificate rates. The weighted average rate paid on savings and money market deposits increased to 2.96% in 1997 compared with 2.80% in 1996. The increased rate coupled with a $5.6 million increase in the average balance added $688,000 of interest expense in 1997. The weighted average rate paid on term certificates decreased to 5.42% from 5.52%. The lower rate partially offset the increased interest expense on term certificates, resulting from a $12.5 million increase in the average balance which added $288,000 of interest expense. The average balance of NOW deposits decreased a modest $1.8 million. This decrease along with a lowering of the rate paid reduced interest expense by $81,000. The overall weighted average rate paid on deposits increased to 4.06% in 1997 from 4.03% in 1996. The increase is principally due to disinteremediation from the lower rate passbook savings into the higher rate "ComboPlus" statement savings, an increase in money market rates, and the 2 year certificate of deposit promotion offered during the first six months of the year. 18 Interest expense on borrowed funds was $10.0 million in 1997, compared with $6.0 million in 1996. Management took advantage of declining interest rates to extend and increase borrowings. Longer-term FHLBB borrowings were acquired to fund and manage the interest rate risk resulting from growth in the residential loan portfolio. The increase in interest expense is the result of a $65.0 million increase in the average balance of borrowings coupled with a weighted average rate that was 15 basis points over the prior year's cost of funds. The increase in rate is attributed to the longer term of the borrowings. In addition, a significant portion of overall borrowings continue to include short-term repurchase agreements of U.S. Government securities that contribute to the funding of the Bank's investment portfolio. Interest expense on deposits was $30.4 million and interest expense on borrowed funds was $6.0 million in 1996, compared with $28.9 million and $3.9 million, respectively, in 1995. While interest-bearing deposit levels remained stable in 1996 as compared with 1995, a certain level of disintermediation from lower rate passbook savings accounts to higher rate core deposits and term certificates increased the average cost of interest-bearing deposits. In addition, the Bank leveraged its strong capital position by increasing average borrowed funds to $104.4 million at an average cost of 5.78% in 1996 from $63.9 million at an average cost of 6.04% in 1995. This cost reduction was achieved by adjusting the borrowed funds mix, in part towards greater short-term, secured borrowings, such as repurchase agreements, at rates averaging 5.07% in 1996 versus 5.93% in 1995. This rate decline more than offset the higher average rates paid for increased average levels of long-term FHLBB advances, at 6.14% in 1996 versus 5.88% in 1995. Rate/Volume Analysis The following table presents, for the periods indicated, changes in interest and dividend income and changes in interest expense attributable to changes in interest rates and volumes of interest-bearing assets and liabilities. Changes attributable to both rate and volume have been allocated proportionally to the two categories.
1997 Compared to 1996 1996 Compared to 1995 Increase (Decrease) Increase (Decrease) ----------------------------- ----------------------------- Volume Rate Total Volume Rate Total ------- ------- ------- ------- ------- ------- (In thousands) INTEREST AND DIVIDEND INCOME Short-term investments $ (234) $ 1 $ (233) $ 54 $ (50) $ 4 Mortgage-backed investments 2,668 87 2,755 333 106 439 Other investment securities 1,362 (22) 1,340 2,727 362 3,089 Loans 2,623 136 2,759 505 269 774 ------- ------- ------- ------- ------- ------- Total interest and dividend income 6,419 202 6,621 3,619 687 4,306 ------- ------- ------- ------- ------- ------- INTEREST EXPENSE NOW deposits (20) (61) (81) (12) (226) (238) Savings deposits and MMDA 158 530 688 (500) 392 (108) Term certificates 683 (395) 288 1,179 736 1,915 Short-term borrowings 1,176 83 1,259 808 (307) 501 Long-term debt 2,704 29 2,733 1,590 78 1,668 ------- ------- ------- ------- ------- ------- Total interest expense 4,701 186 4,887 3,065 673 3,738 ------- ------- ------- ------- ------- ------- Net interest income $ 1,718 $ 16 $ 1,734 $ 554 $ 14 $ 568 ======= ======= ======= ======= ======= =======
19 Distribution of Assets and Liabilities; Interest Rates and Interest Differential The following presents an analysis of average yields earned and rates paid for the years indicated. Average balances are computed using daily averages except for average stockholders' equity for which month-end balances are used.
Years Ended December 31, 1997 December 31, 1996 December 31, 1995 - --------------------------------------------------------------------- --------------------------- --------------------------- Interest Average Interest Average Interest Average Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/ Balance Paid Rate Balance Paid Rate Balance Paid Rate ---------- ------- ------- -------- ------- ------- -------- ------- ------- (Dollars in thousands) ASSETS Earnings assets: Short-term investments $ 3,852 $ 205 5.32% $ 8,257 $ 438 5.30% $ 7,289 $ 434 5.95% Mortgage-backed investments 70,635 4,588 6.50 29,506 1,833 6.21 24,059 1,394 5.79 Other investment securities 391,312 24,326 6.22 369,421 22,986 6.22 325,504 19,897 6.11 Loans (a) 576,258 46,213 8.02 543,547 43,454 7.99 537,226 42,680 7.94 - -------------------------------------------------------------------------------------------------------------------------------- Total earning assets 1,042,057 75,332 7.23 950,731 68,711 7.23 894,078 64,405 7.20 Other assets 41,288 -- -- 40,101 -- -- 41,457 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Total assets $1,083,345 -- -- $990,832 -- -- $935,535 -- -- ================================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW deposits $ 59,485 $ 595 1.00% $ 61,317 $ 676 1.10% $ 62,178 $ 914 1.47% Savings deposits and MMDA 322,079 9,540 2.96 316,498 8,851 2.80 334,739 8,959 2.68 Term certificates 391,204 21,193 5.42 378,680 20,906 5.52 357,031 18,991 5.32 Short-term borrowings 70,417 3,896 5.53 49,123 2,637 5.37 34,594 2,136 6.17 Long-term debt 98,972 6,125 6.19 55,276 3,392 6.14 29,307 1,724 5.88 - -------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 942,157 41,349 4.39 860,894 36,462 4.23 817,849 32,724 4.00 Other liabilities 44,704 -- -- 40,982 -- -- 35,868 -- -- Stockholders' equity 96,484 -- -- 88,956 -- -- 81,818 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,083,345 -- -- $990,832 -- -- $935,535 -- -- ================================================================================================================================ Net interest income $33,983 $32,249 $31,681 Weighted average rate spread (b) 2.84% 3.00% 3.20% Net yield on average earning assets (c) 3.26% 3.39% 3.54% ================================================================================================================================
(a) Includes non-accrual loans. (b) Weighted average yield on earning assets less weighted average rate paid on interest-bearing liabilities. (c) Net interest income divided by average earning assets. 20 Provision for loan losses The provision for loan losses represents a charge against current earnings and an addition to the allowance for loan losses. The provision is determined by management on the basis of many factors including the quality of specific loans, risk characteristics of the loan portfolio, the level of non-performing loans, current economic conditions, trends in delinquency and charge-offs, and collateral values of the underlying security. Ultimate losses may vary from current estimates. The Bank recorded a provision of $125,000 for loan losses in 1997. This compares with a provision of $215,000 for the year ended December 31, 1996 and $772,000 for the year ended December 31, 1995. In 1997, the Bank continued to experience positive trends in credit quality as indicated by the decline in non-performing loans from $4.3 million in 1995 to $3.4 million in 1996 and to $1.7 million in 1997. Net loans charged-off totaled $623,000, $450,000 and $845,000, respectively, for the years ended December 31, 1997, 1996 and 1995. The increase in net loans charged-off in 1997 is principally the result of charging off one large commercial real estate borrower. A reserve for loan losses had been provided for this loan in a prior year. While management considers the allowance for loan losses to be adequate at December 31, 1997, there is no assurance that additional charge-offs and provisions will not be necessary in 1998. The provision for loan losses during 1998 will depend primarily on market conditions and the Bank's actual experience. Other income Total other income amounted to $3.8 million for the year ended December 31, 1997, as compared to $3.3 million for year ended December 31, 1996, and $3.1 million for the year ended December 31, 1995. In 1997, customer service fees declined $185,000 from 1996 and $374,000 from 1995, in part reflecting lower revenues on deposit accounts as customers migrate to deposit products with lower or no service fees. The Company's experience in recent years has been customer willingness to forego earning interest on a deposit account in exchange for reduced service charges. Net gains on the sale of securities were $835,000 in 1997, compared with net gains of $413,000 and $96,000 in 1996 and 1995, respectively. Management elects to sell securities when tactical opportunities arise to do so and recognize a gain without impairing the yield or liquidity of the investment portfolio. The net gain on the sale of loans of $306,000 in 1997 was related to the sale of education loans. Operating expenses Operating expenses were $19.1 million for 1997, up $979,000 or 5.4% over 1996 operating expenses of $18.1 million. Included in professional fees and other general and administrative operating expenses were $200,000 of one-time expenses incurred in the formation of a holding company structure, which the Company elected not to capitalize. Also included in other general and administrative operating expenses was $260,000 of one-time expenses applicable to tax filing matters. 1996 operating expenses reflect $378,000 of one-time expenses associated with the conversion to new operating systems. The most significant increase in 1997 operating expenses was in salary and benefit costs, which increased 5.5% as a result of regular annual merit increases. Other increases include occupancy and equipment depreciation resulting from the Bank's investment of approximately $1.7 million in new technology. Upgrading to new technology has enabled the Bank to realize savings in data processing operating expenses. In 1997, the Bank experienced a $99,000 increase in FDIC deposit insurance expense after a significant reduction from 1995 to 1996. The Bank's expense ratio, which is the ratio of operating expenses to average assets was 1.76% in 1997 compared with 1.82% in 1996 and 1.94% in 1995. Management continues to focus on cost containment with the intent to be a low cost provider of high quality banking products and services. 21 Operating expenses were $18.1 million for 1996, down $94,000 or 0.5% from $18.2 million in 1995. As shown in the table below, "core" operating expenses, excluding gains and losses on the sale of foreclosed real estate and $378,000 of one-time expenses associated with the conversion to new operating systems, were comparable to 1995 except for the virtual elimination of FDIC deposit insurance assessments in 1996. The $378,000 of one-time expenses are shown by category in the table below:
"Core" Comparable 1996 Conversion- 1995 Operating Related Operating Expenses, One-time Expenses, as Reported Expenses Net as Reported Change ------------- -------------- ------------- ------------- ------------- (Dollars in thousands) Salaries and employee benefits $ 9,778 $ 12 $ 9,766 $ 9,551 $ 215 Occupancy and equipment 1,998 10 1,988 1,910 78 Deposit insurance 13 - 13 927 (914) Data processing 1,606 179 1,427 1,452 (25) Professional fees 517 19 498 577 (79) Amortization of intangibles 1,248 - 1,248 1,293 (45) Advertising and marketing 722 28 694 692 2 Other general and administrative 2,128 130 1,998 2,036 (38) ------------ ------------- ------------ ------------ ------------ Totals $18,010 $378 $17,632 $18,438 $(806) ============ ============= ============ ============ ============
Salaries and employee benefits increased 2.4% as a result of regular annual merit increases. Occupancy and equipment expenses increased in 1996 over 1995 as the Bank incurred a full year of operating expenses associated with the Waltham branch which was opened in April 1995. Provision for income taxes The Bank's effective tax rate for the year ended December 31, 1997 was 38.9% as compared with 39.6% and 40.7% for the years ended December 31, 1996 and 1995. The effective tax rates exceeded the statutory federal tax rates of 34.0% for taxable income up to $10.0 million and 35.0% for taxable income exceeding $10.0 million principally due to state taxes. The passage of tax legislation in 1995 reduced the Bank's state tax rate. 22 IMPACT OF INFLATION The consolidated financial statements and related consolidated financial data presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and results of operations in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Bank is reflected in increased operating costs. Unlike most industrial companies, virtually all assets of a financial institution are monetary in nature. As a result, interest rates have a more significant effect on a financial institution's performance than the effect of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. LIQUIDITY AND CAPITAL RESOURCES The Bank's principal sources of funds are customer deposits, amortization and payoff of existing loan principal, and sales or maturities of various investment securities. The Bank is a voluntary member of the FHLBB and as such, may take advantage of the FHLBB's borrowing programs to enhance liquidity and leverage its favorable capital position. The Bank also may draw on lines of credit at the FHLBB and a large commercial bank or enter into repurchase or reverse repurchase agreements with authorized brokers. These various sources of liquidity are used to fund withdrawals, new loans, and investments. Management seeks to promote deposit growth while controlling the Bank's cost of funds. Sales-oriented programs to attract new depositors and the cross-selling of various products to its existing customer base are currently in place. Management reviews, on an ongoing basis, possible new products, with particular attention to products and services which will aid in retaining the Bank's base of lower-costing deposits. Maturities and sales of investment securities provide significant liquidity to the Bank. The Bank's policy of purchasing shorter-term debt securities reduces market risk in the bond portfolio while providing significant cash flow. For the year ended December 31, 1997, cash flow from maturities of securities was $99.2 million and proceeds from sales of securities totaled $19.6 million, compared to maturities of securities of $87.9 million and proceeds from sales of securities of $32.6 million for the year ended December 31, 1996. Principal payments on mortgage-backed investments during the years ended December 31, 1997 and 1996 totaled $8.7 million and $4.7 million, respectively. Purchases of securities during 1997 and 1996 totaled $212.5 million and $188.7 million, respectively. These purchases consisted primarily of short-term debt instruments. During periods of high interest rates or active mortgage origination, maturities in the bond portfolio have provided significant liquidity to the Bank, generally at a lower cost than borrowings. Amortization and pay-offs of the loan portfolio contribute significant liquidity to the Bank. Traditionally, amortization and pay-offs are reinvested into loans. Excess liquidity is invested in short-term debt instruments. The Bank has also used borrowed funds as a source of liquidity. At December 31, 1997, the Bank's outstanding borrowings from the FHLBB were $110.1 million. The Bank also utilizes repurchase agreements to fund loan purchases or to leverage the balance sheet. At December 31, 1997, securities sold under agreements to repurchase totaled $93.6 million. Residential and commercial mortgage loan originations for the years ended December 31, 1997, 1996 and 1995 totaled $124.2 million, $96.4 million and $65.4 million, respectively. Commitments to originate commercial and residential real estate mortgages at December 31, 1997 were $14.9 million, excluding unadvanced construction funds totaling $10.7 million. Management believes that adequate liquidity is available to fund loan commitments utilizing deposits, loan amortization, maturities of securities, or borrowings. The Bank's capital position (total stockholders' equity) was $101.5 million, or 8.94% of total assets at December 31, 1997, compared with $92.5 million, or 8.90% of total assets at December 31, 1996. The FDIC imposes capital guidelines on the Bank. The guidelines define core or "tier 1" capital and supplementary or "tier 2" capital and assign weights to broad categories of assets and certain off-balance sheet items. Ratios of tier 1 and tier 1 plus tier 2 capital to assets are then calculated. Banks must maintain a tier 1 capital to risk-weighted assets ratio of 4.00% and a total capital to risk-weighted assets ratio of 8.00%. The consolidated Company and the Bank's tier 1 risk-based capital ratio, as defined by the FDIC, at December 31, 1997 was 14.7% and 13.6%, respectively, which exceeds both risk-based capital requirements. Massachusetts-chartered savings banks insured by the FDIC are required to maintain minimum leverage capital (tier 1 capital) of 3.0% to 5.0% of total assets, as adjusted, depending on an individual bank's rating. The Bank's leverage capital ratio at December 31, 1997, as defined by the FDIC, was 7.8%, which exceeds the FDIC's requirements. 23 YEAR 2000 DISCLOSURE The year 2000 issue exists because many computer systems and applications currently use two-digit date fields to designate a year. As the century date change occurs, date sensitive systems recognize the year 2000 as 1900, or, not at all. This inability to recognize or properly treat the year 2000 may cause systems to process critical financial and operational information incorrectly. A Year 2000 Task Force Committee represented by members of senior management was formed in 1997 and is responsible for year 2000 compliance. The Committee has developed an action plan with goals, objectives and target dates. In 1997, the Company assessed and continues to assess the impact of the year 2000 issue on its operations. Anticipated spending for the year 2000 computer system programming modifications will be expensed as incurred and, based upon currently available information, is not expected to have a material impact on the Company's on-going results of operations. However, if the efforts initiated by the Committee are not completed on time, or if the cost of updating or replacing the Company's information systems exceeds the Company's current estimates, the Year 2000 issue could have a material adverse impact on the Company's business, financial condition or results of operations. The Company also intends to determine the extent to which the Company may be vulnerable to any failures by its service providers, other third party vendors, and customers to remedy their own Year 2000 issues, and is in the process of initiating formal communications with these parties. At this time, the Company is unable to estimate the nature or extent of any potential adverse impact resulting from the failure of these third parties to achieve Year 2000 compliance, although the Company does not currently anticipate any material adverse impact. However, there can be no assurance that these third parties will not experience Year 2000 problems or that any problems would not have a material effect on the Company's operations. Because the cost and timing of Year 2000 compliance by third parties such as service providers and customers is not within the Company's control, no assurance can be given with respect to the cost or timing of such efforts or any potential adverse effects on the Company of any failure by these third parties to achieve Year 2000 compliance. 24 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Through the Bank's Asset-Liability Management Committee ("ALCO"), which is comprised of certain senior and middle management personnel, the Bank closely monitors the level and general mix of interest rate-sensitive assets and liabilities. The primary objective of the Bank's ALCO program is to manage the assets and liabilities of the Bank to enhance profitability and capital at prudent levels of liquidity, interest rate, credit and market risk. Market risk is the risk of loss from adverse changes in market prices and interest rates. The Bank's market risk arises primarily from interest rate risk inherent in lending, investing in marketable securities, deposit taking, and borrowing activities. To that end, management actively monitors and manages its interest rate risk exposure. In addition, the Bank is exposed to equity price risk associated with investing in marketable equity securities, which is not material. The Bank's primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Bank's net interest income and capital, while adjusting the Bank's asset-liability mix to achieve the maximum yield to cost spread from the mix. However, a sudden and substantial increase or decrease in interest rates may adversely impact the Bank's earnings to the extent that interest sensitive assets and liabilities do not change at the same speed, to the same extent, or on the same basis. It is ALCO's general policy to closely match the maturity or rate sensitivity of its assets and liabilities. Strategies implemented to improve the match between interest-rate sensitive assets and liabilities include, but are not limited to: daily monitoring of the Bank's changing cash requirements, with particular concentration on investment in shorter-term securities; a general policy of originating adjustable-rate and fifteen-year, fixed-rate mortgage loans for the Bank's own portfolio, monitoring the cost and composition of deposits; and generally using matched borrowings to fund specified purchases of loan packages and large loan originations. Occasionally, management may choose to deviate somewhat from specific matching of maturities of assets and liabilities to take advantage of an opportunity to enhance yields; for example holding fixed-rate mortgage loans in portfolio in the last quarter of 1997. The Bank seeks to manage its liability portfolio in order to effectively plan and manage growth and maturities of deposits. Plans designed to achieve growth of different deposit types are reviewed regularly. Programs which are designed to build multiple relationships with customers and to enhance the Bank's ability to retain deposits at controlled rates of interest have been implemented. Management has also adopted a policy of reviewing interest rates on an ongoing basis on all deposit accounts in order to monitor deposit growth and interest costs. In addition to attracting deposits, the Bank has selectively borrowed funds using advances from the FHLBB and reverse repurchase agreements. 25 The following table presents, as of December 31, 1997, interest-rate sensitive assets and liabilities categorized by expected maturity and weighted average rate. Expected maturities are contractual maturities adjusted for amortization and prepayments of principal. For adjustable-rate instruments, contractual maturity is deemed to be the earliest possible interest rate adjustment date.
(Dollars in thousands) Overnight 0-1 yr. 1-2 yrs. 2-3 yrs. 3-4 yrs. 4-5 yrs. 5+ yrs. Total --------- -------- -------- -------- -------- ------- -------- ---------- Rate-sensitive assets: Short-term investments $ 2,804 $ -- $ -- $ -- $ -- $ -- $ -- $ 2,804 5.35% Mortgage-backed investments -- 25,754 20,360 17,001 13,763 10,383 34,703 121,964 6.61% 6.61% 6.61% 6.61% 6.61% 6.61% Other investment securities -- 125,764 116,873 83,467 44,014 -- 5,075 375,193 6.09% 6.13% 6.42% 6.09% 5.63% Adjustable-rate mortgages 22,146 157,976 85,966 45,060 36,243 33,456 23,193 404,040 8.95% 8.41% 8.27% 8.06% 7.76% 7.76% 7.31% Fixed-rate mortgages -- 18,886 17,204 16,584 15,425 16,055 59,825 143,979 7.76% 7.61% 7.60% 7.59% 7.59% 7.40% All other loans 22,916 2,913 1,180 575 165 39 44 27,832 8.80% 10.88% 10.26% 10.39% 10.00% 10.00% 8.19% - ------------------------------------------------------------------------------------------------------------------------------- Total rate-sensitive assets 47,866 331,293 241,583 162,687 109,610 59,933 122,840 1,075,812 - ------------------------------------------------------------------------------------------------------------------------------- Rate-sensitive liabilities: NOW accounts 59,368 -- -- -- -- -- -- 59,368 1.00% Regular savings 254,741 -- -- -- -- -- -- 254,741 2.76% Money market accounts 70,599 -- -- -- -- -- -- 70,599 3.69% Term certificates -- 265,321 98,153 15,918 5,709 7,567 134 392,802 5.28% 5.90% 6.11% 5.94% 5.94% 5.59% Borrowings -- 142,662 50,000 12,717 -- -- 400 205,779 5.66% 6.02% 6.41% 5.61% - ------------------------------------------------------------------------------------------------------------------------------- Total rate-sensitive liabilities 384,708 407,983 148,153 28,635 5,709 7,567 534 983,289 - -------------------------------------------------------------------------------------------------------------------------------
The prepayment experience reflected is based on the Bank's historical experience. Based on the Bank's experience, partial or full payment prior to contractual maturity can be expected and is reflected. Given the interest rate environment at December 31, 1997, management applies the assumption that on average, 7% of the outstanding loan and mortgage-backed securities balances will prepay annually. When adjustable-rate loans reprice at the rate adjustment date, they are generally indexed to the one-, three-, or five-year Treasury rate with an average spread of 275 basis points, with average period caps of 2.0% and life-time caps of 6.0%. The table does not include loans which have been placed on non-accrual status. Assets and liabilities that are immediately replicable are placed in the overnight column. These financial instruments do not have a contractual maturity date. Although NOW, savings and money market deposit accounts are subject to immediate repricing or withdrawal, based on the Bank's history, management considers these liabilities to have longer lives and less interest rate sensitivity than term certificates. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Independent Auditors' Report..................................................28 Consolidated Balance Sheets at December 31, 1997 and 1996.....................29 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995...............................................................30 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995......................................31 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995.........................................32-33 Notes to Consolidated Financial Statements.................................34-60 27 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Medford Bancorp, Inc.: We have audited the consolidated balance sheets of Medford Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Medford Bancorp, Inc. and subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Wolf & Company, P.C. Boston, Massachusetts January 21, 1998 28 MEDFORD BANCORP, INC. CONSOLIDATED BALANCE SHEETS
December 31, -------------------------------- 1997 1996 -------------- -------------- (In thousands) ASSETS Cash and due from banks $ 13,376 $ 11,900 Short-term investments (Note 2) 2,804 4,529 ----------- ----------- Cash and cash equivalents 16,180 16,429 Investment securities available for sale (Note 3) 402,723 268,379 Investment securities held to maturity (Note 3) 103,823 150,591 Restricted equity securities 6,872 5,996 Loans (Notes 4 and 7) 577,577 568,086 Less allowance for loan losses (6,733) (7,231) ----------- ----------- Loans, net 570,844 560,855 ----------- ----------- Banking premises and equipment, net (Note 5) 10,738 10,896 Accrued interest receivable 9,472 9,291 Goodwill and deposit-based intangibles 5,748 6,896 Other assets (Note 9) 9,172 9,765 ----------- ----------- Total assets $ 1,135,572 $ 1,039,098 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (Note 6) $ 821,706 $ 792,141 Short-term borrowings (Note 7) 95,670 80,817 Long-term debt (Note 8) 110,109 67,647 Accrued taxes and expenses (Note 12) 3,988 3,701 Other liabilities 2,589 2,271 ----------- ----------- Total liabilities 1,034,062 946,577 ----------- ----------- Commitments and contingencies (Note 10) Stockholders' equity (Notes 11 and 13): Serial preferred stock, $.50 par value, 5,000,000 shares authorized; none issued -- -- Common stock, 15,000,000 shares authorized; $.50 par value, 4,541,148 and 4,534,648 shares issued, respectively 2,271 2,267 Additional paid-in capital 28,977 28,848 Retained earnings 68,938 61,634 ----------- ----------- 100,186 92,749 Net unrealized gain (loss) on securities available for sale, after tax effects (Notes 3 and 9) 1,324 (228) ----------- ----------- Total stockholders' equity 101,510 92,521 ----------- ----------- Total liabilities and stockholders' equity $ 1,135,572 $ 1,039,098 =========== ===========
See accompanying notes to consolidated financial statements. 29 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ---------------------------------------------- 1997 1996 1995 ------------- ------------ ------------- (Dollars in thousands, except per share data) Interest and dividend income: Interest and fees on loans $ 46,213 $ 43,454 $ 42,680 Interest on debt securities 28,210 24,167 20,864 Dividends on equity securities 704 652 427 Interest on short-term investments 205 438 434 ---------- ---------- ---------- Total interest and dividend income 75,332 68,711 64,405 ---------- ---------- ---------- Interest expense: Interest on deposits 31,328 30,433 28,864 Interest on short-term borrowings 3,896 2,637 2,136 Interest on long-term debt 6,125 3,392 1,724 ---------- ---------- ---------- Total interest expense 41,349 36,462 32,724 ---------- ---------- ---------- Net interest income 33,983 32,249 31,681 Provision for loan losses (Note 4) 125 215 772 ---------- ---------- ---------- Net interest income, after provision for loan losses 33,858 32,034 30,909 ---------- ---------- ---------- Other income: Customer service fees 1,973 2,158 2,347 Gain on sales of investment securities, net (Note 3) 835 413 96 Gain on sale of loans 306 -- -- Miscellaneous 728 744 703 ---------- ---------- ---------- Total other income 3,842 3,315 3,146 ---------- ---------- ---------- Operating expenses: Salaries and employee benefits (Note 12) 10,320 9,778 9,551 Occupancy and equipment (Notes 5 and 10) 2,289 1,998 1,910 Deposit insurance 112 13 927 Data processing 1,416 1,606 1,452 Professional fees 672 517 577 Amortization of intangibles 1,206 1,248 1,293 Advertising and marketing 614 722 692 Other general and administrative 2,425 2,193 1,767 ---------- ---------- ---------- Total operating expenses 19,054 18,075 18,169 ---------- ---------- ---------- Income before income taxes 18,646 17,274 15,886 Provision for income taxes (Note 9) 7,256 6,845 6,463 ---------- ---------- ---------- Net income $ 11,390 $ 10,429 $ 9,423 ========== ========== ========== Weighted averages shares outstanding: Basic 4,540,256 4,522,839 4,409,906 ========== ========== ========== Diluted 4,770,442 4,723,649 4,659,059 ========== ========== ========== Earnings per share: Basic $ 2.51 $ 2.31 $ 2.14 ========== ========== ========== Diluted $ 2.39 $ 2.21 $ 2.02 ========== ========== ==========
See accompanying notes to consolidated financial statements. 30 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1997, 1996 and 1995
Net Unrealized Gain (Loss) on Common Stock Additional Securities --------------------- Paid-In Retained Available Shares Dollars Capital Earnings for Sale Total --------- --------- --------- --------- --------- --------- (In thousands, except number of shares) Balance at December 31, 1994 4,395,790 $ 2,198 $ 27,390 $ 48,677 $ (1,902) $ 76,363 Net income -- -- -- 9,423 -- 9,423 Cash dividends declared ($.71 per share) -- -- -- (3,134) -- (3,134) Issuance of common stock under stock option plan and related income tax benefits 27,400 14 252 -- -- 266 Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- -- 3,158 3,158 --------- --------- --------- --------- --------- --------- Balance at December 31, 1995 4,423,190 2,212 27,642 54,966 1,256 86,076 Net income -- -- -- 10,429 -- 10,429 Cash dividends declared ($.83 per share) -- -- -- (3,761) -- (3,761) Issuance of common stock under stock option plan and related income tax benefits 111,458 55 1,206 -- -- 1,261 Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- -- (1,484) (1,484) --------- --------- --------- --------- --------- --------- Balance at December 31, 1996 4,534,648 2,267 28,848 61,634 (228) 92,521 Net income -- -- -- 11,390 -- 11,390 Cash dividends declared ($.90 per share) -- -- -- (4,086) -- (4,086) Issuance of common stock under stock option plan and related income tax benefits 6,500 4 129 -- -- 133 Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- -- 1,552 1,552 --------- --------- --------- --------- --------- --------- Balance at December 31, 1997 4,541,148 $ 2,271 $ 28,977 $ 68,938 $ 1,324 $ 101,510 ========= ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. 31 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ---------------------------------------------- 1997 1996 1995 ------------- ------------ ------------- (In thousands) Cash flows from operating activities: Net income $ 11,390 $ 10,429 $ 9,423 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan and foreclosed real estate losses 125 265 611 Depreciation and amortization, net 2,163 2,205 1,640 Net gain on sales of foreclosed real estate (44) (15) (299) Gains on sales of investment securities, net (835) (413) (96) Gain on sale of loans (306) -- -- Increase in accrued interest receivable and other assets (291) (2,294) (1,341) Deferred tax benefit (610) (295) (402) Increase in accrued taxes and expenses and other liabilities 521 1,576 727 --------- --------- --------- Net cash provided by operating activities 12,113 11,458 10,263 --------- --------- --------- Cash flows from investing activities: Maturities of investment securities available for sale 52,185 38,168 26,210 Proceeds from sales of investment securities available for sale 19,572 32,602 25,363 Purchases of investment securities available for sale (211,653) (153,844) (103,142) Maturities of investment securities held to maturity 47,034 49,780 97,782 Purchases of investment securities held to maturity and FHLBB stock (876) (34,886) (76,519) Principal amortization of mortgage-backed investments available for sale 8,701 4,746 4,796 Loans originated and purchased, net of amortization and payoffs (42,032) (32,163) (8,492) Proceeds from sale of loans 31,900 -- -- Proceeds from sales of foreclosed real estate 662 384 2,920 Purchases of banking premises and equipment, net (866) (2,018) (755) --------- --------- --------- Net cash used in investing activities (95,373) (97,231) (31,837) --------- --------- ---------
(continued) See accompanying notes to consolidated financial statements. 32 MEDFORD BANCORP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
Years Ended December 31, ---------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- (In thousands) Cash flows from financing activities: Net increase in deposits 29,565 290 71 Net increase in borrowings with maturities of three months or less 44,853 35,536 23,356 Proceeds of short-term borrowings with maturities in excess of three months -- 25,000 25,000 Repayment of short-term borrowings with maturities in excess of three months (30,000) (20,000) (25,000) Proceeds from long-term debt 67,509 39,000 16,400 Repayment of long-term debt (25,047) (3,500) (9,500) Issuance of common stock 34 610 150 Cash dividends paid (3,903) (3,504) (2,907) -------- -------- -------- Net cash provided by financing activities 83,011 73,432 27,570 -------- -------- -------- Net change in cash and cash equivalents (249) (12,341) 5,996 Cash and cash equivalents at beginning of year 16,429 28,770 22,774 -------- -------- -------- Cash and cash equivalents at end of year $ 16,180 $ 16,429 $ 28,770 ======== ======== ======== Supplementary information: Interest paid on deposit accounts $ 31,263 $ 30,474 $ 28,773 Interest paid on borrowed funds 9,942 5,640 3,662 Income taxes paid, net of refunds 7,455 6,671 6,234
See accompanying notes to consolidated financial statements. 33 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1997, 1996 and 1995 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Consolidation The consolidated financial statements include the accounts of Medford Bancorp, Inc. (the "Company") and its wholly-owned subsidiary, Medford Savings Bank (the "Bank"). Pursuant to a Plan of Reorganization and Acquisition (the "Plan") dated July 29, 1997, the Bank formed the Company as a subsidiary of the Bank and completed a reorganization on November 26, 1997 whereby the Company became the Bank's parent company. Each issued and outstanding share of common stock of the Bank, par value $.50 per share (together with associated preferred stock purchase rights) was converted into and exchanged for one share of common stock of the Company, par value $.50 per share (together with associated preferred stock purchase rights). The Bank's wholly-owned subsidiary, Medford Securities Corporation engages in the buying, selling, dealing in, or holding of securities. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly susceptible to significant change in the near term relates to the determination of the allowance for losses on loans. Business The Company is principally engaged in the business of attracting deposits from the general public, originating residential and commercial real estate mortgages and consumer and commercial loans, and investing in securities. The Company is headquartered in Medford, Massachusetts, which is located approximately seven miles north of downtown Boston. It has a network of sixteen banking offices located in Medford, Malden, Arlington, Belmont, Burlington, North Reading, Waltham, and Wilmington. The Company's primary market area includes these communities as well as other cities and towns in Middlesex County and the surrounding area north of Boston. Reclassification Certain amounts have been reclassified in the 1996 and 1995 consolidated financial statements to conform to the 1997 presentation. Cash and Cash Equivalents Cash and cash equivalents include cash, amounts due from banks and short-term investments. Short-term Investments Short-term investments mature within one year and are carried at cost. 34 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Investment Securities Investments in debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and reflected at amortized cost. All other marketable investment securities are classified as "available for sale" and reflected on the balance sheet at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. Purchase premiums and discounts on debt securities are amortized to earnings by a method which approximates the interest method over the terms of the investments. Declines in the value of investments that are deemed to be other than temporary are reflected in earnings when identified. Gains and losses on disposition of investments are recorded on the trade date and computed by the specific identification method. Restricted equity securities include stock of the Federal Home Loan Bank of Boston and The Savings Bank Life Insurance Company of Massachusetts, both of which are carried at cost. Loans The Company grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in the eastern New England area. The ability of the Company's debtors to honor their obligations is dependent upon the real estate, construction, and general economic sectors of that region. Loans, as reported, have been increased by the net premium on loans acquired and net deferred loan origination costs, and reduced by unadvanced loan funds and the allowance for loan losses. Interest on loans is recognized on a simple interest basis and is not accrued on loans which are ninety days or more past due. Loans may be placed on non-accrual status prior to becoming ninety days past due if the collection of principal and interest is, in the opinion of management, doubtful. Loans which are identified as impaired are generally placed on non-accrual status. Interest income previously accrued on such loans is reversed against current period earnings. Interest income on all non-accrual loans is recognized only to the extent of interest payments received. Premiums and discounts on loans acquired and net deferred loan origination costs are amortized as an adjustment of the related loan yields by the interest method over the contractual lives of the loans. Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to operations and is maintained at a level considered adequate to provide for reasonably foreseeable loan losses. The provision and the level of the allowance are evaluated on a regular basis by management and are based upon management's periodic review of the collectibility of the loans in light of historical experience, known inherent risks in the nature and volume of the loan portfolio, levels of non-performing loans, adverse situations that may affect the borrower's ability to repay, trends in delinquencies and charge-offs, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant change. Ultimate losses may vary from current estimates and future additions to the allowance may be necessary. Loan losses are charged against the allowance when management believes the collectibility of the loan balance is unlikely. Subsequent recoveries, if any, are credited to the allowance. 35 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Allowance for Loan Losses (concluded) A loan is considered impaired when, based on current information and events, it is probable that a creditor will be unable to collect the scheduled principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. An impaired loan is required to be measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. All of the Company's loans which have been identified as impaired have been measured by the fair value of existing collateral. Larger groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans for impairment disclosures. Foreclosed Real Estate Real estate properties acquired through foreclosure, included in other assets, are initially recorded at the lower of cost or fair value at the date of foreclosure. Costs relating to development and improvement of property are capitalized, whereas costs relating to holding property are expensed. Valuations are periodically performed by management, and an allowance for losses is established through a charge to operations if the carrying value of a property exceeds its fair value less estimated costs to sell. Banking Premises and Equipment Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation computed on the straight-line method over the estimated useful lives of the assets. It is the Bank's general practice to charge the cost of maintenance and repairs to earnings when incurred; major expenditures for betterments are capitalized and depreciated. Intangible Assets Intangible assets pertaining to core deposits acquired are amortized over 15 years on an accelerated basis, based on the expected run-off of the related deposits. Goodwill is amortized by the straight-line method over periods ranging from 10 to 15 years. 36 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Income Taxes Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted accordingly through the provision for income taxes. The Company's base amount of its federal income tax reserve for loan losses is a permanent difference for which there is no recognition of a deferred tax liability. However, the loan loss allowance maintained for financial reporting purposes is a temporary difference with allowable recognition of a related deferred tax asset, if deemed realizable. Pension Plan The compensation cost of an employee's pension benefit is recognized on the net periodic pension cost method over the employee's approximate service period. The aggregate cost method is utilized for funding purposes. Stock Compensation Plans In accordance with provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation," the Company has elected to continue to measure compensation cost for its stock compensation plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees," whereby compensation cost is the excess, if any, of the quoted market price of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock. Stock options issued under the Company's stock option plans have no intrinsic value at the grant date, and under Option No. 25 no compensation cost is recognized for them. The Company is required to make pro forma disclosures of net income and earnings per share and other disclosures, as if compensation cost had been measured at the grant date based on the fair value of the award and recognized over the service period, which is usually the vesting period. The pro forma disclosures include the effects of all awards granted on or after January 1, 1995. Earnings Per Share In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 128, "Earnings per Share", which requires that earnings per share be calculated on a basic and a dilutive basis. Basic earnings per share represents income available to common stock divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed conversion. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method. The assumed conversion of outstanding dilutive stock options would increase the shares outstanding but would not require an adjustment to income as a result of the conversion. The Statement is effective for interim and annual periods ending after December 15, 1997, and requires the restatement of all prior-period earnings per share data presented. Accordingly, the Company has restated all earnings per share data presented herein. For the years ended December 31, 1997, 1996 and 1995, options applicable to 27,000 shares, 3,000 shares and 970 shares, respectively, were anti-dilutive and excluded from the diluted earnings per share computations. 37 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded) Recent Accounting Pronouncements In June 1997, FASB issued SFAS No. 130, "Reporting Comprehensive Income," effective for fiscal years beginning after December 15, 1997. Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain FASB statements, however, require entities to report specific changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, as a separate component of the equity section of the balance sheet. Such items, along with net income, are components of comprehensive income. SFAS No. 130 requires that all items of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Additionally, SFAS No. 130 requires that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The Company will adopt these disclosure requirements beginning in the first quarter of 1998. In June 1997, FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," effective for fiscal years beginning after December 15, 1997. SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual and interim financial statements. It also establishes standards for related disclosures about products and services, geographic areas and major customers. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. The Statement also requires descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used by the enterprise in its general-purpose financial statements, and changes in the measurement of segment amounts from period to period. Management has not yet determined how the adoption of SFAS No. 131 will impact the Company's financial reporting. 2. SHORT-TERM INVESTMENTS Short-term investments consist of the following: December 31, --------------------------- 1997 1996 ----------- ----------- (In thousands) Federal funds sold $2,802 $4,500 Other interest-bearing deposits 2 29 ------ ------ Total short-term investments $2,804 $4,529 ====== ====== 38 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. INVESTMENT SECURITIES The amortized cost and fair value of investment securities, with gross unrealized gains and losses at December 31, 1997 and 1996, follows:
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1997 Cost Gains Losses Value - ---------------------------------------------- ------------- ------------ ------------ ------------- (In thousands) Securities Available for Sale Debt securities: Corporate bonds $176,093 $ 1,102 $ (107) $177,088 Mortgage-backed 121,964 641 (158) 122,447 U.S. Government and federal agency 95,277 482 (232) 95,527 -------- -------- -------- -------- Total debt securities 393,334 2,225 (497) 395,062 Marketable equity securities 7,233 482 (54) 7,661 -------- -------- -------- -------- Total securities available for sale $400,567 $ 2,707 $ (551) $402,723 ======== ======== ======== ======== Securities Held to Maturity U.S. Government and federal agency $ 95,052 $ 326 $ (59) $ 95,319 Corporate bonds 8,771 12 -- 8,783 -------- -------- -------- -------- Total securities held to maturity $103,823 $ 338 $ (59) $104,102 ======== ======== ======== ======== Gross Gross Amortized Unrealized Unrealized Fair December 31, 1996 Cost Gains Losses Value - ---------------------------------------------- ------------- ------------ ------------ ------------- (In thousands) Securities Available for Sale Debt securities: State and municipal $ 88 $ 1 $ -- $ 89 Corporate bonds 150,774 745 (350) 151,169 Mortgage-backed 28,101 82 (369) 27,814 U.S. Government and federal agency 83,301 280 (930) 82,651 -------- -------- -------- -------- Total debt securities 262,264 1,108 (1,649) 261,723 Marketable equity securities 6,538 236 (118) 6,656 -------- -------- -------- -------- Total securities available for sale $268,802 $ 1,344 $ (1,767) $268,379 ======== ======== ======== ======== Securities Held to Maturity U.S. Government and federal agency $141,868 $ 522 $ (299) $142,091 Corporate bonds 8,723 32 -- 8,755 -------- -------- -------- -------- Total securities held to maturity $150,591 $ 554 $ (299) $150,846 ======== ======== ======== ========
39 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. INVESTMENT SECURITIES (concluded) The amortized cost and fair value of debt securities by contractual maturity at December 31, 1997 is as follows:
Available for Sale Held to Maturity --------------------------- ---------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ------------ ------------ ------------- ------------- (In thousands) Within 1 year $ 46,073 $ 46,107 $ 69,689 $ 69,730 After 1 year through 5 years 217,230 218,451 34,134 34,372 After 5 years through 10 years 8,067 8,057 -- -- -------- -------- -------- -------- 271,370 272,615 103,823 104,102 Mortgage-backed 121,964 122,447 -- -- -------- -------- -------- -------- $393,334 $395,062 $103,823 $104,102 ======== ======== ======== ========
At December 31, 1997, U.S. Government obligations with an amortized cost of $92,352,000, a fair value of $92,612,000 and accrued interest receivable of $1,296,000 have been pledged as collateral for securities sold under agreements to repurchase. In addition, U.S. Government obligations with an amortized cost of $7,997,000 and a fair value of $8,057,000 have been pledged as collateral for a line of credit and to secure public funds. (See Note 7.) For the years ended December 31, 1997, 1996 and 1995, proceeds from the sales of securities available for sale amounted to $19,572,000, $32,602,000 and $25,363,000, respectively. Gross realized gains amounted to $800,000, $412,000 and $211,000, respectively. There were no gross realized losses in 1997, $56,000 in 1996 and $26,000 in 1995. For the years ended December 31, 1997, 1996 and 1995, proceeds from the sales of securities held to maturity that were sold within three months of maturity amounted to $12,034,000, $29,973,000 and $59,782,000, respectively. These sales have been included in the Statement of Cash Flows as maturities. Gross realized gains on these sales amounted to $35,000, $61,000 and $4,000, respectively, and gross realized losses amounted to $4,000 and $93,000 in 1996 and 1995, respectively. Mortgage-backed investments consist of adjustable-rate collateralized mortgage obligations and fixed-rate participation certificates guaranteed by the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation or the Government National Mortgage Association. In November 1995, the FASB issued guidance allowing a one-time reassessment of an entity's investment classifications during the period November 15, 1995 to December 31, 1995. As a result, the amortized cost of securities held to maturity that were transferred to available for sale amounted to $26,987,000 and the related unrealized loss amounted to $206,000. 40 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. LOANS A summary of the balances of loans follows:
December 31, -------------------------------- 1997 1996 -------------- --------------- (In thousands) Mortgage loans on real estate: Residential 1 - 4 family $ 389,593 $ 380,627 Commercial 124,094 123,158 Construction 21,989 18,155 Second mortgages 1,539 1,928 Equity lines of credit 22,146 21,169 --------- --------- 559,361 545,037 Less: Unadvanced loan funds (10,711) (9,436) --------- --------- 548,650 535,601 --------- --------- Other loans: Commercial 14,941 11,014 Personal 2,432 2,219 Education and other 10,499 18,329 --------- --------- 27,872 31,562 --------- --------- Add: Net premium on loans acquired 270 354 Net deferred loan origination costs 785 569 --------- --------- Total loans 577,577 568,086 Less allowance for loan losses (6,733) (7,231) --------- --------- Loans, net $ 570,844 $ 560,855 ========= =========
41 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. LOANS (concluded) An analysis of the allowance for loan losses follows:
Years Ended December 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- (In thousands) Balance at beginning of year $ 7,231 $ 7,466 $ 7,539 Provision for loan losses 125 215 772 ------- ------- ------- 7,356 7,681 8,311 Recoveries 208 380 233 Loans charged-off (831) (830) (1,078) ------- ------- ------- Balance at end of year $ 6,733 $ 7,231 $ 7,466 ======= ======= =======
The following is a summary of the recorded investment in impaired and non-accrual loans:
December 31, -------------------------------- 1997 1996 ------------- ------------- (In thousands) Impaired loans with no valuation allowance $ 302 $ 870 Impaired loans with a corresponding valuation allowance 1,424 3,154 ------ ------ Total impaired loans $1,726 $4,024 ====== ====== Corresponding valuation allowance $ 85 $ 968 ====== ====== Non-accrual loans $1,726 $3,439 ====== ======
No additional funds are committed to be advanced in connection with impaired loans. For the years ended December 31, 1997, 1996 and 1995, the average recorded investment in impaired loans amounted to $3,806,000, $4,751,000 and $3,827,000, respectively. The Bank recognized interest income on impaired loans, on a cash basis, of $74,000 in 1997, $153,000 in 1996 and $167,000 in 1995 during the periods that they were impaired. 42 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. BANKING PREMISES AND EQUIPMENT A summary of the cost and accumulated depreciation of banking premises and equipment and their estimated useful lives follows:
December 31, -------------------------- Estimated 1997 1996 Useful Lives ----------- ----------- ------------------- (In thousands) Banking Premises: Land $ 1,249 $ 782 -- Buildings 9,355 9,634 5 - 50 years Equipment 5,652 6,780 3 - 25 years -------- -------- 16,256 17,196 Less accumulated depreciation (5,518) (6,300) -------- -------- $ 10,738 $ 10,896 ======== ========
Depreciation expense for the years ended December 31, 1997, 1996 and 1995 amounted to $1,024,000, $772,000 and $713,000, respectively. 6. DEPOSITS A summary of deposit balances, by type, is as follows:
December 31, ------------------------------- 1997 1996 ------------- ------------- (In thousands) Demand $ 44,196 $ 40,124 NOW 59,368 60,839 Regular savings 254,741 245,891 Money market deposits 70,599 69,880 -------- -------- Total non-certificate accounts 428,904 416,734 -------- -------- Term certificates ($100,000 or more) 53,794 46,564 Other term certificates 339,008 328,843 -------- -------- Total term certificates 392,802 375,407 -------- -------- Total deposits $821,706 $792,141 ======== ========
43 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. DEPOSITS (concluded) A summary of term certificate accounts, by maturity, is as follows:
December 31, 1997 December 31, 1996 ------------------------------ ------------------------------ Weighted Weighted Average Average Amount Rate Amount Rate ------------- ------------- ------------- ------------- (Dollars in thousands) Within 1 year $265,321 5.28% $247,599 5.17% Over 1 year to 3 years 114,071 5.93 113,220 5.64 Over 3 years to 5 years 13,276 5.94 14,579 6.18 Over 5 years 134 5.59 9 6.08 -------- -------- $392,802 5.48% $375,407 5.35% ======== ========
7. SHORT-TERM BORROWINGS Short-term borrowings consist of the following:
December 31, 1997 December 31, 1996 ---------------------------- ---------------------------- Weighted Weighted Average Average Amount Rate Amount Rate ----------- ------------- ----------- ------------- (Dollars in thousands) Securities sold under agreements to repurchase $93,611 5.73% $49,584 5.99% Federal Reserve Bank of Boston advances 2,059 5.29 1,233 5.00 Federal Home Loan Bank of Boston ("FHLBB") advances -- -- 30,000 5.56 ------- ------- $95,670 5.72% $80,817 5.82% ======= =======
Securities sold under agreements to repurchase are borrowings that mature within one year and are secured by U.S. Government obligations. (See Note 3.) The amount of securities collateralizing the agreements to repurchase remains in investment securities and the obligation to repurchase securities sold is reflected as a liability in the consolidated balance sheets. The Company has a $2,000,000 line of credit (treasury, tax and loan) with the Federal Reserve Bank of Boston, all of which was advanced at December 31, 1997. The interest rate adjusts weekly and certain U.S. Government obligations have been pledged as collateral for the line of credit. (See Note 3.) The Company also has an available line of credit with the FHLBB at an interest rate that adjusts daily. Borrowings under the line are limited to 2% of the Bank's total assets. All borrowings from the FHLBB are secured by a blanket lien on qualified collateral, defined principally as 75% of the carrying value of first mortgage loans on owner-occupied residential property and 90% of the market value of U.S. Government and federal agency securities. 44 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. LONG-TERM DEBT Long-term debt consists of FHLBB advances secured by a blanket lien on qualified collateral (see Note 7), as follows:
December 31, 1997 December 31, 1996 ---------------------------- --------------------------- Weighted Weighted Average Average Maturity Amount Rate Amount Rate - --------------------- ----------- ----------- ----------- ----------- (Dollars in thousands) 1997 $ -- --% $ 25,047 6.23% 1998 46,992 5.91 32,200 5.86 1999 50,000 6.02 5,000 5.87 2000 12,717 6.41 5,000 7.22 2005 400 5.61 400 5.61 --------- -------- $ 110,109 6.02% $ 67,647 6.10% ========= ========
9. INCOME TAXES Allocation of the provision for federal and state income taxes between current and deferred portions is as follows: Years Ended December 31, ------------------------------------ 1997 1996 1995 --------- ---------- --------- (In thousands) Current tax provision: Federal $ 6,672 $ 5,774 $ 5,206 State 1,194 1,366 1,659 ------- ------- ------- 7,866 7,140 6,865 ------- ------- ------- Deferred tax benefit: Federal (525) (240) (306) State (85) (55) (96) ------- ------- ------- (610) (295) (402) ------- ------- ------- $ 7,256 $ 6,845 $ 6,463 ======= ======= ======= 45 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. INCOME TAXES (continued) The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:
Years Ended December 31, --------------------------------- 1997 1996 1995 --------- --------- --------- Statutory rates 35.0% 34.0% 34.0% Increase resulting from: State taxes, net of federal tax benefit 3.9 5.0 6.6 Other, net -- .6 .1 ---- ---- ---- Effective tax rates 38.9% 39.6% 40.7% ==== ==== ====
The components of the net deferred tax asset, included in other assets, are as follows: December 31, ------------------------- 1997 1996 ---------- ----------- (In thousands) Deferred tax assets: Federal $ 4,215 $ 4,175 State 1,537 1,629 ------- ------- 5,752 5,804 ------- ------- Deferred tax liabilities: Federal (2,098) (1,774) State (642) (601) ------- ------- (2,740) (2,375) ------- ------- Net deferred tax asset $ 3,012 $ 3,429 ======= ======= 46 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. INCOME TAXES (concluded) The tax effects of each type of income and expense item that give rise to deferred taxes are as follows:
December 31, ----------------------- 1997 1996 ---------- --------- (In thousands) Cash basis of accounting $ 124 $ 55 Investments: Net unrealized (gain) loss on securities available for sale (832) 195 Other (284) (193) Depreciation (980) (901) Deferred loan origination fees 100 (231) Allowance for loan losses 2,482 2,465 Employee benefit plans 1,614 1,128 Other 788 911 ------- ------- Net deferred tax asset $ 3,012 $ 3,429 ======= =======
A summary of the change in the net deferred tax asset is as follows:
Years Ended December 31, ------------------------------------- 1997 1996 1995 ---------- ---------- ---------- (In thousands) Balance at beginning of year $ 3,429 $ 2,151 $ 3,915 Deferred tax effect of the change in net unrealized gains and losses on securities available for sale (1,027) 983 (2,166) Deferred tax benefit for the year 610 295 402 ------- ------- ------- Balance at end of year $ 3,012 $ 3,429 $ 2,151 ======= ======= =======
The federal income tax reserve for loan losses at the Company's base year is $8,265,000. If any portion of the reserve is used for purposes other than to absorb the losses for which established, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the fiscal year in which used. As the Company intends to use the reserve only to absorb loan losses, a deferred income tax liability of $3,389,000 has not been provided. 47 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. COMMITMENTS AND CONTINGENCIES In the normal course of business, there are outstanding commitments and contingencies which are not reflected in the consolidated financial statements. Employment and Special Termination Agreements The Company has entered into an employment agreement with the President and Chief Executive Officer that provides for a specified minimum annual compensation and the continuation of benefits currently received. However, such employment may be terminated for cause, as defined, without incurring any continuing obligations. The Company and/or the Bank has also entered into special termination agreements with the President and Chief Executive Officer and certain senior executives. The agreements generally provide for certain lump-sum severance payments within a three-year period following a "change in control," as defined in the agreements. Loan Commitments The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the consolidated balance sheet. The Company's exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments as it does for on-balance-sheet instruments. The following financial instruments were outstanding whose contract amounts represent credit risk:
Contract Amount at December 31, ------------------------------ 1997 1996 ----------- ----------- (In thousands) Commitments to grant loans $ 14,918 $ 13,607 Unadvanced funds on equity lines of credit 24,848 20,479 Unadvanced funds on commercial lines of credit 8,407 6,884
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. Funds disbursed under these financial instruments are generally collateralized by real estate, except for the commercial lines of credit which are generally secured by the business assets of the borrower. 48 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. COMMITMENTS AND CONTINGENCIES (concluded) Operating Lease Commitments Pursuant to the terms of noncancelable lease agreements in effect at December 31, 1997, pertaining to banking premises and equipment, future minimum rent commitments aggregate $540,000 through the year 2002. In addition, the leases contain options to extend for periods up to fifteen years. Total rent expense for the years ended December 31, 1997, 1996 and 1995 amounted to $290,000, $282,000 and $270,000, respectively. Other Commitments and Contingencies Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will not have a material effect on the Company's consolidated financial statements. 11. STOCKHOLDERS' EQUITY Minimum regulatory capital requirements The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and/or the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. Holding companies are not subject to prompt corrective action provisions. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997 and 1996, that the Company and the Bank met all capital adequacy requirements to which they are subject. 49 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. STOCKHOLDERS' EQUITY (continued) Minimum regulatory capital requirements (continued) As of December 31, 1997, the Company and the Bank were well capitalized under the applicable regulatory framework. To be categorized as well capitalized, the Company and the Bank must maintain minimum total risk-based and Tier 1 risk-based ratios as set forth in the following tables. In addition, the Bank must maintain a minimum Tier 1 capital to average assets to be categorized as well capitalized. As well capitalized entities, the Company and the Bank are entitled to engage in specified activities on a more expedited basis than entities that are not well capitalized. There are no conditions or events that management believes have changed the Company's or Bank's category. The Company's and the Bank's actual capital amounts and ratios as of December 31, 1997, and the Bank's actual capital amounts and ratios as of December 31, 1996, are also presented in the tables.
December 31, 1997 ----------------------------------------------------------------------------------- Minimum Minimum To Be Categorized Capital as Well Actual Requirement Capitalized ------------------------- ------------------------- ------------------------- Amount Ratio Amount Ratio Amount Ratio ------------- -------- ------------- -------- ------------- -------- (Dollars in thousands) Total Capital to Risk-Weighted Assets: Consolidated $100,938 15.8% $ 51,267 8.0% $ 64,080 10.0% Bank 93,910 14.7 51,267 8.0 64,080 10.0 Tier 1 Capital to Risk-Weighted Assets: Consolidated 94,205 14.7 25,633 4.0 38,450 6.0 Bank 87,177 13.6 25,633 4.0 38,450 6.0 Tier 1 Capital to Average Assets: Consolidated 94,205 8.5 43,334 4.0 N/A N/A 54,167 5.0 Bank 87,177 7.8 43,334 4.0 54,167 5.0 54,167 5.0
50 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. STOCKHOLDERS' EQUITY (concluded) Minimum regulatory requirements (concluded)
December 31, 1996 ------------------------------------------------------------------------------------ Minimum To Be Well Minimum Capitalized Under Capital Prompt Corrective Actual Requirement Action Provisions ------------------------- -------------------------- -------------------------- Amount Ratio Amount Ratio Amount Ratio ------------- -------- ------------- --------- ------------- --------- (Dollars in thousands) Total Capital to risk $ 92,796 16.0% $ 46,409 8.0% $ 58,012 10.0% weighted assets - Bank Tier 1 Capital to risk 85,565 14.8 23,205 4.0 34,807 6.0 weighted assets - Bank Tier 1 Capital to average 85,565 8.4 40,752 4.0 50,940 5.0 assets - Bank 50,940 5.0
Restrictions on dividends, loans and advances Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount of dividends which may be paid at any date under Massachusetts law is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10% of the Bank's capital stock and surplus, as defined, (which for this purpose represents Tier 1 and Tier 2 capital, as calculated under the risk-based capital guidelines, plus the balance of the allowance for loan losses excluded from Tier 2 capital) on a secured basis. In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank's capital to be reduced below applicable minimum capital requirements. At December 31, 1997, $51,267,000 of the Company's equity in the Bank was restricted and funds available for loans or advances amounted to $8,717,000. Shareholder Rights Plan The Company has a Shareholder Rights Plan which distributed one preferred stock purchase right for each outstanding share of common stock. Such rights only become exercisable, or transferable apart from the common stock, ten business days after a person or group acquires beneficial ownership of, or commences a tender or exchange offer for, 15% or more of the Company's common stock, or the declaration by the Board of Directors that any person is an Adverse Person. Each right may then be exercised to acquire one one-hundredth of a share of Series A Junior Participating Cumulative Preferred Stock at an exercise price of $90, subject to adjustment. If the Company is acquired in a merger or other business combination transaction, or 50% of the Company's assets or earning power is sold, the rights entitle holders to acquire common stock of the Acquiring Person having a value twice the exercise price of the rights. The rights may be redeemed in whole by the Company at $.01 per right at any time until the earliest of (i) the declaration of a person as an Adverse Person, (ii) the tenth day following public announcement that a 15% position has been acquired, or (iii) the expiration date of the Company's Amended and Restated Shareholder Rights Agreement. The rights will expire on September 22, 2003. 51 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. EMPLOYEE BENEFIT PLANS Pension Plan The Bank provides basic and supplemental pension benefits for eligible employees through the Savings Banks Employees Retirement Association Pension Plan. Each employee reaching the age of 21 and having completed at least 1,000 hours of service in one twelve-month period beginning with such employee's date of employment, or any anniversary thereof, automatically becomes a participant in the pension plan. Participants are fully vested after three years of such service. Net periodic pension expense for the plan years ended October 31, 1997, 1996 and 1995 consisted of the following:
1997 1996 1995 --------- ---------- --------- (In thousands) Service cost - benefits earned during the year $ 511 $ 514 $ 395 Interest cost on projected benefits 313 305 283 Actual return on plan assets (603) (503) (544) Net amortization and deferral (19) (19) (19) Net loss 224 218 292 ----- ----- ----- Net periodic pension expense $ 426 $ 515 $ 407 ===== ===== =====
Total pension expense for the years ended December 31, 1997, 1996 and 1995 amounted to $426,000, $540,000 and $402,000, respectively. According to the Association's actuary, a reconciliation of the funded status of the plan is as follows:
October 31, -------------------------- 1997 1996 ----------- ----------- (In thousands) Plan assets at fair value $ 4,830 $ 3,994 Projected benefit obligation 4,965 4,180 ------- ------- Excess of projected benefit obligation over plan assets (135) (186) Unamortized net surplus since adoption of SFAS No. 87 (265) (284) Unrecognized net gain (1,577) (1,431) ------- ------- Accrued pension liability $(1,977) $(1,901) ======= =======
The accumulated benefit obligation (substantially all vested) at October 31, 1997 amounted to $2,924,000, which was less than the fair value of plan assets at that date. For the plan years ended October 31, 1997, 1996 and 1995, actuarial assumptions include an assumed discount rate on benefit obligations of 7.25%, 7.50% and 7.00%, respectively, and an expected long-term rate of return on plan assets of 8.00% for all years. An annual salary increase of 5% was utilized for all years. 52 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. EMPLOYEE BENEFIT PLANS (concluded) 401(k) Plan The Bank maintains a 401(k) plan that provides for voluntary contributions by participating employees ranging from 1 percent to 15 percent of their compensation, subject to certain limits based on federal tax laws. Each employee reaching the age of 21 and having completed at least 1,000 hours of service in one twelve-month period beginning with such employee's date of employment, or any anniversary thereof, becomes eligible to participate in the plan. The Bank may choose to match a portion of the employees' contributions. During the years ended December 31, 1997, 1996 and 1995, the Bank made matching contributions equal to twenty-five percent (25%) of the first six percent (6%) of annual compensation contributed to the plan. For the years ended December 31, 1997, 1996 and 1995, expense attributable to the Plan amounted to $77,000, $69,000 and $75,000, respectively. Incentive Plan The Bank has an executive incentive plan whereby all management executives are eligible to receive a bonus, proportionate to their respective salary, if the Bank meets or exceeds certain base standards. The structure of the plan is reviewed on an annual basis by a designated committee, and performance goals are then established. Incentive compensation expense amounted to $166,000, $101,000 and $181,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Executive Supplemental Benefit Agreement The Company has entered into supplemental executive retirement agreements with its President that are designed to provide benefits lost under defined benefit plans and to increase overall retirement benefits. The present value of future benefits is being accrued over the term of employment. Supplemental compensation expense for the years ended December 31, 1997, 1996 and 1995 amounted to $99,000, $36,000 and $42,000, respectively. 13. STOCK OPTION PLANS The Company has stock option plans, for the benefit of directors, officers and full-time employees, covering 736,000 shares of common stock under the Medford Savings Bank 1986 Stock Option Plan (the options under which have all been granted) and 200,000 shares of common stock under the Medford Bancorp, Inc. Stock Option Plan. Both "Incentive Stock Options" and "Non-qualified Stock Options" may be granted under the plans, with a maximum option term of ten years. Under the terms of the plans, stock options may be granted as determined appropriate by the Compensation and Options Committee of the Board of Directors, and will have an exercise price equal to, or in excess of, the fair market value of a share of common stock of the Company on the date the option is granted. The Company applies APB Opinion 25 and related interpretations in accounting for the plans. (See Note 1.) The plans also permit the inclusion of stock appreciation rights ("SARs") in any option granted which would permit the optionee to surrender an option (or portion thereof) for cancellation and to receive cash or common stock equal to the excess, if any, of the then fair market value of the common stock subject to such option or portion thereof over the option exercise price. No SARs have been granted to date. 53 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. STOCK OPTION PLANS (continued) Had compensation cost for the Company's stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method prescribed by SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below:
Years Ended December 31, ---------------------------------------------- 1997 1996 1995 ------------- ------------ ------------- (In thousands, except per share data) Net income: As reported $ 11,390 $ 10,429 $ 9,423 Pro forma 11,044 10,351 9,391 Basic earnings per share: As reported $ 2.51 $ 2.31 $ 2.14 Pro forma 2.43 2.29 2.13 Diluted earnings per share: As reported $ 2.39 $ 2.21 $ 2.02 Pro forma 2.32 2.19 2.02
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Years Ended December 31, ----------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Dividend yield 3.7% 3.7% 3.7% Expected life 10 years 10 years 10 years Expected volatility 59% 66% 66% Risk-free interest rate 5.7% 6.6% 6.9% 54 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. STOCK OPTION PLANS (concluded) Stock option activity under the plans is as follows:
Years Ended December 31, ------------------------------------------------------------------------------------------ 1997 1996 1995 -------------------------- --------------------------- ------------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Amount Price Amount Price Amount Price ----------- ------------ ------------ ------------ ------------- ------------- Shares under option: Outstanding at beginning of year $ 354,176 $ 10.42 $ 453,634 $ 8.90 $ 482,034 $ 8.71 Granted 33,000 36.76 12,000 22.13 6,000 18.09 Cancelled -- -- -- -- (7,000) 17.38 Exercised (6,500) 5.19 (111,458) 5.48 (27,400) 5.47 --------- --------- --------- Outstanding at end of year 380,676 12.81 354,176 10.42 453,634 8.90 ========= ========= ========= Exercisable at end of year 344,076 9.78 315,299 9.33 377,980 7.35 ========= ========= ========= Weighted average fair value of options granted during the year $ 17.48 $ 10.72 $ 8.79 ========= ========= =========
Information pertaining to options outstanding at December 31, 1997 is as follows:
Options Outstanding Options Exercisable ---------------------------------------------- ----------------------------- Weighted Average Weighted Weighted Remaining Average Average Range of Number Contractual Exercise Number Exercise Exercise Prices Outstanding Life Price Exercisable Price --------------- --------------- ------------- ----------- -------------- ----------- $5.19 - $6.13 148,200 3.1 years $ 5.26 148,200 $ 5.26 $7.63 - $10.88 90,886 4.7 9.50 90,886 9.50 $12.25 - $14.44 16,000 6.1 13.99 15,100 13.96 $17.25 - $19.44 77,590 6.6 18.83 77,590 18.83 $20.75 - $24.88 18,000 8.6 22.38 12,300 21.98 $25.75 - $39.50 30,000 9.9 38.13 -- -- ------- ------- Outstanding at end of year 380,676 5.1 years $12.81 344,076 $ 9.78 ======= =======
14. EMPLOYEES' STOCK OWNERSHIP PLAN The Company has an Employees' Stock Ownership Plan ("ESOP") for the benefit of each employee that has reached the age of 21 and has completed at least 500 hours of service with the Company in the previous twelve-month period. The Company may contribute to the ESOP cash or shares of common stock as voted by the Board of Directors, not to exceed the maximum amount deductible for federal income tax purposes. At December 31, 1997, the ESOP held 250,245 shares, all of which have been allocated to participants. Dividends on all shares held by the ESOP are allocated to participants on a pro rata basis. There were no contributions to the ESOP for the years ended December 31, 1997, 1996 or 1995. 55 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments", requires disclosures of estimated fair values of all financial instruments where it is practicable to estimate such values. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Statement No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The following methods and assumptions were used by the Company in estimating fair value disclosures for financial instruments: Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values. Investment securities: Fair values for investment securities, excluding Federal Home Loan Bank of Boston stock, are based on quoted market prices. The carrying values of restricted equity securities approximate fair value based on the redemption provisions of the Federal Home Loan Bank of Boston. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans (e.g., commercial real estate and investment property, mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable. Deposits: The fair values disclosed for non-certificate accounts are, by definition, equal to the amount payable on demand at the reporting date which is the carrying amount. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits. Borrowings: The carrying amounts of short-term borrowings maturing within 90 days approximate their fair values. Fair values of other borrowings are estimated using discounted cash flow analyses based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Accrued interest: The carrying amounts of accrued interest approximate fair value. Off-balance-sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing, and are not material. 56 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded) The estimated fair values, and related carrying amounts, of the Company's financial instruments are as follows:
December 31, ----------------------------------------------------- 1997 1996 ------------------------ ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- (In thousands) Financial assets: Cash and cash equivalents $ 16,180 $ 16,180 $ 16,429 $ 16,429 Investment securities available for sale 402,723 402,723 268,379 268,379 Investment securities held to maturity 103,823 104,102 150,591 150,846 Restricted equity securities 6,782 6,782 5,996 5,996 Loans, net 570,844 575,045 560,855 558,971 Accrued interest receivable 9,472 9,472 9,291 9,291 Financial liabilities: Deposits 821,706 822,449 792,141 791,875 Short-term borrowings 95,670 95,670 80,817 80,817 Long-term debt 110,109 110,293 67,647 67,997 Accrued interest payable 995 995 851 851
57 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY Financial information pertaining only to Medford Bancorp, Inc. is as follows: BALANCE SHEET December 31, 1997 ------------------ (In thousands) Assets Short-term investments with Medford Savings Bank $ 7,028 Investment in common stock of Medford Savings Bank 94,481 Due from Medford Savings Bank 1,650 -------- Total assets $103,159 ======== Liabilities and Stockholders' Equity Accrued expenses $ 14 Other liabilities 1,635 -------- Total liabilities 1,649 -------- Stockholders' equity: Serial preferred stock -- Common stock 2,271 Additional paid-in capital 28,977 Retained earnings 70,262 -------- Total stockholders' equity 101,510 -------- Total liabilities and stockholders' equity $103,159 ======== 58 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (continued) STATEMENT OF INCOME Year Ended December 31, 1997 ------------------- (In thousands) Interest on short-term investments with Medford Savings Bank $ 30 Operating expenses 6 ------- Income before income taxes and equity in undistributed net income of Medford Savings Bank 24 Applicable income tax provision 10 ------- 14 Equity in undistributed net income of Medford Savings Bank 11,376 ------- Net income $11,390 ======= STATEMENT OF CASH FLOWS Year Ended December 31, 1997 ------------------- (In thousands) Cash flows from operating activities: Net income $ 11,390 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of Medford Savings Bank (11,376) Increase in accrued expenses 14 -------- Net cash provided by operating activities 28 -------- Cash flows from financing activities: Dividend from Medford Savings Bank at date of reorganization 7,000 -------- Net cash provided by financing activities 7,000 -------- Net increase in cash and cash equivalents 7,028 Cash and cash equivalents, beginning of period -- -------- Cash and cash equivalents, end of period $ 7,028 ======== 59 MEDFORD BANCORP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17. QUARTERLY DATA (UNAUDITED) A summary of consolidated operating results on a quarterly basis is as follows:
Year Ended December 31, 1997 -------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- (In thousands, except per share data) Interest and dividend income $ 19,464 $ 19,114 $ 18,586 $ 18,168 Interest expense (10,883) (10,585) (10,133) (9,748) -------- -------- -------- -------- Net interest income 8,581 8,529 8,453 8,420 Provision for loan losses -- -- (50) (75) -------- -------- -------- -------- Net interest income, after provision for loan losses 8,581 8,529 8,403 8,345 Other income 789 764 1,288 1,001 Operating expenses (5,068) (4,797) (4,567) (4,622) -------- -------- -------- -------- Income before income taxes 4,302 4,496 5,124 4,724 Provision for income taxes (1,545) (1,786) (2,032) (1,893) -------- -------- -------- -------- Net income $ 2,757 $ 2,710 $ 3,092 $ 2,831 ======== ======== ======== ======== Earnings per share: Basic $ 0.61 $ 0.60 $ 0.68 $ 0.62 ======== ======== ======== ======== Diluted $ 0.58 $ 0.57 $ 0.65 $ 0.60 ======== ======== ======== ======== Year Ended December 31, 1996 -------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------- ----------- ----------- ----------- (In thousands, except per share data) Interest and dividend income $ 17,764 $ 17,139 $ 16,992 $ 16,816 Interest expense (9,598) (9,091) (8,979) (8,794) -------- -------- -------- -------- Net interest income 8,166 8,048 8,013 8,022 Provision for loan losses (20) (45) (90) (60) -------- -------- -------- -------- Net interest income, after provision for loan losses 8,146 8,003 7,923 7,962 Other income 920 742 759 894 Operating expenses (4,549) (4,595) (4,514) (4,417) -------- -------- -------- -------- Income before income taxes 4,517 4,150 4,168 4,439 Provision for income taxes (1,825) (1,646) (1,632) (1,742) -------- -------- -------- -------- Net income $ 2,692 $ 2,504 $ 2,536 $ 2,697 ======== ======== ======== ======== Earnings per share: Basic $ 0.59 $ 0.55 $ 0.56 $ 0.60 ======== ======== ======== ======== Diluted $ 0.57 $ 0.53 $ 0.54 $ 0.57 ======== ======== ======== ========
60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT With the exception of certain information regarding the executive officers of the Company and the Bank, the response to this item is incorporated by reference from the discussion under the captions "Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on April 27, 1998 (the "Proxy Statement"), to be filed with the SEC pursuant to Regulation 14A of the Exchange Act Rules. Information regarding the executive officers of the Company and the Bank is contained in Item I of Part I to this Report under the caption "Executive Officers of the Registrant." ITEM 11. EXECUTIVE COMPENSATION The response to this item is incorporated by reference from the discussion under the captions "Executive Compensation" and "The Board of Directors, its Committees and Compensation" in the Company's Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is incorporated by reference from the discussion under the caption "Ownership by Management and Other Stockholders" in the Company's Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item is incorporated by reference from the discussion under the caption "Relationships and Transactions with the Company" in the Company's Proxy Statement. 61 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Contents: (1) Financial Statements: All financial statements are included in Item 8 of Part II to this Report. (2) Financial Statement Schedules: All financial statement schedules have been omitted because they are not required, not applicable or are included in the consolidated financial statements or related notes. (3) Exhibits: EXHIBIT INDEX Exhibit Description - ------- ----------- 2.1 Plan of Reorganization and Acquisition dated as of July 29, 1997 between the Company and the Bank (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K filed with the SEC on November 26, 1997, and incorporated herein by reference) 3.1 Articles of Organization of the Company (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on November 26, 1997, and incorporated herein by reference) 3.2 Amended and Restated By-laws of the Company 4.1 Specimen certificate for shares of Common Stock of the Company (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K filed with the SEC on November 26, 1997, and incorporated herein by reference) 4.2 Articles IV, VI(A), VI(C), VI(I)-(J) of Articles of Organization of the Company (see Exhibit 3. 1) 4.3 Articles II and V of the By-laws of the Company (see Exhibit 3.2) 4.4 Amended and Restated Shareholder Rights Agreement, dated November 26, 1997, between Medford Bancorp, Inc. and State Street Bank and Trust Company, as Rights Agent (filed as Exhibit 10. 1 to the Company's Current Report on Form 8-K filed with the SEC on November 26, 1997, and incorporated herein by reference) 10.1 Amended and Restated Employment Agreement with Arthur H. Meehan 10.2 Amended and Restated Special Termination Agreement with Arthur H. Meehan 10.3 Amended and Restated Special Termination Agreement with Phillip W. Wong 10.4 Amended and Restated Special Termination Agreement with George A. Bargamian 10.5 Amended and Restated Special Termination Agreement with Eric B. Loth 10.6 Amended and Restated Special Termination Agreement with William F. Rivers 10.7 Supplemental Executive Retirement Plan and Corresponding Adoption Agreement with Arthur H. Meehan 10.8 Executive Supplemental Benefit Agreement with Arthur H. Meehan 10.9 Deferred Investment Plan for Outside Directors (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-8 filed with the SEC on December 24, 1997, and incorporated herein by reference) 10.10 First Amendment to Deferred Investment Plan for Outside Directors (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8 filed with the SEC on December 24, 1997, and incorporated herein by reference) 62 10.11 Medford Savings Bank 1986 Stock Option Plan (filed as Exhibit 4.4 to the Company's Registration Statement on Form S-8 filed with the SEC on November 26, 1997, and incorporated herein by reference) 10.12 Medford Bancorp, Inc. Stock Option Plan (filed as Exhibit 4.5 to the Company's Registration Statement on Form S-8 filed with the SEC on November 26, 1997, and incorporated herein by reference) 10.13 Discretionary Bonus Plan (not set forth in a formal document -- a description of the plan is contained in both the Proxy Statement to be filed with the SEC, and incorporated herein by reference, under the caption "Compensation Committee Report on Executive Compensation" and in the "Notes to Consolidated Financial Statements" under the caption "Employee Benefit Plans -- Incentive Plan" in Item 8 to this Report) 11 Statement Regarding Computation of Per Share Earnings -- As the Company does not have any debt securities registered under Section 12 of the Securities and Exchange Act of 1934, no ratio of earnings to fixed charges appears in this Report. 12 Statement Regarding Computation of Ratios -- Such computation can be clearly determined from the material contained in this Report. 21 Subsidiaries of the Company -- The Company has one direct subsidiary: Medford Savings Bank, a Massachusetts-chartered savings bank in stock form. Medford Savings Bank has one subsidiary: Medford Securities Corporation, a Massachusetts corporation. 23 Consent of Wolf & Company, P.C. as independent certified public accountants 27 Financial Data Schedule (b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K with the SEC on November 26, 1997, in connection with the Reorganization. 63 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDFORD BANCORP, INC. By: /s/ Arthur H. Meehan ---------------------------- Arthur H. Meehan Chairman, President, Chief Executive Officer and Director Date: March 5, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Arthur H. Meehan Chairman, President, Chief March 5, 1998 - ---------------------------- Executive Officer and Director Arthur H. Meehan /s/ Phillip W. Wong Senior Vice President March 5, 1998 - ---------------------------- and Chief Financial Officer Phillip W. Wong /s/ Edward D. Brickley Director March 5, 1998 - ---------------------------- Edward D. Brickley - ---------------------------- Director March 5, 1998 David L. Burke - ---------------------------- Director March 5, 1998 Paul J. Crowley - ---------------------------- Director March 5, 1998 Mary L. Doherty /s/ Edward J. Gaffey Director March 5, 1998 - ---------------------------- Edward J. Gaffey /s/ Andrew D. Guthrie, Jr. Director March 5, 1998 - ---------------------------- Andrew D. Guthrie, Jr. /s/ Robert A. Havern, III Director March 5, 1998 - ---------------------------- Robert A. Havern, III - ---------------------------- Clerk and Director March 5, 1998 Eugene R. Murray /s/ Francis D. Pizzella Director March 5, 1998 - ---------------------------- Francis D. Pizzella 64 EX-3.2 2 AMENDED AND RESTATED BY-LAWS AMENDED AND RESTATED BY-LAWS OF MEDFORD BANCORP, INC. TABLE OF CONTENTS Page ---- ARTICLE I Organization...........................................................1 ARTICLE II Stockholders...........................................................1 SECTION 1. Annual Meeting.............................................1 SECTION 2. Matters to be Considered at the Annual Meeting.............1 SECTION 3. Special Meeting............................................4 SECTION 4. Notice of Meetings; Adjournments...........................4 SECTION 5. Quorum.....................................................5 SECTION 6. Voting and Proxies.........................................5 SECTION 7. Action at Meeting..........................................5 ARTICLE III Directors..............................................................6 SECTION 1. Powers.....................................................6 SECTION 2. Composition and Term.......................................6 SECTION 3. Director Nominations.......................................6 SECTION 4. Qualification..............................................9 SECTION 5. Resignation................................................9 SECTION 6. Removal....................................................9 SECTION 7. Vacancies..................................................9 SECTION 8. Compensation...............................................9 SECTION 9. Regular Meetings...........................................9 SECTION 10. Special Meetings..........................................9 SECTION 11. Notice of Meetings.......................................10 SECTION 12. Quorum...................................................10 SECTION 13. Action at a Meeting......................................10 SECTION 14. Action by Consent........................................10 SECTION 15. Presumption of Assent....................................11 SECTION 16. Committees...............................................11 SECTION 17. Manner of Participation..................................11 (i) Page ---- ARTICLE IV Officers..............................................................12 SECTION 1. Enumeration...............................................12 SECTION 2. Election..................................................12 SECTION 3. Qualification.............................................12 SECTION 4. Tenure....................................................12 SECTION 5. Removal...................................................12 SECTION 6. Absence or Disability.....................................13 SECTION 7. Vacancies.................................................13 SECTION 8. Chief Executive Officer...................................13 SECTION 9. Chairman and Vice Chairman of the Board...................13 SECTION 10. President................................................13 SECTION 11. Vice Presidents, Treasurer and Other Officers............13 SECTION 12. Clerk and Assistant Clerks...............................13 ARTICLE V Capital Stock.........................................................14 SECTION 1. Certificates of Stock.....................................14 SECTION 2. Transfers.................................................14 SECTION 3. Record Holders............................................14 SECTION 4. Record Date...............................................14 SECTION 5. Replacement of Certificates...............................15 SECTION 6. Issuance of Capital Stock.................................15 SECTION 7. Dividends.................................................15 ARTICLE VI Indemnification.......................................................15 SECTION 1. Definitions...............................................15 SECTION 2. Officers..................................................16 SECTION 3. Non-Officer Employees.....................................16 SECTION 4. Service at the Request or Direction of the Company........16 SECTION 5. Good Faith................................................16 SECTION 6. Prior to Final Disposition................................17 SECTION 7. Insurance.................................................17 SECTION 8. Other Indemnification Rights..............................17 ARTICLE VII Miscellaneous Provisions..............................................17 (ii) Page ---- SECTION 1. Amendment of By-laws......................................17 SECTION 2. Fiscal Year...............................................17 SECTION 3. Seal......................................................17 SECTION 4. Execution of Instruments..................................17 SECTION 5. Voting of Securities......................................18 SECTION 6. Inapplicability of Control Share Provisions...............18 SECTION 7. Articles..................................................18 (iii) AMENDED AND RESTATED BY-LAWS OF MEDFORD BANCORP, INC. ARTICLE I Organization The name of this corporation is "Medford Bancorp, Inc." (the "Company"). The main office of the Company shall be in the City of Medford, Massachusetts, or such other location as the Board of Directors may designate, subject to applicable law. The Company shall conduct the business of a bank holding company subject to the Bank Holding Company Act of 1956, as amended, and shall have and may exercise all the powers, privileges and authority, whether expressed or implied, now or hereafter conferred by applicable law. ARTICLE II Stockholders SECTION 1. Annual Meeting. The annual meeting of the stockholders (the "Annual Meeting") for the election of Directors and such other business as may properly come before the Annual Meeting shall be held on the last Monday in April at 10:00 a.m. at the main office of the Company in Medford, Massachusetts, unless a different hour, date or place within Massachusetts (or if permitted by law, elsewhere in the United States) is fixed by the Company's Board of Directors (the "Board"), the Chairman of the Board, if one is elected, or the President, consistent with the requirements of Massachusetts law. If no Annual Meeting has been held on the date fixed as above provided, a special meeting in lieu thereof may be held and such special meeting shall be treated for all purposes as an Annual Meeting. SECTION 2. Matters to be Considered at the Annual Meeting. The purposes for which the Annual Meeting is to be held, in addition to those prescribed by law, by the Articles of Organization (the "Articles") or by these By-laws (the "By-laws"), may be specified by the Board of Directors, the Chairman of the Board or the President. At any Annual Meeting or any special meeting in lieu of Annual Meeting, only such new business shall be conducted, and only such additional proposals shall be acted upon, as shall have been properly brought before such Annual Meeting. To be considered as properly brought before an Annual Meeting, business must be: (a) specified in the notice of meeting; (b) otherwise properly brought before the meeting by, or at the direction of, the Board of Directors (unless at the time of such action there is an Interested Stockholder, in which case the affirmative vote of a majority of the Continuing Directors then in office shall also be required); or (c) otherwise properly brought before the Annual Meeting by or on behalf of any stockholder of record who (i) shall have been a stockholder of record at the time of the giving of notice as provided in this Section 2; (ii) shall continue to be a stockholder of record on the record date for such Annual Meeting and on the Annual Meeting date; and (iii) shall be entitled to vote at such Annual Meeting. In addition to any other applicable requirements, for business to be properly brought before an Annual Meeting by a stockholder of record of any shares of capital stock entitled to vote at such Annual Meeting, such stockholder shall: (i) give timely notice as required by this Section 2 to the Clerk of the Company; and (ii) be present at such meeting, either in person or by a representative. For the first Annual Meeting following the effective date of these ByLaws, to be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Company not less than 75 days nor more than 120 days prior to the scheduled Annual Meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if less than 70 days' notice or prior public disclosure of the date of the scheduled Annual Meeting is given or made, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the earlier of (a) the day on which such notice of the date of the scheduled Annual Meeting was mailed, or (b) the day on which public disclosure was made. For all subsequent Annual Meetings, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Company at its principal executive office not less than seventy-five (75) days nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding Annual Meeting (the "Anniversary Date"); provided, however, that in the event the Annual Meeting is scheduled to be held on a date more than thirty (30) days before the Anniversary Date or more than sixty (60) days after the Anniversary Date, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Company at its principal executive office not later than the close of business on the later of (a) the 75th day prior to the scheduled date of such Annual Meeting, or (b) the 15th day following the day on which public disclosure of the date of such Annual Meeting is first made by the Company. For purposes of these By-laws, "public disclosure" shall mean: (i) disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service; (ii) a report or other document filed publicly with the Securities and Exchange Commission (including, without limitation, a Form 8-K ); or (iii) a letter or report sent to stockholders of record of the Company at the time of the mailing of such letter or report. A stockholder's notice to the Clerk shall set forth as to each matter proposed to be brought before an Annual Meeting: (i) a brief description of the business the stockholder desires to bring before such Annual Meeting and the reasons for conducting such business at such Annual Meeting; (ii) the name and address, as they appear on the Company's stock transfer books, of the stockholder proposing such business; (iii) the class and number of shares 2 of the Company's capital stock beneficially owned by the stockholder proposing such business; (iv) the names and addresses of the beneficial owners, if any, of any capital stock of the Company registered in such stockholder's name on such books, and the class and number of shares of the Company's capital stock beneficially owned by such beneficial owners; (v) the names and addresses of other stockholders known by the stockholder proposing such business to support such proposal, and the class and number of shares of the Company's capital stock beneficially owned by such other stockholders; and (vi) any material interest of the stockholder proposing to bring such business before such meeting (or any other stockholders known to be supporting such proposal) in such proposal. The Board of Directors may reject any stockholder proposal not timely made in accordance with the terms of this Section 2. If the Board of Directors or a designated committee thereof determines that any stockholder proposal was not made in a timely fashion in accordance with the provisions of this Section 2 or that the information provided in a stockholder's notice does not satisfy the information requirements of this Section 2 in any material respect, such stockholder proposal shall not be presented for action at the Annual Meeting in question. The Clerk of the Company shall notify a stockholder in writing whether his or her proposal has been made in accordance with the time and informational requirements of this Section 2. Notwithstanding the procedure set forth in the above paragraph, if neither the Board of Directors nor such committee makes a determination as to the validity of any stockholder proposal in the manner set forth above, the presiding officer of the Annual Meeting shall determine whether the stockholder proposal was made in accordance with the time and informational requirements of this Section 2. If the presiding officer determines that any stockholder proposal was not made in a timely fashion in accordance with the provisions of this Section 2 or that the information provided in a stockholder's notice does not satisfy the information requirements of this Section 2 in any material respect, such proposal shall not be presented for action at the Annual Meeting in question. If the Board of Directors, a designated committee thereof or the presiding officer determines that a stockholder proposal was made in accordance with the time and informational requirements of this Section 2, the presiding officer shall so declare at the Annual Meeting and ballots shall be provided for use at the Annual Meeting with respect to such proposal. If there is an Interested Stockholder at the time, any determinations to be made by the Board of Directors or a designated committee thereof pursuant to the provisions of this Section 2, shall also require the concurrence of a majority of the Continuing Directors then in office. Notwithstanding the foregoing provisions of this By-Law, a stockholder shall also comply with all applicable regulations of the Securities and Exchange Commission set forth in the Securities Exchange Act of 1934, as amended, with respect to the matters set forth in this By-Law, and nothing in this By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Company's proxy statement pursuant to such regulations. 3 As used in these By-laws, the terms "Interested Stockholder" and "Continuing Director" shall have the same respective meanings assigned to them in the Articles. Any determination of beneficial ownership of securities under these By-laws shall be made in the manner specified in the Articles. SECTION 3. Special Meeting. Special meetings of the stockholders for any purpose or purposes may be called at any time only by the Chairman of the Board, if one is elected, the President or by a majority of the Directors then in office; provided however, that if there is an Interested Stockholder, any such call shall also require the affirmative vote of a majority of the Continuing Directors then in office. Only those matters set forth in the call of the special meeting may be considered or acted upon at such special meeting, unless otherwise provided by law. SECTION 4. Notice of Meetings; Adjournments. A written notice of the place, time and date of all annual and special meetings of stockholders shall be given by the Clerk or Assistant Clerk (or other person authorized by these By-laws or by law) not less than ten (10) days nor more than sixty (60) days before the date on which the meeting is to be held to each stockholder entitled to vote at such meeting by mailing it addressed to such stockholder at the address of such stockholder as it appears on the stock transfer books of the Company. Such notice shall be deemed to be delivered when deposited in the mail so addressed with postage pre-paid. Notice of an annual or special meeting of stockholders need not be given to a stockholder if a written waiver of notice is executed before or after such meeting by such stockholder or such stockholder's authorized attorney, if communication with such stockholder is unlawful, or if such stockholder attends such meeting, unless such attendance was for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any annual or special meeting of stockholders need be specified in any written waiver of notice. A written waiver of notice, executed before or after a meeting by a stockholder or by an authorized attorney, shall be deemed equivalent to notice of the meeting. When any annual or special meeting of stockholders is adjourned to another hour, date or place, notice need not be given of the adjourned meeting other than an announcement at the meeting at which the adjournment is taken of the hour, date and place to which the meeting is adjourned; provided, however, that if the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given as in the case of the original meeting to each stockholder of record entitled to vote thereat. The Chairman of the Board, if one is elected, shall preside at all stockholder meetings and shall have the power, among other things, to adjourn such meeting at any time and from time to time, subject to Section 5 of this Article II. If a Chairman of the Board is not elected 4 or is absent, the Vice Chairman shall preside at all stockholder meetings. If both the Chairman and the Vice Chairman of the Board are not elected or are absent, the President shall preside at all stockholder meetings. SECTION 5. Quorum. The holders of a majority in interest of all stock issued, outstanding and entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders; but if less than a quorum is present at a meeting, a majority in interest of the stockholders present or the presiding officer may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice, except as provided in Section 4 of this Article II. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 6. Voting and Proxies. Stockholders shall have one (1) vote for each share of common stock entitled to vote owned by them of record according to the books of the Company and a proportionate vote for a fractional share, unless otherwise provided by law or by the Articles. Stockholders may vote either in person or by written proxy dated not more than six (6) months before the meeting named therein. Proxies shall be filed with the Clerk of the meeting, or of any adjournment thereof, before being voted. Except as otherwise limited therein, proxies shall entitle the persons authorized thereby to vote at any adjournment of such meeting, but they shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two (2) or more persons shall be valid if executed by or on behalf of any one of them unless at or prior to the exercise of the proxy the Company receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. SECTION 7. Action at Meeting. When a quorum is present, any matter before any annual or special meeting of stockholders shall be decided by vote of the holders of a majority of the shares of stock voting on such matter, except where a larger vote is required by law, by the Articles or by these By-laws. Any election by stockholders shall be determined by a plurality of the votes cast, except where a larger vote is required by law, by the Articles or by these By-laws. 5 ARTICLE III Directors SECTION 1. Powers. The business and affairs of the Company shall be managed by a Board of Directors. SECTION 2. Composition and Term. The Board of Directors shall be composed of: those persons who are elected as Directors from time to time as provided herein. The Board of Directors shall consist of not fewer than seven (7) and not more than twenty-five (25) individuals and shall be divided into three (3) classes, such classes to be as nearly equal in number as possible. One of such classes of Directors shall be elected annually by the stockholders. Subject to the foregoing requirements and applicable law, the Board of Directors may from time to time fix the number of Directors and their respective classifications; provided, however, that if at the time of such action there is an Interested Stockholder such action shall in addition require a majority vote of the Continuing Directors then in office. Up to two (2) additional Directors may be elected by vote of a majority of the Directors then in office. Except as otherwise provided in accordance with these By-laws, the members of each class shall be elected for a term of three (3) years and until their successors are elected and qualified. SECTION 3. Director Nominations. Nominations of candidates for election as directors of the Company at any Annual Meeting may be made only (a) by, or at the direction of, a majority of the Board of Directors (unless at the time of such action there is an Interested Stockholder, in which case the affirmative vote of a majority of the Continuing Directors then in office shall also be required), or (b) by or on behalf of any stockholder of record who (i) shall have been a stockholder of record at the time of the giving of notice as provided in this Section 3, (ii) shall continue to be a stockholder of record on the record date for such Annual Meeting and on the Annual Meeting date, and (iii) shall be entitled to vote at such Annual Meeting. Any stockholder who has complied with the timing, informational and other requirements set forth in this Section 3 and who seeks to make such a nomination, or his, her or its representative, must be present in person at the Annual Meeting. Only persons nominated in accordance with the procedures set forth in this Section 3 shall be eligible for election as directors at an Annual Meeting. Nominations, other than those made by, or at the direction of, the Board of Directors (or by the Continuing Directors, if required), shall be made pursuant to timely notice in writing to the Clerk of the Company as set forth in this Section 3. For the first Annual Meeting following the effective date of these By-Laws, to be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Company not less than seventy-five (75) days nor more than one hundred twenty (120) days prior to the scheduled Annual Meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if less than seventy (70) days' notice or prior 6 public disclosure of the date of the scheduled Annual Meeting is given or made, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the earlier of (a) the day on which such notice of the date of the scheduled Annual Meeting was mailed, or (b) the day on which public disclosure was made. For all subsequent Annual Meetings, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Company at its principal executive office not less than seventy-five (75) days nor more than one hundred twenty (120) days prior to the Anniversary Date; provided, however, that in the event the Annual Meeting is scheduled to be held on a date more than 30 days before the Anniversary Date or more than sixty (60) days after the Anniversary Date, a stockholder's notice shall be timely if delivered to, or mailed and received by, the Company at its principal executive office not later than the close of business on the later of (a) the 75th day prior to the scheduled date of such Annual Meeting, or (b) the 15th day following the day on which public disclosure of the date of such Annual Meeting is first made by the Company. A stockholder's notice to the Clerk shall set forth as to each person whom the stockholder proposes to nominate for election or re-election as a director: (i) the name, age, business address and residence address of such person; (ii) the principal occupation or employment of such person; (iii) the class and number of shares of the Company's capital stock which are beneficially owned by such person on the date of such stockholder notice; (iv) the consent of each nominee to serve as a director if elected; and (v) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as directors, pursuant to Section 14 of the Securities Exchange Act of 1934, as amended, and Regulation 14A and Schedule 14A promulgated thereunder by the Securities and Exchange Commission. A stockholder's notice to the Clerk shall further set forth as to the stockholder giving such notice: (i) the name and address, as they appear on the Company's stock transfer books, of such stockholder and of the beneficial owners (if any) of the Company's capital stock registered in such stockholder's name and the name and address of other stockholders known by such stockholder to be supporting such nominee(s); (ii) the class and number of shares of the Company's capital stock which are held of record, beneficially owned or represented by proxy by such stockholder and by any other stockholders known by such stockholder to be supporting such nominee(s) on the record date for the Annual Meeting in question (if such date shall then have been made publicly available) and on the date of such stockholder's notice; and (iii) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder. The Board of Directors may reject any nomination by a stockholder not timely made in accordance with the requirements of this Section 3. If the Board of Directors or a designated committee thereof determines that the information provided in a stockholder's notice does not satisfy the time and informational requirements of this Section 3 in any material respect, then 7 the Board of Directors may reject such stockholder's nomination. The Clerk of the Company shall notify a stockholder in writing whether his or her nomination has been made in accordance with the time and informational requirements of this Section 3. Notwithstanding the procedures set forth in the above paragraph, if neither the Board of Directors nor such committee makes a determination as to whether a stockholder nomination was made in accordance with the provisions of this Section 3, the presiding officer of the Annual Meeting shall determine whether a nomination was made in accordance with the time and informational requirements of this Section 3. If the presiding officer determines that any stockholder nomination was not made in a timely fashion in accordance with the provisions of this Section 3 or that the information provided in a stockholder's notice does not satisfy the informational requirements of this Section 3 in any material respect, such stockholder's nomination shall not be considered at the Annual Meeting in question. If the Board of Directors, a designated committee thereof or the presiding officer determines that a stockholder nomination was made in accordance with the requirements of this Section 3, the presiding officer shall so declare at the Annual Meeting and ballots shall be provided for use at the meeting with respect to such nominee. If there is an Interested Stockholder at the time, any determinations to be made by the Board of Directors or a designated committee thereof pursuant to the provisions of this Section 3, shall also require the concurrence of a majority of the Continuing Directors then in office. Notwithstanding anything to the contrary in the second sentence of the second paragraph of this Section 3 or the third paragraph of this Section 3, in the event that the number of directors to be elected to the Board of Directors of the Company is increased and there is no public disclosure by the Company naming all of the nominees for director or specifying the size of the increased Board of Directors at least seventy-five (75) days prior to the Anniversary Date, a stockholder's notice required by this Section 3 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if (i) with respect only to the first Annual Meeting following the effective date of these By-Laws, such notice shall be delivered to, or mailed and received by the Company at its principal executive office not later than the close of business on the tenth day following the day on which such public announcement is first made by the Company; and (ii) for all subsequent Annual Meetings, such notice shall be delivered to, or mailed to and received by, the Company at its principal executive office not later than the close of business on the 15th day following the day on which such public announcement is first made by the Company. No person shall be elected by the stockholders as a Director of the Company unless nominated in accordance with the procedures set forth in this Section 3. Election of Directors at an Annual Meeting need not be by written ballot, unless otherwise provided by the Board of Directors or presiding officer at such Annual Meeting. If written ballots are to be used, ballots bearing the names of all the persons who have been nominated for election as Directors at the Annual Meeting in accordance with the procedures set forth in this Section shall be provided for use at the Annual Meeting. 8 SECTION 4. Qualification. Each Director shall have such qualifications as are required by applicable law. Unless waived by a vote of the Board of Directors, no person shall serve as a Director after reaching the age of seventy-two (72) years. SECTION 5. Resignation. Any Director may resign at any time by written notice to the Chief Executive Officer. A resignation shall be effective upon receipt, unless the resignation otherwise provides. SECTION 6. Removal. Any Director may be removed from office as provided in the Articles. SECTION 7. Vacancies. Any and all vacancies occurring on the Board of Directors, however occurring, including, without limitation, as a result of a Director reaching the age of seventy-two (72) or by reason of an increase in the size of the Board of Directors, or the death, resignation, disqualification or removal of a Director, shall be filled solely by the affirmative vote of a majority of the remaining Directors then in office, even if less than a quorum of the Board of Directors, unless there is an Interested Stockholder in which case such vacancy shall be filled solely by the affirmative vote of a majority of the Continuing Directors then in office. Any Director appointed in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director's successor shall have been duly elected and qualified or until his or her earlier resignation or removal. When the number of Directors is increased or decreased, the Board of Directors shall determine the class or classes to which the increased or decreased number of Directors shall be apportioned; provided, however, that no decrease in the number of Directors shall shorten the term of any incumbent Director. SECTION 8. Compensation. The members of the Board of Directors and the members of standing or special committees shall receive such compensation as the Board of Directors may determine. SECTION 9. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this By-law on the same date and at the same place as the Annual Meeting following such meeting of stockholders. The Board of Directors may provide the hour, date and place for the holding of regular meetings by resolution without other notice than such resolution. The Board of Directors shall meet in each calendar quarter at a place or places fixed from time to time by the Board of Directors, the Chairman of the Board, if one is elected, or the President. SECTION 10. Special Meetings. Special meetings of the Board of Directors may be called by or at the request of a majority of the Directors, the Chairman of the Board, if one is elected, or the President. The person or persons authorized to call special meetings of the Board of Directors may fix the hour, date and place for holding a special meeting. 9 SECTION 11. Notice of Meetings. Notice of the hour, date and place of all special meetings of the Board of Directors shall be given to each Director by the Clerk or Assistant Clerk, or in the case of the death, absence, incapacity or refusal of such persons, by the officer or one of the Directors calling the meeting. Notice of any special meeting of the Board of Directors shall be given to each Director in person, or by telephone, or sent to his or her business or home address as shown in the Company's records by telegram, telecopier, facsimile or similar method at least twenty-four (24) hours in advance of the meeting or by written notice mailed to his or her business or home address at least forty-eight (48) hours in advance of such meeting. Such notice shall be deemed to be delivered when hand delivered to such address, read to such Director by telephone, deposited in the mail so addressed, with postage thereon prepaid if mailed, delivered to the telegraph company if sent by telegram, or confirmed as the date and time of receipt if sent by telecopier, facsimile or similar method. When any Board of Directors' meeting, either regular or special, is adjourned for thirty (30) days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the hour, date or place of any meeting adjourned for less than thirty (30) days or of the business to be transacted thereat, other than an announcement at the meeting at which such adjournment is taken of the hour, date and place to which the meeting is adjourned. A written waiver of notice executed before or after a meeting by a Director and filed with the records of the meeting shall be deemed to be equivalent to notice of the meeting. The attendance of a Director at a meeting shall constitute a waiver of notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because such meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting. SECTION 12. Quorum. A majority of the number of Directors then in office shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than a quorum is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice, except as provided in Section 11 of this Article III. Any business which might have been transacted at the meeting as originally noticed may be transacted at such adjourned meeting at which a quorum is present. SECTION 13. Action at a Meeting. The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless otherwise prescribed by law, by the Articles or by these By-laws. SECTION 14. Action by Consent. Any action required or permitted to be taken by the Board of Directors at any meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the Directors. Such written consents shall be filed with the records of the meetings of the Board of Directors and shall be treated for all purposes as a vote at a meeting of the Board of Directors. 10 SECTION 15. Presumption of Assent. A Director of the Company who is present at a meeting of the Board of Directors at which action on any Company matter is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention shall be entered in the minutes of the meeting or unless he shall file a written dissent to such action with the person acting as the Clerk of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Clerk of the Company within five (5) days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a Director who voted in favor of such action. SECTION 16. Committees. The Board of Directors shall elect from its number not fewer than three (3) members to serve as an Executive Committee and may elect other committees from its number. It may delegate to the Executive Committee or such other committees some or all of its powers except those which by law, by the Articles or by these By-laws may not be delegated. Except as the Board of Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Board of Directors or in such rules, its business shall be conducted so far as possible in the same manner as is provided by these By-laws for the Board of Directors. All members of such committees shall hold such offices at the pleasure of the Board of Directors. The Board of Directors may abolish any such committee at any time, subject to applicable law. Any committee to which the Board of Directors delegates any of its powers or duties shall keep records of its meetings and shall report its action to the Board of Directors. The Board of Directors shall have power to rescind any action of any committee, but no such rescission shall have retroactive effect. With the approval of the Board of Directors, the Chief Executive Officer may appoint such other committees consisting of such Directors as the Chief Executive Officer shall select. Any recommendations of such committees appointed by the Chief Executive Officer shall be submitted to the Board of Directors. SECTION 17. Manner of Participation. Members of the Board of Directors or of committees elected by the Board pursuant to Section 16 of this Article III may participate in meetings of the Board by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person but shall not constitute attendance for the purpose of compensation pursuant to Section 8 of this Article III, unless the Board of Directors by resolution so provides. 11 ARTICLE IV Officers SECTION 1. Enumeration. The officers of the Company shall consist of a President, a Treasurer, a Clerk and such other officers, including, without limitation, a Chairman of the Board, a Vice Chairman of the Board, a Secretary and one or more Vice Presidents, Assistant Vice Presidents, Assistant Treasurers and Assistant Clerks as the Board of Directors may determine to be necessary for the management of the Company. SECTION 2. Election. The President, Treasurer and Clerk shall be elected annually by the Board of Directors at its first meeting following the Annual Meeting. Other officers shall be elected by the Board of Directors and serve at its pleasure. SECTION 3. Qualification. Any two (2) or more offices may be held by any person. The President shall be a Director. Any officer may be required by the Board of Directors to give bond for the faithful performance of his or her duties in such amount and with such sureties as the Board of Directors may determine. SECTION 4. Tenure. Except as otherwise provided by law, by the Articles, or by these By-laws, the President shall hold office until the first meeting of the Board of Directors following the next Annual Meeting of the stockholders and until his or her respective successors are chosen and qualified; the Clerk shall hold office until the next Annual Meeting of stockholders and until his or her successor is chosen and qualified; and all other officers shall hold office until their respective successors are elected by the Board of Directors. The Chief Executive Officer may resign at any time by written notice to the Board of Directors or the Clerk. Any other officer may resign at any time by written notice to the Chief Executive Officer. Such resignation shall be effective upon receipt unless the resignation otherwise provides. Election or appointment of an officer, employee or agent shall not of itself create contract rights. The Board of Directors may, however, authorize the Company to enter into an employment contract with any officer in accordance with law, but no such contract right shall impair the right of the Board of Directors to remove any officer at any time in accordance with Section 5 of this Article IV. SECTION 5. Removal. Except as otherwise provided by law, the Board of Directors may remove any officer with or without cause by the affirmative vote of a majority of the entire number of Directors then in office; provided, however, that, if at the time of such removal there is an Interested Stockholder, the affirmative vote of a majority of the Continuing Directors then in office shall instead be required. Any such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the persons involved. Any officer may be removed for cause only after reasonable notice and opportunity to be heard by the Board of Directors. 12 SECTION 6. Absence or Disability. In the event of the absence or disability of any officer, the Board of Directors may designate another officer to act temporarily in place of such absent or disabled officer. SECTION 7. Vacancies. Any vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors. SECTION 8. Chief Executive Officer. The President shall be the Chief Executive Officer, unless the Board of Directors shall elect a Chairman of the Board and designate such Chairman to be the Chief Executive Officer. The Chief Executive Officer shall, subject to the direction of the Board of Directors, have general supervision and control of the Company's business. SECTION 9. Chairman and Vice Chairman of the Board. The Chairman of the Board shall preside at all meetings of the Board of Directors. If a Chairman of the Board is not elected or is absent, the Vice Chairman, if one is elected, shall preside at all meetings of the Board of Directors. If both the Chairman and the Vice Chairman of the Board are not elected or are absent, the President shall preside at all meetings of the Board of Directors. The Chairman of the Board shall have such other powers and shall perform such other duties as the Board of Directors may from time to time designate. If the Chairman of the Board is not the Chief Executive Officer, he shall also have such powers and perform such duties as the Chief Executive Officer may from time to time designate. SECTION 10. President. If neither a Chairman of the Board nor a Vice Chairman of the Board are elected or are present, the President shall preside at all meetings of the Board of Directors and of the stockholders. If the President is not the Chief Executive Officer, he shall have such powers and perform such duties as the Chief Executive Officer may from time to time designate. SECTION 11. Vice Presidents, Treasurer and Other Officers. Any Vice President, or Assistant Vice President, any Treasurer or Assistant Treasurer and any other officers whose powers and duties are not otherwise specifically provided for herein shall have such powers and shall perform such duties as the Chief Executive Officer may from time to time designate. SECTION 12. Clerk and Assistant Clerks. The Clerk shall keep a record of the meetings of stockholders. If a Secretary is not elected or is absent, the Clerk shall keep a record of the meetings of the Board of Directors. In the absence of the Clerk, an Assistant Clerk, if one is elected, shall perform the Clerk's duties. Otherwise a Temporary Clerk designated by the person presiding at the meeting shall perform the Clerk's duties. 13 ARTICLE V Capital Stock SECTION 1. Certificates of Stock. Unless otherwise provided by the Board of Directors, each stockholder shall be entitled to a certificate representing the capital stock of the Company in such form as may from time to time be prescribed by the Board of Directors. Such certificate shall be signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer. Such signatures may be facsimile if the certificate is signed by a transfer agent or by a registrar, other than a Director, officer or employee of the Company. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Company with the same effect as if he were such officer at the time of its issue. Every certificate for shares of stock which are subject to any restriction on transfer and every certificate issued when the Company is authorized to issue more than one class or series of stock shall contain such legend with respect thereto as is required by law. SECTION 2. Transfers. Subject to any restrictions on transfer and unless otherwise provided by the Board of Directors, shares of stock may be transferred on the books of the Company by the surrender to the Company or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with transfer stamps (if necessary) affixed, and with such proof of the authenticity of signature as the Company or its transfer agent, if one is appointed, may reasonably require. SECTION 3. Record Holders. Except as otherwise required by law, by the Articles or by these By-laws, the Company shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote, regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the Company in accordance with the requirements of these By-laws. It shall be the duty of each stockholder to notify the Company of his or her address and any changes thereto. SECTION 4. Record Date. The Board of Directors may fix in advance a time of not more than sixty (60) days before the date of any meeting of the stockholders, the date for the payment of any dividend or the making of any distribution to stockholders or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting, and any adjournment thereof, or the right to receive such dividend or distribution or the right to give such consent or dissent. In such case, only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the Company after the record date. Without fixing such record date, the Board of 14 Directors may for any of such purposes close the transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed, (a) the record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be the close of business on the day next preceding the day on which notice is given, and (b) the record date for determining stockholders for any other purpose shall be the close of business on the date on which the Board of Directors acts with respect thereto. SECTION 5. Replacement of Certificates. In case of the alleged loss, destruction or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms as the Board of Directors may prescribe. SECTION 6. Issuance of Capital Stock. Except as provided by law, the Board of Directors shall have the authority to issue or reserve for issue from time to time the whole or any part of the capital stock of the Company which may be authorized from time to time, to such persons or organizations, for such consideration, whether cash, property, services or expenses and on such terms as the Board of Directors may determine, including, without limitation, the granting of options, warrants or conversion or other rights to subscribe to said capital stock. SECTION 7. Dividends. Subject to applicable law, the Articles and these By-laws, the Board of Directors may from time to time declare, and the Company may pay, dividends on outstanding shares of its capital stock. ARTICLE VI Indemnification SECTION 1. Definitions. For purposes of this Article: (a) "Officer" means any person who serves or has served as a Director of the Company or in any other office filled by election or appointment by the stockholders or the Board of Directors and any heirs or personal representatives of such person; (b) "Non-Officer Employee" means any person who serves or has served as an employee of the Company, but who is not or was not an Officer, and any heirs or personal representatives of such person; (c) "Proceeding" means any action, suit or proceeding, civil or criminal, brought or threatened in or before any court, tribunal administrative or legislative body or agency and any claim which could be the subject of a Proceeding; and (d) "Expenses" means any liability fixed by a judgment, order, decree or award in a Proceeding, any amount reasonably paid in settlement of a Proceeding and any professional fees or other disbursements reasonably incurred in a Proceeding. 15 SECTION 2. Officers. Except as provided in Sections 4 and 5 of this Article VI, each Officer of the Company shall be indemnified by the Company against all Expenses incurred by such Officer in connection with any Proceedings in which such Officer is involved as a result of serving or having served (a) as an Officer or employee of the Company; (b) as a director, officer or employee of any wholly owned subsidiary of the Company; or (c) in any capacity with any other corporation, organization, partnership, joint venture, trust or other entity at the request or direction of the Company. SECTION 3. Non-Officer Employees. Except as provided in Sections 4 and 5 of this Article VI, each Non-Officer Employee of the Company may, in the discretion of the Board of Directors, be indemnified against any or all Expenses incurred by such Non-Officer Employee in connection with any Proceeding in which such Non-Officer Employee is involved as a result of serving or having served (a) as a Non-Officer Employee of the Company; (b) as a director, officer or employee of any wholly owned subsidiary of the Company; or (c) in any capacity with any other corporation, organization, partnership, joint venture, trust or other entity at the request or direction of the Company. SECTION 4. Service at the Request or Direction of the Company. No indemnification shall be provided to an Officer or Non-Officer Employee with respect to serving or having served in any of the capacities described in Section 2(c) or 3(c) above unless the following two conditions are met: (a) such service was requested or directed in each specific case by vote of the Board of Directors prior to the occurrence of the event to which the indemnification relates, and (b) the Company maintains insurance coverage for the type of indemnification sought. In no event shall the Company be liable for indemnification under Section 2(c) or 3(c) above for any amount in excess of the proceeds of insurance received with respect to such coverage as the Company in its discretion may elect to carry. The Company may but shall not be required to maintain insurance coverage with respect to indemnification under Section 2(c) or 3(c) above. Notwithstanding any other provision of this Section 4, but subject to Section 5 of this Article VI, the Board of Directors may provide an Officer or Non-Officer Employee with indemnification under Section 2(c) or 3(c) above as to a specific Proceeding even if one or both of the two conditions specified in this Section 4 have not been met and even if the amount of the indemnification exceeds the amount of the proceeds of any insurance which the Company may have elected to carry, provided that the Board of Directors in its discretion determines it to be in the best interests of the Company to do so. SECTION 5. Good Faith. No indemnification shall be provided to an Officer or to a Non-Officer Employee with respect to a matter as to which such person shall have been adjudicated in any Proceeding not to have acted in good faith in the reasonable belief that the action of such person was in the best interests of the Company. In the event that a Proceeding is compromised or settled so as to impose any liability or obligation upon an Officer or Non-Officer Employee, no indemnification shall be provided to said Officer or Non-Officer Employee with respect to a matter if there be a determination that with respect to such matter such person did not act in good faith in the reasonable belief that the action of such person was 16 in the best interests of the Company. The determination shall be made by a majority vote of those Directors who are not involved in such Proceeding. However, if more than half of the Directors are involved in such Proceeding, the determination shall be made by a majority vote of a committee of three disinterested Directors chosen by the disinterested Directors at a regular or special meeting. If there are fewer than three (3) disinterested Directors, the determination shall be based upon the opinion of the Company's regular outside counsel. SECTION 6. Prior to Final Disposition. Unless otherwise provided by the Board of Directors or by the committee pursuant to the procedure specified in Section 5 of this Article VI, any indemnification provided for under this Article VI shall include payment by the Company of Expenses incurred in defending a Proceeding in advance of the final disposition of such Proceeding upon receipt of an undertaking by the Officer or Non-Officer Employee seeking indemnification to repay such payment if such Officer or Non-Officer Employee shall be adjudicated or determined to be not entitled to indemnification under this Article VI. SECTION 7. Insurance. The Company may purchase and maintain insurance to protect itself and any Officer or Non-Officer Employee against any liability of any character asserted against or incurred by the Company or any such Officer or Non-Officer Employee, or arising out of any such status, whether or not the Company would have the power to indemnify such person against such liability by law or under the provisions of this Article VI. SECTION 8. Other Indemnification Rights. Nothing in this Article VI shall limit any lawful rights to indemnification existing independently of this Article VI. ARTICLE VII Miscellaneous Provisions SECTION 1. Amendment of By-laws. These By-laws may be adopted, altered, amended, changed or repealed as provided in the Articles. SECTION 2. Fiscal Year. Except as otherwise determined by the Board of Directors, the fiscal year of the Company shall be the twelve (12) months ending December 31, or on such other date as may be required by law. SECTION 3. Seal. The Board of Directors shall have power to adopt and alter the seal of the Company. SECTION 4. Execution of Instruments. All deeds, leases, transfers, contracts, bonds, notes and other obligations to be entered into by the Company in the ordinary course of its business without Board of Directors' action may be executed on behalf of the Company by the Chairman of the Board, if one is elected, the President, the Treasurer or any other officer, 17 employee or agent of the Company as the Board of Directors or the Executive Committee may authorize. SECTION 5. Voting of Securities. Unless otherwise provided by the Board of Directors, the Chairman of the Board, if one is elected, the President or the Treasurer may waive notice of and act on behalf of the Company, or appoint another person or persons to act as proxy or attorney in fact for the Company with or without discretionary power and/or power of substitution, at any meeting of stockholders or shareholders of any other organization, any of whose securities are held by the Company. SECTION 6. Inapplicability of Control Share Provisions. The provisions of Chapter 110D of the Massachusetts Business Corporation Law, as the same may be amended from time to time, shall not apply to control share acquisitions (as such term in defined in such chapter) of the Company. SECTION 7. Articles. All references in these By-laws to the Articles shall be deemed to refer to the Articles of the Company, as amended and in effect from time to time. 18 EX-10.1 3 EMPLOYMENT AGREEMENT AMENDED AND RESTATED EMPLOYMENT AGREEMENT AMENDED AND RESTATED AGREEMENT made as of the twenty-sixth day of November, 1997, by and among Medford Savings Bank, a Massachusetts savings bank with its main office in Medford, Massachusetts (the "Bank"), Medford Bancorp, Inc., a Massachusetts corporation (the "Company") and Arthur H. Meehan of Dover, Massachusetts (the "Executive"). WITNESSETH WHEREAS, the parties hereto desire to provide for the Executive's employment by the Bank and the Company; NOW THEREFORE, in consideration of the mutual covenants contained herein, the Bank, the Company and the Executive agree as follows: 1. Employment. The Bank and the Company agree to employ the Executive and the Executive agrees to continue in the employ of the Bank and the Company on the terms and conditions hereinafter set forth. 2. Capacity. The Executive shall serve each of the Bank and the Company as its Chairman, President and Chief Executive Officer, subject to his election by their respective Boards of Directors. In this capacity the Executive shall, subject to the respective By-laws of the Bank and the Company and to the direction of their respective Boards of Directors, have responsibility for the general supervision and management of the Bank's and the Company's respective businesses. 3. Effective Date and Term. The commencement date (the "Commencement Date") of this Agreement shall be the date upon which the parties hereto execute this Agreement. Subject to the provisions of Section 6, the term of the Executive's employment hereunder shall be for three years from the Commencement Date, and shall terminate on April 27, 2000; provided, however, that the termination date shall be extended automatically for periods of one year commencing on April 27, 1998, and on each subsequent anniversary of such date thereafter, unless either the Executive gives written notice to the Company and the Bank or the Company and the Bank gives written notice to the Executive, prior to the date of any such anniversary, of such party's election not to extend the term of this Agreement. The last day of such term, as so extended from time to time, is herein sometimes referred to as the "Expiration Date." 4. Compensation and Benefits. The regular compensation and benefits payable to the Executive under this Agreement shall be as follows: (a) Salary. For all services rendered by the Executive under this Agreement, the Bank or the Company shall pay the Executive a salary at the rate of $380,000 per year, subject to increase from time to time in accordance with the usual practice of the Bank and the Company with respect to review of compensation of their senior executives, provided, however, that the Executive's salary shall be increased annually by a percentage amount equal to at least the percentage increase during the immediately preceding twelve months in the Consumer Price Index (All Items) for all Urban Consumers for the Boston, Massachusetts area, as published by the Bureau of Labor Statistics, or if such Index is not available, the U.S. Government Index which is the most similar thereto. The Executive's salary shall be payable in periodic installments in accordance with the Bank's and the Company's usual practice for its senior executives. (b) Regular Benefits. The Executive shall also be entitled to participate in any and all employee benefit plans, medical insurance plans, life insurance plans, disability income plans, retirement plans, bonus incentive plans and other benefit plans from time to time in effect for senior executives of the Bank and the Company. Such participation shall be subject to (i) the terms of the applicable plan documents, (ii) generally applicable Bank and Company policies and (iii) the discretion of the Board of Directors of the Bank and the Company or any administrative or other committee provided for in or contemplated by such plan. In addition, the Executive shall be entitled to receive benefits which are the same or substantially similar to those which are currently being provided to the Executive by the Bank and the Company, including without limitation use of an automobile appropriate for his position and membership in a country club or similar organization of his choice suitable for business entertainment. (c) Business Expenses. The Bank or the Company shall reimburse the Executive for all reasonable travel and other business expenses incurred by him in the performance of his duties and responsibilities, subject to such reasonable requirements with respect to substantiation and documentation as may be specified by the Bank or the Company. (d) Vacation. The Executive shall be entitled to not less than six weeks of vacation per year, to be taken at such times and intervals as shall be determined by the Executive with the approval of the Bank and the Company, which approval shall not be unreasonably withheld. 5. Extent of Service. During his employment with either the Bank or the Company, the Executive shall, subject to the direction and supervision of their respective Boards of Directors, devote his full business time, best efforts and business judgment, skill and knowledge to the advancement of the Bank's and the Company's interests and to the discharge of his duties and responsibilities hereunder. He shall not engage in any other business activity, except as may be approved by the Boards of Directors; provided, however, that nothing herein shall be construed as preventing the Executive from: (a) investing his assets in a manner not prohibited by Section 8(a) hereof, and in such form or manner as shall not require any material services on his part in the 2 operations or affairs of the companies or other entities in which such investments are made; (b) serving on the board of directors of any company, subject to the prohibitions set forth in Section 8(a) and provided that he shall not be required to render any material services with respect to the operations or affairs of any such company; or (c) engaging in religious, charitable or other community or non-profit activities which do not impair his ability to fulfill his duties and responsibilities under this Agreement. 6. Termination and Termination Benefits. Notwithstanding the provisions of Section 3, the Executive's employment hereunder shall terminate under the following circumstances: (a) Death. In the event of the Executive's death during the Executive's employment hereunder, the Executive's employment shall terminate on the date of his death; provided, however, that the Bank or the Company. shall continue to pay an amount equal to the Executive's salary to the Executive's beneficiary designated in writing to the Bank or the Company prior to his death (or to his estate, if he fails to make such designation) for a period of six months after the date of the Executive's death, at the salary rate in effect on the date of his death, without the increase provided for in Section 4(a), said payments to be made on the same periodic dates as salary payments would have been made to the Executive had he not died. (b) Termination for Cause. The Executive's employment with the Bank and the Company may be terminated without further liability on the part of the Bank or the Company effective immediately, by a two-thirds vote of all of the members of the Board of Directors of the Company and a two-thirds vote of all of the members of the Board of Directors of the Bank for cause by written notice to the Executive setting forth in reasonable detail the nature of such cause. Only the following shall constitute "cause" for such termination: (i) Deliberate dishonesty of the Executive with respect to the Bank or the Company or any subsidiary or affiliate thereof. (ii) Conviction of the Executive of a crime involving moral turpitude. (iii) Gross and willful failure to perform a substantial portion of his duties and responsibilities hereunder, which failure continues for more than thirty days after written notice given to the Executive pursuant to a two-thirds vote of all of the members of the Board of Directors of the Company and a two-thirds vote of 3 all of the members of the Board of Directors of the Bank, such vote to set forth in reasonable detail the nature of such failure. (c) Termination by the Executive. The Executive's employment with the Bank and the Company may be terminated, effective immediately, by the Executive by written notice to the Board of Directors of the Company and the Bank in the event of the following: (i) Failure of the Board of Directors of the Bank or the Company, as the case may be, to elect the Executive to the offices of Chairman, President and Chief Executive Officer of the Bank or the Company, as the case may be, or to continue the Executive in such offices; or (ii) Failure by the Bank or the Company to comply with the provisions of Section 4(a) or a material breach by the Bank or the Company of any other provision of this Agreement. (d) Termination Without Cause. The Executive's employment with the Bank and the Company may be terminated without cause by a two-thirds vote of all of the members of the Board of Director of the Company and a two-thirds vote of all of the members of the Board of Directors of the Bank on written notice to the Executive. (e) Certain Termination Benefits. In the event of termination pursuant to Sections 6(c) or (d), the Executive shall be entitled to the following benefits: (i) For the period subsequent to the date of termination until the Expiration Date, the Bank or the Company shall continue to pay the Executive a salary at the rate in effect on the date of termination, with increases as provided in Section 4(a). (ii) For the period subsequent to the date of termination until the Expiration Date, the Executive shall continue to receive all benefits described in Section 4(b) existing on the date of termination (except for any cash bonus plans which shall be pro-rated through the date of termination). For purposes of application of such benefits, the Executive shall be treated as if he had remained in the employ of the Bank and the Company with an annual salary at the rate in effect on the date of termination, with increases as provided in Section 4(a), and service credits will continue to accrue during such period as if the Executive had remained in the employ of the Bank and the Company. (iii) If, in spite of the provisions of Section 6(e)(ii) above, benefits or service credits under any benefit plan shall not be payable or provided under any such plan to the Executive, or to the Executive's dependents, beneficiaries or estate, because the Executive is no longer deemed to be an employee of the Bank and 4 the Company, the Bank or the Company itself shall pay or provide for payment of such benefits and service credits for such benefits to the Executive, or to the Executive's dependents, beneficiaries or estate. (f) Set-off. The Bank or the Company shall be entitled to set off against any cash compensation to be provided to the Executive under Section 6(e)(i) above one-half of the amount of any cash compensation received by the Executive from other employment during the period in which the Executive receives cash compensation under Section 6(e)(i). The Executive shall inform the Company of any such amounts of cash compensation and shall refund to the Bank or the Company, as the case may be, any amounts which the Bank or the Company, as the case may be, has paid which exceed the amounts due from the Bank or the Company, as the case may be, after application of the set-off provided for in this paragraph. Notwithstanding the foregoing and any other provision of this Agreement, the Executive shall be under no obligation to seek or accept any employment after termination of employment with the Bank and the Company for any reason. 7. Disability. If, due to physical or mental illness, the Executive shall be disabled so as to be unable to perform substantially all of his duties and responsibilities hereunder, the Boards of Directors of the Company and the Bank, as the case may be, may designate another executive to act in his place with respect to the Company and the Bank, as the case may be, during the period of such disability. Notwithstanding any such designation, the Executive shall continue to receive his full salary and benefits under Section 4 of this Agreement from either the Bank or the Company until he becomes eligible for disability income under the Bank's or the Company's disability income plan. While receiving disability income payments under such plan, the Executive shall not receive any salary under Section 4(a), but shall continue to participate in those benefit plans of the Bank and the Company in which the Executive was otherwise participating and to receive other benefits as specified in Section 4 until the Expiration Date. In the absence of a disability income plan at the time of such disability, the Bank or the Company shall pay the Executive benefits equal to those the Executive would have received if the Bank's and the Company's current disability income plan were in effect at such time. If any question shall arise as to whether during any period the Executive was disabled so as to be unable to perform substantially all of his duties and responsibilities hereunder due to physical or mental illness, the Executive may, and at the request of the Bank or the Company will, submit to the Bank or the Company, as the case may be, a certification in reasonable detail by a physician selected by the Executive or his guardian to whom the Bank or the Company, as the case may be has no reasonable objection as to whether the Executive was so disabled and such certification shall for the purposes of this Agreement be conclusive of the issue. If such question shall arise and the Executive shall fail to submit such certification, the Bank's or the Company's determination, as the case may be, of such issue shall be binding on the Executive. 8. Noncompetition and Confidential Information. 5 (a) Noncompetition. During (i) a period of one year following the date of termination of the Executive's employment with the Bank and the Company (x) by the Executive as a result of his election not to extend pursuant to Section 3 or (y) by the Bank and the Company for cause pursuant to Section 6(b) hereof or (z) by the Executive in the event that such termination constitutes a material breach by the Executive of any of the provisions of this Agreement, and (ii) the period during which the Bank or the Company would be required to provide benefits to the Executive pursuant to Section 6(e)(i)-(iii) hereof the Executive will not, directly or indirectly, whether as owner, partner, shareholder, consultant, agent, employee, co-venturer or otherwise, or through any Person (as defined in Section 11), compete in the Bank's or the Company's market area (defined as that portion of Massachusetts bounded to the west and north by Interstate 95 and to the south by Interstate 90) with the banking or any other business conducted by the Bank or the Company during the period of his employment with either the Bank or the Company, nor will he attempt to hire any employee of the Bank or the Company, assist in such hiring by any other Person, encourage any such employee to terminate his or her relationship with the Bank or the Company, or solicit or encourage any customer of the Bank or the Company to terminate its relationship with the Bank or the Company or to conduct with any other person any business or activity which such customer conducts or could conduct with the Bank or the Company. (b) Confidential Information. The Executive will not disclose to any other Person (except as required by applicable law or in connection with the performance of his duties and responsibilities hereunder), or use for his own benefit or gain, any confidential information of the Bank or the Company obtained by him incident to his employment with the Bank and the Company. The term "confidential information" includes, without limitation, financial information, business plans, prospects and opportunities (such as lending relationships, financial product developments, or possible acquisitions or dispositions of businesses or facilities) which have been discussed or considered by the Bank's or the Company's management but does not include any information which has become part of the public domain by means other than the Executive's non-observance of his obligations hereunder. (c) Relief; Interpretation. The Executive agrees that the Bank or the Company, either jointly or individually, shall be entitled to injunctive relief for any breach by him of the covenants contained in Sections 8(a) or 8(b). In the event that any provision of this Section 8 shall be determined by any court of competent jurisdiction to be unenforceable by reason of its being extended over too great a period of time, too large a geographic area, or too great a range of activities, it shall be interpreted to extend only over the maximum period of time, geographic area, or range of activities as to 6 which it may be enforceable. For purposes of this Section 8, the term "Bank" shall mean the Bank and any of its subsidiaries and affiliates and the term Company shall mean the Company and any of its subsidiaries (except the Bank). 9. Allocation of Obligations. The Bank and the Company shall allocate among themselves which party shall be responsible for paying the salary and other benefits required to be paid by Sections 4, 6(a), 6(e), 7 and 13 of this Agreement. The payment by either party of such salary and other benefits shall satisfy the obligations of the non-paying party under such Sections. Both the Bank and the Company shall be jointly and severally liable in the event of a failure by both parties to pay such salary and other benefits. 10. Conflicting Agreements. The Executive hereby represents and warrants that the execution of this Agreement and the performance of his obligations hereunder will not breach or be in conflict with any other agreement to which he is a party or is bound, and that he is not now subject to any covenants against competition or similar covenants which would affect the performance of his obligations hereunder. 11. Definition of "Person". For purposes of this Agreement, the term "Person" shall mean an individual, a corporation, an association, a partnership, an estate, a trust and any other entity or organization. 12. Withholding. All payments made by the Bank or the Company under this Agreement shall be net of any tax or other amounts required to be withheld by the Bank or the Company under applicable law. 13. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the laws of the Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Company, one by the Executive and the third by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Boston. Such arbitration shall be conducted in the City of Boston in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 13. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any or all of the Executive's rights under this Agreement, the Bank or the Company shall pay (or the Executive shall be entitled to recover from the Bank or the Company, as the case may be) the Executive's reasonable attorneys' fees and other reasonable costs and expenses in connection with the enforcement of said rights (including the enforcement of any arbitration award in court) regardless of the final outcome, unless and to the extent the arbitrators shall determine that under the circumstances recovery by the Executive of all or a part of any such fees and costs and expenses would be unjust. 7 14. Assignment; Successors and Assigns, etc. Neither the Bank, the Company or the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party; provided, however, that the Bank or the Company may assign its rights under this Agreement without the consent of the Executive in the event the Bank or the Company shall hereafter effect a reorganization, consolidate with or merge into any other Person, or transfer all or substantially all of its properties or assets to any other Person. This Agreement shall inure to the benefit of and be binding upon the Bank, the Company and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Executive's death prior to the completion by the Bank or the Company of all payments due him under this Agreement, the Bank or the Company shall continue such payments to the Executive's beneficiary designated in writing to the Bank or the Company prior to his death (or to his estate, if he fails to make such designation). 15. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 16. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any beach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 17. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to the Executive at the last address the Executive has filed in writing with the Bank and the Company or, in the case of the Bank, at its main office, attention of the Clerk or, in the case of the Company, at its principal place of business, attention of the Clerk. 18. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Executive Committee of each of the Boards of Directors of the Company and the Bank. 19. Governing Law. This is a Massachusetts contract and shall be construed under and be governed in all respects by the laws of the Commonwealth of Massachusetts. 8 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Bank, by its duly authorized officer, by the Company, by its duly authorized officer and by the Executive, as of the date first above written. ATTEST: MEDFORD SAVINGS BANK /s/ Eugene R. Murray By: /s/ Arthur H. Meehan - ---------------------- -------------------------------- Clerk Title: Chairman, President and Chief Executive Officer ----------------------------- [Seal] ATTEST: MEDFORD BANCORP, INC. /s/ Eugene R. Murray By: /s/ Arthur H. Meehan - ---------------------- -------------------------------- Secretary Title: Chairman, President and Chief Executive Officer ----------------------------- [Seal] WITNESS: /s/ Eugene R. Murray /s/ Arthur H. Meehan - ---------------------- ------------------------------------ Arthur H. Meehan 9 EX-10.2 4 SPECIAL TERMINATION AGREEMENT AMENDED AND RESTATED SPECIAL TERMINATION AGREEMENT AMENDED AND RESTATED AGREEMENT made as of the twenty-sixth day of November, 1997 by and among Medford Savings Bank a Massachusetts savings bank with its main office in Medford, Massachusetts (the "Bank"), Medford Bancorp, Inc. a Massachusetts corporation (the "Company") (the Bank and the Company shall be hereinafter collectively referred to as the "Employers"), and Arthur H. Meehan of Dover, Massachusetts (the "Executive"). 1. Purpose. In order to allow the Executive to consider the prospect of a Change in Control (as defined in Section 2) in an objective manner and in consideration of the services to be rendered by the Executive to the Employers and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Employers, the Employers are willing to provide, subject to the terms of this Agreement, consequences of a Terminating Event (as defined in Section 3) occurring subsequent to a Change in Control. 2. Change in Control. A "Change in Control" shall be deemed to have occurred in any one of the following events: (i) if there has occurred a change in control of either the Company or the Bank which the Company would be required to report in response to Item 1 (or, in the case of the Bank, Item 2) of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if such regulation is no longer in effect, any regulations promulgated by the Securities and Exchange Commission, pursuant to the 1934 Act, which are intended to serve similar purposes; (ii) when any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of the Company or the Bank representing twenty-five percent (25%) or more of the total number of votes that may be cast for the election of directors of the Company or the Bank, as the case may be; (iii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who are Continuing Directors (as hereinafter defined) cease for any reason to constitute at least a majority of the Board of Directors of the Company or the Bank. For this purpose, a "Continuing Director" shall mean (a) an individual who was a director of the Company or the Bank at the beginning of such period or (b) any new director (other than a director designated by a person who has entered into an agreement with the Company or the Bank to effect a transaction described in clause (ii), (iv) or (v) of this Section 2) whose election by the Board or nomination for election by the Company's or the Bank's stockholders was approved by a vote of at least two-thirds (2/3) of the directors of the Company or the Bank, as appropriate, then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved; (iv) the stockholders of the Company approve a merger or consolidation of the Company or the Bank with any other corporation or bank, other than (a) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 30% of the combined voting power of the Company's then outstanding securities; or (v) the stockholders of the Company or the Bank approve a plan of complete liquidation of the Company or the Bank or an agreement for the sale or disposition by the Company or the Bank of all or substantially all of the Company's or the Bank's assets. (vi) Notwithstanding the foregoing, no Change in Control shall be deemed to occur by virtue of the Bank becoming a subsidiary of the Company. 3. Terminating Event. A "Terminating Event" shall mean (a) termination by either of the Employers of the employment of the Executive with either of the Employers for any reason other than (i) death, (ii) deliberate dishonesty of the Executive with respect to the Bank or the Company or any subsidiary or affiliate of either, or (iii) conviction of the Executive of a crime involving moral turpitude, or (b) resignation of the Executive from the employ of both of the Employers, while the Executive is not receiving payments or benefits from either of the Employers by reason of the Executive's disability, subsequent to the occurrence of any of the following events: (i) a significant change in the nature or scope of the Executive's responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to the Change in Control; or (ii) a determination by the Executive that, as a result of a Change in Control, he is unable to exercise the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to such Change in Control; or (iii) a reduction in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all management personnel of the Employers and all management personnel of any person in control of the Employers; or 2 (iv) the failure by the Employers to pay to the Executive any portion of his current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Employers within seven (7) days of the date such compensation is due; or (v) the failure by the Employers to continue in effect any material compensation, incentive, bonus or benefit plan in which the Executive participates immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Employers to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control; or (vi) the failure by the Employers to continue to provide the Executive with benefits substantially similar to those available to the Executive under any of the life insurance, medical, health and accident, or disability plans or any other material benefit plans in which the Executive was participating at the time of the change in Control, or the taking of any action by the Employers which would directly or indirectly materially reduce any of such benefits, or the failure by the Employers to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Employers in accordance with the Employers' normal vacation policy in effect at the time of the Change in Control; or (vii) the failure of the Employers to obtain a satisfactory agreement from any successors to assume and agree to perform this Agreement. 4. Severance Payment. In the event a Terminating Event occurs within three (3) years after a Change in Control, the Employers shall pay to the Executive an aggregate amount equal to (x) three times the "base amount" (as defined in Section 280 G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")) applicable to the Executive, less (y) One Dollar ($1.00), payable in one lump-sum payment on the date of termination. 5. Limitation on Benefits. (a) It is the intention of the Executive and of the Employers that no payments by the Employers to or for the benefit of the Executive under this Agreement or any other agreement or plan pursuant to which he is entitled to receive payments or benefits shall be non-deductible to the Employers by reason of the operation of Section 280G of the Code relating to parachute payments. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Bank, such payments shall be reduced to the maximum amount which can be deducted by the Employers. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive, such excess payments shall be refunded to the Employers with interest thereon at the applicable Federal Rate 3 determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order than no such payments shall be non-deductible to the Employers by reason of the operation of said Section 280G. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G, the Executive shall determine which method shall be followed, provided that if the Executive fails to make such determination within forty-five days after the Employers have sent him written notice of the need for such reduction, the Employers may determine the method of such reduction in their sole discretion. (b) If any dispute between the Employers and the Executive as to any of the amounts to be determined under this Section 5, or the method of calculating such amounts, cannot be resolved by the Employers and the Executive, either the Employers or the Executive after giving three days written notice to the other, may refer the dispute to a partner in the Boston office of a firm of independent certified public accountants selected jointly by the Employers and the Executive. The determination of such partner as to the amount to be determined under Section 5(a) and the method of calculating such amounts shall be final and binding on both the Employers and the Executive. The Employers shall bear the costs of any such determination. 6. Employment Status. This Agreement is not an agreement for the employment of the Executive and shall confer no rights on the Executive except as herein expressly provided. 7. Term. This Agreement shall take effect as of the date hereof and shall terminate upon the earlier of (a) the termination by the Employers of the employment of the Executive because of death, deliberate dishonesty of the Executive with respect to the Bank or the Company or any subsidiary or affiliate of either, or conviction of the Executive of a crime involving moral turpitude, (b) the resignation or termination of the Executive for any reason prior to a Change in Control, or (c) the resignation of the Executive after a Change in Control for any reason other than the occurrence of any of the events enumerated in Section 3(b)(i)-(vii) of this Agreement. 8. Withholding. All payments made by the Employers under this Agreement shall be net of any tax or other amounts required to be withheld by the Employers under applicable law. 9. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the laws of the Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Employers, one by the Executive and the third by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Boston. Such arbitration shall be conducted in the City of Boston in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 9. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any or all of the Executive's rights under this Agreement, the Employers shall pay (or the Executive shall be entitled to recover from the Employers, as the case may be) the Executive's 4 reasonable attorneys' fees and other reasonable costs and expenses in connection with the enforcement of said rights (including the enforcement of any arbitration award in court) regardless of the final outcome, unless and to the extent the arbitrators shall determine that under the circumstances recovery by the Executive of all or a part of any such fees and costs and expenses would be unjust. This provision shall not apply to Section 5(b), except in the event that the Employers and the Executive cannot agree on the selection of the accounting partner described in said Section. 10. Allocation of Obligations. The Bank and the Company shall allocate among themselves which party shall be responsible for paying the severance payments and other benefits directed by this Agreement. The payment by either party of such severance payments and other benefits shall satisfy the obligations of the non-paying party under this Agreement. Both the Bank and the Company shall be jointly liable in the event of a failure by both parties to pay such severance payments and other benefits. 11. Assignment; Prior Agreements. Neither the Employers nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party, and without such consent any attempted transfer shall be null and void and of no effect. This Agreement shall inure to the benefit of and be binding upon the Employers and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Executive's death prior to the completion by the Bank of all payments due him under this Agreement, the Employers shall continue such payments to the Executive's beneficiary designated in writing to the Employers prior to his death (or to his estate, if he fails to make such designation). This Agreement supersedes any prior agreement covering the subject matter hereof. 12. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 13. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 14. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to the Executive at the last address the Executive has filed in writing with the Bank, or, in the case of the Employers, at both of their main offices, attention of the Board of Directors. 5 15. Election of Remedies. An election by the Executive to resign after a Change in Control under the provisions of this Agreement shall not constitute a breach by the Executive of any employment agreement between the Employers and the Executive and shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Employers' benefit plans, programs or policies. Nothing in this Agreement shall be construed to limit the rights of the Executive under any employment agreement he may then have with the Employers; provided, however, that if there is a Terminating Event under Section 3 hereof, the Executive may elect either to receive the severance payment provided under Section 4 or such termination benefits as he may under any such employment agreement, but may not elect to receive both. 16. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by duly authorized representatives of each of the Employers. 17. Governing Law. This is a Massachusetts contract and shall be construed under and be governed in all respects by the laws of the Commonwealth of Massachusetts. 6 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Bank, by its duly authorized officer, by the Company, by its duly authorized officer, and by the Executive, as of the date first above written. WITNESS: /s/ Gregory J. Lyons /s/ Arthur H. Meehan - ------------------------ ------------------------------ Arthur H. Meehan ATTEST: MEDFORD SAVINGS BANK Eugene R. Murray By: /s/ Arthur H. Meehan - ------------------------ -------------------------- Clerk Title: Chairman, President and Chief Executive Officer ----------------------- [Seal] ATTEST: MEDFORD BANCORP, INC. Eugene R. Murray By: /s/ Arthur H. Meehan - ------------------------ -------------------------- Clerk Title: Chairman, President and Chief Executive Officer ----------------------- [Seal] 7 EX-10.3 5 SPECIAL TERMINATION AGREEMENT AMENDED AND RESTATED SPECIAL TERMINATION AGREEMENT AMENDED AND RESTATED AGREEMENT made as of the twenty-sixth day of November, 1997 by and among Medford Savings Bank a Massachusetts savings bank with its main office in Medford, Massachusetts (the "Bank"), Medford Bancorp, Inc. a Massachusetts corporation (the "Company") (the Bank and the Company shall be hereinafter collectively referred to as the "Employers"), and Phillip W. Wong of Medway, Massachusetts (the "Executive"). 1. Purpose. In order to allow the Executive to consider the prospect of a Change in Control (as defined in Section 2) in an objective manner and in consideration of the services to be rendered by the Executive to the Employers and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Employers, the Employers are willing to provide, subject to the terms of this Agreement, consequences of a Terminating Event (as defined in Section 3) occurring subsequent to a Change in Control. 2. Change in Control. A "Change in Control" shall be deemed to have occurred in any one of the following events: (i) if there has occurred a change in control of either the Company or the Bank which the Company would be required to report in response to Item 1 (or, in the case of the Bank, Item 2) of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if such regulation is no longer in effect, any regulations promulgated by the Securities and Exchange Commission, pursuant to the 1934 Act, which are intended to serve similar purposes; (ii) when any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of the Company or the Bank representing twenty-five percent (25%) or more of the total number of votes that may be cast for the election of directors of the Company or the Bank, as the case may be; (iii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who are Continuing Directors (as hereinafter defined) cease for any reason to constitute at least a majority of the Board of Directors of the Company or the Bank. For this purpose, a "Continuing Director" shall mean (a) an individual who was a director of the Company or the Bank at the beginning of such period or (b) any new director (other than a director designated by a person who has entered into an agreement with the Company or the Bank to effect a transaction described in clause (ii), (iv) or (v) of this Section 2) whose election by the Board or nomination for election by the Company's or the Bank's stockholders was approved by a vote of at least two-thirds (2/3) of the directors of the Company or the Bank, as appropriate, then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved; (iv) the stockholders of the Company approve a merger or consolidation of the Company or the Bank with any other corporation or bank, other than (a) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 30% of the combined voting power of the Company's then outstanding securities; or (v) the stockholders of the Company or the Bank approve a plan of complete liquidation of the Company or the Bank or an agreement for the sale or disposition by the Company or the Bank of all or substantially all of the Company's or the Bank's assets. (vi) Notwithstanding the foregoing, no Change in Control shall be deemed to occur by virtue of the Bank becoming a subsidiary of the Company. 3. Terminating Event. A "Terminating Event" shall mean (a) termination by either of the Employers of the employment of the Executive with either of the Employers for any reason other than (i) death, (ii) deliberate dishonesty of the Executive with respect to the Bank or the Company or any subsidiary or affiliate of either, or (iii) conviction of the Executive of a crime involving moral turpitude, or (b) resignation of the Executive from the employ of both of the Employers, while the Executive is not receiving payments or benefits from either of the Employers by reason of the Executive's disability, subsequent to the occurrence of any of the following events: (i) a significant change in the nature or scope of the Executive's responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to the Change in Control; or (ii) a determination by the Executive that, as a result of a Change in Control, he is unable to exercise the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to such Change in Control; or (iii) a reduction in the Executive's annual base salary as in effect on the date hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all management personnel of the Employers and all management personnel of any person in control of the Employers; or 2 (iv) the failure by the Employers to pay to the Executive any portion of his current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Employers within seven (7) days of the date such compensation is due; or (v) the failure by the Employers to continue in effect any material compensation, incentive, bonus or benefit plan in which the Executive participates immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Employers to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control; or (vi) the failure by the Employers to continue to provide the Executive with benefits substantially similar to those available to the Executive under any of the life insurance, medical, health and accident, or disability plans or any other material benefit plans in which the Executive was participating at the time of the change in Control, or the taking of any action by the Employers which would directly or indirectly materially reduce any of such benefits, or the failure by the Employers to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Employers in accordance with the Employers' normal vacation policy in effect at the time of the Change in Control; or (vii) the failure of the Employers to obtain a satisfactory agreement from any successors to assume and agree to perform this Agreement. 4. Severance Payment. In the event a Terminating Event occurs within three (3) years after a Change in Control, the Employers shall pay to the Executive an aggregate amount equal to (x) two times the "base amount" (as defined in Section 280 G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")) applicable to the Executive, less (y) One Dollar ($1.00), payable in one lump-sum payment on the date of termination. 5. Limitation on Benefits. (a) It is the intention of the Executive and of the Employers that no payments by the Employers to or for the benefit of the Executive under this Agreement or any other agreement or plan pursuant to which he is entitled to receive payments or benefits shall be non-deductible to the Employers by reason of the operation of Section 280G of the Code relating to parachute payments. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Employers, such payments shall be reduced to the maximum amount which can be deducted by the Employers. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive, such excess payments shall be refunded to the Employers with interest thereon at the 3 applicable Federal Rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order than no such payments shall be non-deductible to the Employers by reason of the operation of said Section 280G. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G, the Executive shall determine which method shall be followed, provided that if the Executive fails to make such determination within forty-five days after the Employers have sent him written notice of the need for such reduction, the Employers may determine the method of such reduction in their sole discretion. (b) If any dispute between the Employers and the Executive as to any of the amounts to be determined under this Section 5, or the method of calculating such amounts, cannot be resolved by the Employers and the Executive, either the Employers or the Executive after giving three days written notice to the other, may refer the dispute to a partner in the Boston office of a firm of independent certified public accountants selected jointly by the Employers and the Executive. The determination of such partner as to the amount to be determined under Section 5(a) and the method of calculating such amounts shall be final and binding on both the Employers and the Executive. The Employers shall bear the costs of any such determination. 6. Employment Status. This Agreement is not an agreement for the employment of the Executive and shall confer no rights on the Executive except as herein expressly provided. 7. Term. This Agreement shall take effect as of the date hereof and shall terminate upon the earlier of (a) the termination by the Employers of the employment of the Executive because of death, deliberate dishonesty of the Executive with respect to the Bank or the Company or any subsidiary or affiliate of either, or conviction of the Executive of a crime involving moral turpitude, (b) the resignation or termination of the Executive for any reason prior to a Change in Control, or (c) the resignation of the Executive after a Change in Control for any reason other than the occurrence of any of the events enumerated in Section 3(b)(i)-(vii) of this Agreement. 8. Withholding. All payments made by the Employers under this Agreement shall be net of any tax or other amounts required to be withheld by the Employers under applicable law. 9. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the laws of the Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Employers, one by the Executive and the third by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Boston. Such arbitration shall be conducted in the City of Boston in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 9. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any or all of the Executive's rights under this Agreement, the Employers shall pay (or the Executive shall be entitled to recover from the Employers, as the case may be) the Executive's 4 reasonable attorneys' fees and other reasonable costs and expenses in connection with the enforcement of said rights (including the enforcement of any arbitration award in court) regardless of the final outcome, unless and to the extent the arbitrators shall determine that under the circumstances recovery by the Executive of all or a part of any such fees and costs and expenses would be unjust. This provision shall not apply to Section 5(b), except in the event that the Employers and the Executive cannot agree on the selection of the accounting partner described in said Section. 10. Allocation of Obligations. The Bank and the Company shall allocate among themselves which party shall be responsible for paying the severance payments and other benefits directed by this Agreement. The payment by either party of such severance payments and other benefits shall satisfy the obligations of the non-paying party under this Agreement. Both the Bank and the Company shall be jointly liable in the event of a failure by both parties to pay such severance payments and other benefits. 11. Assignment; Prior Agreements. Neither the Employers nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party, and without such consent any attempted transfer shall be null and void and of no effect. This Agreement shall inure to the benefit of and be binding upon the Employers and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Executive's death prior to the completion by the Bank of all payments due him under this Agreement, the Employers shall continue such payments to the Executive's beneficiary designated in writing to the Employers prior to his death (or to his estate, if he fails to make such designation). This Agreement supersedes any prior agreement covering the subject matter hereof. 12. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 13. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 14. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to the Executive at the last address the Executive has filed in writing with the Bank, or, in the case of the Employers, at both of their main offices, attention of the Board of Directors. 5 15. Election of Remedies. An election by the Executive to resign after a Change in Control under the provisions of this Agreement shall not constitute a breach by the Executive of any employment agreement between the Employers and the Executive and shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Employers' benefit plans, programs or policies. Nothing in this Agreement shall be construed to limit the rights of the Executive under any employment agreement he may then have with the Employers; provided, however, that if there is a Terminating Event under Section 3 hereof, the Executive may elect either to receive the severance payment provided under Section 4 or such termination benefits as he may under any such employment agreement, but may not elect to receive both. 16. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by duly authorized representatives of each of the Employers. 17. Governing Law. This is a Massachusetts contract and shall be construed under and be governed in all respects by the laws of the Commonwealth of Massachusetts. 6 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Bank, by its duly authorized officer, by the Company, by its duly authorized officer, and by the Executive, as of the date first above written. WITNESS: /s/ Gregory J. Lyons /s/ Phillip W. Wong - ------------------------ ------------------------------ Phillip W. Wong ATTEST: MEDFORD SAVINGS BANK Eugene R. Murray By: /s/ Arthur H. Meehan - ------------------------ -------------------------- Clerk Title: Chairman, President and Chief Executive Officer ----------------------- [Seal] ATTEST: MEDFORD BANCORP, INC. Eugene R. Murray By: /s/ Arthur H. Meehan - ------------------------ -------------------------- Clerk Title: Chairman, President and Chief Executive Officer ----------------------- [Seal] 7 EX-10.4 6 SPECIAL TERMINATION AGREEMENT AMENDED AND RESTATED SPECIAL TERMINATION AGREEMENT AMENDED AND RESTATED AGREEMENT this twenty-sixth day of November, 1997 by and between Medford Savings Bank (the "Bank") a savings bank with its main office in Medford, Massachusetts, which Bank will be a wholly-owned subsidiary of Medford Bancorp, Inc. (the "Company") a Massachusetts corporation, and George A. Bargamian of Boston, Massachusetts (the "Executive"). 1. Purpose. In order to allow the Executive to consider the prospect of a Change in Control (as defined in Section 2) in an objective manner and in consideration of the services to be rendered by the Executive to the Bank and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Bank, the Bank is willing to provide, subject to the terms of this Agreement, certain severance benefits to protect the Executive from the consequences of a Terminating Event (as defined in Section 3) occurring subsequent to a Change in Control. 2. Change in Control. A "Change in Control" shall be deemed to have occurred in any one of the following events: (i) if there has occurred a change in control of either the Company or the Bank which the Company would be required to report in response to Item 1 (or, in the case of the Bank, Item 2) of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if such regulation is no longer in effect, any regulations promulgated by the Securities and Exchange Commission, pursuant to the 1934 Act, which are intended to serve similar purposes; (ii) when any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of the Company or the Bank representing twenty-five percent (25%) or more of the total number of votes that may be cast for the election of directors of the Company or the Bank, as the case may be; (iii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who are Continuing Directors (as hereinafter defined) cease for any reason to constitute at least a majority of the Board of Directors of the Company or the Bank. For this purpose, a "Continuing Director" shall mean (a) an individual who was a director of the Company or the Bank at the beginning of such period or (b) any new director (other than a director designated by a person who has entered into an agreement with the Company or the Bank to effect a transaction described in clause (ii), (iv) or (v) of this Section 2) whose election by the Board or nomination for election by the Company's or the Bank's stockholders was approved by a 1 vote of at least two-thirds (2/3) of the directors of the Company or the Bank, as appropriate, then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved; (iv) the stockholders of the Company approve a merger or consolidation of the Company or the Bank with any other corporation or bank, other than (a) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 30% of the combined voting power of the Company's then outstanding securities; or (v) the stockholders of the Company or the Bank approve a plan of complete liquidation of the Company or the Bank or an agreement for the sale or disposition by the Company or the Bank of all or substantially all of the Company's or the Bank's assets. (vi) Notwithstanding the foregoing, no Change in Control shall be deemed to occur by virtue of the Bank becoming a subsidiary of the Company. 3. Terminating Event. A "Terminating Event" shall mean (a) termination by the Bank of the employment of the Executive with the Bank for any reason other than (i) death, (ii) deliberate dishonesty of the Executive with respect to the Bank or the Company or any subsidiary or affiliate of either, or (iii) conviction of the Executive of a crime involving moral turpitude, or (b) resignation of the Executive from the employ of the Bank, while the Executive is not receiving payments or benefits from the Bank by reason of the Executive's disability, subsequent to the occurrence of any of the following events: (i) a significant change in the nature or scope of the Executive's responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to the Change in Control; or (ii) a determination by the Executive that, as a result of a Change in Control, he is unable to exercise the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to such Change in Control; or (iii) a reduction in the Executive's annual base salary as in effect on the date 2 hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all management personnel of the Bank and the Company and all management personnel of any person in control of the Bank and the Company; or (iv) the failure by the Bank or the Company to pay to the Executive any portion of his current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Bank or the Company within seven (7) days of the date such compensation is due; or (v) the failure by the Bank or the Company to continue in effect any material compensation, incentive, bonus or benefit plan in which the Executive participates immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Bank or the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, in terms of both the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control; or (vi) the failure by the Bank or the Company to continue to provide the Executive with benefits substantially similar to those available to the Executive under any of the life insurance, medical, health and accident, or disability plans or any other material benefit plans in which the Executive was participating at the time of the Change in Control, or the taking of any action by the Bank or the Company which would directly or indirectly materially reduce any of such benefits, or the failure by the Bank to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Bank in accordance with the Bank's normal vacation policy in effect at the time of the Change in Control; or (vii) the failure of the Bank to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement. 4. Severance Payment. In the event a Terminating Event occurs within three (3) years after a Change in Control, the Bank shall pay to the Executive an aggregate amount equal to (x) two times the "base amount" (as defined in Section 280 G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")) applicable to the Executive, less (y) One Dollar ($1.00), payable in one lump-sum payment on the date of termination. 5. Limitation on Benefits. (a) It is the intention of the Executive and of the Bank that no payments by the Bank to or for the benefit of the Executive under this Agreement or any other agreement or plan pursuant to which he is entitled to receive payments or benefits shall be non-deductible to the 3 Bank by reason of the operation of Section 280G of the Code relating to parachute payments. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Bank, such payments shall be reduced to the maximum amount which can be deducted by the Bank. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive, such excess payments shall be refunded to the Bank with interest thereon at the applicable Federal Rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be non-deductible to the Bank by reason of the operation of said Section 280G. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G, the Executive shall determine which method shall be followed, provided that if the Executive fails to make such determination within forty-five days after the Bank has sent him written notice of the need for such reduction, the Bank may determine the method of such reduction in its sole discretion. (b) If any dispute between the Bank and the Executive as to any of the amounts to be determined under this Section 5, or the method of calculating such amounts, cannot be resolved by the Bank and the Executive, either the Bank or the Executive after giving three days written notice to the other, may refer the dispute to a partner in the Boston office of a firm of independent certified public accountants selected jointly by the Bank and the Executive. The determination of such partner as to the amount to be determined under Section 5(a) and the method of calculating such amounts shall be final and binding on both the Bank and the Executive. The Bank shall bear the costs of any such determination. 6. Employment Status. This Agreement is not an agreement for the employment of the Executive and shall confer no rights on the Executive except as herein expressly provided. 7. Term. This Agreement shall take effect on as of the date hereof and shall terminate upon the earlier of (a) the termination by the Bank of the employment of the Executive because of death, deliberate dishonesty of the Executive with respect to the Bank or the Company or any subsidiary or affiliate of either, or conviction of the Executive of a crime involving moral turpitude, (b) the resignation or termination of the Executive for any reason prior to a Change in Control, or (c) the resignation of the Executive after a Change in Control for any reason other than the occurrence of any of the events enumerated in Section 3(b)(i)-(vii) of this Agreement. 8. Withholding. All payments made by the Bank under this Agreement shall be net of any tax or other amounts required to be withheld by the Bank under applicable law. 9. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the laws of the Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Bank, one by the Executive and the third by the first two arbitrators. If the first two 4 arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Boston. Such arbitration shall be conducted in the City of Boston in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 9. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any or all of the Executive's rights under this Agreement, the Bank shall pay (or the Executive shall be entitled to recover from the Bank, as the case may be) the Executive's reasonable attorneys' fees and other reasonable costs and expenses in connection with the enforcement of said rights (including the enforcement of any arbitration award in court) regardless of the final outcome, unless and to the extent the arbitrators shall determine that under the circumstances recovery by the Executive of all or a part of any such fees and costs and expenses would be unjust. This provision shall not apply to Section 5(b), except in the event that the Bank and the Executive cannot agree on the selection of the accounting partner described in said Section. 10. Assignment; Prior Agreements. Neither the Bank nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party and without such consent any attempted transfer shall be null and void and of no effect. This Agreement shall inure to the benefit of and be binding upon the Bank and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Executive's death prior to the completion by the Bank of all payments due him under this Agreement, the Bank shall continue such payments to the Executive's beneficiary designated in writing to the Bank prior to his death (or to his estate, if he fails to make such designation). This Agreement supersedes any prior agreement covering the subject matter hereof. 11. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 12. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 13. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered 5 or certified mail, postage prepaid, to the Executive at the last address the Executive has filed in writing with the Bank or, in the case of the Bank, at the Bank's main office, attention of the Board of Directors. 14. Election of Remedies. An election by the Executive to resign after a Change in Control under the provisions of this Agreement shall not constitute a breach by the Executive of any employment agreement between the Bank and the Executive and shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Bank's benefit plans, programs or policies. Nothing in this Agreement shall be construed to limit the rights of the Executive under any employment agreement he may then have with the Bank; provided, however, that if there is a Terminating Event under Section 3 hereof, the Executive may elect either to receive the severance payment provided under Section 4 or such termination benefits as he may have under any such employment agreement, but may not elect to receive both. 15. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Bank. 16. Governing Law. This is a Massachusetts contract and shall be construed under and be governed in all respects by the laws of the Commonwealth of Massachusetts. 6 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Bank, by its duly authorized officer, and by the Executive, as of the date first above written. WITNESS: /s/ Phillip W. Wong /s/ George Bargamian - ---------------------- ------------------------------ George A. Bargamian ATTEST: MEDFORD SAVINGS BANK /s/ Eugene R. Murray By: /s/ Arthur H. Meehan - ---------------------- -------------------------- Clerk Title: Chairman, President and Chief Executive Officer ----------------------- [Seal] 7 EX-10.5 7 SPECIAL TERMINATION AGREEMENT AMENDED AND RESTATED SPECIAL TERMINATION AGREEMENT AMENDED AND RESTATED AGREEMENT this twenty-sixth day of November, 1997 by and between Medford Savings Bank (the "Bank") a savings bank with its main office in Medford, Massachusetts, which Bank will be a wholly-owned subsidiary of Medford Bancorp, Inc. (the "Company") a Massachusetts corporation, and Eric B. Loth of North Andover, Massachusetts (the "Executive"). 1. Purpose. In order to allow the Executive to consider the prospect of a Change in Control (as defined in Section 2) in an objective manner and in consideration of the services to be rendered by the Executive to the Bank and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Bank, the Bank is willing to provide, subject to the terms of this Agreement, certain severance benefits to protect the Executive from the consequences of a Terminating Event (as defined in Section 3) occurring subsequent to a Change in Control. 2. Change in Control. A "Change in Control" shall be deemed to have occurred in any one of the following events: (i) if there has occurred a change in control of either the Company or the Bank which the Company would be required to report in response to Item 1 (or, in the case of the Bank, Item 2) of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if such regulation is no longer in effect, any regulations promulgated by the Securities and Exchange Commission, pursuant to the 1934 Act, which are intended to serve similar purposes; (ii) when any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of the Company or the Bank representing twenty-five percent (25%) or more of the total number of votes that may be cast for the election of directors of the Company or the Bank, as the case may be; (iii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who are Continuing Directors (as hereinafter defined) cease for any reason to constitute at least a majority of the Board of Directors of the Company or the Bank. For this purpose, a "Continuing Director" shall mean (a) an individual who was a director of the Company or the Bank at the beginning of such period or (b) any new director (other than a director designated by a person who has entered into an agreement with the Company or the Bank to effect a transaction described in clause (ii), (iv) or (v) of this Section 2) whose election by the Board or nomination for election by the Company's or the Bank's stockholders was approved by a 1 vote of at least two-thirds (2/3) of the directors of the Company or the Bank, as appropriate, then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved; (iv) the stockholders of the Company approve a merger or consolidation of the Company or the Bank with any other corporation or bank, other than (a) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 30% of the combined voting power of the Company's then outstanding securities; or (v) the stockholders of the Company or the Bank approve a plan of complete liquidation of the Company or the Bank or an agreement for the sale or disposition by the Company or the Bank of all or substantially all of the Company's or the Bank's assets. (vi) Notwithstanding the foregoing, no Change in Control shall be deemed to occur by virtue of the Bank becoming a subsidiary of the Company. 3. Terminating Event. A "Terminating Event" shall mean (a) termination by the Bank of the employment of the Executive with the Bank for any reason other than (i) death, (ii) deliberate dishonesty of the Executive with respect to the Bank or the Company or any subsidiary or affiliate of either, or (iii) conviction of the Executive of a crime involving moral turpitude, or (b) resignation of the Executive from the employ of the Bank, while the Executive is not receiving payments or benefits from the Bank by reason of the Executive's disability, subsequent to the occurrence of any of the following events: (i) a significant change in the nature or scope of the Executive's responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to the Change in Control; or (ii) a determination by the Executive that, as a result of a Change in Control, he is unable to exercise the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to such Change in Control; or (iii) a reduction in the Executive's annual base salary as in effect on the date 2 hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all management personnel of the Bank and the Company and all management personnel of any person in control of the Bank and the Company; or (iv) the failure by the Bank or the Company to pay to the Executive any portion of his current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Bank or the Company within seven (7) days of the date such compensation is due; or (v) the failure by the Bank or the Company to continue in effect any material compensation, incentive, bonus or benefit plan in which the Executive participates immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Bank or the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, in terms of both the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control; or (vi) the failure by the Bank or the Company to continue to provide the Executive with benefits substantially similar to those available to the Executive under any of the life insurance, medical, health and accident, or disability plans or any other material benefit plans in which the Executive was participating at the time of the Change in Control, or the taking of any action by the Bank or the Company which would directly or indirectly materially reduce any of such benefits, or the failure by the Bank to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Bank in accordance with the Bank's normal vacation policy in effect at the time of the Change in Control; or (vii) the failure of the Bank to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement. 4. Severance Payment. In the event a Terminating Event occurs within three (3) years after a Change in Control, the Bank shall pay to the Executive an aggregate amount equal to (x) two times the "base amount" (as defined in Section 280 G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")) applicable to the Executive, less (y) One Dollar ($1.00), payable in one lump-sum payment on the date of termination. 5. Limitation on Benefits. (a) It is the intention of the Executive and of the Bank that no payments by the Bank to or for the benefit of the Executive under this Agreement or any other agreement or plan pursuant to which he is entitled to receive payments or benefits shall be non-deductible to the 3 Bank by reason of the operation of Section 280G of the Code relating to parachute payments. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Bank, such payments shall be reduced to the maximum amount which can be deducted by the Bank. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive, such excess payments shall be refunded to the Bank with interest thereon at the applicable Federal Rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be non-deductible to the Bank by reason of the operation of said Section 280G. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G, the Executive shall determine which method shall be followed, provided that if the Executive fails to make such determination within forty-five days after the Bank has sent him written notice of the need for such reduction, the Bank may determine the method of such reduction in its sole discretion. (b) If any dispute between the Bank and the Executive as to any of the amounts to be determined under this Section 5, or the method of calculating such amounts, cannot be resolved by the Bank and the Executive, either the Bank or the Executive after giving three days written notice to the other, may refer the dispute to a partner in the Boston office of a firm of independent certified public accountants selected jointly by the Bank and the Executive. The determination of such partner as to the amount to be determined under Section 5(a) and the method of calculating such amounts shall be final and binding on both the Bank and the Executive. The Bank shall bear the costs of any such determination. 6. Employment Status. This Agreement is not an agreement for the employment of the Executive and shall confer no rights on the Executive except as herein expressly provided. 7. Term. This Agreement shall take effect on as of the date hereof and shall terminate upon the earlier of (a) the termination by the Bank of the employment of the Executive because of death, deliberate dishonesty of the Executive with respect to the Bank or the Company or any subsidiary or affiliate of either, or conviction of the Executive of a crime involving moral turpitude, (b) the resignation or termination of the Executive for any reason prior to a Change in Control, or (c) the resignation of the Executive after a Change in Control for any reason other than the occurrence of any of the events enumerated in Section 3(b)(i)-(vii) of this Agreement. 8. Withholding. All payments made by the Bank under this Agreement shall be net of any tax or other amounts required to be withheld by the Bank under applicable law. 9. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the laws of the Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Bank, one by the Executive and the third by the first two arbitrators. If the first two 4 arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Boston. Such arbitration shall be conducted in the City of Boston in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 9. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any or all of the Executive's rights under this Agreement, the Bank shall pay (or the Executive shall be entitled to recover from the Bank, as the case may be) the Executive's reasonable attorneys' fees and other reasonable costs and expenses in connection with the enforcement of said rights (including the enforcement of any arbitration award in court) regardless of the final outcome, unless and to the extent the arbitrators shall determine that under the circumstances recovery by the Executive of all or a part of any such fees and costs and expenses would be unjust. This provision shall not apply to Section 5(b), except in the event that the Bank and the Executive cannot agree on the selection of the accounting partner described in said Section. 10. Assignment; Prior Agreements. Neither the Bank nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party and without such consent any attempted transfer shall be null and void and of no effect. This Agreement shall inure to the benefit of and be binding upon the Bank and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Executive's death prior to the completion by the Bank of all payments due him under this Agreement, the Bank shall continue such payments to the Executive's beneficiary designated in writing to the Bank prior to his death (or to his estate, if he fails to make such designation). This Agreement supersedes any prior agreement covering the subject matter hereof. 11. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 12. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 13. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered 5 or certified mail, postage prepaid, to the Executive at the last address the Executive has filed in writing with the Bank or, in the case of the Bank, at the Bank's main office, attention of the Board of Directors. 14. Election of Remedies. An election by the Executive to resign after a Change in Control under the provisions of this Agreement shall not constitute a breach by the Executive of any employment agreement between the Bank and the Executive and shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Bank's benefit plans, programs or policies. Nothing in this Agreement shall be construed to limit the rights of the Executive under any employment agreement he may then have with the Bank; provided, however, that if there is a Terminating Event under Section 3 hereof, the Executive may elect either to receive the severance payment provided under Section 4 or such termination benefits as he may have under any such employment agreement, but may not elect to receive both. 15. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Bank. 16. Governing Law. This is a Massachusetts contract and shall be construed under and be governed in all respects by the laws of the Commonwealth of Massachusetts. 6 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Bank, by its duly authorized officer, and by the Executive, as of the date first above written. WITNESS: /s/ Phillip W. Wong /s/ Eric B. Loth - ------------------------ --------------------------------- Eric B. Loth ATTEST: MEDFORD SAVINGS BANK /s/ Eugene R. Murray By: /s/ Arthur H. Meehan - ------------------------ --------------------------------- Clerk Title: Chairman, President and Chief Executive Officer -------------------------- [Seal] 7 EX-10.6 8 SPECIAL TERMINATION AGREEMENT AMENDED AND RESTATED SPECIAL TERMINATION AGREEMENT AMENDED AND RESTATED AGREEMENT this twenty-sixth day of November, 1997 by and between Medford Savings Bank (the "Bank") a savings bank with its main office in Medford, Massachusetts, which Bank will be a wholly-owned subsidiary of Medford Bancorp, Inc. (the "Company") a Massachusetts corporation, and William F. Rivers of Reading, Massachusetts (the "Executive"). 1. Purpose. In order to allow the Executive to consider the prospect of a Change in Control (as defined in Section 2) in an objective manner and in consideration of the services to be rendered by the Executive to the Bank and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Bank, the Bank is willing to provide, subject to the terms of this Agreement, certain severance benefits to protect the Executive from the consequences of a Terminating Event (as defined in Section 3) occurring subsequent to a Change in Control. 2. Change in Control. A "Change in Control" shall be deemed to have occurred in any one of the following events: (i) if there has occurred a change in control of either the Company or the Bank which the Company would be required to report in response to Item 1 (or, in the case of the Bank, Item 2) of Form 8-K promulgated under the Securities Exchange Act of 1934, as amended (the "1934 Act"), or, if such regulation is no longer in effect, any regulations promulgated by the Securities and Exchange Commission, pursuant to the 1934 Act, which are intended to serve similar purposes; (ii) when any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act), directly or indirectly, of securities of the Company or the Bank representing twenty-five percent (25%) or more of the total number of votes that may be cast for the election of directors of the Company or the Bank, as the case may be; (iii) during any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who are Continuing Directors (as hereinafter defined) cease for any reason to constitute at least a majority of the Board of Directors of the Company or the Bank. For this purpose, a "Continuing Director" shall mean (a) an individual who was a director of the Company or the Bank at the beginning of such period or (b) any new director (other than a director designated by a person who has entered into an agreement with the Company or the Bank to effect a transaction described in clause (ii), (iv) or (v) of this Section 2) whose election by the Board or nomination for election by the Company's or the Bank's stockholders was approved by a 1 vote of at least two-thirds (2/3) of the directors of the Company or the Bank, as appropriate, then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved; (iv) the stockholders of the Company approve a merger or consolidation of the Company or the Bank with any other corporation or bank, other than (a) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 80% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no "person" (as hereinabove defined) acquires more than 30% of the combined voting power of the Company's then outstanding securities; or (v) the stockholders of the Company or the Bank approve a plan of complete liquidation of the Company or the Bank or an agreement for the sale or disposition by the Company or the Bank of all or substantially all of the Company's or the Bank's assets. (vi) Notwithstanding the foregoing, no Change in Control shall be deemed to occur by virtue of the Bank becoming a subsidiary of the Company. 3. Terminating Event. A "Terminating Event" shall mean (a) termination by the Bank of the employment of the Executive with the Bank for any reason other than (i) death, (ii) deliberate dishonesty of the Executive with respect to the Bank or the Company or any subsidiary or affiliate of either, or (iii) conviction of the Executive of a crime involving moral turpitude, or (b) resignation of the Executive from the employ of the Bank, while the Executive is not receiving payments or benefits from the Bank by reason of the Executive's disability, subsequent to the occurrence of any of the following events: (i) a significant change in the nature or scope of the Executive's responsibilities, authorities, powers, functions or duties from the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to the Change in Control; or (ii) a determination by the Executive that, as a result of a Change in Control, he is unable to exercise the responsibilities, authorities, powers, functions or duties exercised by the Executive immediately prior to such Change in Control; or (iii) a reduction in the Executive's annual base salary as in effect on the date 2 hereof or as the same may be increased from time to time except for across-the-board salary reductions similarly affecting all management personnel of the Bank and the Company and all management personnel of any person in control of the Bank and the Company; or (iv) the failure by the Bank or the Company to pay to the Executive any portion of his current compensation or to pay to the Executive any portion of an installment of deferred compensation under any deferred compensation program of the Bank or the Company within seven (7) days of the date such compensation is due; or (v) the failure by the Bank or the Company to continue in effect any material compensation, incentive, bonus or benefit plan in which the Executive participates immediately prior to the Change in Control, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Bank or the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, in terms of both the amount of benefits provided and the level of the Executive's participation relative to other participants, as existed at the time of the Change in Control; or (vi) the failure by the Bank or the Company to continue to provide the Executive with benefits substantially similar to those available to the Executive under any of the life insurance, medical, health and accident, or disability plans or any other material benefit plans in which the Executive was participating at the time of the Change in Control, or the taking of any action by the Bank or the Company which would directly or indirectly materially reduce any of such benefits, or the failure by the Bank to provide the Executive with the number of paid vacation days to which the Executive is entitled on the basis of years of service with the Bank in accordance with the Bank's normal vacation policy in effect at the time of the Change in Control; or (vii) the failure of the Bank to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement. 4. Severance Payment. In the event a Terminating Event occurs within three (3) years after a Change in Control, the Bank shall pay to the Executive an aggregate amount equal to (x) two times the "base amount" (as defined in Section 280 G(b)(3) of the Internal Revenue Code of 1986, as amended (the "Code")) applicable to the Executive, less (y) One Dollar ($1.00), payable in one lump-sum payment on the date of termination. 5. Limitation on Benefits. (a) It is the intention of the Executive and of the Bank that no payments by the Bank to or for the benefit of the Executive under this Agreement or any other agreement or plan pursuant to which he is entitled to receive payments or benefits shall be non-deductible to the 3 Bank by reason of the operation of Section 280G of the Code relating to parachute payments. Accordingly, and notwithstanding any other provision of this Agreement or any such agreement or plan, if by reason of the operation of said Section 280G, any such payments exceed the amount which can be deducted by the Bank, such payments shall be reduced to the maximum amount which can be deducted by the Bank. To the extent that payments exceeding such maximum deductible amount have been made to or for the benefit of the Executive, such excess payments shall be refunded to the Bank with interest thereon at the applicable Federal Rate determined under Section 1274(d) of the Code, compounded annually, or at such other rate as may be required in order that no such payments shall be non-deductible to the Bank by reason of the operation of said Section 280G. To the extent that there is more than one method of reducing the payments to bring them within the limitations of said Section 280G, the Executive shall determine which method shall be followed, provided that if the Executive fails to make such determination within forty-five days after the Bank has sent him written notice of the need for such reduction, the Bank may determine the method of such reduction in its sole discretion. (b) If any dispute between the Bank and the Executive as to any of the amounts to be determined under this Section 5, or the method of calculating such amounts, cannot be resolved by the Bank and the Executive, either the Bank or the Executive after giving three days written notice to the other, may refer the dispute to a partner in the Boston office of a firm of independent certified public accountants selected jointly by the Bank and the Executive. The determination of such partner as to the amount to be determined under Section 5(a) and the method of calculating such amounts shall be final and binding on both the Bank and the Executive. The Bank shall bear the costs of any such determination. 6. Employment Status. This Agreement is not an agreement for the employment of the Executive and shall confer no rights on the Executive except as herein expressly provided. 7. Term. This Agreement shall take effect on as of the date hereof and shall terminate upon the earlier of (a) the termination by the Bank of the employment of the Executive because of death, deliberate dishonesty of the Executive with respect to the Bank or the Company or any subsidiary or affiliate of either, or conviction of the Executive of a crime involving moral turpitude, (b) the resignation or termination of the Executive for any reason prior to a Change in Control, or (c) the resignation of the Executive after a Change in Control for any reason other than the occurrence of any of the events enumerated in Section 3(b)(i)-(vii) of this Agreement. 8. Withholding. All payments made by the Bank under this Agreement shall be net of any tax or other amounts required to be withheld by the Bank under applicable law. 9. Arbitration of Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach thereof shall be settled by arbitration in accordance with the laws of the Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Bank, one by the Executive and the third by the first two arbitrators. If the first two 4 arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Boston. Such arbitration shall be conducted in the City of Boston in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 9. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any or all of the Executive's rights under this Agreement, the Bank shall pay (or the Executive shall be entitled to recover from the Bank, as the case may be) the Executive's reasonable attorneys' fees and other reasonable costs and expenses in connection with the enforcement of said rights (including the enforcement of any arbitration award in court) regardless of the final outcome, unless and to the extent the arbitrators shall determine that under the circumstances recovery by the Executive of all or a part of any such fees and costs and expenses would be unjust. This provision shall not apply to Section 5(b), except in the event that the Bank and the Executive cannot agree on the selection of the accounting partner described in said Section. 10. Assignment; Prior Agreements. Neither the Bank nor the Executive may make any assignment of this Agreement or any interest herein, by operation of law or otherwise, without the prior written consent of the other party and without such consent any attempted transfer shall be null and void and of no effect. This Agreement shall inure to the benefit of and be binding upon the Bank and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Executive's death prior to the completion by the Bank of all payments due him under this Agreement, the Bank shall continue such payments to the Executive's beneficiary designated in writing to the Bank prior to his death (or to his estate, if he fails to make such designation). This Agreement supersedes any prior agreement covering the subject matter hereof. 11. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 12. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach. 13. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered 5 or certified mail, postage prepaid, to the Executive at the last address the Executive has filed in writing with the Bank or, in the case of the Bank, at the Bank's main office, attention of the Board of Directors. 14. Election of Remedies. An election by the Executive to resign after a Change in Control under the provisions of this Agreement shall not constitute a breach by the Executive of any employment agreement between the Bank and the Executive and shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Bank's benefit plans, programs or policies. Nothing in this Agreement shall be construed to limit the rights of the Executive under any employment agreement he may then have with the Bank; provided, however, that if there is a Terminating Event under Section 3 hereof, the Executive may elect either to receive the severance payment provided under Section 4 or such termination benefits as he may have under any such employment agreement, but may not elect to receive both. 15. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by a duly authorized representative of the Bank. 16. Governing Law. This is a Massachusetts contract and shall be construed under and be governed in all respects by the laws of the Commonwealth of Massachusetts. 6 IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Bank, by its duly authorized officer, and by the Executive, as of the date first above written. WITNESS: /s/ Gregory J. Lyons /s/ William F. Rivers - ---------------------- ------------------------------ William F. Rivers ATTEST: MEDFORD SAVINGS BANK Eugene R. Murray By: /s/ Arthur H. Meehan - ---------------------- -------------------------- Clerk Title: Chairman, President and Chief Executive Officer ----------------------- [Seal] 7 EX-10.7 9 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ================================================================================ MEDFORD SAVINGS BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ================================================================================ SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN BASIC PLAN DOCUMENT TABLE OF CONTENTS ARTICLE I DEFINITIONS 1.1 Actuarial Equivalent 1 1.2 Average Compensation 1 1.3 Beneficiary 1 1.4 Board 1 1.5 Compensation 1 1.6 Construction of Contract 1 1.7 Disability 1 1.8 Early Retirement Age 1 1.9 Election 1 1.10 Employee 1 1.11 Employer 1 1.12 Entry Date 1 1.13 IRC 1 1.14 Normal Form of Benefit 1 1.15 Normal Retirement Age 2 1.16 Normal Retirement Benefit 2 1.17 Participant 2 1.18 Plan 2 1.19 Plan Administrator 2 1.20 Plan Year 2 1.21 Retirement Date 2 1.22 Social Security Benefit 2 1.23 Termination Date 2 1.24 Vested Benefit 2 1.25 Years of Service 2 ARTICLE II BENEFITS 2.1 Accrued Benefit 3 2.2 Automatic Pension 3 2.3 Optional Forms of Payment 3 2.4 Payment of the Accrued Benefit 3 2.5 Early Retirement Benefit 3 2.6 Late Retirement Benefit 3 2.7 Termination of Employment Benefit 3 2.8 Denial of Benefits 3 ARTICLE III DEATH BENEFITS 3.1 Death Benefit 4 3.2 Designation of Beneficiary 4 3.3 Death of Participant After Retirement or Termination of 4 Employment ARTICLE IV DISABILITY BENEFITS 4.1 Disability Benefits 5 4.2 Return to Work 5 ARTICLE V FUNDING 5.1 Investment 6 ARTICLE VI MISCELLANEOUS 6.1 Alienability 7 6.2 Amendment by Employer 7 6.3 Expenses 7 6.4 Limitation 7 6.5 Change of Control 7 6.6 Violation of Agreement 8 6.7 For Cause Clause 8 6.8 Non-Compete Clause 8 ---------------------------- ADOPTION AGREEMENT APPENDIX A Supplemental Executive Retirement Plan Agreement APPENDIX B Change of Beneficiary Form APPENDIX C Application for Plan Benefits APPENDIX D Sample ERISA Department of Labor Statement APPENDIX E Sample Votes of Board SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN BASIC PLAN DOCUMENT ARTICLE I DEFINITIONS 1.1 Actuarial Equivalent means any benefit under this Plan which, at any time, has the same present value as a straight life annuity commencing at Normal Retirement Age based on 6 percent interest and the 1971 Individual Annuity Mortality Table for males set back 3 years, discounted to the payment commencement date by 7 percent, or by interest rates and mortality specified in Section 2.3 of Article II, if applicable. 1.2 Average Compensation means the average of the Participant's highest 3 consecutive Plan Years Compensation prior to his Retirement Date unless otherwise elected in Section A3 of the Adoption Agreement. 1.3 Beneficiary shall mean the person or persons designated by the Participant to receive benefits under the Plan after the death of the Participant. 1.4 Board shall mean the Board of Directors of the Employer. 1.5 Compensation means the definition elected in Section A3 of the Adoption Agreement. 1.6 Construction of Contract shall be made without regard to the gender or whether words are used in the singular or plural unless the context requires such interpretation. 1.7 Disability means the Participant's entitlement to Social Security disability income benefits. 1.8 Early Retirement Age is the earliest of the ages elected in Section A4(b) of the Adoption Agreement. 1.9 Election means a written instrument executed by a Participant and filed with the Plan Administrator on or before its effective date, exercising one or more rights under this Plan. 1.10 Employee shall mean each current or future Employee of the Employer who is a member of a select group of management or otherwise highly compensated personnel as determined by the Board. 1.11 Employer means the Medford Savings Bank, its successors and assigns, any subsidiary or affiliated organizations authorized by the Board to participate in this Plan with respect to their Employees, and any organization into which the Employer may be merged or consolidated or to which all or substantially all of its assets may be transferred. 1.12 Entry Date means the date that an Employee satisfies the eligibility requirements set in Section A5 of the Adoption Agreement. 1.13 IRC means the Internal Revenue Code of 1986 and the appropriate section thereof is designated by the numbers following IRC. 1.14 Normal Form of Benefit means an annuity payable for the life of the Participant ceasing at his death. 1 1.15 Normal Retirement Age means the age elected in Section A4(a) of the Adoption Agreement. 1.16 Normal Retirement Benefit means the Accrued Benefit payable to the Participant upon separation from service at Normal Retirement Age under the Plan. 1.17 Participant means an Employee who has satisfied the eligibility requirements contained in Section A5 of the Adoption Agreement. Participation will commence on the Employee's Entry Date. A terminated Employee who has a Vested Benefit or a Beneficiary entitled to benefits hereunder is an Inactive Participant. 1.18 Plan means the Employer's Supplemental Executive Retirement Plan. 1.19 Plan Administrator shall mean the individual designated by the Board to administer the Plan. 1.20 Plan Year means the period specified in Section A2 of the Adoption Agreement. 1.21 Retirement Date means the date that payment of a Participant's Accrued Benefit commences which shall be the first day of the month following Normal Retirement Age unless the Participant elects a different Retirement Date with the consent of the Employer. 1.22 Social Security Benefit means the monthly old age insurance benefit the Participant is first entitled to receive at his Social Security Retirement Age. Prior to his Social Security Retirement Age it will be assumed that the Participant will continue to earn the same annual Compensation which is in effect for him and that the Social Security law will not change thereafter, and by using his actual salary history, if available, or by estimating his prior Compensation using a 5% salary scale projected backwards. 1.23 Termination Date means the date a Participant ceases to be an Employee. 1.24 Vested Benefit means an Accrued Benefit which is non-forfeitable. An Accrued Benefit derived from Employer Contributions is 100% vested at the earliest of the Participant's Early Retirement Age, or at an earlier mandatory Retirement Age enforced by the Employer, or at his Disability or his death and prior thereto as set in Section A7 of the Adoption Agreement. 1.25 Years of Service shall be defined as elected in Section A6 of the Adoption Agreement. 2 ARTICLE II BENEFITS 2.1 Accrued Benefit means the benefit derived from Employer contributions that a Participant will begin to receive at Normal Retirement Age, as elected in A8 of the Adoption Agreement. For purposes of determining the amount of benefits payable under any qualified plan of the Employer, benefits attributable to Employee contributions, shall not be considered. 2.2 Automatic Pension means a straight life annuity for a Participant who is not married on the Retirement Date and an actuarially equivalent joint & survivor annuity for a Participant who is married on the Retirement Date. 2.3 Optional Forms of Payment. In lieu of the Automatic Pension, the Participant may elect, any time prior to the date specified in Section 2.5 below, Actuarial Equivalent Optional Forms of Payment as provided in Sections A9, A11 and A12 of the Adoption Agreement. Lump sum payments of the defined benefit portion of the Accrued Benefit shall be based on the mortality table and interest rates in Section 1.1. 2.4 Payment of the Accrued Benefit shall begin effective with the first day of the month next following termination of employment and, unless the Participant elects otherwise and with the written approval of the Board, no later than 60 days after the later of the last day of the Plan Year in which the Participant: a) attains Normal Retirement Age; or b) terminates his service with the Employer. 2.5 Early Retirement Benefit. The amount payable to a Participant who terminates employment after attaining Early Retirement Age but before Normal Retirement Age is the Actuarial Equivalent of the Participant's Accrued Benefit payable at Normal Retirement Age. The Early Retirement Benefit is payable as provided in Sections 2.2 and 2.3 of the Plan. 2.6 Late Retirement Benefit. The amount payable to a Participant who continues working after Normal Retirement Age is the Participant's Accrued Benefit upon retirement. The Late Retirement Benefit is payable as provided in Sections 2.2 and 2.3 of this Plan. 2.7 Termination of Employment Benefit. The amount payable at the Termination Date to a Participant who terminates employment prior to Early Retirement Age and satisfies the Vesting requirement in A7 of the Adoption Agreement is the Actuarial Equivalent of the Accrued Benefit payable at Normal Retirement Age. The Termination of Employment Benefit is payable as provided in Sections 2.2 and 2.3 of this Plan. 2.8 Denial of Benefits. The Plan Administrator shall give a written explanation to the Participant, setting forth the specific reasons for the denial of any benefit. 3 ARTICLE III DEATH BENEFITS 3.1 Death Benefit. If a Participant dies prior to his Retirement Date, his designated Beneficiary will be paid, commencing on the first day of the month next following the Participant's death, (i) the Actuarial Equivalent value of his Accrued Benefit on the day he died, payable under any Optional Form of Payment provided in Section A9 of the Adoption Agreement. If a Beneficiary dies prior to receiving all benefits available under the Optional Form of Payment, the remaining benefits shall be made to the person or persons named by the Beneficiary to receive the benefits payable under such Optional Form of Payment or to the Beneficiary's estate if no such person is named. If the Participant is not survived by a named Beneficiary, or if the Board is in doubt as to the effective status of a Beneficiary designation, then the Death Benefit provided by this Section 3.1 shall be paid to the Participant's estate in one lump sum. 3.1 Designation of Beneficiary. The Participant shall have the right to designate a Beneficiary, including a contingent beneficiary, entitled to receive the benefits payable under Section 3.1 in the event of his death. Such designation shall be made in writing and delivered to the Board. The Participant may change such designation from time to time and may revoke such designation. 3.3 Death of Participant After Retirement or Termination of Employment. Upon the death of the Participant after retirement or other termination of employment, no benefits will be payable to the Participant's Beneficiary or any other person so designated by the Participant unless the Automatic Pension or Optional Form of Payment in effect or elected under Section 2.3 or 2.4 of this Plan provides a death benefit. 4 ARTICLE IV DISABILITY BENEFITS 4.1 Disability Benefits. If the Participant is unable to continue in the employ of the Employer by reason of Disability, the Participant shall be entitled to receive a Disability Benefit, in lieu of all other benefits under the Plan, commencing on the first day of the month next following such determination of Disability, payable in monthly installments, in an amount equal to the amount elected in A10 of the Adoption Agreement. Distribution may be in any form provided in A11 of the Adoption Agreement. 4.2 Return to Work. In the event the Participant returns to work after receiving Disability Benefits, Disability Benefits shall cease and the Participant shall continue in this Plan as though such disability had not occurred. Accrued benefits payable under the Plan thereafter shall be determined on the basis of the Participant's total Years of Service and shall be adjusted to take into account the Actuarial Equivalent of the Disability Benefits, if any, previously paid to the Participant. 5 ARTICLE V FUNDING 5.1 Investment. All payments of amounts under the Plan shall be paid from the general funds of the Employer and no special or separate fund shall necessarily be established and no other segregation of assets shall necessarily be made to assure the payment of such amounts. Neither Participants nor their beneficiaries or estates shall have any right, title, or interest whatever in or to any investments, including any "Applicable Policy", which the Employer may make to aid it in meeting its obligation hereunder. To the extent that any person acquires any right to receive payments from the Employer under the Plan, such right shall be no greater than the right of an unsecured general creditor of the Employer. Notwithstanding the foregoing, nothing in the Plan document shall preclude the Employer from contributing to or making Plan payments from a Rabbi Trust, as elected in the Adoption Agreement. 6 ARTICLE VI MISCELLANEOUS 6.1 Alienability. The right of a Participant to receive any amount credited to the Participant under the Plan shall not be transferable or assignable by the Participant. No person shall be entitled to anticipate any payment by assignment, alienation, sale, pledge, encumbrance or transfer in any form or manner prior to actual or constructive receipt thereof. 6.2 Amendment by Employer. The Employer may amend the Adoption Agreement by selecting any of its elective provisions. The amendment may not reduce the Accrued Benefit as elected in A8 of the Adoption Agreement. Any such amendment shall be delivered to the Participants and Beneficiaries and to the Plan Administrator. 6.3 Expenses. The Employer will pay all Expenses of the Plan. 6.4 Limitation. The establishment of this Plan, or the payment of benefits, shall not give any Participant or Employee any legal or equitable right against the Employer. This Plan shall not give any Participant or Employee the right to be retained in the service of the Employer. This Plan shall be governed by, and shall be construed and interpreted in accordance with, applicable federal law and with the laws of the Commonwealth of Massachusetts. The Accrued Benefit of any individual under the Plan shall be reduced by the amount, if any, by which the cash value or the death proceeds under any Applicable Policy maintained by the Employer with respect to such individual's benefits is reduced as a result of any misstatement or other action or omission by the Participant to which such Applicable Policy relates or by any such other individual. In the event that any one or more of the provisions of this Plan shall be held to be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby and the invalidated provision shall be automatically amended to the extent necessary to make it valid consistent with the intent of the Employer hereunder. 6.5 Change of Control. A Participant shall be immediately vested in the total amount credited to his Accrued Benefit in the event of a change of control of the Employer, and such amount will be immediately distributable to the Participant. A change of control for this purpose shall be deemed to occur upon the purchase or other acquisition by any person, entity, or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 50 percent or more of either the outstanding shares of common stock or the combined voting power of the Employer's then outstanding voting securities entitled to vote generally, or the approval by the stockholders of the Employer of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of the Employer immediately prior to such reorganization, merger, or consolidation, do not immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of directors of the reorganized, merged, or consolidated Employer's then outstanding securities, or a liquidation or dissolution of the Employer of the sale 7 of all or substantially all of the Employer's assets. 6.6 Violation of Agreement. In the event that the Participant violates any of the terms of this Plan, the Employer, in addition to any other rights which it may have, shall be relieved of the liability to make any further payments under the Plan to, or on behalf of, the Participant and shall have the right to specifically enforce this Plan by proceedings in equity. 6.7 For Cause Clause. As elected in Section A13(a) of the Adoption Agreement, all of a Participant's benefits under this Plan will be forfeited if the Participant's employment is terminated for cause. The Corporation shall have "cause" to terminate the Participant's employment hereunder because of the Participant's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation involving moral turpitude or final cease and desist order, or material breach of any provision of this Agreement. For purposes of this Section, no act or failure to act on the Participant's part will be considered "willful" unless done, or admitted to be done, by him in bad faith and without reasonable belief that his action or omission was in the best interests of the Employer; provided that any act or omission to act by the Participant in reliance upon an opinion of counsel to the Employer shall not be deemed to be willful. Notwithstanding the foregoing, the Participant shall not be deemed to have been terminated for cause unless and until there shall have been delivered to him a copy of a certification by the Clerk of the Corporation that three-fourths (3/4) of the entire Board of Directors of the Employer found in good faith that the Participant was guilty of conduct which is deemed to be Cause as defined above and specifying the particulars thereof, after reasonable notice to the Participant and an opportunity for him together with his counsel, to be heard before such majority. 6.8 Non-Compete Clause. If the Non-Compete Clause is elected in Section A 13(b) of the Adoption Agreement, the Participant must not violate the terms of this Section 6.8. After becoming a Participant in this Plan, and for the period after termination of employment with the Employer as elected in Section A13(b) of the Adoption Agreement, the Participant may not be an employee or consultant of, or hold any other position with, or directly or indirectly assist, any bank in connection with any banking activities by said bank in the same county where the Participant's Employer has a branch; nor will the Participant attempt to hire any employee of the Employer, assist in such hiring by any other person or entity, encourage any such employee to terminate his or her relationship with the Employer, or solicit or encourage any customer of the Employer to terminate its relationship with the Employer or to conduct with any other person or entity any business or activity which such customer conducts or could conduct with the Employer; provided, however, that nothing herein shall prohibit the Participant from owning up to 2% of the shares of common stock of any bank whose shares are publicly traded on a national securities exchange or in the over-the-counter market. 8 MEDFORD SAVINGS BANK SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN ADOPTION AGREEMENT The undersigned Employer adopts this Plan for the exclusive benefit of its eligible employees and beneficiaries to provide retirement and pre-retirement benefits. The Plan shall operate in accordance with the Basic Plan Document and the Adoption Agreement provisions as elected. Medford Savings Bank PLAN NAME: Supplemental Executive Retirement Plan -------------------------------------- EMPLOYER NAME: Medford Savings Bank -------------------------------------- FEDERAL IDENTIFICATION NUMBER: 04-1609330 -------------------------------------- PLAN ADMINISTRATOR: Phillip W. Wong, S.V.P. -------------------------------------- A1. EFFECTIVE DATE OF PLAN: 11-01-94 -------------- A2. PLAN YEAR: a) The Plan Year is the calendar year. ------ x b) The Plan Year is a 12 month period beginning on 11-01 . ------ ------------- A3. COMPENSATION AND AVERAGE COMPENSATION: a) COMPENSATION x 1) Reported W-2 earnings. ------ 2) As defined in IRC 415(c)(3). ------ (elect 1) or 2)) 3) Compensation as defined in 1) or 2) shall exclude bonuses. ------ 4) Including ____ not including ____ amounts contributed pursuant ------ to a Salary Reduction Agreement and which is not included in the participant's gross income under IRC 125, 402(a)(8), 402(H) or 403(b). Compensation as elected means Compensation which is actually paid to a Participant during the Plan Year and earned from the Participant's Entry Date. b) AVERAGE COMPENSATION is _______________________________________________ (If left blank, the definition of Average Compensation in Plan Section 1.2 shall apply.) A4. DATES: a) NORMAL RETIREMENT AGE IS 65 . ----- b) EARLY RETIREMENT AGE IS 62 . ----- AA1 A5. ELIGIBILITY a) Class of employees (i.e., Exec. V.P. and above/employees ----- earning over $150,000 or IRC 401(a)(17)). (please define) --------------------------------------------------------- --------------------------------------------------------- x b) Individuals by name. (please define) ----- Arthur H. Meehan --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- c) Other, (please define) ----- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- A6. YEARS OF SERVICE x a) Same as SBERA Pension Plan. ----- b) Same as SBERA Defined Contribution Plan. ----- c) Other ----- --------------------------------------------------------- --------------------------------------------------------- A7. VESTING a) Minimum Age of 60 . -------- b) Minimum years of service of 3 . ------- A8. BENEFITS (select all applicable formulas) x a) Make up benefits which will be lost under defined benefit ----- plans due to the reduction in the IRC 401(a)(17) compensation ceiling to $150,000 effective 11/1/94. (The amount lost will be computed by applying the IRC 401(a)(17) cost of living adjustment as a percentage, compounded each year, to the IRC 401(a)(17) limit effective 12/31/93). b) Make up benefits lost under defined benefit plans due to all ----- IRC 401(a)(17) compensation ceilings. (Includes compensation in excess of $200,000 for plan years beginning in 1989 and in excess of $150,000 for plan years beginning in 1994; i.e. there is no limit on the compensation used.) c) Make up all benefits which will be lost under defined ----- contribution plans due to the reduction in the IRC 401(a)(17) compensation ceiling to $150,000 effective 1/1/94. (The amount lost will be computed by applying the IRC 401(a)(17) cost of living adjustment as a percentage, compounded each year, to the IRC 401(a)(17) limit effective 12/31/93.) AA2 d) Make up benefits lost under defined contribution plans due to ----- all IRC 401(a)(17) compensation ceilings. (Includes compensation in excess of $200,000 for plan years beginning in 1989 and in excess of $150,000 for plan years beginning in 1994; i.e. there is no limit on the compensation used.) e) Allow different benefit formulas (please define - for example, ----- Normal Retirement Benefit of ____% of Final Average Compensation times Years of Service offset by Accrued Benefit under the defined benefit plan and further offset by ____% of the Participant's Social Security Benefit.) --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- A9. DISTRIBUTION OPTIONS AT DEATH AND AT EARLY, NORMAL AND LATE RETIREMENT (select desired options) a) Lump Sum ----- b) Annual Installments over ______ (specify options) years ----- c) Life Annuity ----- x d) Joint and 100 % (specify options) Survivor Annuity ----- A10. DISABILITY RETIREMENT BENEFIT x a) Accrued Benefit (unreduced for early commencement) ----- b) Actuarially Equivalent Accrued Benefit (reduced for early ----- commencement) c) Accrued Benefit with payment deferred to _______________ ----- d) None ----- e) Other ----- --------------------------------------------------------- --------------------------------------------------------- --------------------------------------------------------- A11. DISTRIBUTION OPTIONS AT DISABILITY RETIREMENT (select desired options) a) Lump Sum ----- b) Annual Installments over ______ (specify options) years ----- c) Life Annuity ----- x d) Joint and 100 % (specify option) Survivor Annuity ----- e) No Distribution ----- A12. DISTRIBUTION OPTIONS DUE TO TERMINATION OF EMPLOYMENT, IF VESTED (select desired options) a) Lump Sum ----- b) Annual Installments over ______ (specify options) years ----- c) Life Annuity ----- x d) Joint and 100 % (specify option) Survivor Annuity ----- AA3 A13. FORFEITURE CLAUSE x a) For cause ----- b) Non-compete clause within the Commonwealth of Massachusetts ----- which shall be applicable for years after the Participant terminates employment with the Employer. A14. CONTROLLING STATE LAW The laws of The Commonwealth of Massachusetts shall control this Plan. Employer: Medford Savings Bank ------------------------------ FID # 04-1609330 ------------------------ January 1, 1995 BY: /s/ William Rivers - ------------------- -------------------------- AA4 SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT I hereby acknowledge that, as an Employee, I have been offered an opportunity to participate in the Supplemental Executive Retirement Plan (the "Plan") providing the Supplemental Benefits specified in Section A8 of the Adoption Agreement (which Plan and Adoption Agreement are attached hereto and made a part hereof), and that I hereby elect to participate in the Plan. I further acknowledge that neither the Employer nor any of its subsidiaries, affiliated companies, employees or agents has any responsibility or liability whatsoever for any changes which I may make in personal plans or programs as a result of my decision to participate in the Plan and I recognize that the Employer has the right to terminate, amend or modify the Plan at any time. I here designate as Primary Beneficiary under the Plan: Jeanne M. Meehan - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- I hereby designate as Secondary Beneficiary under the Plan: Arthur H. Meehan Family Trust - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- I understand that Beneficiary means the Primary Beneficiary if the Primary Beneficiary survives me, and the Secondary Beneficiary if the Primary Beneficiary does not survive me and means my estate if neither the Primary Beneficiary nor the Secondary Beneficiary survives me. I reserve the right to change the Primary and/or Secondary Beneficiary from time to time in the manner as required by the Plan, and I agree that no change in Beneficiary shall be effective unless received by the Employer while I am living and until acknowledged in writing by the Employer. Notices to me (Participant) shall be sent as follows: Name Arthur H. Meehan --------------------------------------------------------------------- Street Address or Post Office Box No. 5 Fox Run Road ------------------------------------------------------ City and State Dover, MA Zip Code 02030 --------------------------------------- ------ 1 IN WITNESS WHEREOF, the Employer and I have executed this acceptance as of the 1st day of January , 1995. EMPLOYEE: /s/ Arthur H. Meehan ----------------------------- (Signature) Arthur H. Meehan ----------------------------- (Type or Print Name Under Signature) ACCEPTED Medford Savings Bank ------------------------------- By: /s/ William Rivers ------------------------------- Authorized Signature 2 EX-10.8 10 EXECUTIVE SUPPLEMENTAL BENEFIT AGREEMENT EXECUTIVE SUPPLEMENTAL BENEFIT AGREEMENT This agreement, made and entered into this 28th day of October 1997 by Medford Savings Bank, a banking corporation organized and existing under the laws of the Commonwealth of Massachusetts hereinafter called the Bank, and Arthur H. Meehan of Dover, Massachusetts hereinafter called the Executive. WHEREAS, the Executive has been and is now serving the Bank as Chairman, President and Chief Executive Officer; and WHEREAS, it is the opinion of the Board of Directors that the Executive's services to the Bank constitute an invaluable contribution to the general welfare of the Bank and in bringing it to its present status of operating efficiency and its high regard in the banking business; and WHEREAS, the experience of the Executive, his knowledge of the affairs of the Bank, his reputation and contacts in the banking industry are so valuable that assurance of his continued services is essential for the future growth and profits of the Bank and it is in the best interests of the Bank to arrange terms of continued employment for the Executive so as to reasonably assure his remaining in the employment of the Bank during his lifetime or until his age of retirement; and WHEREAS, it is the desire of the Bank that the Executive's services be retained as herein provided; and WHEREAS, The Executive is willing to continue in the employ of the Bank provided the Bank agrees to pay to him or is beneficiaries certain benefits in accordance with the terms and conditions hereinafter set forth; NOW THEREFORE, in consideration of services performed in the past and to be performed in the future as well as of the mutual promises and covenants herein contained, it is agreed as follows: ARTICLE ONE 1.01 Employment. The Bank agrees to employ the Executive as Chief Executive Officer. The Executive will continue in the employ of the Bank in such capacity and with such duties and responsibilities as may be assigned to him, and with such compensation as may be determined from time to time by the Board of Directors of the Bank. 1 The Executive agrees to devote his full time and attention exclusively to the business and affairs of the Bank, except during vacation periods and to use his best efforts to furnish faithful and satisfactory services to the Bank. The Executive further agrees that during the period of his employment pursuant to this Agreement, he will not have any other business affiliations without the approval of the Board of Directors of the Bank. The supplemental benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or an arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of salary continuation benefits. ARTICLE TWO 2.01 Retirement Benefit. If the Executive shall continue in the employment of the Bank until he attains the age of sixty-five (65), which is hereby established to be September 23, 2000, he may retire from active daily employment as of the first day of the month next following attainment of age 65, or upon such later date as may be mutually agreed upon by the Executive and the Bank The Bank agrees that upon such retirement it will pay to the Executive the sum of seventy thousand ($70,000.) dollars, hereinafter called the "Annual Payment", on the first day of the month following such retirement and will pay a like sum on each annual anniversary of said date to the Executive during his lifetime for fifteen years until he shall receive fifteen (15) Annual Payments subject to the conditions and limitations hereinafter set forth. 2.02 Retirement Death Benefit. The Bank agrees that if the Executive shall so retire, but shall die before receiving the fifteen (15) Annual Payments, it will continue to make such Annual Payments annually to such individual or individuals as the Executive shall have designated in a writing, filed with the Bank, until the expiration of the fifteen (15) years from the date of such retirement. In the absence of any effective designation of beneficiary any such amounts becoming due and payable after the death of the Executive shall be paid to his duly qualified executor or administrator. ARTICLE THREE 3.01 Consulting Services. It is mutually agreed that during the fifteen (15) year period following retirement from active daily employment, the Executive shall, from time to time, at the request of the Bank, be available at reasonable times and places as are mutually agreed upon, to render services to the senior executives of the Bank in an advisory or consulting capacity. 2 The Executive shall not be required to travel from whatever place he may then be living or staying for the purposes of such consultation unless all expenses incurred by him shall forthwith be paid by the Bank. It shall not be considered a breach of this condition if the Executive is unable to consult or advise because of a mental or physical disability. In furnishing such consultative or advisory services, the Executive shall not be an employee of the Bank, but shall act in the capacity of an independent contractor. 3.02 Competitive Service. During the said fifteen (15) year period following retirement from active daily employment, the Executive shall not become a director, officer or employee of any banking institution within an area of 25 miles from the City of Medford, unless the Bank has first consented thereto in writing. 3.03 Forfeiture. The payments provided under Article Two are conditioned upon the Executive fulfilling the Requirements of Article Three and in the event the Executive shall at any time materially breach the said requirements, the Board of Directors of the Bank may, by a Resolution at any regular or special meeting, suspend or eliminate payment during the period of such breach. ARTICLE FOUR 4.01 Death Prior to Retirement. In the event the Executive should die while actively employed by the Bank, the Bank will pay each Annual Payment in twelve equal monthly installments of fifty-eight hundred thirty-four $5834.) dollars each for a period of fifteen (15) years to such individual or individuals as the Executive may have designated in a writing, filed with the Bank. The said monthly payment shall begin the first of the month following the month of the decease of the Executive. In the absence of any effective designation of beneficiary any such amounts becoming due and payable upon the death of the Executive shall be payable to his duly qualified executor or administrator. ARTICLE FIVE 5.01 Disability Prior to Retirement. In the event the Executive shall, during the period of active daily employment prior to termination of his employment with the Bank, become permanently and totally disabled, mentally or physically, which disability renders him unable to perform his duties in a manner satisfactory to the Bank, the Bank by a Resolution adopted at any regular or special meeting of its Board of Directors may terminate the active daily employment of the Executive. If the date of the adoption of such Resolution is on or after September 23, 2000 the provisions of Article Two shall immediately be effective. If the date of such Resolution 3 is prior to September 23, 2000 the obligations of the Bank to pay the benefits provided in Articles Two and Four shall cease. In lieu of the payments provided in said Articles the Bank shall pay to the Executive one hundred (100%) percent of his then annual salary payable in equal monthly installments beginning on the first day of the month following the Board Resolution and continuing for a period up to September 23, 2000 at which time the provisions of Article Two shall be effective. The disability payments payable hereunder shall be reduced by any amounts payable under the Bank's Long Term Disability Income policy. If the Executive should die after commencement of such disability payments but prior to September 23, 2000, the provisions of Article Four shall then be effective. ARTICLE SIX 6.01 Voluntary Termination of Service or Discharge. In the event that the Executive shall voluntarily resign or otherwise voluntarily terminate his employment with the Bank, become totally disabled, die or be discharged for actions inimical to the Bank's interests, which shall be in the sole discretion of the Board of Directors,prior to September 23, 2000, the Annual Payments effective under Article Two, Four and Five shall be reduced in accordance with the vesting provisions detailed in section 6.03. 6.02 Other Termination of Service. The Bank reserves the right to terminate the employment of the Executive at any time prior to retirement. In the event that the employment of the Executive shall terminate prior to September 23, 2000, other than by his voluntary action, his disability, his death or his discharge for actions inimical to the Bank's interests, the Annual Payments effective under Article Two, Four and Five shall be paid in full without the reduction specified in Section 6.03. 6.03 Vesting Percentage Schedule. The Annual Payments defined under Articles Two, Four and Five shall be reduced in the event of termination under section 6.01 in accordance with the vesting schedule detailed herein. The Annual Payment due under such circumstances shall be adjusted by determining the maximum Annual Payment due with 100% vesting and multiplying this Annual Payment by the appropriate percentage given the number of completed years of contract service and Article 6.01. Vesting Percentage Schedule Completed Contract Years of Service Percentage Vesting 1 (9/23/98) 33 1/3% 2 (9/23/99) 66 2/3% 3 (9/23/2000) 100% 4 ARTICLE SEVEN 7.01 Alienability. Neither the Executive, his widow, nor any other beneficiary under this Agreement shall have the power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder, nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance, owed by the Executive or his beneficiary or any of them, or be transferable by operation of law in the event of bankruptcy, insolvency, or otherwise. In the event the Executive or any beneficiary attempts assignment, commutation, hypothecation, transfer or disposal of the benefits hereunder the Bank's liabilities hereunder shall forthwith cease and terminate. ARTICLE EIGHT 8.01 Participation in other Plans. Nothing contained herein shall be construed to alter, abridge, or in any manner affect the rights and privileges of the Executive to participate in and be covered by any Pension, Profit Sharing, 401K, Group insurance, Bonus or any similar employee plans which the Bank may now or hereafter have. ARTICLE NINE 9.01 Funding. The Bank reserves the absolute right at its sole and exclusive discretion, either to fund the obligations of the Bank hereunder or to refrain from funding the same, and to determine the extent, nature and method of such funding. Should the Bank elect to fund this Agreement, in whole or in part, through the medium of life insurance or annuities, or both, the Bank shall be the owner and beneficiary of any such policies. The Bank reserves the absolute right, in its sole discretion, to terminate such life insurance or annuities, as well as any other funding program, at anytime, either in whole or in part. At no time shall the Executive be deemed to have any right, title or interest in or to any specified asset or assets of the Bank, including, but not by way of restriction, any insurance or annuity contract or contracts or the proceeds therefrom. Any such policy shall not in any way be considered to be security for the performance of the Bank's obligations hereunder. It shall be, and remain, a general unpledged, unrestricted asset of the Bank. If the Bank purchases a life insurance or annuity policy on the life of the Executive, he agrees to sign any papers that my be required for that purpose and to undergo any medical examination or tests which may be necessary. 5 9.02 This Article shall not be construed as giving the Executive or his beneficiary any greater rights than those of any other unsecured creditor of the Bank. ARTICLE TEN 10.01 Reorganization. The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another bank, corporation, firm, or person unless and until such succeeding or continuing bank, corporation, firm or person agrees to assume and discharge all of the obligations of the Bank hereunder. ARTICLE ELEVEN 11.01 Benefits and Burdens. This Agreement shall be binding upon and inure to the benefit of the Executive and his personal representatives, and the Bank, and any successor organization which shall succeed to substantially all of its assets and business. ARTICLE TWELVE 12.01 Communications. Any notice or communication required of either party with respect to this Agreement shall be made in writing and may either be delivered personally or sent first class mail to the Bank at 29 High Street, Medford, MA 02155 and to the Executive at the address as maintained on the payroll or other accounting records of the Bank. Each party shall have the right by written notice to change the place to which notices shall be sent. ARTICLE THIRTEEN 13.01 Not a Contract of Employment. This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Bank to discharge the Executive, or restrict the right of the Executive to terminate his employment with the Bank. ARTICLE FOURTEEN 14.01 Claims Procedure. In the event that benefits under this Agreement are not paid to the Executive (or his beneficiary in the case of the Executive's death), and such person feels entitled to receive them, a claim shall be made in writing to the Plan Administrator within sixty (60) days from the date payments are not made. Such claim shall be reviewed by the Plan Administrator and the Bank. If the claim is denied, in full or in part, the Plan Administrator shall provide a written notice within ninety (90) days setting forth the specific reasons for denial, specific reference to the provisions of this Agreement upon which the denial is based, and additional material or information 6 necessary to perfect the claim, if any. A claim shall be deemed denied if the Plan Administrator does not provide the required written notice within the said ninety (90) day period. Also, such written notice shall indicate the steps to be taken if a review of the denial is desired. If a claim is denied and a review is desired, the Executive (or his beneficiary in the case of the Executive's death), shall notify the Plan Administrator in writing within sixty (60) days of receipt of the denial or deemed denial. In requesting a review, the Executive or is beneficiary may review this Agreement or any document relating to it and submit any written issues and comments he or she may feel appropriate. The Plan Administrator shall then review the claim and provide a written decision within sixty (60) days. This decision likewise shall state the specific reasons for the decision and shall include reference to specific provisions of this Agreement on which the decision is based. For purposes of implementing this claims procedure (but not for any other purpose) the Chief Financial Officer of the Bank is hereby designated as the Plan Administrator of this Agreement. ARTICLE FIFTEEN 15.01 Administrative Clause. Any payment required to be made pursuant to this Agreement to a person who is under a legal disability at the time such payment is due may be made by the Bank to or for the benefit of such person in such of the following ways as the Bank shall determine; (a) directly to the person entitled to the payment; (b) to the legal representative of such person; (c) to some near relative of such person to be used for the person's benefit; (d) directly in payment of expenses of support, maintenance or education of such person. Any such payment of the Bank shall, to the extent thereof, be a complete discharge of any liability under this Agreement with respect to such payment. The Bank shall not be required to see to the application by any third party of any payments made pursuant to this Article. ARTICLE SIXTEEN 16.01 Marital Deduction Provision. If the Executive designates his spouse to receive payments to be made hereunder after his death, she shall have the right to direct that as to the distribution of the sums, if any, payable after her death the Bank shall pay any such sums to such person or persons or to her own estate as she appoints and directs by a written direction filed with the Bank during her lifetime or by her last will and testament specifically referring to this power of appointment. To the extent that the Executive's spouse does not effectively exercise the power of appointment any such sums shall upon her death be distributed to her estate. 7 ARTICLE SEVENTEEN 17.01 Arbitration. In the event of any dispute, controversy or misunderstanding between the parties hereto, which may directly or indirectly concern or involve any of the terms, covenants or conditions hereof, the parties agree that such controversy shall be settled by arbitration in the City of Medford in accordance with the Rules of American Arbitration Association. One arbitrator shall be named by the each party involved in the dispute and then an additional arbitrator shall be named by the arbitrators so chosen. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. The costs of the arbitration shall be borne by the party or parties designated by the arbitrators. IN WITNESS WHEREOF, the Bank has caused this Agreement to be duly executed by its Chief Financial Officer and its Corporate seal affixed, duly attested by its Secretary, and the Executive has hereunto set his hand and seal on the day and year first written above. Medford Savings Bank /s/ Phillip W. Wong -------------------------- Chief Financial Officer /s/ Arthur H. Meehan --------------------------- Executive ATTEST: /s/ Eugene R. Murray - ------------------------- Secretary /s/ Mary L. Martel - ------------------------- Witness 8 EX-13 11 ANNUAL REPORT [LOGO] Medford Bancorp, Inc. ANNUAL REPORT 1997 [LOGO] Medford Bancorp, Inc. ARLINGTON ROUTE 60 & MYSTIC VALLEY PARKWAY 781-393-6355 BELMONT 4 HILL ROAD, CORNER OF BRIGHTON ST. 617-393-6320 BURLINGTON 258 CAMBRIDGE ST. 781-272-5700 MALDEN MALDEN CENTER 399 MAIN ST. 781-393-6386 BROADWAY 44 BROADWAY 781-393-6334 MAPLEWOOD 28 LEBANON ST. 781-393-6329 OAK GROVE 876 MAIN ST. 781-393-6326 WEST SIDE 443 CHARLES ST. 781-393-6337 MEDFORD MAIN OFFICE 29 HIGH ST. 781-395-7700 LOAN CENTER 5 HIGH ST. 781-395-7700 HAINES SQUARE 257 SPRING ST. 781-393-6380 SOUTH MEDFORD 448 MAIN ST. 781-393-6340 WELLINGTON 499 RIVERSIDE AVE. 781-393-6350 WEST MEDFORD 501 HIGH ST. 781-393-6344 NORTH READING 80 MAIN ST. 978-664-5581 WALTHAM 695 MAIN ST. 781-647-4848 WILMINGTON 240 MAIN ST. 978-658-9134 FINANCIAL HIGHLIGHTS - -------------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 TOTAL ASSETS $1,135,572 $1,039,098 INVESTMENTS 513,418 424,966 NET LOANS 570,844 560,855 DEPOSITS 821,706 792,141 BORROWINGS 205,779 148,464 NET INCOME 11,390 10,429 STOCKHOLDERS' EQUITY 101,510 92,521 SHARES OUTSTANDING 4,541,148 4,534,648 PER COMMON SHARE: BASIC EARNINGS $ 2.51 $ 2.31 DILUTED EARNINGS 2.39 2.21 BOOK VALUE 22.35 20.40 CASH DIVIDENDS DECLARED .90 .83 FINANCIAL RATIOS: RETURN ON AVERAGE ASSETS 1.05% 1.05% RETURN ON AVERAGE EQUITY 11.81 11.72 STOCKHOLDERS' EQUITY TO ASSETS 8.94 8.90 NET INTEREST RATE SPREAD 2.84 3.00 NET YIELD ON AVERAGE EARNING ASSETS 3.26 3.39 EMPLOYEES (AT YEAR END), FULL-TIME EQUIVALENT 252 255 SHAREHOLDERS OF RECORD 1,187 1,221 - -------------------------------------------------------------------------------- ANNUAL MEETING The Annual Meeting of Shareholders will be held April 27, 1998 at 10 a.m. at Medford Bank, 5 High Street, Suite 202, Medford, Massachusetts. CORPORATE INFORMATION Medford Bancorp, Inc. Medford Bank 29 High Street, Medford, MA 02155 781-395-7700 ACCESSING INFORMATION Additional copies of this Annual Report and Form 10-K may be obtained without charge by writing to the Company's Shareholder Relations Department. These reports are also available to the public on request as required by the Securities and Exchange Commission (SEC). These statements have not been reviewed or confirmed for accuracy of relevance by the SEC. 1997 ANNUAL REPORT [LOGO] DEAR SHAREHOLDERS - -------------------------------------------------------------------------------- MEDFORD BANCORP'S STRONG FINANCIAL PERFORMANCE FOR 1997, WITH RECORD-LEVEL EARNINGS FOR THE SEVENTH CONSECUTIVE YEAR, AFFIRMS OUR STRATEGIC DIRECTION TO REMAIN AN INDEPENDENT COMMUNITY BANK AND DELIVER VALUE TO OUR SHAREHOLDERS. [PHOTO OMITTED] (FROM LEFT TO RIGHT) (FIRST ROW) PHILLIP W. WONG, EXECUTIVE VICE PRESIDENT CHIEF FINANCIAL OFFICER ARTHUR H. MEEHAN, CHAIRMAN, PRESIDENT AND CEO GEORGE A. BARGAMIAN, SENIOR VICE PRESIDENT RETAIL BANKING (SECOND ROW) WILLIAM F. RIVERS, SENIOR VICE PRESIDENT ADMINISTRATION MONA BISHLAWI, SENIOR VICE PRESIDENT CONTROLLER ERIC B. LOTH, SENIOR VICE PRESIDENT SENIOR LENDING OFFICER In 1997, we formed Medford Bancorp, Inc. as the holding company for Medford Bank. The holding company affords us greater control in managing capital and positions us well for possible business opportunities. With assets in excess of $1 billion, our financial performance has continually improved as evidenced in the financial statements of recent years. For the year ended December 31, 1997, we reported consolidated net income of $11,390,000. This represents an increase of $961,000 or 9.2% when compared to net income of $10,429,000 for 1996. With continued earnings growth, our shareholders' equity has exceeded $100 million. Dividends declared in 1997 totaled 90 cents per share, which is an increase of 8.4% from 83 cents in 1996. Book value has increased to $22.35 per share from a level of $20.40 in the prior year. Basic earnings per share were $2.51 ($2.39 on a diluted basis), an increase of twenty cents per share when compared to basic earnings per share of $2.31 ($2.21 on a diluted basis) for the previous year. Return on stockholders' equity increased to 11.81% and return on assets remained at 1.05%. Effectively managing net interest income, the Bank's largest component of operating income, is a crucial element to our success. Managing interest rates and credit risks, as we grow the level of interest earning assets in all rate environments, represents management's most integral challenge. Equally important to our success is our vigorous emphasis on tight cost control. We have achieved an efficiency ratio of 48.6% which gives us a distinct operating advantage over most of our peer group. We operate in an intensely competitive financial services industry. However, there remain great opportunities and potential for a community bank given the changing competitive landscape. We expect consolidation to continue throughout 1998, which will afford the Bank the opportunity to exploit the disintermediation of customers from acquired or merged institutions. As an independent community bank, we are well positioned to meet the financial needs of these customers. 1 [LOGO] SHAREHOLDERS LETTER PEOPLE YOU KNOW EXPERIENCE YOU TRUST - -------------------------------------------------------------------------------- The driving force behind our balance sheet is not size, but profitability. We critically assess all lines of business and carefully develop new business which will favorably impact earnings while simultaneously providing good value and service to our customers. During 1997, we were successful in growing core deposit balances bolstered in part by the success of our packaged ComboPlus account and our DDA accounts. We retained our dominant market share of 49.6% in Medford and 42.3% in Malden, and continue to strengthen market share in other Middlesex County communities. We strive to maintain good credit quality in our loan portfolio. Non-performing loans are at the lowest level in recent years at .15% of total assets. The reserve for loan loss is $6.7 million, providing a coverage ratio of 390% to non-performing loans. Over time, the prudent guidelines used in growing the loan portfolio give us a position of strength and should produce more consistent results during any future economic shifts. Our strategic focus, guided by an alert management team with attention to interest risk management, credit quality and low operating expenses, will serve the Bank well and continue to make us a leading community bank in Middlesex County. We also continue to look for new branch opportunities in our market areas to strengthen our franchise. During 1997, Phillip Wong was promoted to executive vice president and Mona Bishlawi was promoted to senior vice president. We also recognized the talents and contributions of many of our employees with a number of promotions during the year, including eight new officers. In closing, the hard work and dedication given by all employees is greatly appreciated. Our achievements and the successes that we have enjoyed as a community bank are a direct result of their concerted efforts. I thank all Medford Bank employees and thank you, our shareholders, for your continued confidence and support. /s/ Arthur H. Meehan Arthur H. Meehan Chairman of the Board President and Chief Executive Officer [The following tables were originally bar charts in the printed materials.] STOCK PRICE (YEAR END) 1997 $39.25 1996 $25.75 1995 $21.50 BOOK VALUE (YEAR END) 1997 $22.35 1996 $20.40 1995 $19.46 BASIC EARNINGS PER SHARE 1997 $2.51 1996 $2.31 1995 $2.14 CASH DIVIDENDS DECLARED 1997 $0.90 1996 $0.83 1995 $0.71 2 1997 ANNUAL REPORT [LOGO] THE YEAR IN REVIEW - -------------------------------------------------------------------------------- DEPOSIT MIX AS OF DECEMBER 31, 1997 (IN THOUSANDS) [PIE CHART OMITTED] TERM CDS $392,802 47.80% SAVINGS $254,741 31.00% DEMAND & OFFICIAL CHECKS $103,564 12.61% MONEY MARKET $70,599 8.59% COMMUNITY BANKING-BUILDING THE FUTURE As a leading community bank, we remain focused on meeting the financial needs of local residents and businesses. We understand that how we do business is just as important as the products and services we offer; delivery of quality service is a source of pride. EMPHASIZING CUSTOMER SERVICE We pay attention to the details that are important to customers. Whether it is a significant investment as with our recent conversion to a new data processor, or a smaller measure such as installing a new ATM for our Arlington branch customers, our steadfast commitment to customer service is evident. Our retail employee training program incorporates this philosophy by instilling the importance of quality service. We continually monitor our service level with the assistance of an outside firm. Consistently, we rate above peer institutions on a direct comparison. As mentioned, our computer conversion has firmly set the foundation to provide greater enhancements to our service delivery system and has enabled us to improve our product offerings. Throughout 1997, we experienced the benefits of teller and platform automation with streamlined transaction processing. This translates into faster, more efficient service for customers conducting business at branch offices. We have also strengthened our non-branch banking options. Our Call Center, with toll-free access, provides customers the opportunity to open accounts without making a special trip to the bank. And usage of InfoLine, our 24-hour automated telephone banking system which enables customers to check balances, transfer funds etc., has increased significantly, to more than 4,000 calls per week. Venturing into cyberspace, we introduced our new web site and also advertised on the Internet. Consumers now have the convenience of obtaining information with just a few clicks of a mouse. Also available at our site, www.medfordbank.com, are special product offerings. Last year we announced plans to build our 17th branch office in Tewksbury. The transfer of the property from the seller was delayed for a prolonged period of time while the seller resolved administrative issues. We are pleased that construction plans are now underway and we anticipate the grand opening in the summer of 1998. The Tewksbury location complements our franchise well and we see excellent potential to develop new retail and commercial business. We plan to seek other opportunities to open new branches and to further extend our network in markets with growth potential. RETAIL PRODUCT OFFERINGS The popularity of our Freedom 55 mature market program and our Club For Kids is a testament to our strength as a community bank. The Freedom 55 program rewards our high balance deposit customers who qualify with free membership. Membership benefits include a package of free and discounted bank services, group-rate travel opportunities and free seminars on a variety of topics. Members eagerly await the planned cruise to Hawaii in the fall of 1998. Our Club For Kids program is available to all children when they open their first savings account with as little as one dollar. We have continued our partnership with the State's Savings Makes Cents program bringing our Club For Kids and savings education into six elementary schools. Meeting the financial needs of our customers keeps new product development in the forefront. Recent new product introductions include our 3 [LOGO] THE YEAR IN REVIEW WE WILL CONTINUE TO EXPLORE SERVICE AND PRODUCT ENHANCEMENTS WHICH WILL ENABLE US TO MEET FUTURE CUSTOMER NEEDS AND WE WILL BUILD UPON OUR SUCCESS WHILE PRESERVING OUR HERITAGE AS A COMMUNITY-FOCUSED INSTITUTION. - -------------------------------------------------------------------------------- Workplace Partner Program, a packaged account with exceptional value which is offered as a banking benefit to employees of local businesses. In addition, our recently introduced debit card offers customers more convenience. LENDING ACTIVITIES Investing in our communities in the form of mortgage and business loans is good for the local economy. The growth of our residential mortgage portfolio represents our success as a top mortgage provider. We hold dominant mortgage market share, ranking number one in total dollar volume, in the cities of Medford and Malden and number two overall in our defined primary market area. We originated $104.6 million in one to four family mortgage loans including refinanced loans and loans originated for sale, surpassing the 1996 origination volume of $86.8 million. We introduced a successful preapproval program in 1997, expanding our product offering. Our first-time home buyer program and our selection of fixed and variable rate products are also well-received. With the addition of three new originators, we now have eight representatives serving our lending territory. Many new families now enjoy the rewards of home ownership made possible with a Medford Bank loan. The potential to generate new business through our commercial lending division remains strong. One of our strengths in the marketplace is our responsiveness to local businesses. We are a financial partner that is committed to providing a high level of service to small and medium sized businesses. We are ideally positioned to meet the needs of these businesses by providing commercial and industrial, commercial real estate and asset-based loans. During 1997, we maintained high credit quality and achieved modest growth in the commercial loan portfolio. This growth is due in part to our new asset-based lending activities and our commercial real estate division. Asset-based lending, established in 1996, gives us greater capacity to serve this segment of the business market by providing $1 to $4 million asset-based lines of credit. With a favorable climate for commercial real estate, new construction is more robust. We provided construction financing for a range of projects including many single family residential sub-divisions and much larger scale projects such as Eagle's Landing, an age 55 and older community with 176 residential units, a club house and golf course in Tewksbury. LOOKING AHEAD We acquired the property situated between our Main Office and Loan Center buildings on High Street in Medford. We are currently considering options for this property that will enable us to enhance our headquarters. Our Medford Square real estate holdings now extend from Bradlee Road to the start of Forest Street, giving us a substantial presence. As the year 2000 approaches, we are diligent in addressing computer and systems issues. We formed a task force in 1997 with key members from operations, systems, compliance, auditing and senior management. We developed an action plan, with testing scheduled to begin later this year, to ensure that all systems will function properly for the year 2000. We will continue to explore service and product enhancements which will enable us to meet future customer needs and we will build upon our success while preserving our heritage as a community-focused institution. LOAN MIX AS OF DECEMBER 31, 1997 (IN THOUSANDS) [PIE CHART OMITTED] RESIDENTIAL MORTGAGES $390,608 67.63% COMMERCIAL MORTGAGES $124,094 21.49% SECOND MORTGAGES/ EQUITY LINES $23,714 4.10% COMMERCIAL LOANS $14,952 2.59% CONSUMER LOANS $12,931 2.24% CONSTRUCTION MORTGAGES $11,278 1.95% 4 DIRECTORS Arthur H. Meehan* Chairman of the Board, President and Chief Executive Officer Medford Bank Edward D. Brickley Manager of Corporate International Accounting at Polaroid Corporation Cambridge, MA (Retired) David L. Burke President and Treasurer, Boston Steel & Manufacturing Co. Malden, MA Paul J. Crowley* President, CSC Consulting Group Cambridge, MA (Retired) Mary Lou Doherty Assistant Principal, Medford School System (Retired) Edward J. Gaffey* President, Country Way Associates Belmont, MA Andrew D. Guthrie, Jr., M.D. Physician, President of Mistick Pediatrics Associates (Retired) Robert A. Havern, III Attorney, Arlington, MA Member of State Legislature of Commonwealth of Massachusetts Eugene R. Murray* Underwriting Manager of the Boston Office of Cigna Special Risk Facility (Retired) Francis D. Pizzella* Attorney and President of The Savings Bank Life Insurance Company of Massachusetts, President of The Savings Bank Employees Retirement Association (Retired) *Member of Executive Committee OFFICERS OF MEDFORD BANK Arthur H. Meehan** Chairman, President and Chief Executive Officer Vincent Gargano Vice President, Strategic Planning and Risk Management Paula M. McNabb Assistant Vice President, CRA/Compliance Officer **Officer of Medford Bancorp, Inc. ADMINISTRATION William F. Rivers Senior Vice President Joan P. Cronholm Vice President, Loan Operations Officer Jane M. Griffin Vice President, Director of Human Resources David L. Korp Vice President, Operations Officer J. Thomas Mitchell Deposit Operations Officer Charles E. Samour Security Officer Joanne Teixeira Checking Operations Officer FINANCE Phillip W. Wong** Executive Vice President, Chief Financial Officer Mona Bishlawi Senior Vice President, Controller Jane E. Cybulski Vice President, Investment/ALCO Officer Mary E. Auterio Assistant Vice President, Assistant Controller Martin J. Heneghan Senior Audit Officer Christine Panno-West Finance Officer **Officer of Medford Bancorp, Inc. LENDING Eric B. Loth Senior Vice President David E. Boudreau Vice President, Commercial Loan Officer Robert S. Kaminer Vice President, Commercial Real Estate Loans Richard P. Lane Vice President, Commercial Loan Officer Anthony R. Visco Vice President, Residential Lending Anne M. Barry Assistant Vice President, Mortgage Representative Donald L. Cullen Assistant Vice President, Collections Officer Mary Ann Devlin Assistant Vice President, Real Estate Officer Kim S. Foster Assistant Vice President, Commercial Loan Officer Joanne M. Franco Assistant Vice President, Senior Credit Officer Harold L. Goldsmith Assistant Vice President, Mortgage Representative Charles M. Byron Education Loan Officer Judith A. Cogan Credit Officer RETAIL George A. Bargamian Senior Vice President Anne M. Gelineau McGann Vice President, Pension Officer Kenneth E. Peterson Vice President, Branch Administrator Elizabeth J. Stodolski Vice President, Marketing Director Anna Beaudoin Assistant Vice President, Retail Systems Administrator Cheryl A. Cannon Assistant Vice President, Regional Manager Linda A. Iacono Assistant Vice President, Regional Manager Kathleen M. Beasley Branch Officer, Regional Manager Michael W. Chabre Branch Officer Judith A. Gilligan Branch Officer Stephanie M. Tiernan Branch Officer Rosanna Natola Officer, Retail Systems & Training [LOGO] Medford Bancorp, Inc. [LOGO] Medford Bancorp, Inc. PEOPLE YOU KNOW. EXPERIENCE YOU TRUST. 781-395-7700 SHAREHOLDER INFORMATION The Company's common stock trades on the Nasdaq Stock Market under the symbol MDBK. The stock is listed under various abbreviations in the Wall Street Journal and other newspapers. There were 1,187 shareholders of record as of December 31, 1997. QUARTERLY STOCK PERFORMANCE The following tabulation shows the range of price quotations per share as reported by Nasdaq for the periods indicated: 1997 High Low - ----------------------------------- First Quarter $29.75 $24.50 Second Quarter $30.50 $24.75 Third Quarter $36.00 $29.25 Fourth Quarter $42.00 $34.00 DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Stockholders may obtain a detailed brochure of the plan by writing to the Company's Shareholder Relations Department. TRANSFER AGENT Contact our stock transfer agent directly for assistance regarding: change of address; transfer of stock certificates; replacement of lost, stolen, or destroyed certificates or dividend checks; elimination of duplicate mailing. Boston EquiServe P.O. Box 8200 Boston, MA 02266-8200 (800) 426-5523 LEGAL COUNSEL Goodwin, Procter & Hoar Exchange Place Boston, MA 02109 (617) 570-1000 INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT Wolf & Company, P.C. One International Place Boston, MA 02110 (617) 439-9700 EX-23 12 CONSENT OF INDEPENDENT AUDITORS CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement Number 333-41161 (dated November 26, 1997, on Form S-8), Registration Statement Number 333-43271 (dated December 24, 1997, on Form S-8), and Registration Statement Number 333-43273 (dated December 24, 1997, on Form S-8) of our report dated January 21, 1998, on the consolidated financial statements of Medford Bancorp, Inc. and subsidiaries, appearing in the Annual Report on Form 10-K of Medford Bancorp, Inc. for the year ended December 31, 1997. /s/ Wolf & Company, P.C. Boston, Massachusetts March 20, 1998 EX-27 13 FDS
9 This schedule contains summary financial information extracted from Medford Bancorp, Inc. year-to-date financial information for the twelve months ended December 31, 1997 and is qualified in its entirety by reference to such Form 10-K. 1000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 13,376 2 2,802 0 402,723 103,823 0 577,577 (6,733) 1,135,572 821,706 95,670 6,577 110,109 0 0 2,271 99,239 1,135,572 46,213 28,914 205 75,332 31,328 41,349 33,983 125 835 19,054 18,646 18,646 0 0 11,390 2.51 2.39 7.23 1,726 0 0 0 7,231 831 208 6,733 0 0 0
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