-----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, Wo0RTb3W7BCtVGH5mKncYqeKogCCqkNO8vIhf1T69iobysfFwbkO6zXAgeWD1g9l P0X5rt7/a/7elV+2H3zing== 0000950135-97-004801.txt : 19971211 0000950135-97-004801.hdr.sgml : 19971211 ACCESSION NUMBER: 0000950135-97-004801 CONFORMED SUBMISSION TYPE: 8-K12G3 PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19971126 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19971126 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: MEDFORD BANCORP INC CENTRAL INDEX KEY: 0001049895 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 043384928 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K12G3 SEC ACT: SEC FILE NUMBER: 000-23435 FILM NUMBER: 97729593 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 8-K 1 MEDFORD BANCORP, INC. CURRENT REPORT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 November 26, 1997 (Date of Earliest Event reported) MEDFORD BANCORP, INC. (Exact name of registrant as specified in charter) MASSACHUSETTS 04-3384928 (State or other jurisdiction (Commission File Number) (IRS Employer of incorporation) Identification No.) 29 HIGH STREET, MEDFORD, MASSACHUSETTS 02155 (Address of principal executive offices, including zip code) (617) 395-7700 (Registrant's telephone number, including area code) The Exhibit Index appears on page 5. There are _____ pages in this Report, including exhibits. 2 ITEM 5. OTHER EVENTS. On November 26, 1997 at 12:01 a.m. (the "Effective Date") Medford Bancorp, Inc. (the "Company") and Medford Savings Bank, a Massachusetts savings bank (the "Bank"), consummated the formation of a holding company for the Bank (the "Reorganization") pursuant to a Plan of Reorganization and Acquisition dated as of July 29, 1997 (the "Plan of Reorganization"). Pursuant to the Plan of Reorganization, at the Effective Date, each issued and outstanding share of the Bank's common stock ("Bank Common Stock"), par value $0.50 per share (together with associated preferred stock purchase rights) (except shares held by stockholders exercising dissenters' rights), automatically and without consideration was converted into and exchanged for one share of the common stock, par value $0.50 per share (the "Common Stock") of the Company (together with associated preferred stock purchase rights). Prior to the completion of the Reorganization, the Company was a wholly-owned subsidiary of the Bank. On the Effective Date, the Bank became a wholly-owned subsidiary of the Company and the stockholders of the Bank became stockholders of the Company. No additional shares were offered or sold in connection with the Reorganization. Until the Effective Date, the Bank's common stock was registered under Section 12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and traded on the Nasdaq National Market System. The Bank has filed reports with the FDIC under Section 12(i) of the Exchange Act since 1993. This report on Form 8-K is being filed in connection with the registration of the Common Stock of the Company under Section 12(g) of the Exchange Act pursuant to Rule 12g-3(a) thereunder. As of the Effective Date, (i) the Company is the successor issuer to the Bank, (ii) the Common Stock of the Company was held of record by three hundred or more persons and (iii) the Common Stock of the Company is listed in place of the common stock of the Bank on the Nasdaq National Market System under the trading symbol "MDBK." Pursuant to the Plan of Reorganization, as of the Effective Date, the Company assumed all of the Bank's obligations under the Bank's stock option plans, as evidenced by the Company's Stock Option Plan and the Medford Savings Bank 1986 Stock Option Plan, which was assumed and adopted by the Company as the Company's stock option plan (the "Stock Option Plans"). Under the Stock Option Plans, the Company will issue shares of its Common Stock in lieu of shares of Bank Common Stock. The Company intends to file, concurrently with this Current Report on Form 8-K, a registration statement on Form S-8 for all Common Stock issuable under the Stock Option Plans. In connection with the Reorganization, the Bank's Shareholder Rights Plan was amended and restated so that it was assumed by the Company following the Reorganization. Accordingly, as of the Effective Date, the outstanding Bank Rights (as defined below) issued pursuant to the Bank's Shareholder Rights Plan were assumed by, and deemed to be rights issued by, the Company (the "Rights"). The Company's Amended and Restated Shareholder Rights Plan (the "Company's Shareholder Rights Plan") has been converted from the Bank's Shareholder Rights Plan. The following summary description of the Company's Shareholder Rights Plan does not 3 purport to be complete and is qualified in its entirety by reference to the Company's Shareholder Rights Plan, which has been filed as an exhibit to this Current Report on Form 8-K. In connection with the adoption of the Bank's Shareholder Rights Plan, the Board of Directors of the Bank declared a dividend distribution of one preferred stock purchase right (a "Bank Right") for each outstanding share of the Bank's common stock to stockholders of record as of the close of business on October 8, 1993. On July 29, 1997, in connection with the Reorganization, the Board of Directors of the Company adopted resolutions assuming the Bank's Shareholder Rights Plan and converting it into the Company's Shareholder Rights Plan, which contains substantially the terms and conditions of the Bank's Shareholder Rights Agreement. On November 25, 1997, the Boards of Directors of the Bank and the Company adopted resolutions confirming the conversion of the Bank Rights to the Rights with the conversion and exchange of the Bank's common stock for the Company's Common Stock. As of the Effective Date, the Rights currently are not exercisable and are attached to and trade with the outstanding shares of the Company's Common Stock. Under the Company's Shareholder Rights Plan, the Rights become exercisable (i) if a person becomes an "acquiring person" by acquiring 15% or more of the outstanding shares of the Company's Common Stock, (ii) if a person who owns 10% or more of the Company's Common Stock is determined to be an "adverse person" by the Board of Directors of the Company, or (iii) if a person commences a tender offer that would result in that person owning 15% or more of the Company's Common Stock. In the event that a person becomes an "acquiring person" or is declared an "adverse person" by the Board of Directors of the Company, each holder of a Right (other than the acquiring person or the adverse person) would be entitled to acquire such number of shares of the Company's preferred stock as are provided for in the Company's Shareholder Rights Plan. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS. The following is a complete list of exhibits filed or incorporated by reference as part of this report. 2.1 Plan of Reorganization and Acquisition dated as of July 29, 1997 between the Company and the Bank 3.1 Articles of Organization of the Company 3.2 By-laws of the Company 3.3 Amended and Restated Charter of the Bank 3.4 Amended and Restated By-laws of the Bank 4.1 Specimen certificate for shares of Common Stock of the Company 2 4 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 By-laws of the Company (see Exhibit 3.2) 10.1 Amended and Restated Shareholders Rights Agreement, dated November 26, 1997, between Medford Bancorp, Inc. and Medford Savings Bank and State Street and Trust Company, as Rights Agent 99.1 Annual Report of the Bank on Form F-2 for the year ended December 31, 1996, as filed with the Federal Deposit Insurance Corporation ("FDIC") 99.2 Quarterly Report of the Bank on Form F-4 for the quarter ended March 31, 1997, as filed with the FDIC 99.3 Current Report of the Bank on Form F-3, as filed with the FDIC on May 7, 1997 99.4 Quarterly Report of the Bank on Form F-4 for the quarter ended June 30, 1997, as filed with the FDIC 99.5 Proxy Statement, dated August 4, 1997, delivered to the Bank's stockholders in connection with the Bank's September 16, 1997 Special Meeting of Stockholders, as filed with the FDIC 99.6 Quarterly Report of the Bank on Form F-4 for the quarter ended September 30, 1997, as filed with the FDIC 99.7 Current Report of the Bank on Form F-3, as filed with the FDIC on October 7, 1997 99.8 Notification pursuant to Section 225.17 of Regulation Y (12 C.F.R. ss. 225.17) for a One-Bank Holding Company Formation filed by the Company with the Federal Reserve Bank of Boston on September 18, 1997 99.9 Application for Acquisition of a Bank by a Company pursuant to MGL c. 172, ss. 26B, filed by the Company with the Commissioner of Banks of the Commonwealth of Massachusetts on September 15, 1997 3 5 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MEDFORD BANCORP, INC. Date: November 26, 1997 By: /s/ Arthur H. Meehan ----------------------------------------------- Arthur H. Meehan Chairman, President and Chief Executive Officer 4 6 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGES 2.1 Plan of Reorganization and Acquisition dated as of July 29, 1997 between the Company and the Bank 3.1 Articles of Organization of the Company 3.2 By-laws of the Company 3.3 Amended and Restated Charter of the Bank 3.4 Amended and Restated By-laws of the Bank 4.1 Specimen certificate for shares of Common Stock of the Company 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 By-laws of the Company (see Exhibit 3.2) 10.1 Amended and Restated Shareholders Rights Agreement, dated November 26, 1997, between Medford Bancorp, Inc. and State Street and Trust Company, as Rights Agent 99.1 Annual Report of the Bank on Form F-2 for the year ended December 31, 1996, as filed with the Federal Deposit Insurance Corporation ("FDIC") 99.2 Quarterly Report of the Bank on Form F-4 for the quarter ended March 31, 1997, as filed with the FDIC 99.3 Current Report of the Bank on Form F-3, as filed with the FDIC on May 7, 1997
5 7
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGES 99.4 Quarterly Report of the Bank on Form F-4 for the quarter ended June 30, 1997, as filed with the FDIC 99.5 Proxy Statement, dated August 4, 1997, delivered to the Bank's stockholders in connection with the Bank's September 16, 1997 Special Meeting of Stockholders, as filed with the FDIC 99.6 Quarterly Report of the Bank on Form F-4 for the quarter ended September 30, 1997, as filed with the FDIC 99.7 Current Report of the Bank on Form F-3, as filed with the FDIC on October 7, 1997 99.8 Notification pursuant to Section 225.17 of Regulation Y (12 C.F.R. ss. 225.17) for a One-Bank Holding Company Formation filed by the Company with the Federal Reserve Bank of Boston on September 18, 1997 99.9 Application for Acquisition of a Bank by a Company pursuant to MGL c. 172, ss. 26B, filed by the Company with the Commissioner of Banks of the Commonwealth of Massachusetts on September 15, 1997
- - - ---------------------------- 6 EX-2.1 2 PLAN OF REORGANIZATION AND ACQUISITION 1 Exhibit 2.1 PLAN OF REORGANIZATION AND ACQUISITION PURSUANT TO SECTION 26B OF CHAPTER 172 OF THE GENERAL LAWS OF MASSACHUSETTS This Plan of Reorganization and Acquisition (the "Plan") is dated as of July 29, 1997, and made between Medford Savings Bank, a Massachusetts guaranty (stock) savings bank (the "Bank"), and Medford Bancorp, Inc., a Massachusetts corporation ("Bancorp"). The Bank is a stock savings bank, duly organized and validly existing under the laws of the Commonwealth of Massachusetts, with its principal office at 29 High Street, Medford, Massachusetts 02155. As of the date hereof, the authorized capital stock of the Bank consists of (1) 15,000,000 shares of common stock, par value $0.50 per share (the "Bank Common Stock"), of which 4,541,148 shares are issued and outstanding, 200,000 shares are reserved for issuance under the Bank's 1993 Stock Option Plan (as the same may be renamed from time to time), and, 736,000 shares are reserved for issuance under the Bank's 1986 Stock Option Plan (the 1993 Stock Option Plan and the 1986 Stock Option Plan are collectively referred to herein as the "Stock Option Plans"), and (2) 5,000,000 shares of preferred stock, par value $0.50 per share, none of which shares are issued and outstanding. Bancorp is a corporation, duly organized and validly existing under the laws of the Commonwealth of Massachusetts, with its principal office at 29 High Street Medford, Massachusetts 02155. The articles of organization of Bancorp at the Effective Time (as defined herein) will provide for authorized capital stock consisting of 15,000,000 shares of common stock, par value $0.50 per share (the "Bancorp Common Stock"), and 5,000,000 shares of preferred stock, par value $0.50 per share. As of the date hereof, there are 100 shares of Bancorp Common Stock issued and outstanding, all of which are held by the Bank. The Bank and Bancorp have agreed that Bancorp will acquire all of the issued and outstanding shares of Bank Common Stock (together with associated preferred stock purchase rights) in exchange for shares of Bancorp Common Stock (together with associated preferred stock purchase rights) pursuant to the provisions of Section 26B of Chapter 172 of the General Laws of Massachusetts and of this Plan. The Plan has been adopted and approved by a vote of a majority of all the members of the Board of Directors of the Bank, and by a vote of a majority of all the members of the Board of Directors of Bancorp. The officers of the Bank and of Bancorp whose respective signatures appear below have been duly authorized to execute and deliver this Plan. Now, THEREFORE, in consideration of these premises, the Bank and Bancorp agree as follows: 2 SECTION 1 - APPROVAL AND FILING OF PLAN 1.1. The Plan shall be submitted for approval by the holders of Bank Common Stock at a meeting to be called and held in accordance with the applicable provisions of law. Notice of such meeting shall be published at least once a week for two successive weeks in a newspaper of general circulation in the County of Suffolk, Commonwealth of Massachusetts. Both of said publications shall be at least fifteen days prior to the date of the meeting. 1.2. Upon approval of the Plan by the affirmative vote of the holders of 66 2/3% of the outstanding shares of Bank Common Stock as required by law, the Bank and Bancorp shall submit the Plan to the Commissioner of Banks of the Commonwealth of Massachusetts (the "Bank Commissioner") for his approval and filing in accordance with the provisions of Section 26B of Chapter 172 of the General Laws of Massachusetts. The Plan shall be accompanied by such certificates of the respective officers of the Bank and Bancorp as may be required by law and a written request from the Bank that the Plan not be filed by the Bank Commissioner until such future time as the Bank Commissioner shall have received from the Bank and Bancorp the written notice described in Subsection 2.1. 1.3. If the requisite approval of the Plan is obtained at the meeting of holders of Bank Common Stock referred to in Subsection 1.1, thereafter and until the Effective Time, as hereinafter defined, the Bank shall issue certificates for Bank Common Stock, whether upon transfer or otherwise, only if such certificates bear a legend indicating that the Plan has been approved and that shares of Bank Common Stock evidenced by such certificates are subject to acquisition by Bancorp pursuant to the Plan. SECTION 2 - DEFINITION OF EFFECTIVE TIME 2.1. The Plan shall become effective at 12:01 A.M. on the first business day following the date on which the Bank and Bancorp advise the Bank Commissioner in writing (i) that all the conditions precedent to the Plan becoming effective specified in Section 5 have been satisfied and (ii) that the Plan has not been abandoned by the Bank or Bancorp in accordance with the provisions of Section 6, or at such other date and time as is specified in such written notice to the Bank Commissioner. Such time is hereafter called the "Effective Time." SECTION 3 - ACTIONS AT THE EFFECTIVE TIME 3.1. At the Effective Time, Bancorp shall, without any further action on its part or on the part of the holders of Bank Common Stock, automatically and by operation of law acquire and become the owner for all purposes of all the then issued and outstanding shares of Bank Common Stock (together with associated preferred stock purchase rights) and shall be entitled to have issued to it by the Bank a certificate or certificates representing such shares. Thereafter, Bancorp shall have full and exclusive power to vote such shares of Bank Common Stock, to receive dividends thereon and to exercise all rights of an owner thereof. 2 3 3.2. At the Effective Time, the shares of Bancorp Common Stock which are outstanding immediately prior to the Effective Time shall be canceled. 3.3. At the Effective Time, the holders of the then issued and outstanding shares of Bank Common Stock (together with associated preferred stock purchase rights) shall, without any further action on their part or on the part of Bancorp, automatically and by operation of law cease to own such shares and shall instead become owners of one share of Bancorp Common Stock (together with associated preferred stock purchase rights) for each share of Bank Common Stock held by them immediately prior to the Effective Time. Thereafter, such persons shall have full and exclusive power to vote such shares of Bancorp Common Stock, to receive dividends thereon, except as otherwise provided herein, and to exercise all rights of an owner thereof. 3.4. At the Effective Time, all previously issued and outstanding certificates representing shares of Bank Common Stock (the "Old Certificates") shall automatically and by operation of law cease to represent shares of Bank Common Stock or any interest therein and each Old Certificate shall instead represent the ownership by the holder thereof of an equal number of shares of Bancorp Common Stock. No holder of an Old Certificate shall be entitled to vote the shares of Bank Common Stock formerly represented by such certificate, or to receive dividends thereon, or to exercise any other rights of ownership in respect thereof. 3.5. Notwithstanding any of the foregoing, any Dissenting Stockholder, as defined in Subsection 8.1, shall have such rights as are provided by Subsection 8.2 and by the laws of the Commonwealth of Massachusetts. SECTION 4 - ACTIONS AFTER THE EFFECTIVE TIME As soon as practicable and in any event not more than thirty days after the Effective Time: 4.1. Bancorp shall deliver to the transfer agent for the Bank and Bancorp (the "Transfer Agent"), as agent for the then holders of the Old Certificates (other than Old Certificates representing shares of Bank Common Stock as to which dissenters' appraisal rights shall have been exercised), a certificate or certificates for the aggregate number of shares of Bancorp Common Stock (the "New Certificates"), to which said holders shall be entitled. Each such holder may surrender his Old Certificate to the Transfer Agent and receive in exchange therefor a New Certificate for an equal number of shares of Bancorp Common Stock. However, holders of Old Certificates need not surrender Old Certificates to the transfer Agent in exchange for a New Certificate. The Transfer Agent shall treat Old Certificates as representing for all purposes an equal number of shares of Bancorp Common Stock. 4.2. Bancorp may publish a notice to the holders of all Old Certificates, specifying the Effective Time of the Plan and notifying such holders that they may present their Old Certificates to the Transfer Agent for exchange for a New Certificate representing an equal number of shares of Bancorp Common Stock. Such notice may likewise be given by mail to such holders at their addresses on the Bank's records. 3 4 SECTION 5 - CONDITIONS PRECEDENT The Plan and the acquisition provided for herein shall not become effective unless all of the following first shall have occurred: 5.1. The Plan shall have been approved by the affirmative vote of the holders of two-thirds of the outstanding Bank Common Stock at a meeting of such stockholders called for such purpose. 5.2. The Plan shall have been approved by the Bank Commissioner and a copy of the Plan with his approval endorsed thereon shall have been filed in his office, all as provided in Section 26B of Chapter 172 of the General Laws of Massachusetts. 5.3. Any approval, consent, or waiver required by the Board of Governors of the Federal Reserve System shall have been received, and any waiting period imposed by applicable law shall have expired. 5.4. The Bank shall have received a favorable opinion from its counsel, satisfactory in form and substance to the Bank, with respect to the federal income tax consequences of the Plan and the acquisition contemplated thereby. 5.5. The shares of Bancorp Common Stock (together with associated preferred stock purchase rights) to be issued to the holders of Bank Common Stock pursuant to the Plan shall have been registered or qualified for such issuance to the extent required under all applicable state securities laws. 5.6. The Bank and Bancorp shall have obtained all other consents, permissions and approvals and taken all actions required by law or agreement, or deemed necessary by the Bank or Bancorp, prior to the consummation of the acquisition provided for by the Plan and to Bancorp's having and exercising all rights of ownership with respect to all of the outstanding shares of Bank Common Stock acquired by it thereunder. SECTION 6 - ABANDONMENT OF PLAN 6.1. The Plan may be abandoned by either the Bank or Bancorp at any time before the Effective Time in the event that: (a) Necessary regulatory approvals cannot be obtained, or the conditions or obligations associated with such regulatory approvals make consummation of the acquisition contemplated by the Plan inadvisable in the opinion of Bank or Bancorp; (b) The number of shares of Bank Common Stock owned by Dissenting Stockholders, as defined in Subsection 8.1, shall make consummation of the acquisition contemplated by the Plan inadvisable in the opinion of the Bank or Bancorp; 4 5 (c) Any action, suit, proceeding or claim has been instituted, made or threatened relating to the Plan which shall make consummation of the acquisition contemplated by the Plan inadvisable in the opinion of the Bank or Bancorp; or (d) For any other reason consummation of the acquisition contemplated by the Plan is inadvisable in the opinion of the Bank or Bancorp. Such abandonment shall be effected by written notice by either the Bank or Bancorp to the other of them, and shall be authorized or approved by the Board of Directors of the party giving such notice. Upon the giving of such notice, the Plan shall be terminated and there shall be no liability hereunder or on account of such on the part of the Bank or Bancorp or the Directors, officers, employees, agents or stockholders of either of them. In the event of abandonment of the Plan, the Bank shall pay the fees and expenses incurred by itself and Bancorp in connection with the Plan and the proposed acquisition. If either party hereto gives written notice of termination to the other party pursuant to this section, the party giving such written notice shall simultaneously furnish a copy thereof to the Bank Commissioner. SECTION 7 - AMENDMENT OF PLAN 7.1. The Plan may be amended or modified at any time by mutual agreement of the Boards of Directors of Bancorp and the Bank (i) prior to its approval by the stockholders of the Bank, in any respect, and (ii) subsequent to such approval, in any respect, provided that the Bank Commissioner shall approve of such amendment or modification. SECTION 8 - RIGHTS OF DISSENTING STOCKHOLDERS 8.1. "Dissenting Stockholders" shall mean those holders of Bank Common Stock who file with the Bank before the taking of the vote on the Plan, written objection to the Plan, pursuant to Section 86 of Chapter 156B of the General Laws of Massachusetts, stating that they intend to demand payment for their shares of Bank Common Stock if the Plan is consummated and whose shares are not voted in favor of the Plan. 8.2. Dissenting Stockholders who comply with the provisions of Sections 86 to 98, inclusive, of Chapter 156B of the General Laws of Massachusetts and all other applicable provisions of law shall be entitled to receive from the Bank payment of the fair value of their shares of Bank Common Stock upon surrender by such holders of the certificates which previously represented shares of Bank Common Stock. Certificates so obtained by the Bank, upon payment of the fair value of such shares as provided by law, shall be canceled. Shares of Bancorp Common Stock, to which Dissenting Stockholders would have been entitled had they not dissented, shall be deemed to constitute authorized but unissued shares of Bancorp Common Stock and may be sold or otherwise disposed of by Bancorp at the discretion of, and on such terms as may be fixed by, its Board of Directors. 5 6 SECTION 9 - STOCK OPTIONS By voting in favor of the Plan and by consummation of the acquisition contemplated by the Plan, Bancorp shall have approved adoption by Bancorp of the Stock Option Plans of the Bank as the Stock Option Plans of Bancorp and shall have agreed to issue Bancorp Common Stock in lieu of Bank Common Stock pursuant to stock options then outstanding under the Stock Option Plans. As of the Effective Time, the unexercised portion of the options outstanding under the existing Stock Option Plans shall be assumed by Bancorp and thereafter shall be exercisable only for shares of Bancorp Common Stock, with each such option being exercisable for a number of shares of Bancorp Common Stock equal to the number of shares of Bank Common Stock that were available thereunder immediately prior to the Effective Time, and with no change in the exercise price or any other term or condition of such option. Bancorp and the Bank shall make appropriate amendments to the Stock Option Plans to reflect the adoption of such plans as the Stock Option Plans of Bancorp without adverse effect upon the options outstanding under the Stock Option Plans. SECTION 10 - GOVERNING LAW The Plan shall take effect as a sealed instrument and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. SECTION 11 - COUNTERPARTS The Plan may be executed in several identical counterparts, each of which when executed and delivered by the parties hereto shall be an original, but all of which together shall constitute a single instrument. In making proof of the Plan, it shall not be necessary to produce or account for more than one such counterpart. 6 7 MEDFORD SAVINGS BANK By: /s/ Arthur H. Meehan ---------------------------------------- Arthur H. Meehan Chairman, President and Chief Executive Officer ATTEST: /s/ Eugene R. Murray - - - ------------------------------ Eugene R. Murray Clerk MEDFORD BANCORP, INC. By: /s/ Arthur H. Meehan ---------------------------------------- Arthur H. Meehan Chairman, President and Chief Executive Officer ATTEST: /s/ Eugene R. Murray - - - ------------------------------ Eugene R. Murray Clerk I hereby approve this Plan of Reorganization and Acquisition. October 30, 1997 /s/ Thomas J. Curry ---------------- ------------------- Date Thomas J. Curry Commissioner of Banks 7 EX-3.1 3 ARTICLES OF ORGANIZATION 1 Exhibit 3.1 THE COMMONWEALTH OF MASSACHUSETTS Examiner: WILLIAM FRANCIS GALVIN Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 ARTICLES OF ORGANIZATION (General Laws, Chapter 156B) Name Approved ARTICLE I The exact name of the corporation is: Medford Bancorp, Inc. ARTICLE II The purpose of the corporation is to engage in the following business activities: See attached Addendum A to the Articles of Organization. C _ _ P _ _ M _ _ R.A. _ P.C. - - - --------- Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on one side only of separate 8 1/2 x 11 sheets of paper with a left margin of at least 1 inch. Additions to more than one article may be made on a single sheet so long as each article requiring each addition is clearly indicated. 2 ARTICLE III State the total number of shares and par value, if any, of each class of stock which the corporation is authorized to issue.
WITHOUT PAR VALUE WITH PAR VALUE - - - ------------------------------- --------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - - - ---- ---------------- ---- ---------------- --------- Common: 0 Common: 15,000,000 $.50 Preferred: 0 Preferred: 5,000,000 $.50
ARTICLE IV If more than one class of stock is authorized, state a distinguishing designation for each class. Prior to the issuance of any shares of a class, if shares of another class are outstanding, the corporation must provide a description of the preferences, voting powers, qualifications, and special or relative rights or privileges of that class and of each other class of which shares are outstanding and of each series then established within any class. See attached Addendum B to the Articles of Organization. ARTICLE V The restrictions, if any, imposed by the Articles of Organization upon the transfer of shares of stock of any class are: None. ARTICLE VI **Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See attached Addendum C to the Articles of Organization. ** If there are no provisions state "None". Note: The preceding six (6) articles are considered to be permanent and may ONLY be changed by filing appropriate Articles of Amendment. 3 ARTICLE VII The effective date of organization of the corporation shall be the date approved and filed by the Secretary of the Commonwealth. If a later effective date is desired, specify such date which shall not be more than thirty days after the date of filing. ARTICLE VIII THE INFORMATION CONTAINED IN ARTICLE VIII IS NOT A PERMANENT PART OF THE ARTICLES OF ORGANIZATION. a. The street address (post office boxes are not acceptable) of the principal office of the corporation in Massachusetts is: 29 High Street, Medford Massachusetts 02155 b. The name, residential address and post office address of each director and officer of the corporation is as follows: NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS President: Treasurer: See attached Addendum D to the Articles of Organization Clerk: Directors: c. The fiscal year (i.e., tax year) of the corporation shall end on the last day of the month of: December d. The name and business address of the resident agent, if any, of the corporation: Eugene R. Murray, Clerk, 29 High Street, Medford, MA 02155 ARTICLE IX By-laws of the corporation have been duly adopted and the president, treasurer, clerk and directors whose names are set forth above, have been duly elected. IN WITNESS WHEREOF AND UNDER THE PAINS AND PENALTIES OF PERJURY, I/we, whose signatures(s) appear below as incorporator(s) and whose name(s) and business or residential address(es) are clearly typed or printed beneath each signature do hereby associate with the intention of forming this corporation under the provisions of General Laws, Chapter 156B and do hereby sign these Articles of Organization as incorporator(s) this 23rd day of July, 1997. /s/ Arthur H. Meehan ------------------------------------------ Arthur H. Meehan 29 High Street Medford, MA 02155 Note: If an existing corporation is acting as incorporator, type in the exact name of the corporation, the state or other jurisdiction where it was incorporated, the name of the person signing on behalf of said corporation and the title he/she holds or other authority by which such action is taken. 4 ADDENDUM A TO THE ARTICLES OF ORGANIZATION OF MEDFORD BANCORP, INC. ARTICLE II A. To acquire, invest in or hold stock in any subsidiary permitted under (i) the Bank Holding Company Act of 1956, and (ii) Massachusetts General Laws, Chapter 167A, as such statutes may be amended from time to time, and to engage in any other activity or enterprise permitted to a bank holding company under said statutes or other applicable law. B. To buy, sell, invest in, hold and deal in property of every nature and description, real and personal, tangible and intangible permissible for such a corporation. C. To carry on any business or other activity which may be lawfully carried on by a corporation organized under the Business Corporation Law of the Commonwealth of Massachusetts, whether or not related to those referred to in the foregoing paragraphs. A-1 5 ADDENDUM B TO THE ARTICLES OF ORGANIZATION OF MEDFORD BANCORP, INC. ARTICLE IV. Capital Stock. The total number of shares of all classes of capital stock which Medford Bancorp, Inc. ("Bancorp") is authorized to issue is 20,000,000 shares, of which 15,000,000 shares shall be common stock, $.50 par value per share, and 5,000,000 shares shall be preferred stock, $.50 par value per share. The shares may be issued by Bancorp from time to time by a vote of its Board of Directors without the approval of its stockholders. Upon payment of lawful consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the surplus of Bancorp which is transferred to stated capital upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance. A description of the different classes and series of Bancorp's capital stock and a statement of the designations and the relative rights, preferences and limitation of the shares of each class and series of capital stock are as follows: A. Common Stock. Except as provided by law or in this Article IV (or in any supplemental sections hereto or in any certificate of establishment of any series of preferred stock), the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holder. There shall be no cumulative voting rights in the election of Directors. If there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of a sinking fund or a retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends; but only when and as declared by the Board of Directors. In the event of any liquidation, dissolution or winding up of Bancorp, after there shall have been paid to or set aside for the holders of any class having preference over the common stock in the event of liquidation, dissolution or winding up of Bancorp the full preferential amounts to which they are respectively entitled, the holders of the common stock, and of any class or series of stock entitled to participate in whole or in part therewith as to distribution of B-1 6 assets, shall be entitled, after payment or provision for payment of all debts and liabilities of Bancorp, to receive the remaining assets of Bancorp available for distribution, in cash or in kind, in proportion to their holdings. B. Preferred Stock. The Board of Directors of Bancorp is authorized by vote or votes, from time to time adopted, to provide for the issuance of preferred stock in one or more series and to fix and state the voting powers, designations, preferences and relative participating, optional or other special rights of the shares of each series and the qualifications, limitations, and restrictions thereof, including, but not limited to, determination of one or more of the following: (1) The distinctive serial designation and the number of shares constituting such series; (2) The dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends and the participating or other special rights, if any, with respect to dividends; (3) The voting powers, if any, of shares of such series; (4) Whether the shares of such series shall be redeemable and, if so, the price or prices at which, and the terms and conditions on which, such shares may be redeemed; (5) The amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of Bancorp; (6) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemable or purchased through the application of such fund; (7) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of Bancorp, and if so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (8) The price or other consideration for which the shares of such series shall be issued; and B-2 7 (9) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of preferred stock and whether such shares may be reissued as shares of the same or any other series of stock. Unless otherwise provided by law, any such vote shall become effective when Bancorp files with the Secretary of State of the Commonwealth of Massachusetts a certificate of establishment of one or more series of preferred stock signed by the President or any Vice President and by the Clerk, Assistant Clerk, Secretary or Assistant Secretary of Bancorp, setting forth a copy of the vote of the Board of Directors establishing and designating the series and fixing and determining the relative rights and preferences thereof, the date of adoption of such vote and a certification that such vote was duly adopted by the Board of Directors. B-3 8 ADDENDUM C TO THE ARTICLES OF ORGANIZATION OF MEDFORD BANCORP, INC. ARTICLE VI(A). Certain Business Combinations. SECTION 1. Vote Required for Certain Business Combinations. A. Required Vote for Certain Business Combinations. In addition to any affirmative vote required by the Massachusetts General Laws or by these Articles of Organization, and except as otherwise expressly provided in Section 2 of this Article VI(A): (1) any merger or consolidation of Bancorp or any Subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as hereinafter defined) or (b) any other corporation or entity (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; (2) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of Bancorp or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $1,000,000 or more; (3) the issuance or transfer by Bancorp or any Subsidiary (in one transaction or a series of transactions) of any securities of Bancorp or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities, or other property (or a combination thereof) having an aggregate Fair Market Value of $1,000,000 or more; (4) the adoption of any plan or proposal for the liquidation or dissolution of Bancorp proposed by or on behalf of any Interested Stockholder or any Affiliate of any Interested Stockholder; or (5) any reclassification of securities (including any reverse stock split), any recapitalization of Bancorp, any merger or consolidation of Bancorp with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving any Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportion of the outstanding shares of any class of equity or convertible securities of Bancorp or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; C-1 9 shall require (subject to Section 2 of this Article VI(A)) the affirmative vote of the holders of at least eighty percent of the voting power of the then outstanding shares of capital stock of Bancorp entitled to vote generally in the election of directors (the "Voting Stock"), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required or that a lesser percentage may be specified by law. B. Definition of "Business Combination." The term "Business Combination" as used in this Article VI(A) shall mean any transaction which is referred to in any one or more of clauses (1) through (5) of Paragraph A of this Section 1. SECTION 2. When Higher Vote is Not Required. The provisions of Section 1 of this Article VI(A) shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Articles of Organization, if all of the conditions specified in either of the following Paragraphs A or B are met: A. Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors then in office (as hereinafter defined); or B. Price and Procedure Requirements. All of the following conditions shall have been met: (1) The aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination (the "Consummation Date") of any consideration other than cash to be received per share by holders of common stock in such Business Combination shall be at least equal to the highest of the following: (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of common stock acquired by it (i) within the two-year period immediately prior to and including the first public announcement of the proposed Business Combination (the "Announcement Date") or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) the highest Fair Market Value per share of common stock on any date during the one-year period prior to and including the Announcement Date; and (c) (if applicable) the price per share equal to the product of (i) the Fair Market Value per share of common stock on the Announcement Date or on the date on which the Interested Stockholder C-2 10 became an Interested Stockholder (such later date is referred to in this Article VI(A) as the "Determination Date"), whichever is higher, multiplied by (ii) the ratio of (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of common stock acquired by it within the two-year period immediately prior to and including the Announcement Date to (y) the Fair Market Value per share of common stock on the first day in such two-year period upon which the Interested Stockholder acquired any shares of common stock. (2) The aggregate amount of the cash and the Fair Market Value as of the Consummation Date of the Business Combination of consideration other than cash to be received per share by holders of shares of any other class of outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this Paragraph B(2) shall be required to be met with respect to every other class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (i) within the two-year period immediately prior to and including the Announcement Date or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) (if applicable) the highest preferential amount per share which the holders of shares of such class of Voting Stock are entitled to receive from Bancorp in the event of any voluntary or involuntary liquidation, dissolution or winding up of Bancorp; (c) the highest Fair Market Value per share of such class of Voting Stock on any date during the one-year period prior to and including the Announcement Date; and (d) (if applicable) the price per share equal to the product of (i) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher, multiplied by (ii) the ratio of (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it within the two-year period immediately prior to and including the Announcement Date to (y) the Fair Market Value per share of such class of Voting Stock on the first day in such two-year period C-3 11 upon which the Interested Stockholder acquired any shares of such class of Voting Stock. (3) The consideration to be received by holders of a particular class of outstanding Voting Stock (including common stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. (4) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of any such Business Combination: (a) there shall have been (i) no failure to declare and pay at regular dates therefor the full amount of any dividends (whether or not cumulative) payable on any class or series having a preference over the common stock of Bancorp as to dividends or upon liquidation, except as approved by a majority of the Continuing Directors; (ii) no reduction in the annual rate of dividends paid on the common stock (except as necessary to reflect any subdivision of the common stock), except as approved by a majority of the Continuing Directors; and (iii) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the common stock, unless the failure to so increase such annual rate is approved by a majority of the Continuing Directors; and (b) such Interested Stockholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder's becoming an Interested Stockholder. (5) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by Bancorp, whether in anticipation of or in connection with such Business Combination or otherwise, unless such transaction shall have been approved or ratified by a majority of the Continuing Directors after such person shall have become an Interested Stockholder. C-4 12 (6) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public stockholders of Bancorp at least twenty days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). SECTION 3. Certain Definitions. For the purpose of these Articles of Organization: A. A "person" shall mean an individual, a group acting in concert, a corporation, a partnership, a limited liability company, an association, a joint stock company, a trust, a business trust, a government or political subdivision, any unincorporated organization and any similar association or entity. B. "Interested Stockholder" shall mean any person (other than Bancorp or any Subsidiary) who or which: (1) is the beneficial owner, directly or indirectly, of more than ten percent of the voting power of the then outstanding shares of Voting Stock; (2) is an Affiliate of Bancorp and at any time within the two-year period immediately prior to and including the date in question was the beneficial owner, directly or indirectly, of ten percent of more of the voting power of the then outstanding shares of Voting Stock; or (3) is an assignee of or has otherwise succeeded to the beneficial ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to and including the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933 and such assignment or succession was not approved by a majority of the Continuing Directors. C. A person shall be a "beneficial owner" of any shares of Voting Stock: (1) which such person or any of its Affiliates or Associates, directly or indirectly, has or shares with respect to the Voting Stock (a) the right to acquire or direct the acquisition of (whether such right is exercisable immediately or only after the passage of time or upon the satisfaction of any conditions or both), pursuant to any agreement, arrangement or understanding or upon the exercise of any conversion rights, warrants, or options or otherwise; (b) the right to vote, or direct the voting of, C-5 13 pursuant to any agreement, arrangement or understanding or otherwise; or (c) the right to dispose of or transfer or direct the disposition or transfer of, pursuant to any agreement, arrangement, understanding or otherwise; or (2) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. D. For the purpose of determining whether a person is an Interested Stockholder pursuant to Paragraph B of this Section 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned by such person through application of Paragraph C of this Section 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options or otherwise. E. "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. F. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by Bancorp; provided, however, that for the purposes of the definition of Interested Stockholder set forth in Paragraph B of this Section 3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by Bancorp. G. "Continuing Director" means any member of the Board of Directors of Bancorp (the "Board") who is not an Affiliate or Associate of the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director who is not an Affiliate or Associate of the Interested Stockholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board. H. "Fair Market Value" means: (1) in the case of stock, the highest closing sale price during the thirty-day period immediately preceding the date in question of a share of such stock on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the thirty-day period preceding the date in question on the National Association of Securities Dealers Automated Quotation System or any comparable system then in use, or if no such quotations are available, the fair market value on the date in question of a C-6 14 share of such stock as determined by at least a majority of the Continuing Directors of the Board in good faith; and (2) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by at least a majority of the Continuing Directors of the Board in good faith. I. "Group Acting in Concert" shall mean persons seeking to combine or pool their voting or other interests in the securities of Bancorp for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written, oral or otherwise, or any "group of persons" as defined under Section 13(d) of the Securities Exchange Act of 1934. When persons act together for any such purpose, their group is deemed to have acquired their stock. J. In the event of any Business Combination in which Bancorp survives, the phrase "other consideration to be received" as used in Paragraphs B(1) and (2) of Section 2 of this Article VI(A) shall include the shares of common stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. SECTION 4. Powers of the Board of Directors. A majority of the Directors of Bancorp (or, if there is an Interested Stockholder, a majority of the Continuing Directors then in office) shall have the power to determine for the purposes of this Article VI (A), on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Stockholder, (B) the number or percentage of any class of securities beneficially owned by any person, (C) whether a person is an Affiliate or Associate of or is affiliated or associated with another, (D) whether the requirements of Section 2 of this Article VI(A) have been met with respect to any Business Combination, (E) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by Bancorp or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more and (F) any other matters of interpretation arising under this Article VI(A). The good faith determination of a majority of the Directors (or, if there is an Interested Stockholder, a majority of the Continuing Directors then in office) on such matters shall be conclusive and binding for all purposes of this Article VI(A). SECTION 5. No Effect on Fiduciary Obligations of Interested Stockholders. Nothing contained in this Article VI(A) shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. ARTICLE VI(B). Standards for Board of Directors' Evaluation of Offers. C-7 15 The Board of Directors of Bancorp, when evaluating any offer of another person (as defined in Article VI(A) hereof) to (A) make a tender or exchange offer for any equity security of Bancorp or any Subsidiary (as defined in Article VI(A) hereof), (B) merge or consolidate Bancorp or any Subsidiary with another institution or (C) purchase or otherwise acquire all or substantially all of the properties and assets of Bancorp or any Subsidiary, shall, in connection with the exercise of its judgment in determining what is in the best interests of Bancorp and its stockholders, give due consideration to all relevant factors including, without limitation, the social and economic effects of acceptance of such offer on Bancorp's and/or any Subsidiaries' present and future account holders, borrowers and employees; on the communities in which Bancorp or any Subsidiary operates or is located; and on the ability of Bancorp and its Subsidiaries to fulfill their objectives under applicable statutes and regulations. ARTICLE VI(C). Pre-emptive Rights. Holders of the capital stock of Bancorp shall not be entitled to preemptive rights with respect to any shares of the capital stock of Bancorp which may be issued. ARTICLE VI(D). Directors. Bancorp shall be under the direction of a Board of Directors. The number of Directors shall not be fewer nor more than permitted by law. The Board of Directors shall be divided into three classes as nearly equal in number as possible, with one class to be elected annually. Any Director (including persons elected by Directors to fill vacancies in the Board of Directors) may be removed from office, with or without cause, by an affirmative vote of not less than (i) 80% of the total votes eligible to be cast by stockholders in the election of directors at a duly constituted meeting of stockholders called expressly for such purpose, or (ii) 66-2/3% of the members of the Board of Directors then in office, unless at the time of such removal there shall be an Interested Stockholder, in which case the affirmative vote of not less than a majority of the Continuing Directors then in office shall instead be required for removal by vote of the Board of Directors. At least thirty days prior to such meeting of stockholders, written notice shall be sent to the Director whose removal will be considered at the meeting. ARTICLE VI(E). Transactions with Interested Persons. SECTION 1. Unless entered into in bad faith or in violation of any provision of these Articles of Organization, no contract or transaction by Bancorp shall be void, voidable or in any way affected by reason of the fact that it is with an Interested Person. SECTION 2. For the purposes of this Article VI(E), "Interested Person" means any person or organization in any way interested in Bancorp whether as a director, officer, stockholder, employee or otherwise, and any other entity in which any such person or organization of Bancorp is in any way interested. C-8 16 SECTION 3. Unless such contract or transaction was entered into in bad faith or in violation of any provision of these Articles of Organization, no Interested Person, because of such interest, shall be liable to Bancorp or to any other person or organization for any loss or expense incurred by reason of such contract or transaction or shall be accountable for any gain or profit realized from such contract or transaction. SECTION 4. The provisions of this Article VI(E) shall be operative notwithstanding the fact that the presence of an Interested Person was necessary to constitute a quorum at a meeting of Directors or stockholders of Bancorp at which such contract or transaction was authorized or that the vote of an Interested Person was necessary for the authorization of such contract or transaction. ARTICLE VI(F). Acting as a Partner. Bancorp may be a partner in any business enterprise which it would have power to conduct by itself. ARTICLE VI(G). Stockholders' Meetings. Meetings of stockholders may be held at such place in the Commonwealth of Massachusetts or, if permitted by applicable law, elsewhere in the United States as the Board of Directors may determine. ARTICLE VI(H). Call of Special Meetings. 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 the affirmative vote of 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. ARTICLE VI(I). Amendment of By-Laws. The By-Laws of Bancorp may be adopted, altered, amended, changed or repealed by the Board of Directors or the stockholders of Bancorp. Such action by the Board of Directors shall require the affirmative vote of at least 66-2/3% of the Directors then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall in addition require the affirmative vote of at least a majority of the Continuing Directors then in office, at such a meeting. Such action by the stockholders shall require (i) approval by the affirmative vote of a majority of the Board of Directors of Bancorp then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which C-9 17 case such action shall in addition require the affirmative vote of at least a majority of the Continuing Directors then in office, at such meeting, (ii) unless waived by the affirmative vote of the Board of Directors (and, if applicable, Continuing Directors) specified in the preceding sentence, the submission by the stockholders of written proposals for adopting, altering, amending, changing or repealing the By-Laws at least sixty days prior to the meeting at which they are to be considered and (iii) the affirmative vote of at least 66-2/3% of the total votes eligible to be cast by stockholders in the election of directors at a duly constituted meeting of stockholders called expressly for such purpose. ARTICLE VI(J). Amendment of Articles of Organization. No amendment, addition, alteration, change or repeal of these Articles of Organization shall be made, unless the same is first approved by the affirmative vote of a majority of the Board of Directors of Bancorp then in office, and thereafter approved by the stockholders by not less than 66-2/3% of the total votes eligible to be cast at a duly constituted meeting, or, in the case of Articles I, II and VIII and the first sentence of Article IV as set forth in Addendum B to these Articles of Organization, by not less than a majority of the total votes eligible to be cast at a duly constituted meeting; provided, however, that if, at any time within the sixty day period immediately preceding the meeting at which the stockholder vote is to be taken, there is an Interested Stockholder, such amendment, addition, alteration, change or repeal shall also require the affirmative vote of not less than a majority of the Continuing Directors then in office, prior to approval by the stockholders. Notwithstanding the foregoing, to the extent that any provision of these Articles of Organization stipulates stockholder approval by a vote of more than 66-2/3% of the total votes eligible to be cast by stockholders in the election of directors, and if, at any time within the sixty day period immediately preceding the meeting at which the stockholder vote is to be taken there is an Interested Stockholder, such provision may only be amended, altered, changed or repealed after approval by the same vote required by such provision, unless such amendment, alteration or repeal shall also have been approved by the affirmative vote of not less than a majority of the Continuing Directors then in office, in which case only the vote of 66-2/3% of the total votes eligible to be cast by the stockholders shall be required. Unless otherwise provided by law, any amendment, addition, alteration, change or repeal so acted upon shall be effective on the date it is filed with the Secretary of State of the Commonwealth of Massachusetts or on such other date as specified in such amendment, addition, alteration, change or repeal or as the Secretary of State may specify. C-10 18 ADDENDUM D TO THE ARTICLES OF ORGANIZATION OF MEDFORD BANCORP, INC. ARTICLE VIII(B) The name, residential address and post office address of each director and officer of the corporation is as follows:
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS PRESIDENT: Arthur H. Meehan 5 Fox Run Road 29 High Street Dover, MA 02030 Medford, MA 02155 TREASURER: Phillip W. Wong 8 Kelly Street 29 High Street Medway, MA 02053 Medford, MA 02155 CLERK: Eugene R. Murray 14 Milton Street 29 High Street E. Falmouth, MA 02536 Medford, MA 02155 DIRECTORS: Paul J. Crowley 15 Old Weston Road 29 High Street Wayland, MA 01778 Medford, MA 02155 Edward J. Gaffey 43 High Street 29 High Street Medford, MA 02155 Medford, MA 02155 Andrew D. Guthrie Jr., 30 Cambridge Street 29 High Street M.D. Winchester, MA 01890 Medford, MA 02155 Edward D. Brickley 79 Mystic Valley Pkwy. 29 High Street Winchester, MA 01890 Medford, MA 02155 Robert A. Havern III 35 Bartlett Avenue 29 High Street Arlington, MA 02174 Medford, MA 02155 Francis D. Pizzella 13 Browning Road 29 High Street Somerville, MA 02145 Medford, MA 02155 David L. Burke 9 Wedgemere Ave. 29 High Street Winchester, MA 01890 Medford, MA 02155 Mary L. Doherty 87 Yale Street 29 High Street Medford, MA 02155 Medford, MA 02155 Arthur H. Meehan 5 Fox Run Road 29 High Street Dover, MA 02030 Medford, MA 02155 Eugene R. Murray 14 Milton Street 29 High Street E. Falmouth, MA 02536 Medford, MA 02155
D-1 19 COMMONWEALTH OF MASSACHUSETTS ARTICLES OF ORGANIZATION (GENERAL LAWS, CHAPTER 156B) ================================================ I hereby certify that, upon examination of these Articles of Organization, duly submitted to me, it appears that the provisions of the General Laws relative to the organization of corporations have been complied with, and I hereby approve said articles; and the filing fee in the amount of $20,000 having been paid, said articles are deemed to have been filed with me this 23rd day of July, 1997. Effective date: July 23, 1997 ________________________________ WILLIAM FRANCIS GALVIN SECRETARY OF THE COMMONWEALTH FILING FEE: One tenth of one percent of the total authorized capital stock, but not less than $200.00. For the purpose of filing, shares of stock with a par value less than $1.00, or no par stock, shall be deemed to have a par value of $1.00 per share. TO BE FILLED IN BY CORPORATION PHOTOCOPY OF DOCUMENT TO BE SENT TO: Paul W. Lee, P.C. _______________________________________________ Goodwin, Procter & Hoar LLP _______________________________________________ Exchange Place, Boston, MA 02109 _______________________________________________ Telephone: (617) 570-1000 ____________________________________ EX-3.2 4 BY-LAWS 1 Exhibit 3.2 BY-LAWS OF MEDFORD BANCORP, INC. 2 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
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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
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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) 5 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 express 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 6 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 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 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 7 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 8 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 9 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 10 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 11 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 12 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 13 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 14 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 15 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 16 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 shall be elected annually by the Board of Directors at its first meeting following the Annual Meeting; and the Clerk shall be elected by the stockholders at their Annual Meeting or at a special meeting of stockholders duly called for such purpose, so long as the election of the Clerk is required by law to be by the stockholders, otherwise the Clerk shall be elected annually by the Board of Directors. 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 12 17 may be removed for cause only after reasonable notice and opportunity to be heard by the Board of Directors. 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 18 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 19 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 20 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 21 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 22 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 is 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-3.3 5 AMENDED AND RESTATED CHARTER OF THE BANK 1 Exhibit 3.3 The Commonwealth of Massachusetts MICHAEL JOSEPH CONNOLLY Secretary of State ONE ASHBURTON PLACE, BOSTON, MASS: 02108 FEDERAL IDENTIFICATION NO. 04-1609330 RESTATED ARTICLES OF ORGANIZATION GENERAL LAWS, CHAPTER 168, SECTION 34C; CHAPTER 172, SECTION 24 AND CHAPTER 156B, SECTIONS 70, 72 This certificate must be submitted to the Secretary of the Commonwealth within sixty days after the date of the vote of corporators adopting the attached amended and restated charter. Make check payable to the Commonwealth of Massachusetts. -------- We, Arthur H. Meehan, President Eugene R. Murray, Clerk Medford Savings Bank ------------------------------------------------------------------------ (NAME OF BANK) located at 29 High Street, Medford, Massachusetts 02155 do hereby certify that the attached amended and restated charter of the Bank was duly adopted at a meeting held on June 29, 1993, at which a quorum was present, by unanimous consent, being at least two-thirds of the corporators present and entitled to vote thereon: 1. The name by which the corporation shall be known is: - Medford Savings Bank 2. The purposes for which the corporation is formed are as follows: - See attached Amended and Restated Charter C / / P / / M / / RA / / 13 - - - ------- P.C. Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper leaving a left hand margin of at least 1 inch for binding. Additions to more than one article may be continued on a single sheet so long as each article requiring each such addition is clearly indicated. 2 3. The total number of shares and the par value, if any, of each class of stock which the corporation is authorized to issue is as follows:
WITHOUT PAR VALUE WITH PAR VALUE ----------------- ----------------------------- CLASS OF STOCK NUMBER OF SHARES NUMBER OF SHARES PAR VALUE - - - -------------- ---------------- ---------------- --------- Preferred ---------------- 5,000,000 $.50 Common ---------------- 15,000,000 $.50
*4. If more than one class is authorized, a description of each of the different classes of stock with, if any, the preferences, voting powers, qualifications, special or relative rights or privileges as to each class thereof and any series now established: See attached Amended and Restated Charter *5. The restrictions, if any, imposed by the articles of organization upon the transfer of shares of stock of any class are as follows: See attached Amended and Restated Charter *6. Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See attached Amended and Restated Charter * If there are no such provisions, state "None". 3 EXHIBIT A AMENDED AND RESTATED CHARTER OF MEDFORD SAVINGS BANK WHEREAS, a Charter was granted in the year 1869 to incorporate Medford Savings Bank (hereinafter referred to as the "Bank"), as a Massachusetts savings bank; and WHEREAS, the Bank in accordance with the laws and regulations of the Commonwealth of Massachusetts converted to a Massachusetts stock savings bank in 1986; The Charter of Medford Savings Bank is hereby amended and restated in its entirety to read as follows: ARTICLE 1. Corporate Title. The full corporate title of the Bank is "Medford Savings Bank." ARTICLE 2. Office. The main office of the Bank is located at 29 High Street, Medford, Massachusetts 02155 and may be changed from time to time by the Board of Directors of the Bank. ARTICLE 3. Powers. The Bank is a stock form savings bank chartered under Chapter 168 of the Massachusetts General Laws and shall have and may exercise all powers and authority, express and implied, available to it under law. ARTICLE 4. Duration. The duration of the Bank is perpetual. ARTICLE 5. Capital Stock. The total number of shares of all classes of capital stock which the Bank is authorized to issue is 20,000,000 shares, of which 15,000,000 shares shall be common stock, $.50 par value per share, and 5,000,000 shares shall be preferred stock $.50 par value per share. The shares may be issued by the Bank from time to time by a vote of its Board of Directors without the approval of its stockholders. Upon payment of lawful consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the surplus of the Bank which is transferred to stated capital upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance. A description of the different classes and series of the Bank's capital stock and a statement of the designations and the relative rights, preferences and limitations of the shares of each class and series of capital stock are as follows: A. Common Stock. Except as provided by law or in this Article 5 (or in any supplementary sections hereto or in any certificate of establishment of any series of preferred stock), the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holder. There shall be no cumulative voting rights in the election of Directors. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of a sinking fund or a retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends; but only when and as declared by the Board of Directors. Subject to Article 9 hereof, in the event of any liquidation, dissolution or winding up of the Bank, after there shall have been paid to or set aside for the holders of any class having preference over the common stock in the event of liquidation, dissolution or winding up of the Bank the full preferential amounts to which they are respectively entitled, the holders of the common stock, and of any class or series of stock entitled to participate in whole or in part therewith as to distribution of assets, shall be entitled, after payment or provision for payment of all debts and liabilities of the Bank, to receive the remaining assets of the Bank available for distribution, in cash or in kind, in proportion to their holdings. B-1 4 B. Preferred Stock. Subject to the approval of the provisions of any series of preferred stock by the Commissioner of Banks of the Commonwealth of Massachusetts (the "Commissioner"), if required by law, the Board of Directors of the Bank is authorized by vote or votes, from time to time adopted, to provide for the issuance of preferred stock in one or more series and to fix and state the voting powers, designations, preferences and relative participating, optional or other special rights of the shares of each series and the qualifications, limitations, and restrictions thereof, including, but not limited to, determination of one or more of the following: (1) The distinctive serial designation and the number of shares constituting such series; (2) The dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends and the participating or other special rights, if any, with respect to dividends; (3) The voting powers, if any, of shares of such series; (4) Whether the shares of such series shall be redeemable and, if so, the price or prices at which, and the terms and conditions on which, such shares may be redeemed; (5) The amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Bank; (6) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemed or purchased through the application of such fund; (7) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Bank, and if so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (8) The price or other consideration for which the shares of such series shall be issued; and (9) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of preferred stock and whether such shares may be reissued as shares of the same or any other series of stock. Unless otherwise provided by law, any such vote shall become effective when the Bank files with the Secretary of State of the Commonwealth of Massachusetts a certificate of establishment of one or more series of preferred stock signed by the President or any Vice President and by the Clerk, Assistant Clerk, Secretary or Assistant Secretary of the Bank, setting forth a copy of the vote of the Board of Directors establishing and designating the series and fixing and determining the relative rights and preferences thereof, the date of adoption of such vote and a certification that such vote was duly adopted by the Board of Directors. ARTICLE 6. Certain Business Combinations. SECTION 1. Vote Required for Certain Business Combinations. A. Required Vote for Certain Business Combinations. In addition to any affirmative vote required by the Massachusetts General Laws or by this Charter, and except as otherwise expressly provided in Section 2 of this Article 6: (1) any merger or consolidation of the Bank or any Subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as herein defined) or (b) any other corporation or entity (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; B-2 5 (2) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Bank or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $1,000,000 or more; (3) the issuance or transfer by the Bank or any Subsidiary (in one transaction or a series of transactions) of any securities of the Bank or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate Fair Market Value of $1,000,000 or more; (4) the adoption of any plan or proposal for the liquidation or dissolution of the Bank proposed by or on behalf of any Interested Stockholder or any Affiliate of any Interested Stockholder; or (5) any reclassification of securities (including any reverse stock split), any recapitalization of the Bank, any merger or consolidation of the Bank with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving any Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportion of the outstanding shares of any class of equity or convertible securities of the Bank or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; share require (subject to Section 2 of this Article 6) the affirmative vote of the holders of at least eighty percent of the voting power of the then outstanding shares of capital stock of the Bank entitled to vote generally in the election of directors (the "Voting Stock"), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required or that a lesser percentage may be specified by law. B. Definition of "Business Combination." The term "Business Combination" as used in this Article 6 shall mean any transaction which is referred to in any one or more of clauses (1) through (5) of Paragraph A of this Section 1. SECTION 2. When Higher Vote Is Not Required. The provisions of Section 1 of this Article 6 shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Articles, if all of the conditions specified in either of the following paragraphs A or B are met: A. Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors then in office (as hereinafter defined); or B. Price and Procedure Requirements. All of the following conditions have been met: (1) The aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination (the "Consummation Date") of any consideration other than cash to be received per share by holders of common stock in such Business Combination shall be at least equal to the highest of the following: (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of common stock acquired by it (i) within the two-year period immediately prior to and including the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher. (b) the highest Fair Market Value per share of common stock on any date during the one-year period prior to and including the Announcement Date; and (c) (if applicable) the price per share equal to the product of (i) the Fair Market Value per share of common stock on the Announcement Date or on the date on which the Interested Stockholder became an Interested Stockholder (such later date is referred to in this Article 6 as the B-3 6 "Determination Date"), whichever is higher, multiplied by (ii) the ratio of (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of common stock acquired by it within the two-year period immediately prior to and including the Announcement Date to (y) the Fair Market Value per share of common stock on the first day in such two-year period upon which the Interested Stockholder acquired any shares of common stock. (2) The aggregate amount of the cash and the Fair Market Value as of the Consummation Date of the Business Combination of consideration other than cash to be received per share by holders of shares of any other class of outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph B(2) shall be required to be met with respect to every other class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (i) within the two-year period immediately prior to and including the Announcement Date or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher. (b) (if applicable) the highest preferential amount per share which the holders of shares of such class of Voting Stock are entitled to receive from the Bank in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Bank; (c) the highest Fair Market Value per share of such class of Voting Stock on any date during the one-year period prior to and including the Announcement Date; and (d) (if applicable) the price per share equal to the product of (i) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher, multiplied by (ii) the ratio of (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it within the two-year period immediately prior to and including the Announcement Date to (y) the Fair Market Value per share of such class of Voting Stock on the first day in such two-year period upon which the Interested Stockholder acquired any shares of such class of Voting Stock. (3) The consideration to be received by holders of a particular class of outstanding Voting Stock (including common stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. (4) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of any such Business Combination: (a) there shall have been (i) no failure to declare and pay at regular dates therefor the full amount of any dividends (whether or not cumulative) payable on any class or series having a preference over the common stock of the Bank as to dividends or upon liquidation, except as approved by a majority of the Continuing Directors; (ii) no reduction in the annual rate of dividends paid on the common stock (except as necessary to reflect any subdivision of the common stock), except as approved by a majority of the Continuing Directors; and (iii) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the common stock, unless the failure to so increase such annual rate is approved by a majority of the Continuing Directors; and B-4 7 (b) such Interested Stockholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder's becoming an Interested Stockholder. (5) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Bank, whether in anticipation or in connection with such Business Combination or otherwise, unless such transaction shall have been approved or ratified by a majority of the Continuing Directors after such person shall have become an Interested Stockholder. (6) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public stockholders of the Bank at least 20 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). SECTION 3. Certain Definitions. For the purpose of this Charter: A. A "person" shall mean an individual, a group acting in concert, a corporation, a partnership, an association, a joint stock company, a trust, a business trust, a government or political subdivision, any unincorporated organization and any similar association or entity. B. "Interested Stockholder" shall mean any person (other than the Bank or any Subsidiary) who or which: (1) is the beneficial owner, directly or indirectly, of more than ten percent of the voting power of the then outstanding shares of Voting Stock; (2) is an Affiliate of the Bank and at any time within the two-year period immediately prior to and including the date in question was the beneficial owner, directly or indirectly, of ten percent or more of the voting power of the then outstanding shares of Voting Stock; or (3) is an assignee of or has otherwise succeeded to the beneficial ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to and including the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933 and such assignment or succession was not approved by a majority of the Continuing Directors. C. A person shall be a "beneficial owner" of any shares of Voting Stock: (1) which such person or any of its Affiliates or Associates, directly or indirectly, has or shares with respect to Voting Stock (a) the right to acquire or direct acquisition of (whether such right is exercisable immediately or only after the passage of time or in the satisfaction of any conditions or both), pursuant to any agreement, arrangement or understanding or upon the exercise of any conversion rights, warrants, or options or otherwise; (b) the right to vote, or direct the voting of, pursuant to any agreement, arrangement or understanding or otherwise; or (c) the right to dispose of or transfer or direct the disposition or transfer of pursuant to any agreement, arrangement, understanding or otherwise; or (2) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. D. For the purposes of determining whether a person is an Interested Stockholder pursuant to paragraph B of this Section 3, the number of shares of Voting Stock deemed to be outstanding shall include shares B-5 8 deemed owned by such person through application of paragraph C of this Section 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options or otherwise. E. "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. F. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by the Bank; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph B of this Section 3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by the Bank. G. "Continuing Director" means any member of the Board of Directors of the Bank (the "Board") who is not an Affiliate or Associate of the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director who is not an Affiliate or Associate of the Interested Stockholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board. H. "Fair Market Value" means: (1) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers Automated Quotation System or any comparable system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by at least a majority of the Continuing Directors of the Board in good faith; and (2) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by at least a majority of the Continuing Directors of the Board in good faith. I. "Group Acting in Concert" shall mean persons seeking to combine or pool their voting or other interests in the securities of the Bank for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written, oral or otherwise, or any "group of persons" as defined under Section 13(d) of the Securities Exchange Act of 1934. When persons act together for any such purpose, their group is deemed to have acquired their stock. J. In the event of any Business Combination in which the Bank survives, the phrase "other consideration to be received" as used in paragraphs B(1) and (2) of Section 2 of this Article 6 shall include the shares of common stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. SECTION 4. Powers of the Board of Directors. A majority of the Directors of the Bank (or, if there is an interested Stockholder, a majority of the Continuing Directors then in office) shall have the power to determine for the purposes of this Article 6, on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Stockholder, (B) the number or percentage of any class of securities beneficially owned by any person, (C) whether a person is an Affiliate or Associate of or is affiliated or associated with another, (D) whether the requirements of Section 2 of this Article 6 have been met with respect to any Business Combination, (E) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by the Bank or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more and (F) any other matters of interpretation arising under this Article 6. The good faith determination of a majority of the Directors (or, if there is an Interested B-6 9 Stockholder, a majority of the Continuing Directors then in office) on such matters shall be conclusive and binding for all purposes of this Article 6. SECTION 5. No Effect on Fiduciary Obligations of Interested Stockholders. Nothing contained in this Article 6 shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. ARTICLE 7. Standards for Board of Directors' Evaluation of Offers. The Board of Directors of the Bank, when evaluating any offer of another person (as defined in Article 6 hereof) to (A) make a tender or exchange offer for any equity security of the Bank, (B) merge or consolidate the Bank with another institution or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Bank, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Bank and its stockholders, give due consideration to all relevant factors including, without limitation, the social and economic effects of acceptance of such offer on the Bank's present and future account holders, borrowers and employees; on the communities in which the Bank operates or is located; and on the ability of the Bank to fulfill the objectives of a Massachusetts-chartered stock form savings bank under applicable statutes and regulations. ARTICLE 8. Pre-emptive Rights. Holders of the capital stock of the Bank shall not be entitled to preemptive rights with respect to any shares of the capital stock of the Bank which may be issued. ARTICLE 9. Liquidation Account. The Bank has established and maintains a liquidation account for the benefit of account holders as of July 31, 1985 ("Eligible Account Holders") in accordance with applicable regulations of the Commissioner. In the event of a complete liquidation of the Bank, it shall comply with such regulations with respect to the amount and the priorities on liquidation of each of the Bank's Eligible Account Holder's interest as a contingent creditor in the liquidation account, to the extent it is still in existence; provided, however, that an Eligible Account Holder's interest in the liquidation account shall not entitle such Eligible Account Holder to any rights of stockholders of the Bank, including, without limitation, any rights to vote at meetings of the Bank's stockholders. ARTICLE 10. (Intentionally Omitted) ARTICLE 11. Directors. The Bank shall be under the direction of a Board of Directors. The number of Directors shall not be fewer nor more than permitted by law. The Board of Directors shall be divided into three classes as nearly equal in number as possible, with one class to be elected annually. Any Director (including persons elected by Directors to fill vacancies in the Board of Directors) may be removed from office, with or without cause, by an affirmative vote of not less than (i) eighty percent of the total votes eligible to be cast by stockholders in the election of directors at a duly constituted meeting of stockholders called expressly for such purpose, or (ii) two-thirds of the members of the Board of Directors then in office, unless at the time of such removal there shall be an Interested Stockholder, in which case the affirmative vote of not less than a majority of the Continuing Directors then in office shall instead be required for removal by vote of the Board of Directors. At least thirty days prior to such meeting of stockholders, written notice shall be sent to the Director whose removal will be considered at the meeting. ARTICLE 12. Transactions with Interested Persons. SECTION 1. Unless entered into in bad faith or in violation of any provision of this Amended and Restated Charter, no contract or transaction by the Bank shall be void, voidable or in any way affected by reason of the fact that it is with an Interested Person. SECTION 2. For the purposes of this Article 12, "Interested Person" means any person or organization in any way interested in the Bank whether as a director, officer, stockholder, employee or otherwise, and any other entity in which any such person or organization of the Bank is in any way interested. B-7 10 SECTION 3. Unless such contract or transaction was entered into in bad faith or in violation of any provision of this Amended and Restated Charter, no Interested Person, because of such interest, shall be liable to the Bank or to any other person or organization for any loss or expense incurred by reason of such contract or transaction or shall be accountable for any gain or profit realized from such contract or transaction. SECTION 4. The provisions of this Article 12 shall be operative notwithstanding the fact that the presence of an Interested Person was necessary to constitute a quorum at a meeting of Directors or stockholders of the Bank at which such contract or transaction was authorized or that the vote of an Interested Person was necessary for the authorization of such contract or transaction. ARTICLE 13. Acting as a Partner. The Bank may be a partner in any business enterprise which it would have power to conduct by itself. ARTICLE 14. Stockholders' Meetings. Meetings of stockholders may be held at such place in the Commonwealth of Massachusetts or, if permitted by applicable law, elsewhere in the United States as the Board of Directors may determine. ARTICLE 15. Call of Special Meetings. 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 the affirmative vote of 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. ARTICLE 16. Amendment of By-Laws. The By-Laws of the Bank may be adopted, altered, amended, changed or repealed by the Board of Directors or the stockholders of the Bank. Such action by the Board of Directors shall require the affirmative vote of at least two-thirds of the Directors then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall in addition require the affirmative vote of at least a majority of the Continuing Directors then in office, at such a meeting. Such action by the stockholders shall require (i) approval by the affirmative vote of a majority of the Board of Directors of the Bank then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall in addition require the affirmative vote of at least a majority of the Continuing Directors then in office, at such meeting, (ii) unless waived by the affirmative vote of the Board of Directors (and, if applicable, Continuing Directors) specified in the preceding sentence, the submission by the stockholders of written proposals for adopting, altering, amending, changing or repealing the By-Laws at least sixty days prior to the meeting at which they are to be considered and (iii) the affirmative vote of at least two-thirds of the total votes eligible to be cast by stockholders in the election of directors at a duly constituted meeting of stockholders called expressly for such purpose. ARTICLE 17. Amendment of Charter. No amendment, addition, alteration, change or repeal of this Charter shall be made, unless the same is first approved by the affirmative vote of a majority of the Board of Directors of the Bank then in office, and thereafter approved by the stockholders by not less than two-thirds of the total votes eligible to be cast at a duly constituted meeting, or, in the case of Articles 1, 2, 3 and 9 and the first sentence of Article 5 of this Charter, by not less than a majority of the total votes eligible to be cast at a duly constituted meeting; provided, however, that if, at any time within the sixty day period immediately preceding the meeting at which the stockholder vote is to be taken, there is an Interested Stockholder, such amendment, addition, alteration, change or repeal shall also require the affirmative vote of not less than a majority of the Continuing Directors then in office, prior to approval by the stockholders. Notwithstanding the foregoing, to the extent that any provision of this Charter stipulates stockholder approval by a vote of more than two-thirds of the total votes eligible to be cast by stockholders in the election of directors, and if, at any time within the sixty day period immediately preceding the meeting at which the stockholder vote is to be taken there is an Interested Stockholder, such provision may only be amended, altered, changed or repealed after approval by the same vote required by such provision, unless such amendment, alteration or repeal shall also have been approved by the affirmative vote of not less than a majority of the Continuing Directors then in office, in which case only the vote of two-thirds of the total votes eligible to be cast by the stockholders shall be B-8 11 required. Unless otherwise provided by law, any amendment, addition, alteration, change or repeal so acted upon shall be effective on the date it is filed with the Secretary of State of the Commonwealth of Massachusetts or on such other date as specified in such amendment, addition, alteration, change or repeal or as the Secretary of State may specify. B-9 12 *We further certify that the foregoing restated articles of organization effect no amendments to the articles of organization of the corporation as heretofore amended, except amendments to the following articles ............... ............................................................................... (*If there are no such amendments, state "None".) Briefly describe amendments in space below: See attached Amended and Restated Charter IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed our names this 22nd day of July in the year 1993 /s/ Arthur H. Meehan ......................................... Arthur H. Meehan President and Chief Executive Officer /s/ Eugene R. Murray ......................................... Eugene R. Murray Clerk 13 THE COMMONWEALTH OF MASSACHUSETTS RESTATED ARTICLES OF ORGANIZATION (GENERAL LAWS, CHAPTER 168, 172 & 156, SECTION 74) I hereby approve the within Amended and Restated Charter and, the filing fee in the amount of $300.00 having been paid, said Charter is deemed to have been filed with me this 26th day of July, 1993. /s/ Michael Joseph Connolly -------------------------------- Michael Joseph Connolly Secretary of State Amended and Restated Charter approved this 23rd day of July, 1993 /s/ Alan Morse - - - ------------------------------------ Commissioner of Banks TO BE FILLED IN BY CORPORATION PHOTO COPY OF RESTATED ARTICLES OF ORGANIZATION TO BE SENT TO: Paul W. Lee, Esq. Goodwin, Procter & Hoar .......................................................... Exchange Place .......................................................... Boston, MA 02109 .......................................................... Telephone (617) 570-1590 ................................................. Copy Mailed EX-3.4 6 AMENDED AND RESTATED BY-LAWS 1 Exhibit 3.4 AMENDED AND RESTATED BY-LAWS OF MEDFORD SAVINGS BANK 2 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..............................................10 SECTION 11. Notice of Meetings............................................10 SECTION 12. Quorum........................................................10 SECTION 13. Action at a Meeting...........................................11 SECTION 14. Action by Consent.............................................11 SECTION 15. Presumption of Assent.........................................11 SECTION 16. Committees....................................................11 SECTION 17. Manner of Participation.......................................11 ARTICLE IV Officers...................................................................12 SECTION 1. Enumeration....................................................12 SECTION 2. Election.......................................................12
(i) 3 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 Deposits...................................................................15 ARTICLE VII Withdrawals................................................................16 ARTICLE VIII Interest...................................................................16 ARTICLE IX Indemnification............................................................16 SECTION 1. Definitions....................................................16 SECTION 2. Officers.......................................................16 SECTION 3. Non-Officer Employees..........................................17 SECTION 4. Service at the Request or Direction of the Bank................17 SECTION 5. Good Faith.....................................................17 SECTION 6. Prior to Final Disposition.....................................18
(ii) 4 SECTION 7. Insurance......................................................18 SECTION 8. Other Indemnification Rights...................................18 ARTICLE X Conveyances and Foreclosures...............................................18 SECTION 1. General Authority..............................................18 SECTION 2. Foreclosure of Mortgages.......................................18 ARTICLE XI Miscellaneous Provisions...................................................19 SECTION 1. Amendment of By-laws...........................................19 SECTION 2. Fiscal Year....................................................19 SECTION 3. Seal...........................................................19 SECTION 4. Execution of Instruments.......................................19 SECTION 5. Voting of Securities...........................................19 SECTION 6. Charter........................................................19
(iii) 5 AMENDED AND RESTATED BY-LAWS OF MEDFORD SAVINGS BANK ARTICLE I ORGANIZATION The name of this Bank is "Medford Savings Bank" (the "Bank"). The main office of the Bank shall be in the City of Medford, Massachusetts, or such other location as the Board of Directors may designate, subject to applicable law. Branches and deposits heretofore or hereafter established shall be located and operated in accordance with applicable law. The Bank shall conduct the business of a savings bank and shall have and may exercise all the powers, privileges and authority, whether express 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 Bank 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 Bank'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 Incorporation (the "Charter") or by these Amended and Restated 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; 6 (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 Bank; 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 By-Laws, to be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Bank 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 Bank 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 Bank 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 Bank. 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 Federal Deposit Insurance Corporation or the Securities and Exchange Commission (including, without limitation, a Form F-3); or (iii) a letter or report sent to stockholders of record of the Bank 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 2 7 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 Bank's stock transfer books, of the stockholder proposing such business; (iii) the class and number of shares of the Bank'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 Bank registered in such stockholder's name on such books, and the class and number of shares of the Bank'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 Bank'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 Bank 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 Federal Deposit Insurance Corporation set forth in 12 C.F.R. Part 335 with respect to the matters set forth in this By-Law, and nothing in this 3 8 By-Law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Bank's proxy statement pursuant to such regulations. As used in these By-laws, the terms "Interested Stockholder" and "Continuing Director" shall have the same respective meanings assigned to them in the Charter. Any determination of beneficial ownership of securities under these By-laws shall be made in the manner specified in the Charter. 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 Bank. 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. 4 9 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 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 Bank and a proportionate vote for a fractional share, unless otherwise provided by law or by the Charter. 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 Bank 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 Charter 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 Charter or by these By-laws. ARTICLE III Directors 5 10 SECTION 1. Powers. The business and affairs of the Bank 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 Bank 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 Bank 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 Bank 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 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. 6 11 For all subsequent Annual Meetings, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Bank 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 Bank 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 Bank. 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 Bank'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 12 C.F.R. 335.212 promulgated under the Federal Deposit Insurance Corporation under the Securities Exchange Act of 1934, as amended. 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 Bank's stock transfer books, of such stockholder and of the beneficial owners (if any) of the Bank'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 Bank'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 the Board of Directors may reject such stockholder's nomination. The Clerk of the Bank 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 7 12 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 are 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, in the event that the number of directors to be elected to the Board of Directors of the Bank is increased and there is no public disclosure by the Bank 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 Bank 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 Bank; and (ii) for all subsequent Annual Meetings, such notice shall be delivered to, or mailed to and received by, the Bank 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 Bank. No person shall be elected by the stockholders as a Director of the Bank 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. SECTION 4. Qualification. Each Director shall have such qualifications as are required by applicable law. Each Director shall own, in his or her own right and free of any lien or encumbrance, common stock, either of the Bank or of a company owning seventy-five percent (75%) of the stock of the Bank, having a par value, or a fair market value on the date the person became a Director, of not less than $1,000. Any Director who ceases to be the owner of the required number of shares of stock, or who becomes in any other manner disqualified, 8 13 shall vacate his or her office forthwith. Each Director, when appointed or elected, shall take an oath that he will faithfully perform the duties of his or her office and that he is the owner, in his or her own right and free of any lien or encumbrance, of the amount of stock required by this Section 4. The oath shall be taken before a notary public or justice of the peace, who is not an officer of the Bank, and a record of the oath shall be made a part of the records of the Bank. 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 Charter. 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 at least once in each calendar month 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. 9 14 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. 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 Bank'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, 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 Charter or by these By-laws. 10 15 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. SECTION 15. Presumption of Assent. A Director of the Bank who is present at a meeting of the Board of Directors at which action on any Bank matter is taken shall be presumed to have assented to the action taken unless his or her dissent or abstention shall be entered in the minutes of the meeting or unless he 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 Bank within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a Director who voted in favor of such action. SECTION 16. Committees. The Board of Directors shall elect from its number not fewer than three 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 Charter 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. ARTICLE IV 11 16 Officers SECTION 1. Enumeration. The officers of the Bank 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 Bank. SECTION 2. Election. The President shall be elected annually by the Board of Directors at its first meeting following the Annual Meeting; and the Clerk shall be elected by the stockholders at their Annual Meeting or at a special meeting of stockholders duly called for such purpose, so long as the election of the Clerk is required by law to be by the stockholders, otherwise the Clerk shall be elected annually by the Board of Directors. 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 Charter, 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 Bank 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 17 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 Bank'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. ARTICLE V Capital Stock 13 18 SECTION 1. Certificates of Stock. Unless otherwise provided by the Board of Directors, each stockholder shall be entitled to a certificate of the capital stock of the Bank 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 Bank. 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 Bank 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 Bank 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 Bank by the surrender to the Bank 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 Bank or its transfer agent, if one is appointed, may reasonably require. SECTION 3. Record Holders. Except as otherwise required by law, by the Charter or by these By-laws, the Bank 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 Bank in accordance with the requirements of these By-laws. It shall be the duty of each stockholder to notify the Bank 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 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 Bank after the record date. Without fixing such record date, the Board of Directors may for any of such purposes close the transfer books for all or any part of such period. 14 19 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 Bank 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 Charter and these By-laws, the Board of Directors may from time to time declare, and the Bank may pay, dividends on outstanding shares of its capital stock. ARTICLE VI Deposits Deposits of any type permitted by law may be received by the Bank on such terms and subject to such limitations as are from time to time provided by law and the rules, regulations and By-laws of the Bank, but any deposit may be refused by the Bank for any legal reason. Each depositor shall sign a statement signifying assent to the rules, regulations and By-laws of the Bank then in force or as thereafter added or amended. All rules, regulations and By-laws of the Bank and all additions and amendments thereto from time to time in effect shall be binding on all depositors and on all other persons dealing with the Bank whether or not such statement is signed. 15 20 ARTICLE VII Withdrawals Deposits may be withdrawn by the depositor or by any person legally authorized to act on the depositor's behalf. Withdrawals may be made by written order or by any other method permitted by the Bank, subject to such requirements as may be established from time to time by the Bank or by law. Withdrawals requesting payment to the depositor or to one or more persons may be honored by the Bank. Any payment made by the Bank to the depositor in person or pursuant to any such withdrawal shall discharge the liability of the Bank to all persons to the extent of such payment. No alleged agreement with a depositor or with any other person inconsistent with law, these By-laws or with any of the rules or regulations of the Bank shall be valid or binding upon the Bank. ARTICLE VIII Interest The Bank may pay interest on deposits in accordance with law. Fractional parts of a dollar shall not be included in principal in computing interest. With respect to deposit accounts on which interest is payable, the Bank may elect not to pay interest on accounts that have a balance of less than $10.00, or such other minimum amount as may be fixed or permitted by law, unless otherwise provided by law. ARTICLE IX Indemnification SECTION 1. Definitions. For purposes of this Article: (a) "Officer" means any person who serves or has served as a Director of the Bank 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 Bank, 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. SECTION 2. Officers. Except as provided in Sections 4 and 5 of this Article IX, each Officer of the Bank shall be indemnified by the Bank against all Expenses incurred by such 16 21 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 Bank; (b) as a director, officer or employee of any wholly owned subsidiary of the Bank; or (c) in any capacity with any other corporation, organization, partnership, joint venture, trust or other entity at the request or direction of the Bank. SECTION 3. Non-Officer Employees. Except as provided in Sections 4 and 5 of this Article IX, each Non-Officer Employee of the Bank 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 Bank; (b) as a director, officer or employee of any wholly owned subsidiary of the Bank; or (c) in any capacity with any other corporation, organization, partnership, joint venture, trust or other entity at the request or direction of the Bank. SECTION 4. Service at the Request or Direction of the Bank. 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 Bank maintains insurance coverage for the type of indemnification sought. In no event shall the Bank 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 Bank in its discretion may elect to carry. The Bank 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 IX, 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 Bank may have elected to carry, provided that the Board of Directors in its discretion determines it to be in the best interests of the Bank 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 Bank. 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 in the best interests of the Bank. 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 17 22 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 disinterested Directors, the determination shall be based upon the opinion of the Bank'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 IX, any indemnification provided for under this Article IX shall include payment by the Bank 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 IX. SECTION 7. Insurance. The Bank 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 Bank or any such Officer or Non-Officer Employee, or arising out of any such status, whether or not the Bank would have the power to indemnify such person against such liability by law or under the provisions of this Article IX. SECTION 8. Other Indemnification Rights. Nothing in this Article IX shall limit any lawful rights to indemnification existing independently of this Article IX. ARTICLE X Conveyances and Foreclosures SECTION 1. General Authority. Any officer is authorized and empowered severally to execute, acknowledge and deliver, in the name and on behalf of the Bank, whenever authorized by the Board of Directors or Executive Committee, by general or specific vote, all deeds and conveyances of real estate, all assignments, extensions, releases, partial releases and discharges of mortgages, and all assignments and transfers of bonds and other securities; and in connection with any of the foregoing, said officers are authorized and empowered severally to release or assign the interest of the Bank in any policy of insurance held by it. SECTION 2. Foreclosure of Mortgages. In the event of a breach of condition of any mortgage held by the Bank, any officer is authorized and empowered severally in the name and on behalf of the Bank, whenever authorized by the Board of Directors or Executive Committee by general or specific vote, to make entry for the purpose of taking possession of the mortgaged property or foreclosing such mortgage and to perform any and all acts necessary or proper to consummate such foreclosure and effect the due execution of any power of sale contained in such mortgage, including the execution, acknowledgment and delivery of all deeds and instruments of conveyance to the purchaser and the execution of all affidavits and certificates required by law or deemed necessary or appropriate by any of such officers. 18 23 ARTICLE XI Miscellaneous Provisions SECTION 1. Amendment of By-laws. These By-laws may be adopted, altered, amended, changed or repealed as provided in the Charter. SECTION 2. Fiscal Year. Except as otherwise determined by the Board of Directors, the fiscal year of the Bank 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 Bank. SECTION 4. Execution of Instruments. All deeds, leases, transfers, contracts, bonds, notes and other obligations to be entered into by the Bank in the ordinary course of its business without Board of Directors' action may be executed on behalf of the Bank by the Chairman of the Board, if one is elected, the President, the Treasurer or any other officer, employee or agent of the Bank 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 Bank, or appoint another person or persons to act as proxy or attorney in fact for the Bank 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 Bank. SECTION 6. Charter. All references in these By-laws to the Charter shall be deemed to refer to the Charter of the Bank, as amended and in effect from time to time. 19 EX-4.1 7 SPECIMEN CERTIFICATE FOR SHARES OF COMMON STOCK 1 [STOCK CERTIFICATE BACKGROUND] EXHIBIT 4.1 [MEDFORD BANCORP, INC. LOGO] INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MA OR NEW YORK CITY, NY COMMON STOCK COMMON STOCK PAR VALUE $0.50 PAR VALUE $0.50 THIS CERTIFIES that CUSIP 584131 10 6 SEE REVERSE FOR CERTAIN DEFINITIONS AND FOR INFORMATION WITH RESPECT TO CERTAIN REFERENCES WHICH MAY EXIST WITH RESPECT TO THE COMMON STOCK is the owner of FULLY PAID AND NON-ASSESSABLE $0.50 PAR VALUE SHARES OF COMMON STOCK OF MEDFORD BANCORP, INC. transferable on the books of the Company by the holder hereof in person or by duly authorized attorney upon surrender of this certificate properly endorsed or assigned. This certificate and the shares of common stock represented hereby are issued and shall be held subject to the laws of The Commonwealth of Massachusetts and to the Charter and By-laws of the Company, as in effect and as amended from time to time hereafter. Such shares are not deposit accounts and are not insured by the Federal Deposit Insurance Corporation, the Massachusetts Mutual Savings Central Fund, Inc. or any other insurer. This certificate is not valid until countersigned and registered by the Transfer Agent and Registrar. Witness the facsimile seal of the Company and the facsimile of its duly authorized officers. Dated: [MEDFORD BANCORP, INC. SEAL] /s/ Phillip W. Wong /s/ Arthur H. Meehan Philip W. Wong Arthur H. Meehan Treasurer President 2 MEDFORD BANCORP, INC. The shares of common stock represented by this certificate are issued and shall be held subject to all the provisions of the Charter and By-laws of the Company, as in effect and as amended from time to time hereafter, to all of which the holder by acceptance hereof assents. The Company will furnish to any stockholder upon written request and without charge, a copy of the Charter and By-laws of the Company. Such request may be made to the Shareholder Relations Department. The Charter authorizes the issuance of shares of preferred stock in one or more series with such voting, dividend, dissolution and other rights and preferences as specified by the Board of Directors of the Company at the time of issuance of the shares. The Charter, in accordance with Massachusetts regulations, also provides for a liquidation account for the benefit of certain account holders of Medford Savings bank (the "Bank") as of July 31, 1985 who continue to maintain their accounts at the Bank, which holders have priority rights over the common stockholders of the Company in the event of a complete liquidation of the Bank. A statement of the preferences, powers, qualifications and rights of the series and classes of such stock and of the terms of the liquidation account will be furnished to the holder of this certificate upon written request and without charge. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common UNIF GIFT MIN ACT - __________ Custodian ___________ TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right Under Uniform Gifts to Minors of survivorship and not as Act _________ tenants in common (State)
Additional abbreviations may also be used though not in the above list. For value received, _______________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE ______________________________________ | | |______________________________________|________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ Please print or typewrite name and address including postal zip code of assignee ________________________________________________________________________________ ________________________________________________________________________________ represented by the within certificate, and do hereby irrevocably constitute and appoint _______________________________________________________________________ Attorney to transfer the said shares on the books of the within-named Company with full power of substitution in the premises. Dated ______________________ _____________________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the certificate in every particular, without alteration or enlargement, or any change whatever. Signature Guaranteed: _______________________________________________ ALL GUARANTEES MUST BE MADE BY A FINANCIAL INSTITUTION (SUCH AS A BANK OR BROKER) WHICH IS A PARTICIPANT IN THE SECURITIES TRANSFER AGENTS MEDALLION PROGRAM ("STAMP"). THE NEW YORK STOCK EXCHANGE, INC. MEDALLION SIGNATURE PROGRAM ("MSP") OR THE STOCK EXCHANGE MEDALLION PROGRAM ("SEMP") AND MUST NOT BE DATED. GUARANTEES BY A NOTARY PUBLIC ARE NOT ACCEPTABLE. This certificate also evidences and entitles the holder hereof to certain Rights as set forth in an Amended and Restated Shareholder Rights Agreement among Medford Bancorp, Inc., Medford Savings bank, and State Street Bank and Trust Company, as Rights Agent, dated as of November 26, 1997, as amended, restated, renewed or extended from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal offices of Medford Bancorp, Inc. and the stock transfer administration office of the Rights Agent. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Medford Bancorp, Inc. may redeem the Rights at a redemption price of $.01 per Right, subject to adjustment, under the terms of the Rights Agreement. Medford Bancorp, Inc. will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge promptly after receipt of a written request therefor. Under certain circumstances, Rights issued to or held by Acquiring Persons, Adverse Persons or any Affiliates or Associates thereof (as defined in the Rights Agreement), and any subsequent holder of such Rights, may become null and void. The Rights shall not be exercisable, and shall be void so long as held, by a holder in any jurisdiction where the requisite qualification, if any, to the issuance to such holder, or the exercise by such holder, of the Rights in such jurisdiction shall not have been obtained or be obtainable. EX-10.1 8 AMENDED AND RESTATED SHAREHOLDERS RIGHTS AGREEMENT 1 - - - -------------------------------------------------------------------------------- MEDFORD BANCORP, INC. and MEDFORD SAVINGS BANK and STATE STREET BANK AND TRUST COMPANY, as Rights Agent -------------- Amended and Restated Shareholder Rights Agreement Dated as of November 26, 1997 - - - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
Section Page - - - ------- ---- 1. Certain Definitions...................................................................................2 2. Amendment and Restatement of the Original Rights Agreement; Appointment of Rights Agent..............................................................................................6 3. Issue of Right Certificates...........................................................................7 4. Form of Right Certificates............................................................................9 5. Countersignature and Registration....................................................................10 6. Transfer, Split Up, Combination and Exchange of Right Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.................................................................11 7. Exercise of Rights; Exercise Price; Expiration Date of Rights........................................12 8. Cancellation and Destruction of Right Certificates...................................................14 9. Reservation and Availability of Preferred Stock......................................................14 10. Preferred Stock Record Date..........................................................................16 11. Adjustment of Exercise Price, Number and Kind of Shares or Number of Rights..........................16 12. Certificate of Adjusted Exercise Price or Number of Shares...........................................25 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power.................................25 14. Fractional Rights and Fractional Shares..............................................................29 15. Rights of Action.....................................................................................29 16. Agreement of Right Holders...........................................................................30 17. Right Certificate Holder Not Deemed a Shareholder....................................................30 18. Concerning the Rights Agent..........................................................................31 19. Merger or Consolidation or Change of Name of Rights Agent............................................31
(i) 3 20. Duties of Rights Agent..............................................................................32 21. Change of Rights Agent..............................................................................34 22. Issuance of New Right Certificates..................................................................35 23. Redemption..........................................................................................35 24. Exchange............................................................................................36 25. Notice of Certain Events............................................................................38 26. Notices.............................................................................................39 27. Supplements and Amendments..........................................................................40 28. Successors..........................................................................................41 29. Determinations and Actions by the Board of Directors................................................41 30. Benefits of this Agreement..........................................................................41 31. Severability........................................................................................41 32. Governing Law.......................................................................................42 33. Counterparts........................................................................................42 34. Descriptive Headings................................................................................42 Exhibit A -- Certificate of Designation of Series A Junior Participating Cumulative Preferred Stock Exhibit B -- Form of Right Certificate
(ii) 4 AMENDED AND RESTATED SHAREHOLDER RIGHTS AGREEMENT Amended and Restated Agreement (the "Agreement"), dated as of November 26, 1997, among Medford Bancorp, Inc., a Massachusetts corporation (the "Company"), Medford Savings Bank, a Massachusetts savings bank (the "Bank"), and State Street Bank and Trust Company, a Massachusetts trust company (the "Rights Agent"). W I T N E S S E T H WHEREAS, the Bank and the Rights Agent entered into a Shareholder Rights Agreement, dated as of September 22, 1993 (the "Original Rights Agreement"), pursuant to which, among other things, the Board of Directors of the Bank authorized and declared a dividend distribution of one Right (as defined in the Original Rights Agreement and hereinafter referred to as a "Bank Right")) per share of Common Stock, par value $.50 per share, of the Bank ("Bank Common Stock") outstanding as of the close of business on October 8, 1993 (the "Record Date"), to then holders of outstanding shares of Bank Common Stock; and WHEREAS, the Bank and the Company entered into a Plan of Reorganization and Acquisition (the "Plan of Reorganization"), dated July 29, 1997, duly approved by the holders of Bank Common Stock at a meeting held on September 16, 1997, pursuant to which the Bank became a wholly-owned subsidiary of the Company and shares of Bank Common Stock (together with associated preferred stock purchase rights (i.e., the Bank Rights)), except those held by stockholders exercising dissenters' rights, were converted and exchanged into an equal number of shares of Common Stock (as hereinafter defined) (together with associated preferred stock purchase rights (i.e., the Rights are hereinafter defined)); and WHEREAS, the Board of Directors of the Company desires to provide shareholders of the Company with the continued opportunity to benefit from the long-term prospects and value of the Company and to ensure that shareholders of the Company receive fair and equal treatment in the event of any proposed takeover of the Company; and WHEREAS, in accordance with the Plan of Reorganization, the Board of Directors of the Company has determined that it is in the best interests of the shareholders of the Company to amend and restate the Original Rights Agreement in its entirety to, among other things, confirm that the Bank Rights issued pursuant to the Original Rights Agreement have been converted to equivalent preferred stock purchase rights (the "Rights") with respect to the Common Stock; and WHEREAS, on November 25, 1997, the Boards of Directors of the Bank and the Company adopted resolutions confirming the conversion of the Bank Rights to the Rights concurrently with the conversion and exchange of Bank Common Stock for the Common Stock; and 5 WHEREAS, the Company desires to appoint the Rights Agent to act as rights agent hereunder, in accordance with the terms and conditions hereof; NOW, THEREFORE, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the meanings indicated: (a) "ACQUIRING PERSON" shall mean any Person (as hereinafter defined) who or which, together with all Affiliates (as such term is hereinafter defined) and Associates (as such term is hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 15% or more of the shares of Common Stock of the Company then outstanding, but shall not include (i) the Company, (ii) any Subsidiary (as such term is hereinafter defined) of the Company, (iii) any employee benefit plan or compensation arrangement of the Company or any Subsidiary of the Company or (iv) any Person holding shares of Common Stock of the Company organized, appointed or established by the Company or any Subsidiary of the Company for or pursuant to the terms of any such employee benefit plan or compensation arrangement (the Persons described in clauses (i) through (iv) above are referred to herein as "Exempt Persons"). Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of the Company's Common Stock by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 15% or more of the shares of Common Stock of the Company then outstanding; PROVIDED, HOWEVER, that if a Person shall become the Beneficial Owner of 15% or more of the shares of Common Stock of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional shares (other than pursuant to a stock split, stock dividend or similar transaction) of Common Stock of the Company and immediately thereafter be the Beneficial Owner of 15% or more of the shares of Common Stock of the Company then outstanding, then such Person shall be deemed to be an "Acquiring Person." In addition, notwithstanding the foregoing, a Person shall not be an "Acquiring Person" if the Board of Directors of the Company determines that a Person who would otherwise be an "Acquiring Person," as defined pursuant to the foregoing provisions of this Section 1(a), has become such inadvertently, and such Person divests as promptly as practicable (or within such period of time as the Board of Directors determines is reasonable) a sufficient number of shares of Common Stock of the Company so that such Person would no longer be an "Acquiring Person," as defined pursuant to the foregoing provisions of this Section 1(a). (b) "ADJUSTMENT SHARES" shall have the meaning set forth in Section 11(a)(iii) hereof. 2 6 (c) "ADVERSE PERSON" shall mean any Person declared to be an Adverse Person by the Board of Directors upon a determination of the Board of Directors that the criteria set forth in Section 11(a)(ii)(B) apply to such Person. (d) "AFFILIATE" and "ASSOCIATE" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations (the "Rules") under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on the date of this Agreement; PROVIDED, HOWEVER, that no Person who is a director or officer of the Company shall be deemed an Affiliate or an Associate of any other director or officer of the Company solely as a result of his or her position as director or officer of the Company. (e) A Person shall be deemed the "BENEFICIAL OWNER" of, and shall be deemed to "BENEFICIALLY OWN," any securities: (i) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, beneficially owns (as determined pursuant to Rule 13d-3 of the Rules under the Exchange Act, as in effect on the date of this Agreement); (ii) which such Person or any of such Person's Affiliates or Associates, directly or indirectly, has: (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time or upon the satisfaction of any conditions or both) pursuant to any agreement, arrangement or understanding (whether or not in writing) (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants or options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," (1) securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; (2) securities issuable upon exercise of these Rights at any time prior to the occurrence of a Triggering Event; or (3) securities issuable upon exercise of Rights from and after the occurrence of a Triggering Event, which Rights were acquired by such Person or any of such Person's Affiliates or Associates prior to the Distribution Date or pursuant to Sections 3(a), 11(i) or 22 hereof; or (B) the right to vote pursuant to any agreement, arrangement or understanding (whether or not in writing); PROVIDED, HOWEVER, that a Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any security under this clause (B) if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy given in response to 3 7 a public proxy or consent solicitation made pursuant to, and in accordance with, the Rules of the Exchange Act and (2) is not also then reportable by such person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (C) the right to dispose of pursuant to any agreement, arrangement or understanding (whether or not in writing) (other than customary arrangements with and between underwriters and selling group members with respect to a bona fide public offering of securities); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in clause (B) of Section 1(d)(ii) hereof) or disposing of any securities of the Company; PROVIDED, HOWEVER, that (1) no Person engaged in business as an underwriter of securities shall be deemed the Beneficial Owner of any securities acquired through such Person's participation as an underwriter in good faith in a firm commitment underwriting until the expiration of forty (40) days after the date of such acquisition, and (2) no Person who is a director or an officer of the Company shall be deemed, as a result of his or her position as director or officer of the Company, the Beneficial Owner of any securities of the Company that are beneficially owned by any other director or officer of the Company. (f) "BUSINESS DAY" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the State of Massachusetts are authorized or obligated by law or executive order to close. (g) "CLOSE OF BUSINESS" on any given date shall mean 5:00 P.M., Boston, Massachusetts time, on such date; PROVIDED, HOWEVER, that if such date is not a Business Day it shall mean 5:00 P.M., Boston, Massachusetts time, on the next succeeding Business Day. (h) "COMMON STOCK" when used in reference to the Company shall mean the common stock, par value $.50 per share, of the Company or any other shares of capital stock of the Company into which such stock shall be reclassified or changed. "Common Stock" when used with reference to any Person other than the Company organized in corporate form shall mean (i) the capital stock or other equity interest of such Person with the greatest voting power, (ii) the equity securities or other equity interest having power to control or direct the management of such Person or (iii) if such Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person and which have issued any such outstanding capital stock, equity securities or equity interest. "Common Stock" when 4 8 used with reference to any Person not organized in corporate form shall mean units of beneficial interest which shall be entitled to exercise the greatest voting power of such Person or, in the case of a limited partnership, shall have the power to remove or otherwise replace the general partner or partners. (i) "CURRENT VALUE" shall have the meaning set forth in Section 11(a)(iii) hereof. (j) "DEPOSITARY AGENT" shall have the meaning set forth in Section 7(c) hereof. (k) "DISTRIBUTION DATE" shall have the meaning defined in Section 3(a) hereof. (l) "EXERCISE PRICE" shall have the meaning defined in Section 4(a) hereof. (m) "EXPIRATION DATE" and "FINAL EXPIRATION DATE" shall have the meanings set forth in Section 7(a) hereof. (n) "FAIR MARKET VALUE" of any securities or other property shall be as determined in accordance with Section 11(d) hereof. (o) "GROUP" shall have the meaning set forth in clause (b) of the definition of "Person." (p) "PERSON" shall mean (a) an individual, a corporation, a partnership, an association, a joint stock company, a trust, a business trust, a government or political subdivision, any unincorporated organization, or any other association or entity, or (b) a "group" as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (any such group under this Clause (b), a "Group"). (q) "PREFERRED STOCK" shall mean shares of Series A Junior Participating Cumulative Preferred Stock, par value $.50 per share, of the Company having the rights and preferences set forth in the form of Certificate of Designation attached hereto as EXHIBIT A. (r) "PREFERRED STOCK EQUIVALENTS" shall have the meaning set forth in Section 11(b) hereof. (s) "PRINCIPAL PARTY" shall have the meaning defined in Section 13(b) hereof. (t) "REDEMPTION PRICE" shall have the meaning defined in Section 23 hereof. (u) "REGISTERED COMMON STOCK" shall have the meaning set forth in Section 13(b) hereof. 5 9 (v) "RIGHT CERTIFICATE" shall have the meaning set forth in Section 3(a) hereof. (w) "SECTION 11(a)(II) EVENT" shall mean any event described in Section 11(a)(ii) hereof. (x) "SECTION 11(a)(II) TRIGGER DATE" shall have the meaning set forth in Section 11(a)(ii) hereof. (y) "SECTION 13 EVENT" shall mean any event described in clauses (x), (y) or (z) of Section 13(a) hereof. (z) "SECTION 24(a)(I) EXCHANGE RATIO" shall have the meaning set forth in Section 24(a)(i) hereof. (aa) "SECTION 24(a)(II) EXCHANGE RATIO" shall have the meaning set forth in Section 24(a)(ii) hereof. (bb) "SPREAD" shall have then meaning set forth in Section 11(a)(iii) hereof. (cc) "STOCK ACQUISITION DATE" shall mean the date of the first public announcement (which for purposes of this definition shall include, without limitation, the issuance of a press release or the filing of a publicly-available report or other document with the Securities and Exchange Commission or any other governmental agency) by the Company or an Acquiring Person that an Acquiring Person has become such. (dd) "SUBSIDIARY" shall mean, with reference to any Person, any corporation or other entity of which securities or other ownership interest having ordinary voting power sufficient, in the absence of contingencies, to elect a majority of the board of directors or other persons performing similar functions of such corporation or other entity are at the time directly or indirectly beneficially owned or otherwise controlled by such Person and any Affiliate of such Person. (ee) "SUBSTITUTION PERIOD" shall have the meaning set forth in Section 11(a)(iii) hereof. (ff) "TRIGGERING EVENT" shall mean any Section 11(a)(ii) Event or any Section 13 Event. Section 2. AMENDMENT AND RESTATEMENT OF THE ORIGINAL RIGHTS AGREEMENT; APPOINTMENT OF RIGHTS AGENT. (a) The Original Rights Agreement is hereby amended and restated in its entirety by this Agreement and in connection therewith all Bank Rights issued pursuant to the 6 10 Original Rights Agreement are deemed to be automatically converted to Rights as of the date hereof without further action and no holder of any such Bank Rights shall have any rights whatsoever with respect to such Bank Rights, whether under any provision of this Agreement or otherwise. (b) The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall prior to the Distribution Date (as hereinafter defined in Section 3(a)) also be the holders of the Common Stock of the Company) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable. In the event the Company appoints one or more Co-Rights Agents, the respective duties of the Rights Agent and any Co- Rights Agents shall be as the Company shall determine. The Company shall give 10 days prior written notice to the Rights Agent of the appointment of one or more Co-Rights Agents and the respective duties of the Rights Agent and any such Co-Rights Agents. The Rights Agent shall have no duty to supervise, and in no event shall be liable for, the acts or omissions of any such Co-Rights Agents. Section 3. ISSUE OF RIGHT CERTIFICATES. (a) From the date hereof until the earlier of (i) the Close of Business on the tenth calendar day after the Stock Acquisition Date, (ii) the Close of Business on the tenth Business Day (or such other calendar day, if any, as the Board of Directors may determine in its sole discretion) after the date a tender or exchange offer by any Person, other than an Exempt Person, is first published or sent or given within the meaning of Rule 14d-4(a) of the Exchange Act, or any successor rule, if, upon consummation thereof, such Person would be the Beneficial Owner of 15% or more of the shares of Common Stock of the Company then outstanding or (iii) the determination by the Board of Directors of the Company, pursuant to the criteria set forth in Section 11(a)(ii)(B) hereof, that a Person is an Adverse Person (including any such date which is after the date of this Agreement and prior to the issuance of the Rights) (the earliest of such dates being herein referred to as the "Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of Section 3(b) hereof) by the certificates for the Common Stock of the Company registered in the names of the holders of the Common Stock of the Company (which certificates for Common Stock of the Company shall be deemed also to be certificates for Rights) and not by separate certificates, and (y) the Rights will be transferable only in connection with the transfer of the underlying shares of Common Stock of the Company. As soon as practicable after the Distribution Date, the Rights Agent will, at the Company's expense send, by first-class, insured, postage prepaid mail, to each record holder of the Common Stock of the Company as of the Close of Business on the Distribution Date, at the address of such holder shown on the records of the Company, one or more certificates, in substantially the form of EXHIBIT B hereto (the "Right Certificates"), evidencing one Right for each share of Common Stock of the Company so held, subject to adjustment as provided herein. In the event that an adjustment in the number of Rights per share of Common Stock of the Company has been made pursuant to Section 11(o) hereof, the 7 11 Company may make the necessary and appropriate rounding adjustments (in accordance with Section 14(a) hereof) at the time of distribution of the Right Certificates, so that Right Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of and after the Close of Business on the Distribution Date, the Rights will be evidenced solely by such Right Certificates. (b) With respect to certificates for the Common Stock of the Company issued prior to the Close of Business on the Record Date, the Rights will be evidenced by such certificates for the Common Stock of the Company on or until the Distribution Date (or the earlier redemption, expiration or termination of the Rights), and the registered holders of the Common Stock of the Company also shall be the registered holders of the associated Rights. Until the Distribution Date (or the earlier redemption, expiration or termination of the Rights), the transfer of any of the certificates for the Common Stock of the Company outstanding prior to the date of this Agreement shall also constitute the transfer of the Rights associated with the Common Stock of the Company represented by such certificate. (c) Certificates for the Common Stock of the Company issued after the Record Date, but prior to the earlier of the Distribution Date or the redemption, expiration or termination of the Rights, shall be deemed also to be certificates for Rights, and shall bear a legend, substantially in the form set forth below: This certificate also evidences and entitles the holder hereof to certain Rights as set forth in an Amended and Restated Shareholder Rights Agreement among Medford Bancorp, Inc., Medford Savings Bank, and State Street Bank and Trust Company, as Rights Agent, dated as of November 26, 1997, as amended, restated, renewed or extended from time to time (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal offices of Medford Bancorp, Inc. and the stock transfer administration office of the Rights Agent. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. Medford Bancorp, Inc. may redeem the Rights at a redemption price of $.01 per Right, subject to adjustment, under the terms of the Rights Agreement. Medford Bancorp, Inc. will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge promptly after receipt of a written request therefor. Under certain circumstances, Rights issued to or held by Acquiring Persons, Adverse Persons or any Affiliates or Associates thereof (as defined in the Rights Agreement), and any subsequent holder of such Rights, may become null and void. The Rights shall not be exercisable, and shall be void so long as 8 12 held, by a holder in any jurisdiction where the requisite qualification, if any, to the issuance to such holder, or the exercise by such holder, of the Rights in such jurisdiction shall not have been obtained or be obtainable. With respect to such certificates containing the foregoing legend, the Rights associated with the Common Stock of the Company represented by such certificates shall be evidenced by such certificates alone until the Distribution Date (or the earlier redemption, expiration or termination of the Rights), and the transfer of any of such certificates shall also constitute the transfer of the Rights associated with the Common Stock of the Company represented by such certificates. In the event that the Company purchases or acquires any shares of Common Stock of the Company after the Record Date but prior to the Distribution Date, any Rights associated with such Common Stock of the Company shall be deemed canceled and retired so that the Company shall not be entitled to exercise any Rights associated with the shares of Common Stock of the Company which are no longer outstanding. The failure to print the foregoing legend on any such certificate representing Common Stock of the Company or any defect therein shall not affect in any manner whatsoever the application or interpretation of the provisions of Section 7(e) hereof. Section 4. FORM OF RIGHT CERTIFICATES. (a) The Right Certificates (and the forms of election to purchase shares and of assignment and certificate to be printed on the reverse thereof) shall each be substantially in the form of EXHIBIT B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law, rule or regulation or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to customary usage. The Rights Certificates shall be in a machine printable format and in a form reasonably satisfactory to the Rights Agent. Subject to the provisions of Section 11 and Section 22 hereof, the Right Certificates, whenever distributed, shall be dated as of the Record Date, shall show the date of countersignature, and on their face shall entitle the holders thereof to purchase such number of one one-hundredths of a share of Preferred Stock as shall be set forth therein at the price set forth therein (the "Exercise Price"), but the number of such shares and the Exercise Price shall be subject to adjustment as provided herein. (b) Any Right Certificate issued pursuant to Section 3(a) or Section 22 hereof that represents Rights beneficially owned by (i) an Acquiring Person, an Adverse Person or any Associate or Affiliate of an Acquiring Person or an Adverse Person, (ii) a transferee of an Acquiring Person or an Adverse Person (or of any Associate or Affiliate of an Acquiring Person or an Adverse Person) who becomes a transferee after the Acquiring Person or Adverse Person becomes such, or (iii) a transferee of an Acquiring Person or an Adverse Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person or Adverse Person becoming such and receives such 9 13 Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person or Adverse Person to holders of equity interests in such Acquiring Person or Adverse Person or to any Person with whom the Acquiring Person or Adverse Person has any continuing agreement, arrangement or understanding (whether or not in writing) regarding the transferred Rights, the shares of Common Stock of the Company associated with such Rights or the Company or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of Section 7(e) hereof, and any Right Certificate issued pursuant to Section 6, Section 11 or Section 22 upon transfer, exchange, replacement or adjustment of any other Right Certificate referred to in this sentence, shall have deleted therefrom the second sentence of the existing legend on such Right Certificate and in substitution therefor shall contain the following legend: The Rights represented by this Right Certificate are or were beneficially owned by a Person who was or became an Acquiring Person, an Adverse Person or an Affiliate or an Associate of an Acquiring Person or an Adverse Person (as such terms are defined in the Rights Agreement). This Right Certificate and the Rights represented hereby may become null and void under certain circumstances as specified in Section 7(e) of the Rights Agreement. The Company shall give notice to the Rights Agent promptly after it becomes aware of the existence and identity of any Acquiring Person or Adverse Person or any Associate or Affiliate thereof. The Company shall instruct the Rights Agent in writing of the Rights which should be so legended. The failure to print the foregoing legend on any such Right Certificate or any defect therein shall not affect in any manner whatsoever the application or interpretation of the provisions of Section 7(e) hereof. Section 5. COUNTERSIGNATURE AND REGISTRATION. (a) The Right Certificates shall be executed on behalf of the Company by its Chairman of the Board of Directors, or its President or any Vice President and by its Treasurer or any Assistant Treasurer, or by its Secretary or any Assistant Secretary, either manually or by facsimile signature, and shall have affixed thereto the Company's seal or a facsimile thereof which shall be attested to by the Secretary or any Assistant Secretary of the Company, either manually or by facsimile signature. The Right Certificates shall be manually countersigned by an authorized signatory of the Rights Agent and shall not be valid for any purpose unless so countersigned, and such countersignature upon any Right Certificate shall be conclusive evidence, and the only evidence, that such Right Certificate has been duly countersigned as required hereunder. In case any officer of the Company who shall have signed any of the Right Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Right Certificates, nevertheless, may be countersigned by an authorized signatory of the Rights Agent, and issued and delivered 10 14 by the Company with the same force and effect as though the person who signed such Right Certificates had not ceased to be such officer of the Company; and any Right Certificates may be signed on behalf of the Company by any person who, at the actual date of the execution of such Right Certificate, shall be a proper officer of the Company to sign such Right Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at one of its offices designated as the appropriate place for surrender of Right Certificates upon exercise or transfer, books for registration and transfer of the Right Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Right Certificates, the number of Rights evidenced on its face by each of the Right Certificates and the date of each of the Right Certificates. Section 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHT CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHT CERTIFICATES. (a) Subject to the provisions of Section 4(b), Section 7(e) and Section 14 hereof, at any time after the Close of Business on the Distribution Date, and at or prior to the Close of Business on the Expiration Date, any Right Certificate or Certificates may be transferred, split up, combined or exchanged for another Right Certificate or Certificates, entitling the registered holder to purchase a like number of one one-hundredths of a share of Preferred Stock (or following a Triggering Event, preferred stock, cash, property, debt securities, Common Stock of the Company or any combination thereof) as the Right Certificate or Certificates surrendered then entitled such holder to purchase and at the same Exercise Price. Any registered holder desiring to transfer, split up, combine or exchange any Right Certificate shall make such request in writing delivered to the Rights Agent, and shall surrender the Right Certificate or Certificates to be transferred, split up, combined or exchanged, with the form of assignment and certificate duly executed, at the office or offices of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Right Certificate until the registered holder shall have completed and signed the certificate contained in the form of assignment on the reverse side of such Right Certificate and shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e) and Section 14 hereof, countersign and deliver to the Person entitled thereto a Right Certificate or Certificates, as the case may be, as so requested. The Company may require payment by the registered holder of a Right Certificate, of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of Right Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Right 11 15 Certificate, and, in case of loss, theft or destruction, of indemnity or security satisfactory to them, and reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Right Certificate, if mutilated, the Company will execute and deliver a new Right Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered owner in lieu of the Right Certificate so lost, stolen, destroyed or mutilated. Section 7. EXERCISE OF RIGHTS; EXERCISE PRICE; EXPIRATION DATE OF RIGHTS. (a) Subject to Section 7(e) hereof, the registered holder of any Right Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Right Certificate, with the form of election to purchase and the certificate on the reverse side thereof duly executed, to the Rights Agent at the office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Exercise Price for the total number of one one-hundredths of a share of Preferred Stock (or other securities, cash or other assets, as the case may be) as to which such surrendered Rights are then exercised, at or prior to the earlier of (i) the Close of Business on September 22, 2003 (the "Final Expiration Date"), (ii) the time at which the Rights are redeemed as provided in Section 23 hereof or (iii) the time at which such Rights are exchanged as provided in Section 24 hereof (the earlier of (i), (ii) or (iii) being herein referred to as the "Expiration Date"). Except as set forth in Section 7(e) hereof and notwithstanding any other provision of this Agreement, any Person who prior to the Distribution Date becomes a record holder of shares of Common Stock of the Company may exercise all of the rights of a registered holder of a Right Certificate with respect to the Rights associated with such shares of Common Stock of the Company in accordance with the provisions of this Agreement, as of the date such Person becomes a record holder of shares of Common Stock of the Company. (b) The Exercise Price for each one one-hundredth of a share of Preferred Stock pursuant to the exercise of a Right shall initially be ninety dollars ($90.00), shall be subject to adjustment from time to time as provided in Section 11 and Section 13 hereof and shall be payable in lawful money of the United States of America in accordance with Section 7(c) below. (c) As promptly as practicable following the Distribution Date, the Company shall deposit with a corporation, trust, bank or similar institution in good standing organized under the laws of the United States or any State of the United States, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by a federal or state authority (such institution is hereinafter referred to as the "Depositary Agent"), certificates representing the shares of Preferred Stock that may be acquired upon exercise of the Rights and the Company shall cause such Depositary Agent to enter into an agreement pursuant to which the Depositary Agent shall issue receipts representing interests in the shares of Preferred Stock so deposited. Upon receipt of a Right Certificate representing exercisable Rights, with the form of election to purchase and the 12 16 certificate on the reverse side thereof duly executed, accompanied by payment of the Exercise Price for the shares to be purchased and an amount equal to any applicable transfer tax (as determined by the Rights Agent) in cash, or by certified check or bank draft payable to the order of the Company, the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i) requisition from the Depositary Agent (or make available, if the Rights Agent is the Depositary Agent) depositary receipts or certificates for the number of one one-hundredths of a share of Preferred Stock to be purchased and the Company hereby irrevocably authorizes the Depositary Agent to comply with all such requests, (ii) when appropriate, requisition from the Company the amount of cash, if any, to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) promptly after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Right Certificate, registered in such name or names as may be designated by such holder and (iv) when appropriate, after receipt promptly deliver such cash to or upon the order of the registered holder of such Right Certificate. In the event that the Company is obligated to issue other securities (including Common Stock) of the Company, pay cash or distribute other property pursuant to Section 11(a) hereof, the Company will make all arrangements necessary so that such other securities, cash or other property are available for distribution by the Rights Agent, if and when appropriate. The payment of the Exercise Price may be made in cash or by certified or bank check payable to the order of the Company, or by wire transfer of immediately available funds to the account of the Company (provided that notice of such wire transfer shall be given by the holder of the related Right to the Rights Agent). (d) In case the registered holder of any Right Certificate shall exercise less than all the Rights evidenced thereby, a new Right Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent and delivered to the registered holder of such Right Certificate or to his duly authorized assigns, subject to the provisions of Section 14 hereof. (e) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Section 11(a)(ii) Event or Section 13 Event, any Rights beneficially owned by (i) an Acquiring Person, an Adverse Person or any Associate or Affiliate of an Acquiring Person or an Adverse Person, (ii) a transferee of an Acquiring Person or an Adverse Person (or of any Associate or Affiliate of an Acquiring Person or an Adverse Person) who becomes a transferee after the Acquiring Person or Adverse Person becomes such or (iii) a transferee of an Acquiring Person or an Adverse Person (or of any Associate or Affiliate of an Acquiring Person or an Adverse Person) who becomes a transferee prior to or concurrently with the Acquiring Person or Adverse Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person or Adverse Person to holders of equity interests in such Acquiring Person or Adverse Person or to any Person with whom the Acquiring Person or Adverse Person has any continuing agreement, arrangement or understanding regarding the transferred Rights, the shares of Common Stock of the Company associated with such Rights or the Company, or (B) a transfer which the Board of Directors of the Company has determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this 13 17 Section 7(e), shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to ensure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no liability to any holder of Right Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person or Adverse Person or any Affiliates or Associates of an Acquiring Person or an Adverse Person or any transferee of any of them hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder of Rights upon the occurrence of any purported exercise as set forth in this Section 7 unless such registered holder shall have (i) completed and signed the certificate contained in the form of election to purchase set forth on the reverse side of the Right Certificate surrendered for such exercise, and (ii) provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. CANCELLATION AND DESTRUCTION OF RIGHT CERTIFICATES. All Right Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be canceled by it, and no Right Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Right Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Right Certificates to the Company. Section 9. RESERVATION AND AVAILABILITY OF PREFERRED STOCK. (a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued shares of Preferred Stock or any authorized and issued shares of Preferred Stock held in its treasury, the number of shares of Preferred Stock that will be sufficient to permit the exercise in full of all outstanding and exercisable Rights. Upon the occurrence of any events resulting in an increase in the aggregate number of shares of Preferred Stock issuable upon exercise of all outstanding Rights in excess of the number then reserved, the Company shall make appropriate increases in the number of shares so reserved. (b) The Company shall use its best efforts to cause, from and after such time as the Rights become exercisable, all shares of Preferred Stock issued or reserved for issuance to be listed, upon official notice of issuance, upon the principal national securities exchange, if any, upon which the Common Stock of the Company is listed or, if the principal market for the Common Stock of the Company is not on any national securities exchange, to be eligible for 14 18 quotation on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") or any successor thereto or other comparable quotation system. (c) The Company shall use its best efforts to (i) file, as soon as practicable following the earliest date after the occurrence of a Section 11(a)(ii) Event on which the consideration to be delivered by the Company upon exercise of the Rights has been determined in accordance with Section 11(a)(iii) hereof, or as soon as required by law following the Distribution Date, as the case may be, a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities purchasable upon exercise of the Rights on an appropriate form, (ii) cause such registration statement to become effective as soon as practicable after such filing and (iii) cause such registration statement to remain effective (with a prospectus that at all times meets the requirements of the Securities Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities or (B) the Expiration Date. The Company will also take such action as may be appropriate under, and which will ensure compliance with, the securities or "blue sky" laws of the various states in connection with the exercisability of the Rights. The Company may temporarily suspend, for a period of time not to exceed ninety (90) days after the date determined in accordance with the provisions of the first sentence of this Section 9(c), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect, in each case with prompt written notice to the Rights Agent. Notwithstanding any such provision of this Agreement to the contrary, the Rights shall not be exercisable in any jurisdiction unless the requisite qualification in such jurisdiction shall have been obtained. (d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all shares of Preferred Stock delivered upon the exercise of the Rights shall, at the time of delivery of the certificates or depositary receipts for such shares (subject to payment of the Exercise Price), be duly and validly authorized and issued and fully paid and nonassessable. (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and charges which may be payable in respect of the issuance or delivery of the Right Certificates or of any certificates for shares of Preferred Stock upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Right Certificates to a person other than, or in respect of the issuance or delivery of securities in a name other than that of, the registered holder of the Right Certificates evidencing Rights surrendered for exercise or to issue or deliver any certificates for securities in a name other than that of the registered holder upon the exercise of any Rights until such tax shall have been paid (any such tax being payable by the holder of such Right Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. 15 19 Section 10. PREFERRED STOCK RECORD DATE. Each Person in whose name any certificate for Preferred Stock (including any fraction of a share of Preferred Stock) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the shares of Preferred Stock represented thereby on, and such certificate shall be dated, the date upon which the Right Certificate evidencing such Rights was duly surrendered and payment of the Exercise Price (and any applicable transfer taxes) was made; PROVIDED, HOWEVER, that if the date of such surrender and payment is a date upon which the Preferred Stock transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Stock transfer books of the Company are open; and further PROVIDED, HOWEVER, that if delivery of shares of Preferred Stock is delayed pursuant to Section 9(c), such Person shall be deemed to have become the record holder of such shares of Preferred Stock only when such shares first become deliverable. Prior to the exercise of the Right evidenced thereby, the holder of a Right Certificate shall not be entitled to any rights of a shareholder of the Company with respect to shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11. ADJUSTMENT OF EXERCISE PRICE, NUMBER AND KIND OF SHARES OR NUMBER OF RIGHTS. The Exercise Price, the number and kind of shares covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a) (i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Stock payable in shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock, (C) combine the outstanding Preferred Stock into a smaller number of shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a) and Section 7(e) hereof, the Exercise Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of capital stock issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Stock transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; PROVIDED, HOWEVER, that in no event shall the consideration to be paid upon the exercise of a Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of a Right. If an event occurs which would require an adjustment under both Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii) hereof. 16 20 (ii) Subject to the provisions of Section 24 hereof, in the event (A) any Person, alone or together with its Affiliates and Associates, shall become an Acquiring Person, or (B) the Board of Directors of the Company, by majority vote, shall declare any Person to be an Adverse Person, after (x) a determination that such Person, alone or together with its Affiliates and Associates, has become the Beneficial Owner of 10% or more of the outstanding shares of Common Stock of the Company and (y) a determination by the Board of Directors, after reasonable inquiry and investigation, including such consultation, if any, with such persons as such directors shall deem appropriate, that (a) such Beneficial Ownership by such Person is intended to cause, is reasonably likely to cause or will cause the Company to repurchase the Common Stock of the Company beneficially owned by such Person or to cause pressure on the Company to take action or enter into a transaction or series of transactions which would provide such Person with short-term financial gain under circumstances where the Board of Directors determines that the best long-term interests of the Company and its shareholders, but for the actions and possible actions of such Person, would not be served by taking such action or entering into such transactions or series of transactions at that time or (b) such Beneficial Ownership is causing or reasonably likely to cause a material adverse impact (including, but not limited to, impairment of relationships with customers or impairment of the Company's ability to maintain its competitive position) on the business or prospects of the Company. No delay or failure by the Board of Directors to declare a Person to be an Adverse Person shall in any way waive or otherwise affect the power of the Board of Directors subsequently to declare a Person to be an Adverse Person. In the event that the Board of Directors should at any time determine, upon reasonable inquiry and investigation, including consultation with such Persons as the Board of Directors shall deem appropriate, that such Person has not met or complied with any condition specified by the Board of Directors, the Board of Directors may at any time thereafter declare such Person to be an Adverse Person pursuant to the provisions of this Section 11(a)(ii)(B), then, and in each such case, promptly following any such occurrence, proper provision shall be made so that each holder of a Right, except as provided in Section 7(e) hereof, shall thereafter have a right to receive, upon exercise thereof at the then current Exercise Price in accordance with the terms of this Agreement, such number of shares of Preferred Stock of the Company as shall equal the result obtained by (x) multiplying the then current Exercise Price by the then number of one one-hundredths of a share of Preferred Stock for which a Right was exercisable immediately prior to the first occurrence of a Section 11(a)(ii) Event, whether or not such Right was then exercisable, and dividing that product by (y) 50% of the Fair Market Value per one one-hundredth of a share of the Preferred Stock (determined pursuant to Section 11(d)) on 17 21 the date of the occurrence of a Section 11(a)(ii) Event (such number of shares being referred to as the "Adjustment Shares"). (iii) In lieu of issuing any shares of Preferred Stock in accordance with Section 11(a)(ii) hereof, the Company, acting by or pursuant to resolution of the Board of Directors, may, and in the event that the number of shares of Preferred Stock which are authorized by the Company's Articles of Organization but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights is not sufficient to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii) of this Section 11(a), the Company, acting by or pursuant to resolution of the Board of Directors, shall: (A) determine the excess of (X) the Fair Market Value of the Adjustment Shares issuable upon the exercise of a Right (the "Current Value") over (Y) the Exercise Price attributable to each Right (such excess being referred to as the "Spread") and (B) with respect to all or a portion of each Right (subject to Section 7(e) hereof), make adequate provision to substitute for the Adjustment Shares, upon payment of the applicable Exercise Price, (1) cash, (2) a reduction in the Exercise Price, (3) Preferred Stock Equivalents which the Board of Directors has deemed to have the same value as shares of Common Stock of the Company, (4) debt securities of the Company, (5) other assets of the Company or (6) any combination of the foregoing which, when added to any shares of Preferred Stock issued upon such exercise, has an aggregate value equal to the Current Value, where such aggregate value has been determined by the Board of Directors based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors; PROVIDED, HOWEVER, that if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within thirty (30) days following the later of (x) the first occurrence of a Section 11(a)(ii) Event and (y) the date on which the Company's right of redemption pursuant to Section 23(a) expires (the later of (x) and (y) being referred to herein as the "Section 11(a)(ii) Trigger Date"), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Exercise Price, shares of Preferred Stock (to the extent available) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. If the Board of Directors shall determine in good faith that it is likely that sufficient additional shares of Preferred Stock could be authorized for issuance upon exercise in full of the Rights, the 30-day period set forth above may be extended to the extent necessary, but not more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek stockholder approval for the authorization of such additional shares (such period, as it may be extended, being referred to herein as the "Substitution Period"). To the extent that the Company determines that some action need be taken pursuant to the first and/or second sentences of this Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(e) hereof, that such action shall apply uniformly to all 18 22 outstanding Rights and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended and a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11(a)(iii), the value of the Preferred Stock shall be the Fair Market Value (as determined pursuant to Section 11(d) hereof) per share of the Preferred Stock on the Section 11(a)(ii) Trigger Date and the value of any Preferred Stock Equivalent shall be deemed to have the same value as the Preferred Stock on such date. (b) If the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Stock entitling them (for a period expiring within forty-five (45) calendar days after such record date) to subscribe for or purchase Preferred Stock (or securities having the same or more favorable rights, privileges and preferences as the shares of Preferred Stock ("Preferred Stock Equivalents")) or securities convertible into Preferred Stock or Preferred Stock Equivalents at a price per share of Preferred Stock or per share of Preferred Stock Equivalents (or having a conversion price per share, if a security convertible into Preferred Stock or Preferred Stock Equivalents) less than the Fair Market Value (as determined pursuant to Section 11(d) hereof) per share of Preferred Stock on such record date, the Exercise Price to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of shares of Preferred Stock which the aggregate offering price of the total number of shares of Preferred Stock and/or Preferred Stock Equivalents to be offered (and the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such Fair Market Value and the denominator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of additional shares of Preferred Stock and Preferred Stock Equivalents to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); PROVIDED, HOWEVER, that in no event shall the consideration to be paid upon the exercise of a Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of a Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be the Fair Market Value thereof determined in accordance with Section 11(d) hereof. Shares of Preferred Stock owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such rights or warrants are not so issued, the Exercise Price shall be adjusted to be the Exercise Price which would then be in effect if such record date had not been fixed. 19 23 (c) If the Company shall fix a record date for the making of a distribution to all holders of Preferred Stock (including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), of evidences of indebtedness, cash (other than a regular periodic cash dividend out of the earnings or retained earnings of the Company), assets (other than a dividend payable in Preferred Stock, but including any dividend payable in stock other than Preferred Stock) or convertible securities, subscription rights or warrants (excluding those referred to in Section 11(b)), the Exercise Price to be in effect after such record date shall be determined by multiplying the Exercise Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the Fair Market Value (as determined pursuant to Section 11(d) hereof) per one one-hundredth of a share of Preferred Stock on such record date, less the Fair Market Value (as determined pursuant to Section 11(d) hereof) of the portion of the cash, assets or evidences of indebtedness so to be distributed or of such convertible securities, subscription rights or warrants applicable to one one-hundredth of a share of Preferred Stock and the denominator of which shall be the Fair Market Value (as determined pursuant to Section 11(d) hereof) per one one-hundredth of a share of Preferred Stock; PROVIDED, HOWEVER, that in no event shall the consideration to be paid upon the exercise of a Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of a Right. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Exercise Price shall again be adjusted to be the Exercise Price which would be in effect if such record date had not been fixed. (d) For the purpose of this Agreement, the "Fair Market Value" of any share of Preferred Stock, Common Stock or any other stock or any Right or other security or any other property shall be determined as provided in this Section 11(d). (i) In the case of a publicly-traded stock or other security, the Fair Market Value on any date shall be deemed to be the average of the daily closing prices per share of such stock or per unit of such other security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; PROVIDED, HOWEVER, that in the event that the Fair Market Value per share of any share of stock is determined during a period following the announcement by the issuer of such stock of (x) a dividend or distribution on such stock payable in shares of such stock or securities convertible into shares of such stock or (y) any subdivision, combination or reclassification of such stock, and prior to the expiration of the 30 Trading Day period after the ex- dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the Fair Market Value shall be properly adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the securities are not 20 24 listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which such security is listed or admitted to trading; or, if not listed or admitted to trading on any national securities exchange, the last quoted price (or, if not so quoted, the average of the last quoted high bid and low asked prices) in the over-the-counter market, as reported by NASDAQ or such other system then in use; or, if on any such date no bids for such security are quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in such security selected by the Board of Directors of the Company. If on any such date no market maker is making a market in such security, the Fair Market Value of such security on such date shall be determined reasonably and with utmost good faith to the holders of the Rights by the Board of Directors of the Company, PROVIDED, HOWEVER, that if at the time of such determination there is an Acquiring Person or an Adverse Person, the Fair Market Value of such security on such date shall be determined by a nationally recognized investment banking firm selected by the Board of Directors, which determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights. The term "Trading Day" shall mean a day on which the principal national securities exchange on which such security is listed or admitted to trading is open for the transaction of business or, if such security is not listed or admitted to trading on any national securities exchange, a Business Day. (ii) If a security is not publicly held or not so listed or traded, "Fair Market Value" shall mean the fair value per share of stock or per other unit of such security, determined reasonably and with utmost good faith to the holders of the Rights by the Board of Directors of the Company; PROVIDED, HOWEVER, that if at the time of such determination there is an Acquiring Person or an Adverse Person, the Fair Market Value of such security on such date shall be determined by a nationally recognized investment banking firm selected by the Board of Directors, which determination shall be described in a statement filed with the Rights Agent and shall be binding on the Rights Agent and the holders of the Rights; PROVIDED, HOWEVER, that for the purposes of making any adjustment provided for by Section 11(a)(ii) hereof, the Fair Market Value of a share of Preferred Stock shall not be less than the product of the then Fair Market Value of a share of Common Stock multiplied by the higher of the then Dividend Multiple or Vote Multiple (as both of such terms are defined in the Certificate of Designation attached as Exhibit A hereto) applicable to the Preferred Stock and shall not exceed 105% of the product of the then Fair Market Value of a share of Common Stock multiplied by the higher of the then Dividend Multiple or Vote Multiple applicable to the Preferred Stock. 21 25 (iii) In the case of property other than securities, the Fair Market Value thereof shall be determined reasonably and with utmost good faith to the holders of Rights by the Board of Directors of the Company; PROVIDED, HOWEVER, that if at the time of such determination there is an Acquiring Person or an Adverse Person, the Fair Market Value of such property on such date shall be determined by a nationally recognized investment banking firm selected by the Board of Directors, which determination shall be described in a statement filed with the Rights Agent and shall be binding upon the Rights Agent and the holders of the Rights. (e) Anything herein to the contrary notwithstanding, no adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least 1% in the Exercise Price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest ten thousandth of a share of Common Stock of the Company or one-millionth of a share of Preferred Stock, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three (3) years from the date of the transaction which mandates such adjustment or (ii) the Expiration Date. (f) If as a result of any provision of Section 11(a) or Section 13(a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Preferred Stock, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Stock contained in Section 11(a), (b), (c), (d), (e), (g) through (k) and (m), inclusive, and the provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred Stock shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Exercise Price hereunder shall evidence the right to purchase, at the adjusted Exercise Price, the number of one one-hundredths of a share of Preferred Stock (or other securities or amount of cash or combination thereof) purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Exercise Price as a result of the calculations made in Section 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of one one-hundredths of a share of Preferred Stock (calculated to the nearest one- millionth) as the Board of Directors reasonably determines is appropriate to preserve economic value of the Rights, including, by way of example, that number obtained by (i) multiplying (x) the number of one one-hundredths of a share of Preferred Stock for which a Right may be 22 26 exercisable immediately prior to this adjustment by (y) the Exercise Price in effect immediately prior to such adjustment of the Exercise Price and (ii) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price. (i) The Company may elect on or after the date of any adjustment of the Exercise Price to adjust the number of Rights, in substitution for any adjustment in the number of shares of Preferred Stock purchasable upon the exercise of a Right. Each of the Rights outstanding after the adjustment in the number of Rights shall be exercisable for the number of one one-hundredths of a share of Preferred Stock for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest one-ten- thousandth) obtained by dividing the Exercise Price in effect immediately prior to adjustment of the Exercise Price by the Exercise Price in effect immediately after adjustment of the Exercise Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Exercise Price is adjusted or any day thereafter, but, if the Right Certificates have been issued, shall be at least ten (10) days later than the date of the public announcement. If Right Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Right Certificates on such record date Right Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Right Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Right Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Right Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Exercise Price) and shall be registered in the names of the holders of record of Right Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Exercise Price or the number of one one-hundredths of a share of Preferred Stock issuable upon the exercise of the Rights, the Right Certificates theretofore and thereafter issued may continue to express the Exercise Price per share and the number of shares which were expressed in the initial Right Certificates issued hereunder without prejudice to any adjustment or change. (k) Before taking any action that would cause an adjustment reducing the Exercise Price below the then stated value, if any, of the number of one one-hundredths of a share of Preferred Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable shares of Preferred Stock at such adjusted Exercise Price. 23 27 (l) In any case in which this Section 11 shall require that an adjustment in the Exercise Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date the number of one one-hundredths of a share of Preferred Stock or other capital stock or securities of the Company, if any, issuable upon such exercise over and above the number of one one-hundredths of a share of Preferred Stock and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Exercise Price in effect prior to such adjustment; PROVIDED, HOWEVER, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Exercise Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that in their good faith judgment a majority of the Board of Directors shall determine to be advisable in order that any consolidation or subdivision of the Preferred Stock, issuance wholly for cash of any shares of Preferred Stock at less than the Fair Market Value, issuance wholly for cash of shares of Preferred Stock or securities which by their terms are convertible into or exchangeable for shares of Preferred Stock, stock dividends or issuance of rights, options or warrants referred to hereinabove in this Section 11, hereafter made by the Company to holders of its Preferred Stock, shall not be taxable to such shareholders. (n) The Company covenants and agrees that it shall not, at any time after the Distribution Date and so long as the Rights have not been redeemed pursuant to Section 23 hereof or exchanged pursuant to Section 24 hereof, (i) consolidate with (other than a Subsidiary of the Company in a transaction that complies with the proviso at the end of this sentence), (ii) merge with or into, or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one transaction or a series of related transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries taken as a whole, to any other Person or Persons (other than the Company and/or any of its Subsidiaries in one or more transactions each of which complies with the proviso at the end of this sentence) if (x) at the time of or immediately after such consolidation, merger or sale there are any rights, warrants or other instruments outstanding or agreements or arrangements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights, or (y) prior to, simultaneously with or immediately after such consolidation, merger or sale the shareholders of a Person who constitutes, or would constitute, the "Principal Party" for the purposes of Section 13(a) hereof shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates; PROVIDED, HOWEVER, that this Section 11(n) shall not affect the ability of any Subsidiary of the Company to consolidate with, or merge with or into, or sell or transfer assets or earning power to, any other Subsidiary of the Company. The Company further covenants and agrees that after the Distribution Date it will not, except as permitted by Section 23 or Section 27 hereof, take (or permit any Subsidiary to take) any action if at the time such action is taken it is 24 28 reasonably foreseeable that such action will substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights. (o) Notwithstanding anything in this Agreement to the contrary, in the event the Company shall at any time after the date of this Agreement and prior to the Distribution Date (i) declare or pay any dividend on the outstanding Common Stock of the Company payable in shares of Common Stock of the Company or (ii) effect a subdivision, combination or consolidation of the outstanding shares of Common Stock of the Company (by reclassification or otherwise than by payment of dividends in shares of Common Stock of the Company) into a greater or lesser number of shares of Common Stock of the Company, then in any such case (A) the number of one one-hundredths of a share of Preferred Stock purchasable after such event upon proper exercise of each Right shall be determined by multiplying the number of one one-hundredths of a share of Preferred Stock so purchasable immediately prior to such event by a fraction, the numerator of which is the number of shares of Common Stock of the Company outstanding immediately prior to such event and the denominator of which is the number of shares of Common Stock of the Company outstanding immediately after such event, and (B) each share of Common Stock of the Company outstanding immediately after such event shall have issued with respect to it that number of Rights which each share of Common Stock of the Company outstanding immediately prior to such event had issued with respect to it. The adjustments provided for in this Section 11(o) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. (p) The exercise of Rights under Section 11(a)(ii) shall only result in the loss of rights under Section 11(a)(ii) to the extent so exercised and shall not otherwise affect the rights of holders of Right Certificates under this Rights Agreement, including rights to purchase securities of the Principal Party following a Section 13 Event which has occurred or may thereafter occur, as set forth in Section 13 hereof. Upon exercise of a Right Certificate under Section 11(a)(ii), the Rights Agent shall return such Right Certificate duly marked to indicate that such exercise has occurred. Section 12. CERTIFICATE OF ADJUSTED EXERCISE PRICE OR NUMBER OF SHARES. Whenever an adjustment is made as provided in Section 11 or Section 13 hereof, the Company shall (a) promptly prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent and with each transfer agent for the Preferred Stock and the Common Stock of the Company a copy of such certificate and (c) mail a brief summary thereof to each holder of a Right Certificate in accordance with Section 26 hereof. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment contained therein and shall not be deemed to have knowledge of any such adjustment unless and until it shall have received such certificate. Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER. 25 29 (a) In the event that, following the Stock Acquisition Date, directly or indirectly, (x) the Company shall consolidate with, or merge with and into, any other Person (other than a Subsidiary of the Company in a transaction which is not prohibited by Section 11(n) hereof), and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (y) any Person (other than a Subsidiary of the Company in a transaction which is not prohibited by the proviso at the end of the first sentence of Section 11(n) hereof) shall consolidate with the Company, or merge with and into the Company and the Company shall be the continuing or surviving corporation of such merger and, in connection with such merger, all or part of the shares of Common Stock of the Company shall be changed into or exchanged for stock or other securities of any other Person or cash or any other property, or (z) the Company shall sell, mortgage or otherwise transfer (or one or more of its Subsidiaries shall sell, mortgage or otherwise transfer), in one transaction or a series of related transactions, assets or earning power aggregating 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person or Persons (other than the Company or any Subsidiary of the Company in one or more transactions, each of which is not prohibited by the proviso at the end of the first sentence of Section 11(n) hereof), then, and in each such case, proper provision shall be made so that: (i) each holder of a Right, except as provided in Section 7(e) hereof, shall have the right to receive, upon the exercise thereof at the then current Exercise Price in accordance with the terms of this Agreement, such number of validly authorized and issued, fully paid and nonassessable shares of freely tradeable Common Stock of the Principal Party (as hereinafter defined in Section 13(b)), free and clear of rights of call or first refusal, liens, encumbrances, transfer restrictions or other adverse claims, as shall be equal to the result obtained by (1) multiplying the then current Exercise Price by the number of one one-hundredths of a share of Preferred Stock for which a Right is exercisable immediately prior to the first occurrence of a Section 13 Event, and dividing that product by (2) 50% of the Fair Market Value (determined pursuant to Section 11(d) hereof) per share of the Common Stock of such Principal Party on the date of consummation of such consolidation, merger, sale or transfer; (ii) such Principal Party shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, sale, mortgage or transfer, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 hereof shall apply to such Principal Party; and (iv) such Principal Party shall take such steps (including, but not limited to, the reservation of a sufficient number of shares of its Common Stock to permit exercise of all outstanding Rights in accordance with this Section 13(a) and the making of payments in cash and/or other securities in accordance with Section 11(a)(iii) hereof) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its shares of Common Stock thereafter deliverable upon the exercise of the Rights. (b) "Principal Party" shall mean (i) in the case of any transaction described in clause (x) or (y) of the first sentence of Section 13(a), the Person that is the issuer of any securities into which 26 30 shares of Common Stock of the Company are converted in such merger or consolidation, or, if there is more than one such issuer, the issuer of Common Stock that has the highest aggregate Fair Market Value (determined pursuant to Section 11(d)), and if no securities are so issued, the Person that is the other party to the merger or consolidation, or, if there is more than one such Person, the Person the Common Stock of which has the highest aggregate Fair Market Value (determined pursuant to Section 11(d)); and (ii) in the case of any transaction described in clause (z) of the first sentence of Section 13(a), the Person that is the party receiving the greatest portion of the assets or earning power transferred pursuant to such transaction or transactions, or, if each Person that is a party to such transaction or transactions receives the same portion of the assets or earning power transferred pursuant to such transaction or transactions or if the Person receiving the largest portion of the assets or earning power cannot be determined, whichever Person the Common Stock of which has the highest aggregate Fair Market Value (determined pursuant to Section 11(d)); PROVIDED, HOWEVER, that in any such case, (1) if the Common Stock of such Person is not at such time and has not been continuously over the preceding 12-month period registered under Section 12 of the Exchange Act ("Registered Common Stock") or such Person is not a corporation, and such Person is a direct or indirect Subsidiary or Affiliate of another Person who has Registered Common Stock outstanding, "Principal Party" shall refer to such other Person; (2) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is a direct or indirect Subsidiary of another Person but is not a direct or indirect Subsidiary of another Person which has Registered Common Stock outstanding, "Principal Party" shall refer to the ultimate parent entity of such first-mentioned Person; (3) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is directly or indirectly controlled by more than one Person, and one or more of such other Persons has Registered Common Stock outstanding, "Principal Party" shall refer to whichever of such other Persons is the issuer of the Registered Common Stock having the highest aggregate Fair Market Value (determined pursuant to Section 11(d)); and (4) if the Common Stock of such Person is not Registered Common Stock or such Person is not a corporation, and such Person is directly or indirectly controlled by more than one Person, and none of such other Persons has Registered Common Stock outstanding, "Principal Party" shall refer to whichever ultimate parent entity is the corporation having the greatest stockholders' equity or, if no such ultimate parent entity is a corporation, "Principal Party" shall refer to whichever ultimate parent entity is the entity having the greatest net assets. (c) The Company shall not consummate any such consolidation, merger, sale or transfer unless prior thereto (x) the Principal Party shall have a sufficient number of authorized shares of its Common Stock, which have not been issued or reserved for issuance, to permit the exercise in full of the Rights in accordance with this Section 13, and (y) the Company and each Principal Party and each other Person who may become a Principal Party 27 31 as a result of such consolidation, merger, sale or transfer shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in Section 13(a) and (b) and further providing that, as soon as practicable after the date of any consolidation, merger, sale or transfer of assets mentioned in Section 13(a), the Principal Party at its own expense will: (i) prepare and file a registration statement under the Securities Act with respect to the Rights and the securities purchasable upon exercise of the Rights on an appropriate form, use its reasonable best efforts to cause such registration statement to become effective as soon as practicable after such filing and use its reasonable best efforts to cause such registration statement to remain effective (with a prospectus that at all times meets the requirements of the Securities Act) until the Expiration Date; (ii) use its reasonable best efforts to qualify or register the Rights and the securities purchasable upon exercise of the Rights under the blue sky laws of such jurisdictions as may be necessary or appropriate; (iii) use its reasonable best efforts to list (or continue the listing of) the Rights and the securities purchasable upon exercise of the Rights on a national securities exchange or to meet the eligibility requirements for quotation on NASDAQ; and (iv) deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all respects with the requirements for registration on Form 10 under the Exchange Act. (d) In case the Principal Party which is to be a party to a transaction referred to in this Section 13 has a provision in any of its authorized securities or in its Certificate of Incorporation or By-laws or other instrument governing its affairs, which provision would have the effect of (i) causing such Principal Party to issue (other than to holders of Rights pursuant to this Section 13), in connection with, or as a consequence of, the consummation of a transaction referred to in this Section 13, shares of Common Stock of such Principal Party at less than the then current Fair Market Value (determined pursuant to Section 11(d)) or securities exercisable for, or convertible into, Common Stock of such Principal Party at less than such Fair Market Value, or (ii) providing for any special payment, tax or similar provisions in connection with the issuance of the Common Stock of such Principal Party pursuant to the provisions of this Section 13, then, in such event, the Company shall not consummate any such transaction unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing that the provision in question of such Principal Party shall have been canceled, waived or amended, or that the authorized securities shall be redeemed, so that the applicable provision will have no effect in connection with, or as a consequence of, the consummation of the proposed transaction. 28 32 The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company shall not be required to issue fractions of Rights, except prior to the Distribution Date as provided in Section 11(o) hereof, or to distribute Right Certificates which evidence fractional Rights. If the Company elects not to issue such fractional Rights, the Company shall pay, in lieu of such fractional Rights, to the registered holders of the Right Certificates with regard to which such fractional Rights would otherwise be issuable, an amount in cash equal to the same fraction of the Fair Market Value of a whole Right, as determined pursuant to Section 11(d) hereof. (b) The Company shall not be required to issue fractions of shares of Preferred Stock (other than fractions which are integral multiples of one one-hundredth of a share of Preferred Stock) upon exercise of the Rights or to distribute certificates which evidence fractional shares of Preferred Stock (other than fractions which are integral multiples of one one-hundredth of a share of Preferred Stock). In lieu of fractional shares of Preferred Stock that are not integral multiples of one one-hundredth of a share of Preferred Stock, the Company may pay to the registered holders of Right Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the Fair Market Value of one one-hundredth of a share of Preferred Stock. For purposes of this Section 14(b), the Fair Market Value of one one-hundredth of a share of Preferred Stock shall be determined pursuant to Section 11(d) hereof for the Trading Day immediately prior to the date of such exercise. (c) The holder of a Right by the acceptance of the Rights expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right, except as permitted by this Section 14. Section 15. RIGHTS OF ACTION. All rights of action in respect of this Agreement, other than rights of action vested in the Rights Agent pursuant to Sections 18 and 20 hereof, are vested in the respective registered holders of the Right Certificates (or, prior to the Distribution Date, the registered holders of the Common Stock of the Company); and any registered holder of any Right Certificate (or, prior to the Distribution Date, of the Common Stock of the Company), without the consent of the Rights Agent or of the holder of any other Right Certificate (or, prior to the Distribution Date, of the Common Stock of the Company), may, in such registered holder's own behalf and for such registered holder's own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Right evidenced by such Right Certificate in the manner provided in such Right Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and shall be entitled to specific performance of the obligations 29 33 hereunder and injunctive relief against actual or threatened violations of the obligations hereunder of any Person subject to this Agreement. Holders of Rights shall be entitled to recover the reasonable costs and expenses, including attorneys' fees, incurred by them in any action to enforce the provisions of this Agreement. Section 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, each Right will be transferable only simultaneously and together with the transfer of shares of Common Stock of the Company; (b) after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the office or offices of the Rights Agent designated for such purpose, duly endorsed or accompanied by a proper instrument of transfer; (c) subject to Sections 6(a) and 7(f), the Company and the Rights Agent may deem and treat the person in whose name a Right Certificate (or, prior to the Distribution Date, the associated certificate representing Common Stock of the Company) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated certificate representing Common Stock of the Company made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and, subject to the last sentence of Section 7(e), neither the Company nor the Rights Agent shall be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as the result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority prohibiting or otherwise restraining performance of such obligations; PROVIDED, HOWEVER, that the Company must use its best efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible. Section 17. RIGHT CERTIFICATE HOLDER NOT DEEMED A SHAREHOLDER. No holder, as such, of any Right Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the shares of Preferred Stock or any other securities of the Company which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Right Certificate be construed to confer upon the holder of any Right Certificate, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of 30 34 meetings or other actions affecting shareholders (except as provided in Section 25 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Right Certificate shall have been exercised in accordance with the provisions hereof. Section 18. CONCERNING THE RIGHTS AGENT. (a) The Company agrees to pay to the Rights Agent such compensation as shall be agreed to in writing between the Company and the Rights Agent for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and disbursements and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without gross negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability arising therefrom, directly or indirectly. The provisions of this Section 18(a) shall survive the expiration of the Rights and the termination of this Agreement. (b) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any Right Certificate or certificate representing Common Stock of the Company, Preferred Stock, or other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, direction, consent, certificate, statement, or other paper or document believed by it in good faith and without negligence to be genuine and to be signed and executed by the proper Person or Persons. (c) The Rights Agent shall not be liable for consequential damages under any provision of this Agreement or for any consequential damages arising out of any act or failure to act hereunder. Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust or shareholder services business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Right Certificates shall have been countersigned but not delivered, any such successor Rights Agent 31 35 may adopt the countersignature of the predecessor Rights Agent and deliver such Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, any successor Rights Agent may countersign such Right Certificates either in the name of the predecessor or in the name of the successor Rights Agent; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Right Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Right Certificates so countersigned; and in case at that time any of the Right Certificates shall not have been countersigned, the Rights Agent may countersign such Right Certificates either in its prior name or in its changed name; and in all such cases such Right Certificates shall have the full force provided in the Right Certificates and in this Agreement. Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties and obligations expressly imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Right Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel selected by it (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any Acquiring Person or Adverse Person and the determination of "Fair Market Value") be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof shall be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by a person believed by the Rights Agent to be the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President, a Vice President, the Treasurer, any Assistant Treasurer, the Secretary or an Assistant Secretary of the Company and delivered to the Rights Agent. Any such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder only for its own gross negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Right Certificates (except its 32 36 countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Right Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Right Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 7(e) hereof) or any adjustment required under the provisions of Sections 11, 13 or 23(c) hereof or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Right Certificates after receipt of a certificate describing any such adjustment furnished in accordance with Section 12 hereof), nor shall it be responsible for any determination by the Board of Directors of the Company of the Fair Market Value of the Rights or Preferred Stock pursuant to the provisions of Section 14 hereof; nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock of the Company or Preferred Stock to be issued pursuant to this Agreement or any Right Certificate or as to whether any shares of Common Stock of the Company or Preferred Stock will, when so issued, be validly authorized and issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder and certificates delivered pursuant to any provision hereof from any person believed by the Rights Agent to be the Chairman of the Board of Directors, any Vice Chairman of the Board of Directors, the President, a Vice President, the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer of the Company, and is authorized to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer. Any application by the Rights Agent for written instructions from the Company may, at the option of the Rights Agent, set forth in writing any action proposed to be taken or omitted by the Rights Agent under this Agreement and the date on or after which such action shall be taken or such omission shall be effective. The Rights Agent shall not be liable for any action taken by, or omission of, the Rights Agent in accordance with a proposal included in such application on or after the date specified in such application (which date shall not be less than five Business Days after the date any officer of the Company actually receives such application, unless any such officer shall have consented in writing to an earlier date) unless, prior to taking any such action (or the effective date in the case of an omission), the Rights 33 37 Agent shall have received written instructions in response to such application specifying the action to be taken or omitted. (h) The Rights Agent and any shareholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not the Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Right Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause (1) or clause (2) thereof, the Rights Agent shall not take any further action with respect to such requested exercise or transfer without first consulting with the Company. Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon thirty (30) days' notice in writing mailed to the Company by first class mail. The Company may remove the Rights Agent or any successor Rights Agent (with or without cause) upon thirty (30) days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock of the Company and Preferred Stock by registered or certified mail, and to the holders of the Right Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of thirty (30) days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Right Certificate (who shall, with such notice, submit his Right Certificate for inspection by the Company), then the incumbent Rights Agent or the registered holder of any Right Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (a) a corporation organized and doing business under the laws of the United States or of the Commonwealth of Massachusetts or the State of New York (or of any other state of the United States so long as such corporation is 34 38 authorized to do business as a banking institution in the Commonwealth of Massachusetts or the State of New York), in good standing, which is authorized under such laws to exercise stock transfer or corporate trust powers and is subject to supervision or examination by federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50,000,000 or (b) an Affiliate of a corporation described in clause (a) of this sentence. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock of the Company and the Preferred Stock, and mail a notice thereof in writing to the registered holders of the Right Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. ISSUANCE OF NEW RIGHT CERTIFICATES. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Right Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Exercise Price per share and the number or kind or class of shares of stock or other securities or property purchasable under the Right Certificates made in accordance with the provisions of this Agreement. In addition, in connection with the issuance or sale of shares of Common Stock of the Company following the Distribution Date and prior to the redemption or expiration of the Rights, the Company (a) shall, with respect to shares of Common Stock of the Company so issued or sold pursuant to the exercise of stock options or under any employee plan or arrangement, or upon the exercise, conversion or exchange of securities hereafter issued by the Company, and (b) may, in any other case, if deemed necessary or appropriate by the Board of Directors of the Company, issue Right Certificates representing the appropriate number of Rights in connection with such issuance or sale; PROVIDED, HOWEVER, that (i) no such Right Certificate shall be issued if, and to the extent that, the Company shall be advised by counsel that such issuance would create a significant risk of material adverse tax consequences to the Company or the person to whom such Right Certificate would be issued, and (ii) no such Right Certificate shall be issued if, and to the extent that, appropriate adjustments shall otherwise have been made in lieu of the issuance thereof. Section 23. REDEMPTION. (a) The Board of Directors of the Company may, at its option, redeem all but not less than all of the then outstanding Rights at a redemption price of $.01 per Right, appropriately adjusted to reflect any dividend declared or paid on the Common Stock of the Company in shares of Common Stock of the Company or any subdivision or combination of the outstanding shares of Common Stock of the Company or similar event occurring after the 35 39 date of this Agreement (such redemption price, as adjusted from time to time, being hereinafter referred to as the "Redemption Price"). The Rights may be redeemed only until the earlier to occur of (i) 5:00 P.M., Boston, Massachusetts time, on the tenth calendar day after the Stock Acquisition Date, (ii) the declaration by the Board of Directors that any Person is an Adverse Person or (iii) the Final Expiration Date. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price for each Right so held. Promptly after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the Rights Agent and the holders of the then outstanding Rights by mailing such notice to the Rights Agent and to all such holders at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the Transfer Agent for the Common Stock of the Company. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23 or Section 24 hereof or in connection with the purchase of shares of Common Stock of the Company prior to the Distribution Date. (c) The Company may, at its option, pay the Redemption Price in cash, shares of Common Stock of the Company (based on the Fair Market Value of the Common Stock of the Company as of the time of redemption) or any other form of consideration deemed appropriate by the Board of Directors. Section 24. EXCHANGE. (a) (i) The Board of Directors of the Company may, at its option, at any time on or after the Distribution Date, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 7(e) hereof) for shares of Common Stock of the Company at an exchange ratio of one share of Common Stock of the Company per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the "Section 24(a)(i) Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than an Exempt Person), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Stock of the Company. 36 40 (ii) Notwithstanding the foregoing, the Board of Directors of the Company may, at its option, at any time on or after the Distribution Date, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to the provisions of Section 7(e) hereof) for shares of Common Stock of the Company at an exchange ratio specified in the following sentence, as appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date of this Agreement. Subject to the adjustment described in the foregoing sentence, each Right may be exchanged for that number of shares of Common Stock of the Company obtained by dividing the Spread (as defined in Section 11(a)(iii)) by the then Fair Market Value per one one-hundredth of a share of Preferred Stock on the earlier of (x) the date on which any person becomes an Acquiring Person or (y) the date on which a tender or exchange offer by any Person (other than an Exempt Person) is first published or sent or given within the meaning of Rule 14d-4(a) of the Exchange Act or any successor rule, if upon consummation thereof such Person would be the Beneficial Owner of more than 15% of the shares of Common Stock of the Company then outstanding (such exchange ratio being referred to herein as the "Section 24(a)(ii) Exchange Ratio"). Notwithstanding the foregoing, the Board of Directors shall not be empowered to effect such exchange at any time after any Person (other than an Exempt Person), together with all Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or more of the Common Stock of the Company. (b) Immediately upon the action of the Board of Directors of the Company ordering the exchange of any Rights pursuant to subsection (a) of this Section 24 and without any further action and without any notice, the right to exercise such Rights shall terminate and the only right thereafter of a holder of such Rights shall be to receive that number of shares of Common Stock of the Company equal to the number of such Rights held by such holder multiplied by the Section 24(a)(i) Exchange Ratio or the Section 24(a)(ii) Exchange Ratio, as applicable. The Company shall promptly give notice of any such exchange in accordance with Section 26 hereof and shall promptly mail a notice of any such exchange to all of the holders of such Rights at their last addresses as they appear upon the registry books of the Rights Agent; PROVIDED, HOWEVER, that the failure to give, or any defect in, such notice shall not affect the validity of such exchange. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of exchange will state the method by which the exchange of the shares of Common Stock of the Company for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to the provisions of Section 7(e) hereof) held by each holder of Rights. (c) In any exchange pursuant to this Section 24, the Company, at its option, may substitute Preferred Stock (or Preferred Stock Equivalent, as such term is defined in Section 11(b) hereof) for Common Stock of the Company exchangeable for Rights, at the 37 41 initial rate of one one-hundredth of a share of Preferred Stock (or Preferred Stock Equivalent) for each share of Common Stock of the Company, as appropriately adjusted to reflect adjustments in the voting rights of the Preferred Stock pursuant to the terms thereof, so that the fraction of a share of Preferred Stock delivered in lieu of each share of Common Stock of the Company shall have the same voting rights as one share of Common Stock of the Company. (d) In the event that there shall not be sufficient shares of Common Stock of the Company or Preferred Stock (or Preferred Stock Equivalent) issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated in accordance with this Section 24, the Company shall take all such action as may be necessary to authorize additional shares of Common Stock of the Company or Preferred Stock (or Preferred Stock Equivalent) for issuance upon exchange of the Rights. (e) The Company shall not be required to issue fractions of Common Stock of the Company or to distribute certificates which evidence fractional shares of Common Stock of the Company. If the Company elects not to issue such fractional shares of Common Stock of the Company, the Company shall pay, in lieu of such fractional shares of Common Stock of the Company, to the registered holders of the Right Certificates with regard to which such fractional shares of Common Stock of the Company would otherwise be issuable, an amount in cash equal to the same fraction of the Fair Market Value of a whole share of Common Stock of the Company. For the purposes of this paragraph (e), the Fair Market Value of a whole share of Common Stock of the Company shall be the closing price of a share of Common Stock of the Company (as determined pursuant to the second sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of exchange pursuant to this Section 24. Section 25. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall propose, at any time after the Distribution Date, (i) to pay any dividend payable in stock of any class to the holders of Preferred Stock or to make any other distribution to the holders of Preferred Stock (other than a regular periodic cash dividend out of earnings or retained earnings of the Company), or (ii) to offer to the holders of Preferred Stock rights or warrants to subscribe for or to purchase any additional shares of Preferred Stock or shares of stock of any class or any other securities, rights or options, or (iii) to effect any reclassification of its Preferred Stock (other than a reclassification involving only the subdivision of outstanding shares of Preferred Stock), or (iv) to effect any consolidation or merger into or with, or to effect any sale, mortgage or other transfer (or to permit one or more of its Subsidiaries to effect any sale, mortgage or other transfer), in one transaction or a series of related transactions, of 50% or more of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to, any other Person (other than a Subsidiary of the Company in one or more transactions each of which is not prohibited by the proviso at the end of the first sentence of Section 11(n) hereof), (v) to effect the liquidation, dissolution or winding up of the Company, or (vi) to declare or pay any dividend on the Common Stock of the Company payable in Common Stock of the Company or to effect a subdivision, combination or consolidation of the Common Stock of the Company (by 38 42 reclassification or otherwise than by payment of dividends in Common Stock of the Company) then in each such case, the Company shall give to each holder of a Right Certificate and to the Rights Agent, in accordance with Section 26 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the shares of Common Stock of the Company and/or Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least twenty (20) days prior to the record date for determining holders of the shares of Preferred Stock for purposes of such action, and in the case of any such other action, at least twenty (20) days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the shares of Common Stock of the Company and/or Preferred Stock, whichever shall be the earlier; PROVIDED, HOWEVER, no such notice shall be required pursuant to this Section 25 as a result of any Subsidiary of the Company effecting a consolidation or merger with or into, or effecting a sale or other transfer of assets or earnings power to, any other Subsidiary of the Company in a manner not inconsistent with the provisions of this Agreement. (b) In case any Section 11(a)(ii) Event shall occur, then, in any such case, the Company shall as soon as practicable thereafter give to each registered holder of a Right Certificate and to the Rights Agent, in accordance with Section 26 hereof, a notice of the occurrence of such event, which shall specify the event and the consequences of the event to holders of Rights under Section 11(a)(ii) hereof. Section 26. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Right Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage prepaid, by facsimile transmission or by nationally-recognized overnight courier addressed (until another address is filed in writing with the Rights Agent) as follows: Medford Bancorp, Inc. 29 High Street Medford, MA 02155 Subject to the provisions of Section 21, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage prepaid, by facsimile transmission or by nationally-recognized overnight courier addressed (until another address is filed in writing with the Company) as follows: 39 43 State Street Bank and Trust Company c/o Boston EquiServe Limited Partnership 150 Royall Street Canton, Massachusetts 02021 Attention: Administration Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Right Certificate (or, prior to the Distribution Date, to the holder of any certificate representing shares of Common Stock of the Company) shall be sufficiently given or made if sent by first-class mail, postage prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 27. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution Date, the Company and the Rights Agent shall, if the Company so directs, supplement or amend any provision of this Agreement as the Company may deem necessary or desirable without the approval of any holders of certificates representing shares of Common Stock of the Company. From and after the Distribution Date, the Company and the Rights Agent shall, if the Company so directs, supplement or amend this Agreement without the approval of any holder of Right Certificates in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) to shorten or lengthen any time period hereunder, or (iv) to change or supplement the provisions hereof in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Right Certificates (other than an Acquiring Person, Adverse Person or any Affiliate or Associate of an Acquiring Person or Adverse Person); PROVIDED, HOWEVER, that from and after the Distribution Date this Agreement may not be supplemented or amended to lengthen, pursuant to clause (iii) of this sentence, (A) a time period relating to when the Rights may be redeemed at such time as the Rights are not then redeemable or (B) any other time period unless such lengthening is for the purpose of protecting, enhancing or clarifying the rights of, and the benefits to, the holders of Rights (other than an Acquiring Person, Adverse Person or any Affiliate or Associate of an Acquiring Person or Adverse Person). Without limiting the foregoing, the Company may at any time prior to such time as any Person becomes an Acquiring Person amend this Agreement to lower the threshold set forth in Section 1(a) to not less than the greater of (i) the sum of .001% and the largest percentage of the outstanding Common Stock of the Company then known by the Company to be beneficially owned by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or any Subsidiary of the Company, or any entity holding Common Stock of the Company for or pursuant to the terms of any such plan) and (ii) 10%. Upon the delivery of such certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section 27, the Rights Agent shall execute such supplement or amendment. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Stock of the Company. Notwithstanding any other provision hereof, the Rights Agent's consent must be obtained regarding any amendment or supplement pursuant to this Section 27 which alters the Rights Agent's rights or duties. 40 44 Section 28. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. DETERMINATIONS AND ACTIONS BY THE BOARD OF DIRECTORS. For all purposes of this Agreement, any calculation of the number of shares of Common Stock of the Company outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of the Company of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d- 3(d)(1)(i) of the Rules under the Exchange Act as in effect on the date hereof. The Board of Directors of the Company shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board of Directors or to the Company, or as may be necessary or advisable in the administration of this Agreement, including without limitation, the right and power to (i) interpret the provisions of this Agreement and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend the Agreement). All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Board of Directors in good faith shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights and all other parties, and (y) not subject any member of the Board of Directors to any liability to the holders of the Rights or to any other person. Section 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, the Common Stock of the Company) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Right Certificates (and, prior to the Distribution Date, registered holders of the Common Stock of the Company). Section 31. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; PROVIDED, HOWEVER, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and the Board of Directors of the Company determines in its good faith judgment that severing the invalid language from the Agreement would adversely affect the purpose or effect of the Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the Close of Business on the tenth day following the date of such determination by the Board of Directors. 41 45 Section 32. GOVERNING LAW. This Agreement, each Right and each Right Certificate issued hereunder shall be deemed to be a contract made under the laws of the Commonwealth of Massachusetts and for all purposes shall be governed by and construed in accordance with the laws of such Commonwealth applicable to contracts to be made and to be performed entirely within such Commonwealth. The courts of the Commonwealth of Massachusetts and of the United States of America located in the Commonwealth of Massachusetts (the "Massachusetts Courts") shall have exclusive jurisdiction over any litigation arising out of or relating to this Agreement and the transactions contemplated hereby, and any Person commencing or otherwise involved in any such litigation shall waive any objection to the laying of venue of such litigation in the Massachusetts Courts and shall not plead or claim in any Massachusetts Court that such litigation brought therein has been brought in an inconvenient forum. Section 33. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. [Remainder of page intentionally left blank] 42 46 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as an instrument under seal and attested, all as of the day and year first above written. ATTEST: MEDFORD BANCORP, INC. By: /s/ Eugene Murray By: /s/ Arthur H. Meehan ---------------------- ------------------------------- Name: Arthur H. Meehan Title: Chairman, President and Chief Executive Officer ATTEST: MEDFORD SAVINGS BANK By: /s/ Eugene Murray By: /s/ Arthur H. Meehan ---------------------- ------------------------------- Name: Arthur H. Meehan Title: Chairman, President and Chief Executive Officer ATTEST: STATE STREET BANK AND TRUST COMPANY, as Rights Agent Justine Alonzo Account Manager By: /s/ Justine Alonzo By: /s/ Charles Rossi ----------------------- ------------------------------- Name: Charles Rossi Title: Vice President 47 EXHIBIT A VOTE OF DIRECTORS ESTABLISHING SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK of MEDFORD BANCORP, INC. Pursuant to Section 26 of Chapter 156B of the General Laws of The Commonwealth of Massachusetts: VOTED, that pursuant to authority conferred upon and vested in the Board of Directors by the Articles of Organization, as amended (the "Articles"), of Medford Bancorp, Inc. (the "Corporation"), the Board of Directors hereby establishes and designates a series of Preferred Stock of the Corporation, and hereby fixes and determines the relative rights and preferences of the shares of such series, in addition to those set forth in the Articles, as follows: Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series A Junior Participating Cumulative Preferred Stock" (the "Series A Preferred Stock"), and the number of shares constituting such series shall be 200,000. Section 2. DIVIDENDS AND DISTRIBUTIONS. (A) (i) Subject to the rights of the holders of any shares of any series of preferred stock (or any similar stock) ranking prior and superior to the Series A Preferred Stock with respect to dividends, the holders of shares of Series A Preferred Stock, in preference to the holders of shares of common stock and of any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provisions for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of common stock or a subdivision of the outstanding shares of common stock (by reclassification or otherwise), declared on the common stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. The multiple of cash and non-cash dividends declared on the common stock to which holders of the Series A Preferred Stock are entitled, which shall be 100 initially but which shall be adjusted from 1 48 time to time as hereinafter provided, is hereinafter referred to as the "Dividend Multiple." In the event the Corporation shall at any time after September 22, 1993 (the "Rights Declaration Date") (i) declare or pay any dividend on common stock payable in shares of common stock, or (ii) effect a subdivision or combination or consolidation of the outstanding shares of common stock (by reclassification or otherwise than by payment of a dividend in shares of common stock) into a greater or lesser number of shares of common stock, then in each such case the Dividend Multiple thereafter applicable to the determination of the amount of dividends which holders of shares of Series A Preferred Stock shall be entitled to receive shall be the Dividend Multiple applicable immediately prior to such event multiplied by a fraction, the numerator of which is the number of shares of common stock outstanding immediately after such event and the denominator of which is the number of shares of common stock that were outstanding immediately prior to such event. (ii) Notwithstanding anything else contained in this paragraph (A), the Corporation shall, out of funds legally available for that purpose, declare a dividend or distribution on the Series A Preferred Stock as provided in this paragraph (A) immediately after it declares a dividend or distribution on the common stock (other than a dividend payable in shares of common stock); provided that, in the event no dividend or distribution shall have been declared on the common stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (B) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix in accordance with applicable law a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than such number of days prior to the date fixed for the payment thereof as may be allowed by applicable law. Section 3. VOTING RIGHTS. In addition to any other voting rights required by law, the holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Corporation. The number of votes which a holder of a share of Series 2 49 A Preferred Stock is entitled to cast, which shall initially be 100 but which may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Vote Multiple." In the event the Corporation shall at any time after the Rights Declaration Date (i) declare or pay any dividend on common stock payable in shares of common stock, or (ii) effect a subdivision or combination or consolidation of the outstanding shares of common stock (by reclassification or otherwise than by payment of a dividend in shares of common stock) into a greater or lesser number of shares of common stock, then in each such case the Vote Multiple thereafter applicable to the determination of the number of votes per share to which holders of shares of Series A Preferred Stock shall be entitled shall be the Vote Multiple immediately prior to such event multiplied by a fraction, the numerator of which is the number of shares of common stock outstanding immediately after such event and the denominator of which is the number of shares of common stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of common stock and the holders of shares of any other capital stock of this Corporation having general voting rights, shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation. (C) Except as otherwise required by applicable law or as set forth herein, holders of Series A Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of common stock as set forth herein) for taking any corporate action. Section 4. CERTAIN RESTRICTIONS. (A) Whenever dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series A Preferred Stock outstanding shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) except as permitted in subsection 4(A)(iv) below, redeem, purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to 3 50 dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series A Preferred Stock, or any shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under subsection (A) of this Section 4, purchase or otherwise acquire such shares at such time and in such manner. Section 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of preferred stock and may be reissued as part of a new series of preferred stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made (x) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, plus an amount equal to the greater of (1) $100.00 per share or (2) an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of common stock, or (y) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all other such parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare or pay any dividend on common stock payable in shares of common stock, or (ii) effect a subdivision or combination or consolidation of the outstanding shares of common stock (by reclassification or otherwise than by payment of a dividend in shares 4 51 of common stock) into a greater or lesser number of shares of common stock, then in each such case the aggregate amount per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (x) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of common stock outstanding immediately after such event and the denominator of which is the number of shares of common stock that were outstanding immediately prior to such event. Neither the consolidation of nor merging of the Corporation with or into any other corporation or corporations, nor the sale or other transfer of all or substantially all of the assets of the Corporation, shall be deemed to be a liquidation, dissolution or winding up of the Corporation within the meaning of this Section 6. Section 7. CONSOLIDATION, MERGER, ETC. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of common stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of common stock is changed or exchanged, plus accrued and unpaid dividends, if any, payable with respect to the Series A Preferred Stock. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare or pay any dividend on common stock payable in shares of common stock, or (ii) effect a subdivision or combination or consolidation of the outstanding shares of common stock (by reclassification or otherwise than by payment of a dividend in shares of common stock) into a greater or lesser number of shares of common stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of common stock outstanding immediately after such event and the denominator of which is the number of shares of common stock that were outstanding immediately prior to such event. Section 8. REDEMPTION. The shares of Series A Preferred Stock shall not be redeemable. Section 9. RANKING. Unless otherwise provided in the Articles of Organization of the Corporation or a Certificate of Vote of Directors Establishing a Class of Stock relating to a subsequently-designated series of preferred stock of the Corporation, the Series A Preferred Stock shall rank junior to any other series of the Corporation's preferred stock subsequently issued, as to the payment of dividends and the distribution of assets on liquidation, dissolution or winding up and shall rank senior to the common stock. Section 10. AMENDMENT. The Articles of Organization of the Corporation and this Certificate of Vote of Directors Establishing a Class of Stock shall not be amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely (within the meaning of Section 77 of Chapter 156B 5 52 of the Massachusetts General Laws) without the affirmative vote of the holders of two-thirds or more of the outstanding shares of Series A Preferred Stock, voting separately as a class. Section 11. FRACTIONAL SHARES. Series A Preferred Stock may be issued in whole shares or in any fraction of a share that is one one-hundredth (1/100th) of a share or any integral multiple of such fraction, which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. In lieu of fractional shares, the Corporation may elect to make a cash payment as provided in the Rights Agreement for fractions of a share other than one one-hundredth (1/100th) of a share or any integral multiple thereof. 6 53 Exhibit B [Form of Right Certificate] Certificate No. R- ________ Rights NOT EXERCISABLE AFTER SEPTEMBER 22, 2003 OR EARLIER IF NOTICE OF REDEMPTION IS GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF MEDFORD BANCORP, INC., AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE AMENDED AND RESTATED SHAREHOLDER RIGHTS AGREEMENT AMONG MEDFORD BANCORP, INC., MEDFORD SAVINGS BANK AND STATE STREET BANK AND TRUST COMPANY, AS RIGHTS AGENT, DATED AS OF NOVEMBER 26, 1997 (THE "RIGHTS AGREEMENT"). UNDER CERTAIN CIRCUMSTANCES SPECIFIED IN SECTION 7(e) OF THE RIGHTS AGREEMENT, RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON, AN ADVERSE PERSON OR AN ASSOCIATE OR AFFILIATE OF AN ACQUIRING PERSON OR AN ADVERSE PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND VOID. Right Certificate MEDFORD BANCORP, INC. This certifies that _________, or registered assigns, is the registered owner of the number of Rights set forth above, each of which entitles the owner thereof, subject to the terms, provisions and conditions of the Rights Agreement among MEDFORD BANCORP, INC. (the "Company"), MEDFORD SAVINGS BANK and STATE STREET BANK AND TRUST COMPANY, as Rights Agent (the "Rights Agent"), to purchase from the Company at any time after the Distribution date (as such term is defined in the Rights Agreement) and prior to the close of business on September 22, 2003 at the office or offices of the Rights Agent designated for such purpose, or its successors as Rights Agent, one one-hundredth of a fully paid, non-assessable share of the Series A Junior Participating Cumulative Preferred Stock (the "Preferred Stock") of the Company, at a purchase price of $90.00 per one one-hundredth of a share (the "Exercise Price"), upon presentation and surrender of this Right Certificate with the Form of Election to Purchase and the related Certificate duly executed. The number of Rights evidenced by this Right Certificate (and the number of shares which may be purchased upon exercise thereof) set forth above, and the Exercise Price per share set 54 forth above, are the number and Exercise Price as of _____________, based on the Preferred Stock as constituted at such date. Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined in the Rights Agreement), if the Rights evidenced by this Right Certificate are beneficially owned by (i) an Acquiring Person, an Adverse Person or an Affiliate or Associate of any such Person (as such terms are defined in the Rights Agreement), (ii) a transferee of any such Acquiring Person, Adverse Person, Associate or Affiliate, or (iii) under certain circumstances specified in the Rights Agreement, a transferee of a Person who, after such transfer, became an Acquiring Person or an Adverse Person, or an Affiliate or Associate of an Acquiring Person or an Adverse Person, such Rights shall become null and void and no holder hereof shall have any right with respect to such Rights from and after the occurrence of such Section 11(a)(ii) Event. As provided in the Rights Agreement, the Exercise Price and the number of shares of Preferred Stock or other securities which may be purchased upon the exercise of the Rights evidenced by this Right Certificate are subject to modification and adjustment upon the happening of certain events. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Right Certificates, which limitations of rights include the temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the principal office of the Company and the designated office of the Rights Agent and are also available upon written request to the Company or the Rights Agent. This Right Certificate, with or without other Right Certificates, upon surrender at the office or offices of the Rights Agent designated for such purpose, may be exchanged for another Right Certificate or Certificates of like tenor and date evidencing Rights entitling the holder to purchase a like aggregate number of shares of Preferred Stock as the Rights evidenced by the Right Certificate or Certificates surrendered shall have entitled such holder to purchase. If this Right Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Right Certificate or Certificates for the number of whole Rights not exercised. If this Right Certificate shall be exercised in whole or in part pursuant to Section 11(a)(ii) of the Rights Agreement, the holder shall be entitled to receive this Right Certificate duly marked to indicate that such exercise has occurred as set forth in the Rights Agreement. Under certain circumstances, subject to the provisions of the Rights Agreement, the Board of Directors of the Company at its option may exchange all or any part of the Rights evidenced by this Certificate for shares of the Company's Common Stock or Preferred Stock 55 at an exchange ratio (subject to adjustment) of one share of Common Stock or one one-hundredth of a share of Preferred Stock per Right. Subject to the provisions of the Rights Agreement, the Rights evidenced by this Certificate may be redeemed by the Board of Directors of the Company at its option at a redemption price of $0.01 per Right (payable in cash, Common Stock or other consideration deemed appropriate by the Board of Directors). The Company is not obligated to issue fractional shares of stock upon the exercise of any Right or Rights evidenced hereby (other than fractions which are integral multiples of one one-hundredth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depositary receipts). If the Company elects not to issue such fractional shares, in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Right Certificate, as such, shall be entitled to vote or receive dividends or be deemed for any purpose the holder of shares of Preferred Stock, Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by this Right Certificate shall have been exercised as provided in the Rights Agreement. This Right Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by an authorized signatory of the Rights Agent. WITNESS the facsimile signature of the proper officers of the Company and its corporate seal. [Corporate Seal] MEDFORD BANCORP, INC. Attested: By_________________________________ Name: By___________________________ Title: [Chairman, Vice Chairman, [Clerk or Assistant Clerk] President or Vice President] 56 Countersigned: STATE STREET BANK AND TRUST COMPANY, as Rights Agent ____________________________ Authorized Signatory Date of countersignature: 57 [Form of Reverse Side of Right Certificate] FORM OF ASSIGNMENT (To be executed by the registered holder if such holder desires to transfer the Right Certificate.) FOR VALUE RECEIVED ________________________________________ hereby sells, assigns and transfers unto ________________________________________________ (Please print name and address of transferee) __________________________________ this Right Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________ Attorney, to transfer the within Right Certificate on the books of the within-named Company, with full power of substitution. Dated: _____________, _____ _______________________________ Signature Signature Guaranteed: ____________________ CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Right Certificate are are not being transferred by or on behalf of a Person who is or was an Acquiring Person, an Adverse Person or an Affiliate or Associate of any such Person (as such terms are defined in the Rights Agreement); and (2) after due inquiry and to the best knowledge of the undersigned, the undersigned did did not directly or indirectly acquire the Rights evidenced by this Right Certificate from any Person who is, was or became an Acquiring Person, an Adverse Person or an Affiliate or Associate of any such Person. Dated: _____________, _____ _______________________________ Signature 58 NOTICE The signature to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. 59 FORM OF ELECTION TO PURCHASE (To be executed if holder desires to exercise the Right Certificate.) To MEDFORD BANCORP, INC.: The undersigned hereby irrevocably elects to exercise _________ Rights represented by this Right Certificate to purchase the shares of Preferred Stock issuable upon the exercise of the Rights (or such other securities of the Company or of any other person which may be issuable upon the exercise of the Rights) and requests that certificates for such shares be issued in the name of: Please insert social security or other identifying taxpayer number: ____________________ _____________________________________________________________ (Please print name and address) _____________________________________________________________ If such number of Rights shall not be all the Rights evidenced by this Right Certificate or if the Rights are being exercised pursuant to Section 11(a)(ii) of the Rights Agreement, a new Right Certificate for the balance of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying taxpayer number: ____________________ _____________________________________________________________ (Please print name and address) _____________________________________________________________ _____________________________________________________________ Dated: _____________, _____ _______________________________ Signature Signature Guaranteed: ____________________ 60 CERTIFICATE The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Right Certificate ____ are ____ are not being exercised by or on behalf of a Person who is or was an Acquiring Person, an Adverse Person or an Affiliate or Associate of any such Person (as such terms are defined in the Rights Agreement); and (2) after due inquiry and to the best knowledge of the undersigned, the undersigned __ did __ did not directly or indirectly acquire the Rights evidenced by this Right Certificate from any Person who is, was or became an Acquiring Person, an Adverse Person or an Affiliate or Associate of any such Person. Dated: _____________, _____ _______________________________ Signature NOTICE The signature to the foregoing Election to Purchase and Certificate must correspond to the name as written upon the face of this Right Certificate in every particular, without alteration or enlargement or any change whatsoever. EX-99.1 9 1996 ANNUAL REPORT ON FORM F-2 1 Exhibit 99.1 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. 20549 FORM F-2 ANNUAL REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended FDIC Certificate Number December 31, 1996 23290 MEDFORD SAVINGS BANK (Exact name of Bank as specified in its charter) MASSACHUSETTS (State or other jurisdiction of incorporation or organization) 04-1609330 (I.R.S. Employer Identification No.) 29 HIGH STREET MEDFORD, MASSACHUSETTS (Address of principal office) 02155 (Zip Code) (617) 395-7700 (Bank's telephone number, including area code) Securities registered under Section 12(b) of the Act: None Securities registered under Section 12(g) of the Act: Title of Class Common Stock, par value $0.50 per share Indicate by check mark if disclosure of delinquent filers pursuant to item 10 is not contained herein, and will not be contained, to the best of the Bank's knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form F-2 or any amendment of this Form F-2. [X] Indicate by check mark whether the Bank (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The aggregate market value of the voting stock held by non-affiliates of the Bank, based on the closing sale price for the Bank's Common Stock on February 20, 1997, as reported by NASDAQ, was $114,827,126. The number of shares outstanding of each of the Bank's classes of Common Stock, as of the latest practicable date is: CLASS: COMMON STOCK, PAR VALUE $0.50 PER SHARE OUTSTANDING AS OF FEBRUARY 20, 1997: 4,539,648 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Medford Savings Bank Notice of Annual Meeting and Proxy Statement for the Annual Meeting of Stockholders to be held on April 28, 1997 (Exhibit A) are incorporated by reference into Parts I and III of this Form F-2. 1 2 PART I ITEM 1. BUSINESS GENERAL Medford Savings Bank, (the "Bank"), was chartered 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. 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, or holding of securities. SUPERVISION AND REGULATION General. 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 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, 1996. 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. 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. 2 3 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, the Commissioner has proposed rules that generally would give Massachusetts banks 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 association 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. 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 will be permitted, each with different effective dates. 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 will be permissible on June 1, 1997, unless a state either passes legislation either to prevent or to permit the earlier occurrence of interstate mergers. States may at any time enact legislation permitting interstate branching either de novo or through acquisition. Affiliated banks may act as agents for one another beginning one year after enactment. 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. Community Reinvestment Act. The Community Reinvestment Act of 1974, as amended (the "CRA"), was enacted to encourage every financial institution to help meet the credit needs of its entire community, including low and moderate income neighborhoods, consistent with its safe and sound operation. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the purposes of the CRA. The federal banking agencies jointly issued final CRA regulations. Under the regulations, the twelve-point system of assessment factors is replaced by lending, service and investment performance-based tests. 3 4 OTHER ACTIVITIES The Bank owns stock in The Savings Bank Life Insurance Company of Massachusetts. The Bank sells life insurance and tax-deferred annuities and sold over $1.7 million in SBLI annuities in 1996, making it the top seller of this product in Massachusetts. In addition, the Bank makes available mutual funds and other investment products through a third-party company. The Bank provides safe deposit services at nine of its branches. The Bank originates 30-year, fixed-rate, residential 1-4 family loans in a correspondent relationship with Chase Manhattan Mortgage Corporation, whereby the Bank originates the loans for Chase Manhattan Mortgage Corporation in exchange for an origination fee. COMPETITION The Bank 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 Bank 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 Bank competes with regional and national firms which offer stocks, bonds, mutual funds and other investment alternatives to the general public. The Bank 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 Bank'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, 1996, the Bank employed 211 full time staff including 34 officers, and 91 part-time staff. None of the Bank's employees is represented by a labor union. 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 Bank also owns a building that houses the Bank's finance department, an office building that formerly was a Bank branch and is currently available for sale, and an office building currently housing the Bank'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. On January 13, 1997, the Bank signed an agreement to purchase an office building in Medford. This building is located between the main branch office in Medford and the lending and administrative office building. The Bank also signed an agreement on January 21, 1997 to purchase a tract of land in the City of Tewksbury with plans to construct a new branch office. Subject to the foregoing, the Bank 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 Bank's lending staff. 4 5 ITEM 3. LEGAL PROCEEDINGS There are no material legal proceedings to which the Bank is a party or to which any of its property is subject, although the Bank is a party to ordinary routine litigation incidental to its business. ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference to the section captioned "Ownership by Management and Other Stockholders" of the Proxy Statement for the Annual Meeting of Stockholders to be held on April 28, 1997 (the "Proxy Statement"). 5 6 PART II ITEM 5. MARKET FOR BANK'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS 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 Prices ------------------- Dividends Declared High Low Per Share ---- --- --------- 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 1995 1st quarter $17 1/2 $13 1/2 $0.14 2nd quarter 18 3/4 16 0.15 3rd quarter 23 18 3/4 0.15 4th quarter 22 1/2 20 1/2 0.27
At December 31, 1996, according to the Bank's transfer agent, the Bank had approximately 1,221 record holders of its common stock. The declaration of future dividends is subject to future operating results, financial conditions, tax and legal considerations and other factors. 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 FDIC regulations, the Bank would be prohibited from declaring dividends, if among other things, it was 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 Bank are available for various corporate uses, including the payment of future dividends. (Remainder of page intentionally left blank) 6 7 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
At December 31, ------------------------------------------------------------------ (Dollars in thousands, except per share data) 1996 1995 1994 1993 1992 ---------- -------- -------- -------- -------- BALANCE SHEET DATA Total assets $1,039,098 $955,933 $915,055 $831,939 $831,440 Investment securities 424,966 363,599 332,248 294,390 280,859 Loans, net 560,855 529,424 523,125 478,632 483,614 Deposits 792,141 791,851 791,780 735,753 741,683 Stockholders' equity 92,521 86,076 76,363 71,352 67,964 Book value per share, excluding treasury shares 20.40 19.46 17.37 16.45 15.37 Stockholders' equity to total assets 8.90% 9.00% 8.35% 8.58% 8.17% Number of offices 16 16 15 12 13
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Years Ended December 31, ---------------------------------------------------------------------------- (Dollars in thousands, except per share data) 1996 1995 1994 1993 1992 ------- ------- -------- ------- ---------- STATEMENT OF OPERATIONS DATA Interest and dividend income $68,711 $64,405 $ 55,401 $55,868 $ 60,189 Interest expense 36,462 32,724 24,523 25,642 33,481 ------- ------- -------- ------- ---------- Net interest income 32,249 31,681 30,878 30,226 26,708 ------- ------- -------- ------- ---------- Provision for loan losses 215 772 583 2,110 4,157 Other income: Gain (loss) on investment securities, net 413 96 (65) 753 1,720 All other income 2,902 3,050 2,960 2,383 2,551 ------- ------- -------- ------- ---------- Total other income 3,315 3,146 2,895 3,136 4,271 ------- ------- -------- ------- ---------- Operating expenses 18,075 18,169 19,645 19,418 19,270 ------- ------- -------- ------- ---------- Income before income taxes and cumulative effect of change in accounting principle 17,274 15,886 13,545 11,834 7,552 Provision for income taxes 6,845 6,463 5,292 4,665 3,508 ------- ------- -------- ------- ---------- Income before cumulative effect of change in accounting principle 10,429 9,423 8,253 7,169 4,044 Cumulative effect of change in method of accounting for income taxes -- -- -- -- 1,379 ------- ------- -------- ------- ---------- Net income $10,429 $ 9,423 $ 8,253 $ 7,169 $ 5,423 ======= ======= ======== ======= ========== Primary earnings per share: Income before cumulative effect of change in accounting principle $ 2.21 $ 2.02 $ 1.78 $ 1.57 $ 0.87 Cumulative effect of change in method of accounting for income taxes -- -- -- -- 0.30 ------- ------- -------- ------- ---------- Net income $ 2.21 $ 2.02 $ 1.78 $ 1.57 $ 1.17 ======= ======= ======== ======= ========== Fully diluted earnings per share: Income before cumulative effect of change in accounting principle $ 2.20 $ 2.01 $ 1.78 $ 1.56 $ 0.86 Cumulative effect of change in method of accounting for income taxes -- -- -- -- 0.29 ------- ------- -------- ------- ---------- Net income $ 2.20 $ 2.01 $ 1.78 $ 1.56 $ 1.15 ======= ======= ======== ======= ========== Cash dividends declared per share $ 0.83 $ 0.71 $ 0.62 $ 0.50 $ 0.32 ======= ======= ======== ======= ========== SELECTED RATIOS Return on average assets 1.05% 1.01% 0.95% 0.87% 0.65% Return on average equity 11.72 11.52 11.14 10.21 8.03 Average equity to average assets 8.98 8.75 8.53 8.49 8.12 Weighted average rate spread 3.00 3.20 3.50 3.64 3.21 Net yield on average earning assets 3.39 3.54 3.74 3.86 3.48 Dividend payout ratio 37.56 35.15 34.83 31.85 27.35
- - - -------------------------------------------------------------------------------- On May 6, 1994, the Bank acquired certain assets and assumed certain liabilities of the former Commercial Bank and Trust Company ("CBTC"). 7 8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form F-2 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. GENERAL The Bank'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 Bank'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 Bank is significantly affected by general economic conditions, by the Bank'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 Bank'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 recent years, operating results have been significantly affected by declining deposit insurance premiums. As the Bank continued to experience positive trends in credit quality during 1996, the provision for loan losses was reduced. In 1995, the Bank successfully disposed of certain foreclosed real estate and recorded a net gain on sales. A net loss on foreclosed real estate was recorded in 1996. In 1996, the Bank 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 Bank achieved record net income of $10,429,000, an increase of $1,006,000, or 10.7% compared to net income of $9,423,000 for 1995. Earnings per share for 1996 were $2.21 ($2.20 on a fully-diluted basis) compared with $2.02 ($2.01 on a fully diluted basis) for 1995, an increase of 19 cents or 9.4% compared to the previous year. Total assets increased 8.7% from $956.0 million at December 31, 1995 to $1.04 billion at December 31, 1996. Total deposits were $792.1 million at December 31, 1996, a slight increase from $791.9 million at December 31, 1995. Stockholders' equity increased 7.5% to $92.5 million at December 31, 1996 representing a book value of $20.40 per share, up from $19.46 at December 31, 1995. The Bank's capital to assets ratio at December 31, 1996 was 8.90%, exceeding all regulatory requirements. FINANCIAL CONDITION INVESTMENT PORTFOLIO The investment policy of the Bank 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 with 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 of three years or less. At December 31, 1996, 28.6% of the investment portfolio will mature or reprice within one year, 85.8% within three years, and 97.3% within 5 years. Although the emphasis on short-term and medium-term investments reduces the overall yield, this strategy is in accordance with the Bank's desire to minimize interest rate risk. Investment securities increased 16.9% from $363.6 million at December 31, 1995 to $425.0 million at December 31, 1996. The increase was primarily in U.S. government and federal agency obligations, in addition to corporate bonds designated as "available for sale". During 1996, the Bank implemented a strategy using the investment portfolio to increase earning assets and generate higher levels of interest income. 8 9 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, 1996, the net unrealized loss on investments classified as "available for sale" was $423,000 and the net unrealized gain on investments classified as "held to maturity" was $255,000. 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, -------------------------------------- 1996 1995 1994 -------- -------- -------- (In thousands) Investment securities: Debt securities: U.S. Government and federal agency $224,519 $193,106 $210,787 Mortgage-backed securities 27,814 32,780 22,619 State and municipal 89 232 323 Corporate bonds 159,892 126,545 93,447 Equity securities 12,652 10,936 5,072 -------- -------- -------- Total investment securities $424,966 $363,599 $332,248 ======== ======== ========
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, 1996 ---------------------------------------------------------------------------------- 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 $ 46,871 6.59% $168,802 6.01% $ 8,846 6.41% State and municipal 89 6.75 -- -- -- -- Other 49,995 6.24 109,897 6.28 -- -- -------- -------- -------- $ 96,955 $278,699 $ 8,846 ======== ======== =======
Tax-exempt obligations of states and municipalities are shown at their actual yields rather than on a tax equivalent basis. At December 31, 1996, there was one obligation of an issuer other than the U. S. Government or its agencies for which the aggregate book values and market values of $10.0 million, exceeded 10 percent of the Bank's total stockholders' equity. 9 10 LOAN PORTFOLIO The Bank 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, student loans, and commercial business loans. As a portfolio lender, the Bank retains all newly originated loans except for 30-year, fixed-rate residential loans. The 30-year, fixed-rate residential loan is offered whereby the Bank originates the loan for a correspondent and collects an origination fee. 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 Bank 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. Management expects continued intense competition for loans, especially given moderate growth forecasts for the regional economy. Within this framework, the Bank created the necessary infrastructure in 1995 and 1996 to facilitate commercial and commercial real estate portfolio growth. Through an intensified calling program, commercial lenders are now offering a range of loan products to small-to-middle market companies in a variety of industries, and have initiated new marketing efforts for asset-based lending opportunities. Composition of portfolio. The following table shows the composition of the loan portfolio by type of loan:
At December 31, ------------------------------------------- 1996 1995 1994 ---------- --------- --------- (In thousands) Commercial loans $ 11,014 $ 9,075 $ 10,270 Construction loans, net of unadvanced funds 8,719 8,591 7,577 Loans secured by real estate: Residential * 380,627 353,172 350,013 Commercial 123,158 125,771 125,190 Second mortgages 1,928 2,175 2,441 Equity lines of credit 21,169 20,819 20,080 Consumer loans 20,548 16,710 14,396 --------- --------- -------- 567,163 536,313 529,967 Add: Net premium on loans acquired 354 504 648 Net deferred costs 569 73 49 Less: Allowance for loan losses (7,231) (7,466) (7,539) --------- --------- -------- Loans, net $ 560,855 $ 529,424 $ 523,125 ========= ========= ========
* Residential first mortgages represent qualified collateral under a blanket lien securing FHLBB borrowings. See "Borrowings" for a more detailed explanation of this lien. 10 11 The following table presents the maturity distribution of commercial and construction loans at December 31, 1996:
Maturities --------------------------------------------------------- 1 Year Over 1 Year Over or Less to 5 Years 5 Years Total --------- ------------- --------- --------- (In thousands) Commercial loans $6,524 $3,445 $1,045 $11,014 Construction loans 8,719 -- -- 8,719
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 $ 1,261 $ 39 $1,300 Adjustable rates 2,184 1,006 3,190 ------- ------ ------ $ 3,445 $1,045 $4,490 ======= ====== ======
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 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. 11 12 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, ------------------------------------ 1996 1995 1994 ------ ------ ------ (In thousands) Impaired loans accounted for on a non-accrual basis $2,752 $4,239 $ n/a Other loans accounted for on a non-accrual basis 687 82 1,740 Troubled debt restructurings n/a n/a 829 Foreclosed real estate 276 350 1,444 ------ ------ ------ $3,715 $4,671 $4,013 ====== ====== ======
At December 31, 1996, $687,000 of loans were 90 days or more past due but were not considered impaired. Management expects 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, 1996 had gross interest income of $307,000 that would have been recorded during 1996 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 $131,000. The Bank's holdings of foreclosed real estate decreased from $350,000 at December 31, 1995 to $276,000 at December 31, 1996 as the Bank continued to dispose of such properties. 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. The Bank recorded a provision for loan losses for the year ended December 31, 1996 of $215,000, compared with $772,000 for the year ended December 31, 1995. At December 31, 1996, the allowance for loan losses totaled $7.2 million or 210.3% of non-accrual loans at that date, compared with $7.5 million or 172.8% of non-accrual loans at December 31, 1995. Non-accrual loans at December 31, 1996 were $3.4 million or 0.61% of total net loans, compared with $4.3 million or 0.82% of total net loans at December 31, 1995. 12 13 An analysis of the allowance for loan losses is presented in the following table:
At December 31, ------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (In thousands) Allowance for loan losses, beginning of year $ 7,466 $ 7,539 $ 7,007 ---------- ---------- ---------- Loans charged-off --- Residential real estate (64) (66) (267) --- Commercial real estate (656) (884) -- --- Consumer (89) (28) (34) --- Commercial (21) (100) (8) Recoveries --- Residential real estate 7 104 218 --- Commercial real estate 348 102 35 --- Consumer 8 10 5 --- Commercial 17 17 -- ---------- ---------- ---------- Net charge-offs (450) (845) (51) ---------- ---------- ---------- Provision for loan losses, charged to operations 215 772 583 ---------- ---------- ---------- Allowance for loan losses, end of year $ 7,231 $ 7,466 $ 7,539 ========== ========== ========== Ratio of net charge-offs to average loans 0.08% 0.16% 0.01% ========== ========== ==========
An analysis of the allocation of the allowance for loan losses is presented in the following table:
At December 31, ----------------------------------------------------------------------------------- 1996 1995 1994 ------------------------- ------------------------ -------------------------- Percent Percent Percent of Loans of Loans of Loans To Total To Total To Total Amount Loans Amount Loans Amount Loans ---------- ----------- --------- ----------- ---------- ------------ (Dollars in thousands) Residential real estate $ 1,179 71.23% $ 1,036 70.17% $ 2,669 70.29% Commercial real estate 5,711 21.68 6,118 23.43 4,553 23.62 Construction 131 1.53 129 1.60 114 1.43 Consumer 44 3.62 47 3.11 49 2.72 Commercial 166 1.94 136 1.69 154 1.94 ---------- ----------- --------- ----------- ---------- ----------- Total $ 7,231 100.00% $ 7,466 100.00% $ 7,539 100.00% ========== =========== ========= =========== ========== ===========
While management considers the allowance for loan losses to be adequate at December 31, 1996, there is no assurance that additional charge-offs and provisions will not be necessary in 1997. The provision for loan losses during 1997 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 1996. 13 14 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 1996 this cross-sell ratio was 2.03, meaning for each customer "buying" one product, the customer was "sold" a total of 2.03 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. Deposit levels and the mix of deposits have remained fairly stable from December 31, 1995 to December 31, 1996. The average deposit balances as shown in the table below, however, are indicative of a shift in the deposit mix from 1994 to 1995, as the Bank experienced disintermediation from regular savings deposits and money market deposits to certificates of deposits. The Bank's strategy was to maintain stable deposit rates and to grow deposit levels through selective promotions. To increase core deposits, the Bank has been promoting its "ComboPlus" account which combines a statement savings and a demand account into one convenient account. This account has contributed to an increase in statement savings and checking deposits. The low interest rate environment, coupled with continued strength in the stock market and mutual funds presented management with the challenge of attracting and retaining deposits. Total deposits were $792.1 million at December 31, 1996, a slight increase over $791.9 at December 31, 1995 and $791.8 million at December 31, 1994. The following table indicates the balances in various deposit accounts at the end of each reported period:
At December 31, ---------------------------------------------- 1996 1995 1994 ------------- ------------- ------------ (In thousands) Demand accounts $ 40,124 $ 36,427 $ 37,867 NOW accounts 60,839 63,248 64,243 Savings and money market accounts 315,771 314,813 371,630 Term certificates 375,407 377,363 318,040 ------------- ------------- ------------ $ 792,141 $ 791,851 $ 791,780 ============= ============= ============
The following table sets forth the average deposits of the Bank with related average rates paid during each reported period:
1996 1995 1994 ------------------------- ------------------------ ------------------------- Average Rate Average Rate Average Rate Balance Paid Balance Paid Balance Paid --------- --------- --------- -------- --------- --------- (Dollars in thousands) Demand accounts $ 30,935 - % $ 25,752 - % $ 26,315 - % NOW accounts 61,317 1.10 62,178 1.47 59,921 1.50 Savings and money market deposits 316,498 2.80 334,739 2.68 398,027 2.56 Term certificates 378,680 5.52 357,031 5.32 279,660 4.31
14 15 Included in term certificates of deposit are certificates having balances of $100,000 or more. At December 31, 1996, such term certificates had the following maturities:
At December 31, 1996 --------------------------------------------------------------------------------------- 3 Months Over 3 Months Over 6 Months Over or Less to 6 Months to 12 Months 12 Months Total ------------ ---------------- ------------------ ------------- ------------- (In thousands) $ 15,565 $ 6,620 $ 12,499 $ 11,880 $ 46,564
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 $148.5 million at December 31, 1996 from $72.4 million at December 31, 1995. (Remainder of page intentionally left blank) 15 16 The following table presents, by category, the borrowings of the Bank for the reported periods:
At December 31, ---------------------------------------- 1996 1995 1994 ---------- ---------- ---------- (Dollars in thousands) Short-term borrowings: FHLBB advances $ 30,000 $ 20,000 $ 59 Federal Reserve Bank of Boston advances 1,233 -- -- Securities sold under agreements to repurchase 49,584 20,281 16,866 ---------- ---------- ---------- Total short-term borrowings $ 80,817 $ 40,281 $ 16,925 ========== ========== ========== Weighted average rate 5.82% 5.92% 6.27% Average balance of short-term borrowings during the year $ 49,123 $ 34,594 $ 5,942 Weighted average rate paid on short-term borrowings during the year 5.37% 6.17% 4.17% Maximum amount outstanding at any month-end during the year $ 80,817 $ 42,406 $ 16,925 Long-term debt: FHLBB advances $ 67,647 $ 32,147 $ 25,247 ========== ========== ========== Weighted average rate 6.10% 6.19% 5.59% Average balance of long-term debt during the year $ 55,276 $ 29,307 $ 20,972 Weighed average rate paid on long-term debt during the year 6.14% 5.88% 5.29% Maximum amount outstanding at any month-end during the year $ 68,647 $ 32,147 $ 25,647
STOCKHOLDERS' EQUITY The Bank's capital to assets ratio was 8.90% at December 31, 1996, compared to 9.00% at December 31, 1995. The Bank's capital ratios at December 31, 1996 and 1995 exceeded all regulatory requirements. Book value at December 31, 1996 was $20.40 per share, compared with $19.46 per share at December 31, 1995. (See "Liquidity and Capital Resources.") 16 17 RESULTS OF OPERATIONS GENERAL In 1996, the Bank reported consolidated net income of $10.4 million, or $2.21 per share, as compared to net income of $9.4 million, or $2.02 per share, in 1995 and net income of $8.3 million, or $ 1.78 per share, in 1994. Fully diluted earnings per share were $2.20, $2.01, and $1.78 for 1996, 1995 and 1994, respectively. 1996 consolidated net income increased 11% over 1995 and 26% over 1994 while return on assets was 1.05% in 1996 as compared to 1.01% in 1995 and .95% in 1994. The Bank's return on equity was 11.72% in 1996 as compared to 11.52% in 1995 and 11.14% in 1994. The increased earnings in 1996 when compared to 1995 reflect a slight increase in net interest income, a reduction in the provision for loan losses as loan quality improved and increased securities gains. When determining "core" operating expenses, net gains and losses from foreclosed real estate and one-time expenses are excluded. In 1996, the Bank incurred $378,000 of one-time expenses concurrent with the purchase and installation of a new loan and deposit processing system which is expected to enhance customer service and improve management information. A total of $1.7 million was invested in 1996 in this new system and is represented by hardware and software which was capitalized. As shown in the following schedule, the exclusion of the aforementioned gains and losses and these one-time expenses reveals a "core" operating expense reduction of $806,000 between 1996 and 1995. This reduction arises, in large part, from the virtual elimination in 1996 of deposit insurance expense.
Years Ended December 31, --------------------------- 1996 1995 Change --------- ----------- ---------- (Dollars in thousands) Operating expenses as reported $ 18,075 $18,169 $ (94) Less: Losses on foreclosed real estate, net (65) -- (65) Plus: Gains on foreclosed real estate, net -- 269 (269) Less: One-time expenses for systems conversion (378) -- (378) -------- ------- ----- "Core" operating expenses $ 17,632 $18,438 $(806) ======== ======= ===== Deposit insurance $ 13 $ 927 $(914) ======== ======= =====
Ongoing control of 1995 operating expenses, aided by the FDIC insurance assessment reduction, foreclosed real estate recoveries, and continued growth in net interest income resulting from an increase in average earning assets, were the primary factors contributing to the 14% improvement of 1995 earnings as compared to those of 1994. NET INTEREST INCOME Net interest income was $32.2 million in 1996; an increase of $568,000 or 1.8% from $31.7 million earned in 1995. Average earning assets in 1996 increased $56.7 million as compared to $43.0 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 17.8% to $89.8 million from the $76.2 million in 1995. In addition, the Bank maintained its earning assets to total assets ratio at 96.0%; up from 95.6% in the prior year. The earnings on this excess flows directly to interest income. Changes in the mix of earning assets and higher funding costs reduced the net interest margin in 1996 to 3.39% from 3.54% in 1995 and 3.74% in 1994. During 1996, management continued to seek 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 1996, average loan balances represented 54.9% of average assets. This compares with 57.4% in 1995. The average investment securities balance was 41.1% of average assets in 1996 as compared to 38.1% in 1995. As the percentage of loans to assets decreases and the percentage of investments to assets increase the net interest margin declines as loans are typically a higher yielding asset than the types of securities in which the Bank mostly invests. 17 18 INTEREST AND DIVIDEND INCOME Interest and dividend income totalled $68.7 million for 1996; an increase of $4.3 million or 6.7% from 1995 and $13.3 million or 24.0% from 1994. The weighted average yield on earning assets was 7.23% in 1996 compared to 7.20% and 6.71% for 1995 and 1994, respectively. 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 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 on 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 matured and sold investment securities at higher yields. Interest and dividend income was $64.4 million for the year ended December 31, 1995, compared with $55.4 million for the year ended December 31, 1994. The weighted average yield on earning assets was 7.20% for the year ended December 31, 1995 as compared to 6.71% for the year ended December 31, 1994. Interest on loans of $42.7 million for the year ended December 31, 1995 was up from $38.3 million in 1994. The average loan volume increased $39.7 million primarily in residential mortgages. In addition, the upward repricing of adjustable-rate real estate loans, equity lines of credit, and commercial real estate loans increased the average yield on loans by 24 basis points. In 1994, the Bank was more aggressive in offering competitive introductory rates on residential adjustable rate mortgages. Management's focus during the interest rate cycle in 1995 was to maintain a stable net interest margin which resulted in less aggressive pricing and more moderate residential loan growth. The increased loan volume and increase in the yield on loans contributed $4.4 million in additional interest income on loans when comparing 1995 to 1994. Interest income on investments accounted for $21.7 million in 1995 as compared to $17.1 million in 1994. The average balance of investments increased $28.5 million in 1995 over the prior year, and the average yield on investments increased 89 basis points to 6.09%. The increased volume and increase in the yield on investments contributed $4.6 million in additional interest income from investments in 1995 when compared to 1994. INTEREST EXPENSE Interest expense was $36.5 million in 1996, up $3.7 million or 11.4% from 1995, and $11.9 million or 48.7% from 1994. The cost of funds increased to 4.23% in 1996 compared with 4.00% and 3.21% in 1995 and 1994, respectively. 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. Interest expense was $32.7 million for the year ended December 31, 1995 compared to $24.5 million for the year ended December 31, 1994. The increase in interest expense was primarily attributable to a shift from core deposits into certificates of deposits paying a higher rate, in addition to an increased level of borrowings used to fund asset growth. In an effort to control interest expense while continuing to attract and retain deposits, the Bank implemented a strategy of selectively promoting certificates of deposit throughout the year. As a result, the cost of funds on interest-bearing deposits in 1995 increased 79 basis points to 4.00%. Average borrowings in 1995 with a cost of 6.09% increased $37.0 million from 1994. Interest expense on borrowings was $3.9 million in 1995, compared with $1.4 million in 1994. 18 19 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.
1996 Compared to 1995 1995 Compared to 1994 Increase (Decrease) Increase (Decrease) -------------------------------- --------------------------------- Volume Rate Total Volume Rate Total ------- ------ -------- ------- ------- ------- (In thousands) INTEREST AND DIVIDEND INCOME Short-term investments $ 54 $ (50) $ 4 $ 7 $ 140 $ 147 Mortgage-backed investments 333 106 439 (502) 96 (406) Other investment securities 2,727 362 3,089 2,081 2,817 4,898 Loans 505 269 774 3,126 1,239 4,365 ------- ------ ------- ------- ------- ------- Total interest and dividend income 3,619 687 4,306 4,712 4,292 9,004 ------- ------ ------- ------- ------- ------- INTEREST EXPENSE NOW deposits (12) (226) (238) 33 (18) 15 Savings deposits and MMDA (500) 392 (108) (1,678) 432 (1,246) Term certificates 1,179 736 1,915 3,758 3,172 6,930 Short-term borrowings 808 (307) 501 1,717 171 1,888 Long-term debt 1,590 78 1,668 480 134 614 ------- ------ ------- ------- ------- ------- Total interest expense 3,065 673 3,738 4,310 3,891 8,201 ------- ------ ------- ------- ------- ------- Net interest income $ 554 $ 14 $ 568 $ 402 $ 401 $ 803 ======= ===== ======= ======= ======= =======
(Remainder of page intentionally left blank) 19 20 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, 1996 December 31, 1995 December 31, 1994 - - - ------------------------------------ ---------------------------- --------------------------- ------------------------------ 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 $ 8,257 $ 438 5.30% $ 7,289 $ 434 5.95% $ 7,118 $ 287 4.03% Mortgage-backed investments 29,506 1,833 6.21 24,059 1,394 5.79 32,795 1,800 5.49 Other investment securities 369,421 22,986 6.22 325,504 19,897 6.11 288,284 14,999 5.20 Loans (a) 543,547 43,454 7.99 537,226 42,680 7.94 497,527 38,315 7.70 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total earning assets 950,731 68,711 7.23 894,078 64,405 7.20 825,724 55,401 6.71 Other assets 40,101 -- -- 41,457 -- -- 43,515 -- -- - - - ----------------------------------------------------------------------------------------------------------------------------------- Total assets $990,832 -- -- $935,535 -- -- $869,239 -- -- =================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Interest-bearing liabilities: NOW deposits $ 61,317 $ 676 1.10% $ 62,178 $ 914 1.47% $ 59,921 $ 899 1.50% Savings deposits and MMDA 316,498 8,851 2.80 334,739 8,959 2.68 398,027 10,205 2.56 Term certificates 378,680 20,906 5.52 357,031 18,991 5.32 279,660 12,061 4.31 Short-term borrowings 49,123 2,637 5.37 34,594 2,136 6.17 5,942 248 4.17 Long-term debt 55,276 3,392 6.14 29,307 1,724 5.88 20,972 1,110 5.29 - - - ----------------------------------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 860,894 36,462 4.23 817,849 32,724 4.00 764,522 24,523 3.21 Other liabilities 40,982 -- -- 35,868 -- -- 30,608 -- -- Stockholders' equity 88,956 -- -- 81,818 -- -- 74,109 -- -- - - - ----------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $990,832 -- -- $935,535 -- -- $869,239 -- -- =================================================================================================================================== Net interest income $32,249 $31,681 $30,878 Weighted average rate spread (b) 3.00% 3.20% 3.50% Net yield on average earning assets (c) 3.39% 3.54% 3.74% ===================================================================================================================================
(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 21 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 $215,000 in provisions for loan losses in 1996. This compares with a provision of $772,000 for the year ended December 31, 1995 and $583,000 for the year ended December 31, 1994. In 1996, the Bank experienced positive trends in credit quality. Net loans charged-off totaled $450,000, $845,000 and $51,000, respectively, for the years ended December 31, 1996, 1995 and 1994. Moreover, at December 31, 1996, the allowance for loan losses totaled $7.2 million or 210.3% of non-accrual loans at that date, compared with $7.5 million or 172.8% of non-accrual loans at December 31, 1995, and $7.5 million or 433.3% of non-accrual loans at December 31, 1994. While management considers the allowance for loan losses to be adequate at December 31, 1996, there is no assurance that additional charge-offs and provisions will not be necessary in 1997. The provision for loan losses during 1997 will depend primarily on market conditions and the Bank's actual experience. OTHER INCOME Total other income amounted to $3.3 million for the year ended December 31, 1996, as compared to $3.1 million for year ended December 31, 1995. Customer service fees declined $189,000, in part reflecting lower revenues on NOW accounts as lower balance accounts were replaced by demand deposits with reduced service fee charges. Net gains on the sale of securities was $413,000 in 1996, compared with net gains of $96,000 in 1995. As in prior years, management sold securities when tactical opportunities arose to do so without impairing the yield or liquidity of the investment portfolio. Total other income amounted to $3.1 million for the year ended December 31, 1995, as compared to $2.9 million for the year ended December 31, 1994. The acquisition of the CBTC deposit relationships and increases in the demand, NOW, savings and other fee producing products were beneficial toward increasing the customer service fees in 1995 when compared to 1994. A net gain on the sale of investment securities of $96,000 was recorded in 1995, as compared to a net loss of $65,000 in 1994. In 1995, the Bank sold debt securities as they neared maturity in order to reinvest at higher yields in anticipation of a declining rate environment. Since the debt securities were within three months of maturity, the gains and losses on sales were insignificant. OPERATING EXPENSES 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 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) ======= ==== ======= ======= =====
21 22 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. Management continues to exercise diligent expense control and measured growth, resulting in an improved efficiency ratio of 48.1% as compared to the 49.3% for 1995. PROVISION FOR INCOME TAXES The Bank's effective tax rate for the year ended December 31, 1996 was 39.6% as compared with 40.7% and 39.1% for the years ended December 31, 1995 and 1994. 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. In the fourth quarter of 1994, the Bank received $449,000 in prior years' state tax abatements reducing the effective tax rate for the year. (Remainder of page intentionally left blank) 22 23 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. ASSET-LIABILITY MANAGEMENT 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 and interest rate, credit, and market risk. 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, 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. 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. (Remainder of page intentionally left blank) 23 24 The following table presents, as of December 31, 1996, interest-rate sensitive assets and liabilities. GAP is the difference between assets and liabilities that will mature or become subject to repricing during a given interval of time. Investments classified as "available for sale" are listed at their fair value in the table below.
(Dollars in thousands) 0-6 mo. 6 mo.-1 yr. 1-2 yrs. 2-3 yrs. 3-5 yrs. 5-10 yrs. Total ---------- ----------- ---------- -------- -------- --------- -------- Rate-sensitive assets: Short-term investments $ 4,529 $ -- $ -- $ -- $ -- $ -- $ 4,529 Mortgage-backed investments 6,769 2,488 8,024 2,914 6,043 1,576 27,814 Other securities 62,600 47,436 116,497 111,197 42,291 9,488 389,509 Adjustable-rate mortgages 131,057 83,839 76,892 89,365 28,276 -- 409,429 Fixed-rate mortgages 8,826 9,545 14,653 13,350 23,703 53,576 123,653 All other loans 28,490 1,064 1,131 594 158 128 31,565 - - - ------------------------------------------------------------------------------------------------------------------------- Total rate-sensitive assets 242,271 144,372 217,197 217,420 100,471 64,768 986,499 - - - ------------------------------------------------------------------------------------------------------------------------- Rate-sensitive liabilities: NOW accounts 1,684 -- 29,578 29,577 -- -- 60,839 Regular savings -- 61,472 61,475 61,472 61,472 -- 245,891 Money market accounts 69,880 -- -- -- -- -- 69,880 Term certificates 130,958 116,641 88,729 24,491 14,579 9 375,407 Borrowings 85,817 20,047 32,200 5,000 5,000 400 148,464 - - - ------------------------------------------------------------------------------------------------------------------------- Total rate-sensitive liabilities 288,339 198,160 211,982 120,540 81,051 409 900,481 - - - ------------------------------------------------------------------------------------------------------------------------- GAP (46,068) (53,788) 5,215 96,880 19,420 64,359 -- - - - ------------------------------------------------------------------------------------------------------------------------- CUMULATIVE GAP (46,068) (99,856) (94,641) 2,239 21,659 86,018 -- - - - ------------------------------------------------------------------------------------------------------------------------- PERCENT TO TOTAL ASSETS -4.43% -9.61% -9.11% 0.22% 2.08% 8.28% -- - - - -------------------------------------------------------------------------------------------------------------------------
The deficiency gap is a reflection of the greater speed and magnitude of interest rate changes of liabilities as compared with the Bank's ability to adjust the rates of its earning assets in response to such changes. So long as any excess or deficiency exists, the Bank's earnings are likely to be affected by changes in prevailing interest rates. The one-year gap is a common benchmark for comparison of a financial institution's susceptibility to changes in interest rates. A negative one-year gap, such as the Bank's, implies that an institution's liabilities reprice faster than its assets. Accordingly, a decline in interest rates would be likely to benefit the institution by improving its interest rate spread, and accordingly, its net interest income. Conversely, a rising interest rate environment would be likely to adversely affect such an institution's interest rate spread. In the above table, loans reflect regular amortization of principal and prepayment estimates. In addition, fixed-rate loans are shown in the period corresponding to contractual maturity, whereas adjustable-rate loans are shown in the period corresponding to the earliest possible interest rate adjustment date. Based on the Bank's experience with such loans, partial or full payment prior to contractual maturity can be expected and is reflected in the table. The table does not include loans which have been placed on non-accrual status. Although savings and NOW deposit accounts are subject to immediate withdrawal, based on the Bank's history, management considers these liabilities to have longer effective lives as illustrated in the table above. 24 25 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, 1996, cash flow from maturities of securities was $87.9 million and proceeds from sales of securities totaled $32.6 million, compared to maturities of securities of $124.0 million and proceeds from sales of securities of $25.4 million for the year ended December 31, 1995. Principal payments on mortgage-backed investments during the years ended December 31, 1996 and 1995 totaled $4.8 million for both years. Purchases of securities during 1996 and 1995 totaled $188.7 million and $179.7 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, 1996, the Bank's outstanding borrowings from the FHLBB were $97.6 million. The Bank also utilizes repurchase agreements to fund loan purchases or to leverage the balance sheet. At December 31, 1996, securities sold under agreements to repurchase totaled $49.6 million. Residential and commercial mortgage loan originations for the years ended December 31, 1996, 1995 and 1994 totaled $96.4 million, $65.4 million and $95.1 million, respectively. In 1994, the Bank participated in a $26.1 million purchased loan program. The Bank discontinued the program in 1995. Commitments to originate mortgages at December 31, 1996 were $9.4 million, excluding unadvanced construction funds totaling $9.4 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 $92.5 million, or 8.90% of total assets at December 31, 1996, compared with $86.1 million, or 9.00% of total assets at December 31, 1995. 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 Bank's tier 1 risk-based capital ratio, as defined by the FDIC, at December 31, 1996 was 14.8%, 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 capital ratio, as defined by the FDIC, was 8.4%, which exceeds the FDIC's requirements. 25 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Independent Auditors' Report............................................. 27 Consolidated Balance Sheets.............................................. 28 Consolidated Statements of Income........................................ 29 Consolidated Statements of Changes in Stockholders' Equity............... 30 Consolidated Statements of Cash Flows.................................... 31-32 Notes to Consolidated Financial Statements............................... 33-56 26 27 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Medford Savings Bank: We have audited the consolidated balance sheets of Medford Savings Bank and subsidiaries as of December 31, 1996 and 1995, 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, 1996. These consolidated financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with 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 Savings Bank and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. /s/ Wolf & Company, P.C. Boston, Massachusetts January 24, 1997 27 28 MEDFORD SAVINGS BANK CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------- 1996 1995 ----------- --------- (In thousands) ASSETS Cash and due from banks $ 11,900 $ 14,599 Short-term investments (Note 3) 4,529 14,171 ----------- --------- Cash and cash equivalents 16,429 28,770 Investment securities (Note 4) 424,966 363,599 Loans (Notes 5 and 8) 568,086 536,890 Less allowance for loan losses (7,231) (7,466) ----------- --------- Loans, net 560,855 529,424 ----------- --------- Foreclosed real estate 276 350 Banking premises and equipment, net (Note 6) 10,896 9,650 Accrued interest receivable 9,291 7,877 Other assets (Notes 2 and 10) 16,385 16,263 ----------- --------- Total assets $ 1,039,098 $ 955,933 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (Note 7) $ 792,141 $ 791,851 Short-term borrowings (Note 8) 80,817 40,281 Long-term debt (Note 9) 67,647 32,147 Accrued taxes and expenses (Note 13) 3,701 3,285 Other liabilities 2,271 2,293 ----------- --------- Total liabilities 946,577 869,857 ----------- --------- Commitments and contingencies (Note 11) Stockholders' equity (Notes 12 and 14): Serial preferred stock, $.10 par value, 5,000,000 shares authorized; none issued -- -- Common stock, 15,000,000 shares authorized; $.50 par value, 4,534,648 and 4,423,190 shares issued, respectively 2,267 2,212 Additional paid-in capital 28,848 27,642 Retained earnings 61,634 54,966 ----------- --------- 92,749 84,820 Net unrealized gain (loss) on securities available for sale, after tax effects (Notes 4 and 10) (228) 1,256 ----------- --------- Total stockholders' equity 92,521 86,076 ----------- --------- Total liabilities and stockholders' equity $ 1,039,098 $ 955,933 =========== =========
See accompanying notes to consolidated financial statements. 28 29 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, ------------------------------------------------ 1996 1995 1994 ---------- ------------ ------------ (Dollars in thousands, except per share data) Interest and dividend income: Interest and fees on loans $ 43,454 $ 42,680 $ 38,315 Interest on debt securities 24,167 20,864 16,330 Dividends on equity securities 652 427 469 Interest on short-term investments 438 434 287 ---------- ----------- ----------- Total interest and dividend income 68,711 64,405 55,401 ---------- ----------- ----------- Interest expense: Interest on deposits 30,433 28,864 23,165 Interest on short-term borrowings 2,637 2,136 248 Interest on long-term debt 3,392 1,724 1,110 ---------- ----------- ----------- Total interest expense 36,462 32,724 24,523 ---------- ----------- ----------- Net interest income 32,249 31,681 30,878 Provision for loan losses (Note 5) 215 772 583 ---------- ----------- ----------- Net interest income, after provision for loan losses 32,034 30,909 30,295 ---------- ----------- ----------- Other income: Customer service fees 2,158 2,347 2,194 Gain (loss) on sales of investment securities, net (Note 4) 413 96 (65) Miscellaneous 744 703 766 ---------- ----------- ----------- Total other income 3,315 3,146 2,895 ---------- ----------- ----------- Operating expenses: Salaries and employee benefits (Notes 13 and 15) 9,778 9,551 9,608 Occupancy and equipment (Notes 6 and 11) 1,998 1,910 1,842 Deposit insurance 13 927 1,718 Data processing 1,606 1,452 1,308 Professional fees 517 577 767 Amortization of intangibles (Note 2) 1,248 1,293 1,249 Foreclosed real estate, net 65 (269) 346 Advertising and marketing 722 692 704 Other general and administrative 2,128 2,036 2,103 ---------- ----------- ----------- Total operating expenses 18,075 18,169 19,645 ---------- ----------- ----------- Income before income taxes 17,274 15,886 13,545 Provision for income taxes (Note 10) 6,845 6,463 5,292 ---------- ----------- ----------- Net income $ 10,429 $ 9,423 $ 8,253 ========== =========== =========== Weighted averages shares outstanding: Primary 4,723,649 4,659,059 4,628,793 ========== =========== =========== Fully diluted 4,741,542 4,685,693 4,628,793 ========== =========== =========== Earnings per share: Primary $ 2.21 $ 2.02 $ 1.78 ========== =========== =========== Fully diluted $ 2.20 $ 2.01 $ 1.78 ========== =========== ===========
See accompanying notes to consolidated financial statements. 29 30 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31, 1996, 1995 and 1994
Net Unrealized Gain (Loss) on Common Stock Additional Securities ----------------------- Paid-In Retained Available Shares Dollars Capital Earnings for Sale --------- ------- ---------- -------- -------------- (In thousands, except number of shares) Balance at December 31, 1993 2,168,595 $1,084 $ 27,563 $ 43,136 $ -- Net income -- -- -- 8,253 -- Cash dividends declared ($.62 per share) -- -- -- (2,712) -- Issuance of common stock under stock option plan and related income tax benefits 42,500 22 919 -- -- Stock split (2 for 1) 2,184,695 1,092 (1,092) -- -- Change in method of accounting for investment securities, after tax effects -- -- -- -- 572 Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- -- (2,474) Decrease in unearned compensation -- ESOP -- -- -- -- -- --------- ------ -------- -------- ------- Balance at December 31, 1994 4,395,790 2,198 27,390 48,677 (1,902) Net income -- -- -- 9,423 -- Cash dividends declared ($.71 per share) -- -- -- (3,134) -- Issuance of common stock under stock option plan and related income tax benefits 27,400 14 252 -- -- Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- -- 3,158 --------- ------ -------- -------- ------- Balance at December 31, 1995 4,423,190 2,212 27,642 54,966 1,256 Net income -- -- -- 10,429 -- Cash dividends declared ($.83 per share) -- -- -- (3,761) -- Issuance of common stock under stock option plan and related income tax benefits 111,458 55 1,206 -- -- Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- -- (1,484) --------- ------ -------- -------- ------- Balance at December 31, 1996 4,534,648 $2,267 $ 28,848 $ 61,634 $ (228) ========= ====== ======== ======== =======
Unearned Compensation ESOP Total ------------ --------- Balance at December 31, 1993 $(431) $ 71,352 Net income -- 8,253 Cash dividends declared ($.62 per share) -- (2,712) Issuance of common stock under stock option plan and related income tax benefits -- 941 Stock split (2 for 1) -- -- Change in method of accounting for investment securities, after tax effects -- 572 Change in net unrealized gain (loss) on securities available for sale, after tax effects -- (2,474) Decrease in unearned compensation -- ESOP 431 431 ----- -------- Balance at December 31, 1994 -- 76,363 Net income -- 9,423 Cash dividends declared ($.71 per share) -- (3,134) Issuance of common stock under stock option plan and related income tax benefits -- 266 Change in net unrealized gain (loss) on securities available for sale, after tax effects -- 3,158 ----- -------- Balance at December 31, 1995 -- 86,076 Net income -- 10,429 Cash dividends declared ($.83 per share) -- (3,761) Issuance of common stock under stock option plan and related income tax benefits -- 1,261 Change in net unrealized gain (loss) on securities available for sale, after tax effects -- (1,484) ----- -------- Balance at December 31, 1996 $ -- $ 92,521 ===== ========
See accompanying notes to consolidated financial statements. 30 31 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, ---------------------------------------------- 1996 1995 1994 ------------ ------------ ----------- (In thousands) Cash flows from operating activities: Net income $ 10,429 $ 9,423 $ 8,253 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan and foreclosed real estate losses 265 611 750 Depreciation and amortization, net 2,205 1,640 3,268 Net (gain) loss on sales of foreclosed real estate (15) (299) 4 (Gains) losses on sales of investment securities, net (413) (96) 65 Increase in accrued interest receivable and other assets (2,294) (1,341) (646) Deferred tax benefit (295) (402) (385) Increase in accrued taxes and expenses and other liabilities 1,576 727 656 --------- --------- --------- Net cash provided by operating activities 11,458 10,263 11,965 --------- --------- --------- Cash flows from investing activities: Proceeds received in connection with acquisition of failed institution -- -- 27,012 Maturities of investment securities available for sale 38,168 26,210 35,490 Sales of investment securities available for sale 32,602 25,363 10,678 Purchases of investment securities available for sale (153,844) (103,142) (54,487) Maturities of investment securities held to maturity 49,780 97,782 73,000 Purchases of investment securities held to maturity and FHLBB stock (34,886) (76,519) (116,212) Principal amortization of mortgage-backed investments available for sale 4,746 4,796 9,076 Loans originated and purchased, net of amortization and payoffs (32,163) (8,492) (45,432) Sales of foreclosed real estate 384 2,920 1,781 Purchases of bank premises and equipment, net (2,018) (755) (436) --------- --------- --------- Net cash used in investing activities (97,231) (31,837) (59,530) --------- --------- ---------
(continued) See accompanying notes to consolidated financial statements. 31 32 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
Years Ended December 31, ---------------------------------------------- 1996 1995 1994 ------------- ------------ ------------- (In thousands) Cash flows from financing activities: Net increase in deposits 290 71 27,522 Net increase in borrowings with maturities of three months or less 35,536 23,356 16,925 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 (20,000) (25,000) (5,000) Proceeds from long-term debt 39,000 16,400 13,247 Repayment of long-term debt (3,500) (9,500) (3,600) Issuance of common stock 610 150 307 Cash dividends paid (3,504) (2,907) (2,547) -------- -------- -------- Net cash provided by financing activities 73,432 27,570 46,854 -------- -------- -------- Net change in cash and cash equivalents (12,341) 5,996 (711) Cash and cash equivalents at beginning of year 28,770 22,774 23,485 -------- -------- -------- Cash and cash equivalents at end of year $ 16,429 $ 28,770 $ 22,774 ======== ======== ======== Supplementary information: Interest paid on deposit accounts $ 30,474 $ 28,773 $ 23,125 Interest paid on borrowed funds 5,640 3,662 1,296 Income taxes paid, net of refunds 6,671 6,234 5,547 Non-cash investing activity: Assets acquired from failed institution, excluding cash and equivalents -- -- 1,609 Liabilities assumed from failed institution -- -- 28,621
See accompanying notes to consolidated financial statements. 32 33 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION AND CONSOLIDATION The consolidated financial statements include the accounts of Medford Savings Bank (the "Bank") and its wholly-owned subsidiaries, Medford Securities Corporation which engages in the buying, selling, dealing in, or holding of securities, and in 1995 and 1994, Medco Realty, Inc. which engaged in property rental and development. The Bank elected to dissolve Medco Realty, Inc. in January 1996, and to acquire all of its assets and liabilities. 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 Bank 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 Bank 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 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. RECLASSIFICATION Certain amounts have been reclassified in the 1995 and 1994 consolidated financial statements to conform to the 1996 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. 33 34 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(continued) INVESTMENT SECURITIES Effective January 1, 1994, the Bank adopted the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Accordingly, 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. The cumulative effect of the change in accounting principle at January 1, 1994, net of tax effects, was to increase stockholders' equity by $572,000. There was no effect on net income in 1994. Restricted equity securities are reflected at cost. 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. LOANS The Bank 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 Bank'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 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. Generally, loans which are identified as impaired are 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 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. 34 35 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) ALLOWANCE FOR LOAN LOSSES (CONCLUDED) On January 1, 1995, the Bank adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended by SFAS No. 118. 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 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 Bank's loans which have been identified as impaired have been measured by the fair value of existing collateral. The Statement is not applicable to large groups of smaller balance homogeneous loans that are collectively evaluated for impairment. Accordingly, the Bank has not applied SFAS No. 114 to its consumer loan portfolio. The adoption of SFAS No. 114 had no effect on the Bank's assessment of the overall adequacy of the allowance for loan losses. The restatement of previously issued financial statements to conform with SFAS No. 114 was expressly prohibited. FORECLOSED REAL ESTATE Foreclosed real estate includes both formally foreclosed properties and in-substance foreclosed properties, whereby the Bank has taken physical possession of the property without formal foreclosure proceedings. Real estate properties acquired through foreclosure 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 AND REAL ESTATE HELD FOR INVESTMENT 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. 35 36 MEDFORD SAVINGS BANK 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 Bank'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 October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation." This Statement encourages all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, it also allows an entity to continue to measure compensation cost for those 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 Bank'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 Bank has elected to remain with the accounting in Opinion No. 25. The pro forma impact of accounting for stock options granted during 1996 and 1995 in accordance with SFAS No. 123 was not material to net income and earnings per share for the years ended December 31, 1996 and 1995. EMPLOYEES' STOCK OWNERSHIP PLAN ("ESOP") Compensation expense is recognized based on cash contributions paid or committed to be paid to the ESOP. All shares held by the ESOP are deemed outstanding for purposes of earnings per share calculations. Dividends declared on all shares held by the ESOP are charged to retained earnings. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE On August 30, 1994, the Board of Directors approved a two-for-one stock split of the Bank's common stock. The stock split was effective on October 15, 1994 to shareholders of record as of September 15, 1994. Par value remained at $0.50 per share. The stock split resulted in the issuance of 2,184,695 additional shares of common stock from authorized but unissued shares. The primary earnings per share computation includes common stock and dilutive common stock equivalents attributable to outstanding stock options. Fully diluted earnings per share computations reflect the higher market price of the Bank's common stock at the end of the period and assume further dilution applicable to outstanding stock options. 36 37 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded) RECENT ACCOUNTING PRONOUNCEMENTS In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The accounting and reporting standards of this Statement are based on a financial components approach that focuses on control, whereby after a transfer of financial assets, an entity recognizes only financial and servicing assets it controls and liabilities it has incurred. Liabilities incurred will be initially recognized at fair value, if practicable. Financial assets will be derecognized when control has been surrendered, and liabilities will be derecognized when extinguished. The determination of whether control over a financial asset has been surrendered is based on meeting specific criteria as defined in the Statement. The Statement provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings, and impacts the accounting for various transactions including the servicing of financial assets, securitizations, securities lending transactions, repurchase agreements including "dollar rolls," "wash sales," loan syndications and participations, and transfers of receivables with recourse. The Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied on a prospective basis. In December 1996, the FASB voted to defer for one year the provisions of the Statement that relate to secured borrowings and collateral. Management is currently evaluating the impacts of the Statement on its secured borrowings such as repurchase agreements but does not expect , based on the general terms of its current agreements, that the Statement will significantly change its accounting for similar transactions in the future. Other provisions of the Statement will not, in management's opinion, have a significant impact on the consolidated financial statements, except that certain loan participations that the Bank will service for other investors may be reflected on the balance sheet at their gross amount with a related liability to the participant for the participant's portion. Such transactions are currently reflected on a net basis in the Bank's loan portfolio. 2. ACQUISITIONS On May 6, 1994, the Bank acquired certain assets and assumed certain liabilities of the former Commercial Bank and Trust Company ("CBTC") located in Lowell, Massachusetts from the Federal Deposit Insurance Corporation (the "FDIC"), pursuant to a Purchase and Assumption Agreement (the "CBTC Agreement") among the FDIC, as Receiver of CBTC, the FDIC and Medford Savings Bank. Pursuant to the CBTC Agreement, the Bank paid a premium of $1,225,000 to the FDIC and the fair values of assets and liabilities assumed amounted to $7,472,000 and $28,621,000, respectively. The CBTC acquisition has been accounted for using the purchase method of accounting. At December 31, 1996 and 1995, the goodwill applicable to the CBTC transaction amounted to $1,001,000 and $1,085,000, respectively. In 1992, the Bank acquired certain assets and assumed the insured deposits and related liabilities of the former Bank for Savings, in Malden, Massachusetts. The acquisition was accounted for using the purchase method of accounting. At December 31, 1996 and 1995, intangible assets applicable to the Bank for Savings transaction, including goodwill and core deposit intangible, amounted to $5,895,000 and $7,002,000, respectively. 37 38 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. SHORT-TERM INVESTMENTS Short-term investments consist of the following:
December 31, --------------------------- 1996 1995 ----------- ----------- (In thousands) Federal funds sold $4,500 $ 9,171 Other interest-bearing deposits 29 5,000 ------ ------- Total short-term investments $4,529 $14,171 ====== =======
4. INVESTMENT SECURITIES Investment securities consist of the following:
December 31, --------------------------------- 1996 1995 -------------- --------------- (In thousands) Securities available for sale, at fair value $268,379 $192,585 Securities held to maturity, at amortized cost 150,591 165,671 Restricted equity securities: Federal Home Loan Bank stock 4,882 4,229 Massachusetts Savings Bank Life Insurance stock 1,114 1,114 -------- -------- $424,966 $363,599 ======== ========
38 39 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. INVESTMENT SECURITIES (continued) The amortized cost and fair value of investment securities, with gross unrealized gains and losses at December 31, 1996 and 1995, follows:
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 ======== ====== ======= ========
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1995 Cost Gains Losses Value - - - ------------------------------------------------------ --------------- ------------- -------------- ----------- (In thousands) Securities Available for Sale Debt securities: State and municipal $ 236 $ - $ (4) $ 232 Corporate bonds 114,166 1,763 (62) 115,867 Mortgage-backed 32,423 417 (60) 32,780 U.S. Government and federal agency 38,083 127 (97) 38,113 -------- ------ ----- -------- Total debt securities 184,908 2,307 (223) 186,992 Marketable equity securities 5,633 14 (54) 5,593 -------- ------ ----- -------- Total securities available for sale $190,541 $2,321 $(277) $192,585 ======== ====== ===== ======== Securities Held to Maturity U.S. Government and federal agency $154,993 $2,317 $(210) $157,100 Corporate 10,678 159 - 10,837 -------- ------ ----- -------- Total securities held to maturity $165,671 $2,476 $(210) $167,937 ======== ====== ===== ========
39 40 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 4. INVESTMENT SECURITIES (concluded) The amortized cost and fair value of debt securities by contractual maturity at December 31, 1996 is as follows:
Available for Sale Held to Maturity -------------------------------- ------------------------------ Amortized Fair Amortized Fair Cost Value Cost Value --------------- --------------- --------------- ------------- (In thousands) Within 1 year $ 49,839 $ 50,084 $ 46,871 $ 47,068 After 1 year through 5 years 175,259 174,979 103,720 103,778 After 5 years through 10 years 9,065 8,846 - - -------- -------- -------- -------- 234,163 233,909 150,591 150,846 Mortgage-backed 28,101 27,814 - - -------- -------- -------- -------- $262,264 $261,723 $150,591 $150,846 ======== ======== ======== ========
At December 31, 1996, U.S. Government obligations with an amortized cost of $49,340,000, a fair value of $48,930,000 and accrued interest receivable of $440,000 have been pledged as collateral for securities sold under agreements to repurchase. In addition, U.S. Government obligations with an amortized cost of $8,047,000 and a fair value of $8,088,000 have been pledged as collateral for a line of credit and to secure public funds. (See Note 8.) For the years ended December 31, 1996, 1995 and 1994, proceeds from the sales of securities available for sale amounted to $32,602,000, $25,363,000 and $10,678,000, respectively. Gross realized gains amounted to $412,000, $211,000 and $51,000, respectively. Gross realized losses amounted to $56,000, $26,000 and $116,000, respectively. For the years ended December 31, 1996 and 1995, proceeds from the sales of securities held to maturity that were sold within three months of maturity amounted to $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 $61,000 and $4,000, respectively, and gross realized losses amounted to $4,000 and $93,000, 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 41 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LOANS A summary of the balances of loans follows:
December 31, ------------------------------------- 1996 1995 ---------------- ---------------- (In thousands) Mortgage loans on real estate: Residential 1 - 4 family $ 380,627 $ 353,172 Commercial 123,158 125,771 Construction 18,155 15,341 Second mortgages 1,928 2,175 Equity lines of credit 21,169 20,819 --------- --------- 545,037 517,278 Less: Unadvanced loan funds (9,436) (6,750) --------- --------- 535,601 510,528 --------- --------- Other loans: Commercial 11,014 9,075 Personal 2,219 2,193 Education and other 18,329 14,517 --------- --------- 31,562 25,785 --------- --------- Add Net premium on loans acquired 354 504 Net deferred loan costs 569 73 --------- --------- Total loans 568,086 536,890 Less allowance for loan losses (7,231) (7,466) --------- --------- Loans, net $ 560,855 $ 529,424 ========= =========
41 42 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. LOANS (concluded) An analysis of the allowance for loan losses follows:
Years Ended December 31, ------------------------------------------------ 1996 1995 1994 ------------- ------------- ------------- (In thousands) Balance at beginning of year $ 7,466 $ 7,539 $ 7,007 Provision for loan losses 215 772 583 ------- ------- ------- 7,681 8,311 7,590 Recoveries 380 233 258 Loans charged-off (830) (1,078) (309) ------- ------- ------- Balance at end of year $ 7,231 $ 7,466 $ 7,539 ======= ======= =======
At December 31, 1996 and 1995, the Bank had loans amounting to $3,439,000 and $4,321,000, respectively, which had been placed on non-accrual status. Interest not accrued on such loans at December 31, 1996 and 1995 amounted to $451,000 and $558,000, respectively, and was excluded from interest income. The following is a summary of the recorded investment in impaired loans:
December 31, ------------------------------------- 1996 1995 --------------- --------------- (In Thousands) Loans with no valuation allowance $ 870 $ 804 Loans with a corresponding valuation allowance 3,154 3,435 ------ ------ Total impaired loans $4,024 $4,239 ====== ====== Corresponding valuation allowance $ 968 $1,705 ====== ======
No additional funds are committed to be advanced in connection with impaired loans. For the years ended December 31, 1996 and 1995, the average recorded investment in impaired loans amounted to $4,751,000 and $3,827,000, respectively. The Bank recognized, on a cash basis, $153,000 in 1996 and $167,000 in 1995 of interest income on impaired loans, during the period that they were impaired. 42 43 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. 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 ----------------------------- 1996 1995 Useful Lives ------------- ------------ ---------------------- (In thousands) Banking Premises: Land $ 782 $ 782 - Buildings 9,634 9,575 5 - 50 years Equipment 6,780 4,992 3 - 25 years ----------- -------- 17,196 15,349 Less accumulated depreciation (6,300) (5,699) ----------- --------- $ 10,896 $ 9,650 =========== =========
Depreciation expense for the years ended December 31, 1996, 1995 and 1994 amounted to $772,000, $713,000 and $663,000, respectively. 7. DEPOSITS A summary of deposit balances, by type, is as follows:
December 31, ----------------------------------- 1996 1995 -------------- -------------- (In thousands) Demand $ 40,124 $ 36,427 NOW 60,839 63,248 Regular savings 245,891 244,370 Money market deposits 69,880 70,443 -------- -------- Total non-certificate accounts 416,734 414,488 -------- -------- Term certificates ($100,000 or more) 46,564 39,943 Other term certificates 328,843 337,420 -------- -------- Total term certificates 375,407 377,363 -------- -------- Total deposits $792,141 $791,851 ======== ========
43 44 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. DEPOSITS (concluded) A summary of term certificate accounts, by maturity, is as follows:
December 31, 1996 December 31, 1995 ---------------------------------- ---------------------------------- Weighted Weighted Average Average Amount Rate Amount Rate --------------- ---------------- --------------- ---------------- (Dollars in thousands) Within 1 year $247,599 5.17% $296,287 5.64% Over 1 year to 3 years 113,220 5.64 55,866 5.56 Over 3 years to 5 years 14,579 6.18 25,103 5.93 Over 5 years 9 6.08 107 5.50 -------- -------- $375,407 5.35% $377,363 5.65% ======== ========
8. SHORT-TERM BORROWINGS Short-term borrowings consist of the following:
December 31, 1996 December 31, 1995 -------------------------------- -------------------------------- Weighted Weighted Average Average Amount Rate Amount Rate ------------- --------------- ------------- -------------- (Dollars in thousands) Securities sold under agreements to repurchase $49,584 5.99% $20,281 5.81% Federal Reserve Bank of Boston advances 1,233 5.00 - - Federal Home Loan Bank of Boston ("FHLBB") advances 30,000 5.56 20,000 6.03 ------- ------- $80,817 5.82% $40,281 5.92% ======= =======
Securities sold under agreements to repurchase are borrowings that mature within one year and are secured by U.S. Government obligations. (See Note 4.) 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 maximum amount of repurchase agreements outstanding at any month end during 1996 was $54,840,000. The average balance of repurchase agreements for the year ended December 31, 1996 amounted to $25,047,000. The Bank has a $2,000,000 (treasury, tax and loan) line of credit with the Federal Reserve Bank of Boston of which $767,000 was available to be advanced at December 31, 1996. The interest rate adjusts weekly and certain U.S. Government obligations have been pledged as collateral for the line of credit. (See Note 4.) The Bank 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 45 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. LONG-TERM DEBT Long-term debt consists of Federal Home Loan Bank of Boston advances secured by a blanket lien on qualified collateral (see Note 8), as follows:
December 31, 1996 December 31, 1995 -------------------------------- -------------------------------- Weighted Weighted Average Average Maturity Amount Rate Amount Rate - - - ------------------------ ------------- ------------- ------------- ------------- (Amount in thousands) 1996 $ - - % $ 3,500 4.93% 1997 25,047 6.23 15,047 6.50 1998 32,200 5.86 3,200 5.03 1999 5,000 5.87 5,000 5.87 2000 5,000 7.22 5,000 7.22 2005 400 5.61 400 5.61 ---------- ---------- $ 67,647 6.10% $ 32,147 6.19% ========== ===========
10. INCOME TAXES Allocation of the provision for federal and state income taxes between current and deferred portions is as follows:
Years Ended December 31, ------------------------------------------ 1996 1995 1994 ------------ ----------- ----------- (In thousands) Current tax provision: Federal $ 5,774 $ 5,206 $ 4,325 State 1,366 1,659 1,352 ------- ------- ------- 7,140 6,865 5,677 ------- ------- ------- Deferred tax benefit: Federal (240) (306) (264) State (55) (96) (121) ------- ------- ------- (295) (402) (385) ------- ------- ------- $ 6,845 $ 6,463 $ 5,292 ======= ======= =======
45 46 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. 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, -------------------------------------- 1996 1995 1994 ---------- --------- ---------- Statutory rates 34.0% 34.0% 34.0% Increase (decrease) resulting from: State taxes, net of federal tax benefit 5.0 6.6 6.0 Other, net .6 .1 (.9) ---- ---- ---- Effective tax rates 39.6% 40.7% 39.1% ==== ==== ====
The components of the net deferred tax asset, included in other assets, are as follows:
December 31, ------------------------------ 1996 1995 ------------ -------------- (In thousands) Deferred tax assets: Federal $ 4,175 $ 3,616 State 1,629 1,584 ------- ------- 5,804 5,200 Valuation reserve on assets - (67) ------- ------- 5,804 5,133 ------- ------- Deferred tax liabilities: Federal (1,774) (2,253) State (601) (729) ------- ------- (2,375) (2,982) ------- ------- Net deferred tax asset $ 3,429 $ 2,151 ======= =======
46 47 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. 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, --------------------------- 1996 1995 ----------- ----------- (In thousands) Cash basis of accounting $ 55 $ 617 Investments: Net unrealized (gain) loss on securities available for sale 195 (788) Other (193) (214) Depreciation (901) (862) Deferred loan fees (231) (31) Allowance for loan losses 2,465 2,472 Employee benefit plans 1,128 1,040 Other 911 (16) ------- ------- 3,429 2,218 Valuation reserve - (67) ------- ------- Net deferred tax asset $ 3,429 $ 2,151 ======= =======
A summary of the change in the net deferred tax asset is as follows:
Years Ended December 31, ------------------------------------------- 1996 1995 1994 ----------- ----------- ----------- (In thousands) Balance at beginning of year $2,151 $ 3,915 $2,152 Deferred tax effect of the change in net unrealized gains and losses on securities available for sale 983 (2,166) 1,378 Deferred tax benefit for the year 295 402 385 ------ ------- ------ Balance at end of year $3,429 $ 2,151 $3,915 ====== ======= ======
The federal income tax reserve for loan losses at the Bank'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 Bank intends to use the reserve only to absorb loan losses, a deferred income tax liability of $3,389,000 has not been provided. 48 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. 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 Bank 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 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 Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. 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 Bank's exposure to credit loss is represented by the contractual amount of these commitments. The Bank 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, ----------------------------- 1996 1995 ---------- ----------- (In thousands) Commitments to grant loans $ 13,607 $ 4,667 Unadvanced funds on equity lines of credit 20,479 18,760 Unadvanced funds on commercial lines of credit 6,884 4,197
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 Bank 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 49 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. COMMITMENTS AND CONTINGENCIES (concluded) OPERATING LEASE COMMITMENTS Pursuant to the terms of noncancelable lease agreements in effect at December 31, 1996, pertaining to banking premises and equipment, future minimum rent commitments aggregate $702,000 through the year 2000. In addition, the leases contain options to extend for periods up to fifteen years. Total rent expense for the years ended December 31, 1996, 1995 and 1994 amounted to $282,000, $270,000 and $185,000, respectively. OTHER COMMITMENTS AND CONTINGENCIES In January, 1997, the Bank entered into agreements to purchase two properties for business expansion totaling $1,171,000. 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 Bank's consolidated financial statements. 12. STOCKHOLDERS' EQUITY RESTRICTIONS ON DIVIDENDS Federal and state banking regulations place certain restrictions on dividends paid. No dividends may be paid by the Bank if such dividends would reduce the Bank's capital to a level below minimum regulatory capital requirements. MINIMUM REGULATORY REQUIREMENTS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. 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 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, 1996, that the Bank meets all capital adequacy requirements to which it is subject. 49 50 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. STOCKHOLDERS' EQUITY (concluded) MINIMUM REGULATORY REQUIREMENTS (concluded) As of December 31, 1996, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank's category. The Bank's actual capital amounts and ratios as of December 31, 1996 are also presented in the table.
Minimum To Be Well For Minimum Capitalized Under Capital Prompt Corrective Actual Adequacy Purposes Action Provisions -------------------------- -------------------------- ------------------------- Amount Ratio Amount Ratio Amount Ratio ------------- --------- ------------- --------- ------------ --------- (Dollars in Thousands) Total Capital $ 92,796 16.0% $ 46,409 8.0% $ 58,012 10.0% (to risk weighted assets) Tier 1 Capital 85,565 14.8 23,205 4.0 34,807 6.0 (to risk weighted assets) Tier 1 Capital 85,565 8.4 40,752 - 4.0 - 50,940 5.0 (to average assets) 50,940 5.0
SHAREHOLDER RIGHTS PLAN The Bank 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 Bank'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 Bank is acquired in a merger or other business combination transaction, or 50% of the Bank'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 Bank at $.01 per right at any time prior to (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 occurrence of a merger or other business combination. The rights will expire on September 22, 2003. 50 51 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. 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, 1996, 1995 and 1994 consisted of the following:
1996 1995 1994 ---- ---- ---- (In thousands) Service cost - benefits earned during the year $ 514 $ 395 $ 427 Interest cost on projected benefits 305 283 276 Actual return on plan assets (503) (544) (201) Net amortization and deferral (19) (19) (19) Net (gain) loss 218 292 (51) ----- ----- ----- $ 515 $ 407 $ 432 ===== ===== =====
Total pension expense for the years ended December 31, 1996, 1995 and 1994 amounted to $540,000, $402,000 and $432,000, respectively. According to the Association's actuary, a reconciliation of the funded status of the plan is as follows:
October 31, ----------- 1996 1995 ---- ---- (In thousands) Plan assets at fair value $ 3,994 $ 3,334 Projected benefit obligation 4,180 4,355 ------- ------- Excess of projected benefit obligation over plan as (186) (1,021) Unamortized net surplus since adoption of SFAS No 87 (284) (303) Unrecognized net gain (1,431) (443) ------- ------- Accrued pension liability $(1,901) $(1,767) ======= =======
The accumulated benefit obligation (substantially all vested) at October 31, 1996 amounted to $2,613,000, which was less than the fair value of plan assets at that date. For the plan years ended October 31, 1996, 1995 and 1994, actuarial assumptions include an assumed discount rate on benefit obligations of 7.50%, 7.00% and 8.00%, respectively, and an expected long-term rate of return on plan assets of 8.00%, 8.00% and 7.00%, respectively. An annual salary increase of 5% was utilized for all years. 51 52 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. EMPLOYEE BENEFIT PLANS (concluded) 401(k) PLAN As of November 1, 1994, the Bank adopted a 401(k) plan. The plan 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, 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, 1996 and 1995, expense attributable to the Plan amounted to $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 $101,000, $181,000 and $338,000 for the years ended December 31, 1996, 1995 and 1994, respectively. EXECUTIVE SUPPLEMENTAL BENEFIT AGREEMENT The Bank has entered into a supplemental executive retirement plan with its President, effective November 1, 1994. The agreement is designed to provide the benefits lost under defined benefit plans due to the reduction in the IRC compensation ceiling effective November 1, 1994. The present value of future benefits is being accrued over the term of employment. Supplemental compensation expense for the years ended December 31, 1996 and 1995 amounted to $36,000 and $42,000, respectively. 14. STOCK OPTION PLANS The Bank has stock option plans, for the benefit of directors, officers and full-time employees, covering 736,000 shares of common stock under the 1986 Stock Option Plan and 200,000 shares of common stock under the 1993 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 Option 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 Bank on the date the option is granted. The Bank 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. 52 53 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 14. STOCK OPTION PLANS (concluded) Stock option activity under the plans is as follows:
Years Ended December 31, ------------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------- ------------------------------ -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Amount Price Amount Price Amount Price ------------ ------------ ------------- ------------- ------------- ---------- Shares under option: Outstanding at beginning of year 453,634 $ 8.90 482,034 $ 8.71 446,644 $ 6.23 Granted 12,000 22.13 6,000 18.09 94,590 18.25 Cancelled -- -- (7,000) 17.38 (600) 6.13 Exercised (111,458) 5.48 (27,400) 5.47 (58,600) 5.23 -------- ---- ------- ---- ------- ---- Outstanding at end of year 354,176 10.42 453,634 8.90 482,034 8.71 ======= ===== ======= ==== ======= ==== Exercisable at end of year 315,299 9.33 377,980 7.35 330,228 5.87 ======= ==== ======= ==== ======= ====
Information pertaining to options outstanding at December 31, 1996 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 - $6.13 154,700 4.1 years $ 5.26 154,700 $ 5.26 $7.63 - $10.88 90,886 5.7 9.50 90,886 9.50 $12.25 - $14.44 16,000 7.1 13.99 11,200 13.81 $17.25 - $19.44 77,590 7.6 18.83 54,313 18.83 $20.75 - $25.75 15,000 9.4 22.05 4,200 21.04 ------------ ----------- Outstanding at end of year 354,176 5.6 years $ 10.42 315,299 $ 9.33 =============== ===========
15. EMPLOYEES' STOCK OWNERSHIP PLAN The Bank 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 Bank in the previous twelve-month period. The Bank 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, 1996, the ESOP held 258,794 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. The ESOP previously had a loan agreement with a third-party lender whereby $1,500,000 was borrowed for the purpose of purchasing additional shares of the Bank's common stock. Shares purchased with loan proceeds were held in a suspense account and released for allocation to participants as the loans were repaid. The loan provided for quarterly interest payments and varying annual principal payments. The principal balance was fully paid during 1994. Total compensation and interest expense applicable to the ESOP amounted to $465,000 for the year ended December 31, 1994. 53 54 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. 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 Bank. The following methods and assumptions were used by the Bank 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 restricted equity securities, are based on quoted market prices. The carrying values of restricted equity securities approximate fair values. 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 Bank'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. 54 55 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16.FAIR VALUE OF FINANCIAL INSTRUMENTS (concluded) The estimated fair values, and related carrying amounts, of the Bank's financial instruments are as follows:
December 31, ----------------------------------------------------- 1996 1995 ------------------------ ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- (In thousands) Financial assets: Cash and cash equivalents $ 16,429 $ 16,429 $ 28,770 $ 28,770 Investment securities 424,966 425,221 363,599 365,865 Loans, net 560,855 558,971 529,424 529,620 Accrued interest receivable 9,291 9,291 7,877 7,877 Financial liabilities: Deposits 792,141 791,875 791,851 792,995 Short-term borrowings 80,817 80,817 40,281 40,298 Long-term debt 67,647 67,997 32,147 32,710 Accrued interest payable 851 851 504 504
55 56 MEDFORD SAVINGS BANK 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, 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: Primary $ 0.57 $ 0.53 $ 0.54 $ 0.57 ======== ======== ======== ======== Fully diluted $ 0.57 $ 0.53 $ 0.54 $ 0.57 ======== ======== ======== ========
Year Ended December 31, 1995 --------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter ----------- ----------- ----------- ---------- (In thousands, except per share data) Interest and dividend income $ 16,563 $ 16,290 $ 16,159 $ 15,393 Interest expense (8,771) (8,618) (8,101) (7,234) -------- -------- -------- -------- Net interest income 7,792 7,672 8,058 8,159 Provision for loan losses (130) (200) (196) (246) -------- -------- -------- -------- Net interest income, after provision for loan losses 7,662 7,472 7,862 7,913 Other income 813 822 866 645 Operating expenses (4,508) (4,289) (4,917) (4,455) -------- -------- -------- -------- Income before income taxes 3,967 4,005 3,811 4,103 Provision for income taxes (1,651) (1,551) (1,551) (1,710) -------- -------- -------- -------- Net income $ 2,316 $ 2,454 $ 2,260 $ 2,393 ======== ======== ======== ======== Earnings per share: Primary $ 0.49 $ 0.52 $ 0.49 $ 0.52 ======== ======== ======== ======== Fully diluted $ 0.49 $ 0.52 $ 0.49 $ 0.52 ======== ======== ======== ========
56 57 PART III ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE BANK DIRECTORS OF THE BANK: The response to this item is incorporated by reference from the discussion under the captions entitled "Directors" and "The Board of Directors and its Committees" in the Proxy Statement. PRINCIPAL OFFICERS OF THE BANK: Arthur H. Meehan, age 61, is President and Chief Executive Officer of the Bank and Chairman of the Board of Directors. 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. George A. Bargamian, age 48, is Senior Vice President of the Bank. He 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. Eric B. Loth, age 54, is Senior Vice President of the Bank. Mr. Loth commenced his employment with the Bank at this level in August 1994. Prior to this date, Mr. Loth served as Vice President of Lending at Sterling Bank in Waltham, Massachusetts. William F. Rivers, age 41, is Senior Vice President of the Bank. He has been with the Bank since 1974, serving as Assistant Treasurer from 1980-1985, and as Vice President from 1985-1989. Phillip W. Wong, age 47, is Senior Vice President and Chief Financial Officer of the Bank. Mr. Wong commenced his employment with the Bank at this level in December 1992. Prior to this date, Mr. Wong served as Chief Financial Officer of Guaranty-First Trust Co. in Waltham, Massachusetts. FAMILY RELATIONSHIPS AND INVOLVEMENTS IN CERTAIN LEGAL PROCEEDINGS The response to this item is incorporated by reference from the discussion under the caption, "Relationships and Transactions with the Bank", in the Proxy Statement. The directors and officers had no involvement in any material legal proceedings. ITEM 10. MANAGEMENT COMPENSATION AND TRANSACTIONS The response to this item is incorporated by reference from the discussion under the caption entitled "Executive Compensation" in the Proxy Statement and the discussion concerning Section 16 Compliance therein. 57 58 INDEPENDENT AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF MEDFORD SAVINGS BANK: Under date of January 24, 1997, we reported on the consolidated balance sheets of Medford Savings Bank as of December 31, 1996 and 1995, 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, 1996, which are included in this Form F-2. In connection with our audit of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules III and V included in this Form F-2. These financial statement schedules are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ Wolf & Company, P.C. Boston, Massachusetts January 24, 1997 58 59 MEDFORD SAVINGS BANK SCHEDULE III LOANS AND LEASE FINANCING RECEIVABLES
December 31, ----------------------------- 1996 1995 ------------- ------------ (In thousands) Loans secured by real estate: Construction and land development $ 8,719 $ 8,591 Secured by farm land -- -- Secured by 1-4 family residential properties 404,078 376,670 Secured by multifamily residential properties 28,603 27,754 Secured by nonfarm, nonresidential properties 94,555 98,017 Loans to depository institutions -- -- Loans to finance agricultural production and other loans to farmers -- -- Commercial and industrial loans (1) 11,014 9,075 Loans to individuals for households, family and other personal expenditures: Credit card and related plans 722 700 Other 19,826 16,010 Loans to foreign governments and official institutions -- -- Obligations (other than securities) of states and political subdivisions in the U.S. -- -- Other loans -- -- -------- -------- 567,517 536,817 Deferred loan costs 569 73 -------- -------- $568,086 $536,890 ======== ========
(1) All commercial loans are to U.S. addresses 59 60 MEDFORD SAVINGS BANK SCHEDULE V INVESTMENTS IN, INCOME FROM DIVIDENDS, AND EQUITY IN EARNINGS OR LOSSES OF SUBSIDIARIES AND ASSOCIATED COMPANIES
For the Year Ended At December 31, 1996 December 31, 1996 ----------------------------------------------- ----------------------------- Percent of Equity in Voting Underlying Amount Bank's Stock Total Net of Share of Owned Investment Assets Dividends Earnings (1) ----------- -------------- -------------- ------------- ------------ Name of Issuer (In thousands) Medford Securities Corporation 100% $ 107,825 $ 107,825 $ -- $ 4,484 =========== ============== ============== ============= ============
For the Year Ended At December 31, 1995 December 31, 1995 ----------------------------------------------- ----------------------------- Percent of Equity in Voting Underlying Amount Bank's Stock Total Net of Share of Owned Investment Assets Dividends Earnings (1) ----------- -------------- -------------- ------------- ------------ Name of Issuer (In thousands) Medco Realty, Inc. (2) 100% $ 130 $ 130 $ -- $ 157 =========== ============== ============== ============= ============ Medford Securities Corporation 100% $ 103,834 $ 103,834 $ -- $ 2,126 =========== ============== ============== ============= ============
For the Year Ended At December 31, 1994 December 31, 1994 ----------------------------------------------- ----------------------------- Percent of Equity in Voting Underlying Amount Bank's Stock Total Net of Share of Owned Investment Assets Dividends Earnings (1) ----------- -------------- -------------- ------------- ------------ Name of Issuer (In thousands) Medco Realty, Inc. 100% $ (27) $ (27) $ -- $ 132 =========== ============== ============== ============= ============
(1) Exclusive of income tax effect. (2) Medco Realty, Inc. was dissolved in January 1996 and the Bank acquired all of its assets and liabilities. 60 61 PART IV ITEM 11. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM F-3 (a) CONTENTS: (1) Financial Statements: All Financial Statements are included as Part II, Item 8 of this Report. (2) Financial Statement Schedules: Schedules I, IV and VI are omitted because the required information is contained in or may be obtained from the consolidated financial statement or notes thereto included as Item 8 of this Report. Schedule II is omitted because it is not applicable. Schedules III and V are set forth in this Item 11 of this Report. (3) No new exhibits required by Item 11(c) are being filed with this report. (b) REPORTS ON FORM F-3: None filed during the fourth quarter of 1996. (c) EXHIBITS: (1) Articles of Incorporation and Bylaws (a) Amended and Restated Articles of Incorporation of Medford Savings Bank** (b) Amended and Restated Bylaws of Medford Savings Bank** (2) Instruments Defining the Rights of Security Holders (a) Amended and Restated Articles of Incorporation of Medford Savings Bank** (b) Amended and Restated Bylaws of Medford Savings Bank** (c) Specimen Certificate of Medford Savings Bank's Common Stock, $.50 per value per share** (d) Shareholder Rights Agreement dated September 22, 1993 by and between the Bank and State Street Bank and Trust Co., as Rights Agent*** (3) Material Contracts (a) Stock Option Plans: (i) Medford Savings Bank 1986 Stock Option Plan** (ii) Medford Savings Bank 1993 Stock Option Plan** (b) Employment Agreement with Arthur H. Meehan** (c) Termination Agreements (i) Termination Agreement with Arthur H. Meehan** (ii) Termination Agreement with William F. Rivers** (iii) Termination Agreement with George A. Bargamian** (iv) Termination Agreement with Joseph S. Winning** (v) Termination Agreement with Phillip W. Wong** (vi) Termination Agreement with Eric B. Loth* (d) Executive Supplemental Benefit Agreements (i) Executive Supplemental Benefit Agreement with Thomas F. O'Connor** (ii) Supplemental Executive Retirement Plan with Arthur H. Meehan* (e) Deferred Investment Plan for Outside Directors** * Filed pursuant to Item 11 of the Annual Report for the fiscal year ended December 31, 1994, previously filed with the FDIC. ** Filed pursuant to Item 11 of the Annual Report for the fiscal year ended December 31, 1993, previously filed with the FDIC. *** Filed as Exhibit 1 to the Registration Statement on Form F-10 filed with the FDIC on September 27, 1993. 61 62 (4) Statement Regarding Computation of Per Share Earnings Such computation can be clearly determined from the material contained in this Annual Report on Form F-2. (5) Statement Regarding Computation of Ratios As the Bank does not have any debt securities registered under Section 12 of the Act, no ratio of earnings to fixed charges appears in this Annual Report on Form F-2. (6) Annual Report to Security Holders The Medford Savings Bank 1996 Annual Report is furnished only for the information of the FDIC and is not deemed to be filed herewith. (7) Letter Regarding Change in Accounting Principles None. (8) Previously Unfiled Documents None. (9) List of all Subsidiaries of the Bank, the State or Other Jurisdiction of Incorporation or Organization of each, and the Names under which such Subsidiaries do Business Medford Securities Corporation - Incorporated in Massachusetts 62 63 Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDFORD SAVINGS BANK By: /s/Arthur H. Meehan ------------------------------------------------ Arthur H. Meehan Chairman, President, Chief Executive Officer and Director Date: February 25, 1997 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 Bank and in the capacities and on the dates indicated. /s/Arthur H. Meehan Chairman, President, Chief February 25, 1997 - - - ----------------------- Executive Officer and Director Arthur H. Meehan /s/Phillip W. Wong Senior Vice President February 25, 1997 - - - ----------------------- and Chief Financial Officer Phillip W. Wong /s/Edward D. Brickley Director February 25, 1997 - - - ----------------------- Edward D. Brickley /s/David L. Burke Director February 25, 1997 - - - ----------------------- David L. Burke - - - ----------------------- Director February 25, 1997 Paul J. Crowley /s/Mary L. Doherty Director February 25, 1997 - - - ----------------------- Mary L. Doherty - - - ----------------------- Director February 25, 1997 Edward J. Gaffey /s/Andrew D. Guthrie, Jr. Director February 25, 1997 - - - ----------------------- Andrew D. Guthrie, Jr. /s/Robert A. Havern, III Director February 25, 1997 - - - ----------------------- Robert A. Havern, III /s/Hugh J. MacIsaac Director February 25, 1997 - - - ----------------------- Hugh J. MacIsaac /s/Eugene R. Murray Clerk and Director February 25, 1997 - - - ----------------------- Eugene R. Murray /s/Francis D. Pizzella Director February 25, 1997 - - - ----------------------- Francis D. Pizzella
63 EX-99.2 10 QUARTERLY REPORT ON FORM F-4 QUARTER ENDED 3/31/97 1 Exhibit 99.2 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. 20429 FORM F-4 QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended March 31, 1997 F.D.I.C. Insurance Certificate No.23290 MEDFORD SAVINGS BANK (Exact name of bank as specified in its charter) MASSACHUSETTS (State or other jurisdiction of incorporation or organization) 04-1609330 (IRS Employer Identification Number) 29 HIGH STREET, MEDFORD, MASSACHUSETTS (Address of principal executive office) 02155 (Zip Code) (617) 395-7700 (Bank's telephone number, including area code) N/A (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the bank (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO The number of shares outstanding of the Bank's common stock as of May 9, 1997 - 4,539,648 2
TABLE OF CONTENTS ITEM 1 - FINANCIAL STATEMENTS PAGE Consolidated Balance Sheets............................................................1 Consolidated Statements of Income ...................................................2-3 Consolidated Statements of Changes in Stockholders' Equity ............................4 Consolidated Statements of Cash Flows................................................5-6 Notes to Consolidated Financial Statements.............................................7 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Financial Condition.........................................................8-15 Results of Operations..............................................................16-18 Liquidity and Capital Resources....................................................19-20 Asset and Liability Management........................................................21 Impact of Inflation...................................................................21 Signatures........................................................................... 22
3
MEDFORD SAVINGS BANK CONSOLIDATED BALANCE SHEETS March 31, Dec. 31, 1997 1996 -------------------------------- (In thousands) ASSETS Cash and due from banks $ 10,015 $ 11,900 Short-term investments 2,616 4,529 ----------- ----------- Cash and cash equivalents 12,631 16,429 ----------- ----------- Investment securities 439,867 424,966 Loans 570,589 568,086 Less allowance for loan losses (6,942) (7,231) ----------- ----------- Loans, net 563,647 560,855 ----------- ----------- Foreclosed real estate, net 356 276 Banking premises and equipment, net 10,829 10,896 Accrued interest receivable 9,485 9,291 Other assets 17,260 16,385 ----------- ----------- TOTAL ASSETS $ 1,054,075 $ 1,039,098 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 798,815 $ 792,141 Short-term borrowings 63,760 80,817 Long-term debt 92,647 67,647 Accrued taxes and expenses 4,330 3,701 Other liabilities 1,783 2,271 ----------- ----------- Total liabilities 961,335 964,577 ----------- ----------- Stockholders' equity: Serial preferred stock, $.10 par value, 5,000,000 shares authorized; none issued; -- -- Common stock, 15,000,000 shares authorized; $.50 par value, 4,539,648 and 4,534,648 shares issued, respectively 2,270 2,267 Additional paid-in capital 28,917 28,848 Retained earnings 63,648 61,634 ----------- ----------- 94,835 92,749 Net unrealized loss on securities available for sale, after tax effects (2,095) (228) ----------- ----------- Total stockholders' equity 92,740 92,521 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,054,075 $ 1,039,098 =========== =========== See accompanying notes to consolidated financial statements. 1
4
MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 1997 1996 ------------------------- (Dollars in thousands except per share amounts) Interest and dividend income: Interest and fees on loans $ 11,289 $10,823 Interest on debt securities 6,678 5,642 Dividend income 155 162 Interest on short-term investments 47 189 -------- ------- Total interest and dividend income 18,169 16,816 -------- ------- Interest expense: Interest on deposits 7,438 7,611 Interest on short-term borrowings 1,063 613 Interest on long-term debt 1,246 570 -------- ------- Total interest expense 9,747 8,794 -------- ------- Net interest income 8,422 8,022 Provision for loan losses 75 60 -------- ------- Net interest income, after provision for loan losses 8,347 7,962 -------- ------- Other income: Customer service fees 500 549 Gain on sales of securities, net 265 183 Miscellaneous 236 162 -------- ------- Total other income 1,001 894 -------- ------- Operating expenses: Salaries and employee benefits 2,565 2,406 Occupancy and equipment 607 509 Data Processing 330 359 Professional fees 109 136 Amortization of intangibles 304 320 Advertising and marketing 143 157 Other general and administrative 566 530 -------- ------- Total operating expenses 4,624 4,417 -------- ------- Income before income taxes 4,724 4,439 Provision for income taxes 1,893 1,742 -------- ------- Net income $ 2,831 $ 2,697 ======== ======= See accompanying notes to consolidated financial statements. (continued) 2
5 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF INCOME (concluded)
Three Months Ended March 31, 1997 1996 ------------------------------- (Dollars in thousands, except per share amounts) Earnings per share: Primary $0.60 $0.57 Fully Diluted $0.60 $0.57 Cash dividends declared per share $0.18 $0.17 Weighted average shares outstanding Primary 4,755,977 4,710,451 Fully Diluted 4,755,977 4,712,288
See accompanying notes to consolidated financial statements. 3 6
MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE MONTHS ENDED MARCH 31, 1997 AND 1996 Net Unrealized Additional Gain (Loss)on Common Paid-in Retained Securities Stock Capital Earnings Available for Sale Total ----- ------- -------- ------------------ ----- (In thousands) Balance at December 31, 1996 $ 2,267 $ 28,848 $ 61,634 $( 228) $ 92,521 Net income -- -- 2,831 2,831 Issuance of common stock under stock option plan and related income tax benefits 3 69 -- -- 72 Cash dividends declared ($.18 per share) -- -- (817) -- (817) Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- (1,867) (1,867) -------- -------- -------- -------- -------- Balance at March 31, 1997 $ 2,270 $ 28,917 $ 63,648 $ (2,095) $ 92,740 ======== ======== ======== ======== ========
Net Unrealized Additional Gain (Loss) on Common Paid-in Retained Securities Stock Capital Earnings Available for Sale Total ----- ------- -------- ------------------ ----- (In thousands) Balance at December 31, 1995 $ 2,212 $ 27,642 $ 54,966 $ (1,256) $ 86,076 Net income -- -- 2,697 -- 2,697 Issuance of common stock under stock option plan and related income tax benefits 53 1,058 -- -- 1,111 Cash dividends declared ($.17 per share) -- -- (770) -- (770) Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- (1,945) (1,945) -------- -------- -------- -------- -------- Balance at March 31, 1996 $ 2,265 $ 28,700 $ 56,893 $ (689) $ 87,169 ======== ======== ======== ======== ========
See accompanying notes to consolidated financial statements. 4 7
MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1997 1996 -------------------------------- (In thousands) Cash flows from operating activities: $ 2,831 $ 2,697 Net income Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan losses 75 60 Depreciation and amortization, net 401 524 Foreclosed real estate losses and provisions, net (1) 15 Gain on sales of securities, net (265) (183) Decrease (increase) in accrued interest receivable and other assets (198) 310 (Decrease)increase in accrued taxes and expenses and other liabilities 728 (527) --------- --------- Net cash provided by operating activities 3,571 2,896 --------- --------- Cash flows from investing activities: Maturities of investment securities available for sale 14,485 5,450 Purchases of investment securities available for sale (52,341) (68,456) Sales of investment securities available for sale 7,891 21,718 Maturities of investment securities held to maturity 11,000 10,750 Purchases of investment securities held to maturity and FHLBB stock (250) (144) Principal amortization of mortgage-backed investments 1,445 1,201 Loans originated and purchased, net of amortization and payoffs (3,108) 4,855 Purchases of bank premises and equipment, net 189 (60) Sales of, and principal payments received on, foreclosed real estate 128 -- --------- --------- Net cash used in investing activities (20,561) (24,686) --------- --------- (continued) See accompanying notes to consolidated financial statements. 5
8 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
Three Months Ended March 31, 1997 1996 --------------------------------- (In thousands) Cash Flows from financing activities: Net increase in deposits 6,674 (1,167) Net increase (decrease) in borrowings with maturities of three months or less (17,057) 8,206 Proceeds from short-term borrowings with maturities in excess of three months -- -- Proceeds from long-term debt 25,000 15,000 Issuance of common stock 26 585 Cash dividends paid (1,451) (1,194) -------- ------- Net cash provided by financing activities 13,192 23,764 -------- ------- Net change in cash and cash equivalents (3,798) 1,974 Cash and cash equivalents, beginning of period 16,429 28,770 -------- ------- Cash and cash equivalents, end of period $ 12,631 $ 30,744 ======== ======= See accompanying notes to consolidated financial statements. 6
9 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS THREE MONTHS ENDED MARCH 31, 1997 AND 1996 NOTE 1. BASIS OF PRESENTATION Certain amounts have been reclassified in the March 31, 1996 financial statements to conform to the 1997 presentation. The consolidated interim financial statements of Medford Savings Bank (the "Bank") and subsidiary presented herein are intended to be read in conjunction with the consolidated financial statements presented in its annual report for the year ended December 31, 1996. The consolidated financial information for the three months ended March 31, 1997 and 1996 is unaudited; however, in the opinion of management, the consolidated financial information reflects all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation in accordance with generally accepted accounting principles. Interim results are not necessarily indicative of results to be expected for the entire year. NOTE 2. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE Primary earnings per share computations include common stock and dilutive common stock equivalents attributable to outstanding stock options. Fully diluted earnings per share computations reflect the higher market price of the Bank's common stock at the end of the period, if applicable, and assume further dilution applicable to outstanding stock options. NOTE 3. COMMITMENTS At March 31, 1997 the Bank had outstanding commitments to originate residential and commercial real estate mortgage loans of approximately $12.6 million which are not reflected on the consolidated balance sheet. Unadvanced construction and commercial loan funds not included in the above amount totaled approximately $7.0 million at March 31, 1997. (Remainder of this page intentionally left blank) 7 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This Form F-4 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 Bank'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. Consolidated net income was $2.8 million, or $0.60 per share for the quarter ended March 31, 1997, an increase of 5.0% on a per share basis from $2.7 million or $0.57 per share for the same quarter in 1996. The annualized return on assets was 1.09% and the annualized return on equity was 12.29% for the first three months of 1997. The improved earnings for the three months ended March 31, 1997 was attributable in part to an increase of $400,000 in net interest income due to higher earning asset levels and an increase in net gains on the sale of securities of $82,000. Partially offsetting this improvement was a $207,000 increase in operating expenses due in large part to increases in salary and benefit costs and depreciation costs associated with the Bank's investment to upgrade technology and systems which was completed in the fourth quarter of 1996. As a percentage of average assets, operating expenses actually declined to 1.78% on an annualized basis from 1.82% experienced in the prior year. The Bank's provision for loan losses increased to $75,000 for the quarter ended March 31, 1997 from $60,000 for the same prior year quarter. Non-performing assets were $4,745,000 or 0.45% of total assets at March 31, 1997 compared to $5,422,000 or 0.55% of total assets at March 31, 1996. At March 31, 1997, the allowance for loan losses was $6,942,000 which represents approximately 158% coverage of non-accrual loans and 1.22% of total loans. The Bank had total assets of $1.1 billion, and total deposits of $798.8 million at March 31, 1997 compared to total assets of $1.0 billion, and total deposits of $792.1 million at December 31, 1996. Net loans of $563.6 million at March 31, 1997 increased from $560.9 million at December 31, 1996. Investment securities increased $14.9 million during the period to $439.9 million at March 31, 1997. 8 11 Stockholders' equity was $92.7 million at March 31, 1997, representing a book value of $20.43 per share. The Bank's primary capital to assets ratio at March 31, 1997 was 8.80% exceeding all regulatory requirements. A more detailed discussion and analysis of the Bank's financial condition and results of operations follows. (The remainder of this page intentionally left blank.) 9 12 INVESTMENT SECURITIES Investment securities consist of the following:
March 31, December 31, 1997 1996 ---- ---- (In thousands) Securities available for sale, at fair value $293,952 $268,379 Securities held to maturity, at amortized cost 139,669 150,591 Restricted equity securities: Federal Home Loan Bank stock 5,132 4,882 Massachusetts Savings Bank Life Insurance stock 1,114 1,114 -------- -------- $439,867 $424,966 ======== ========
The amortized cost and fair value of investment securities at March 31, 1997, and December 31, 1996 with gross unrealized gains and losses, follows:
March 31, 1997 ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- (In thousands) Securities Available for Sale Debt securities: State and municipal $ 67 $ 1 $ -- $ 68 Mortgage - backed 45,854 1 (1,004) 44,851 U.S. Government and federal agency 82,358 1 (1,729) 80,630 Other 162,399 272 (1,163) 161,508 -------- -------- -------- -------- Total debt securities 290,678 275 (3,896) 287,057 Marketable equity securities 6,799 376 (280) 6,895 -------- -------- -------- -------- Total securities available for sale $297,477 $ 651 $ (4,176) $293,952 ======== ======== ======== ======== Securities Held to Maturity U.S. Government and federal agency $130,934 $ 209 $ (645) $130,498 Other 8,735 10 (24) 8,721 -------- -------- -------- -------- Total securities held to maturity $139,669 $ 219 $ (669) $139,219 ======== ======== ======== ======== 10
13
December 31, 1996 ----------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value -------- -------- -------- -------- (In thousands) Securities Available for Sale Debt securities: State and municipal $ 88 $ 1 $ -- $ 89 Mortgage - backed 28,101 82 (369) 27,814 U.S. Government and federal agency 83,301 280 (930) 82,651 Other 150,774 745 (350) 151,169 -------- -------- -------- -------- 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 Other 8,723 32 -- 8,755 -------- -------- -------- -------- Total securities held to maturity $150,591 $ 554 $ (299) $150,846 ======== ======== ======== ========
The amortized cost and fair value of debt securities by contractual maturity at March 31, 1997 is as follows:
March 31, 1997 -------------------------------------------------------- Available for Sale Held to Maturity ------------------------ ------------------------- Amortized Fair Amortized Fair Cost Value Cost Value -------- -------- -------- -------- (In thousands) Within 1 year $ 52,754 $ 52,968 $ 59,919 $ 60,087 After 1 year through 5 years 192,070 189,238 79,750 79,132 -------- -------- -------- -------- 244,824 242,206 139,669 139,219 Mortgage - backed securities 45,854 44,851 -- -- -------- -------- -------- -------- $290,678 $287,057 $139,669 $139,219 ======== ======== ======== ======== 11
14 The amortized cost and fair value of debt securities by contractual maturity at December 31, 1996 is as follows:
December 31, 1996 -------------------------------------------------------- Available for Sale Held to Maturity ------------------------ ------------------------- Amortized Fair Amortized Fair Cost Value Cost Value -------- -------- -------- -------- (In thousands) Within 1 year $ 49,839 $ 50,084 $ 46,871 $ 47,068 After 1 year through 5 years 175,259 174,979 103,720 103,778 After 5 years through 10 years 9,065 8,846 -- -- -------- -------- -------- -------- 234,163 233,909 150,591 150,846 Mortgage - backed securities 28,101 27,814 -- -- -------- -------- -------- -------- $262,264 $261,723 $150,591 $150,846 ======== ======== ======== ========
Investment securities increased $14.9 million from $425.0 million at December 31, 1996 to $439.9 million at March 31, 1997. The increase was primarily in mortgage-backed securities and corporate bonds designated as available for sale. The investment in mortgage-backed securities was increased for the purpose of generating a higher yield in the investment portfolio. Borrowings from various sources are utilized to fund investment purchases. At March 31, 1997, the securities portfolio classified as "available for sale" reflects a $3.5 million depreciation in market value as a result of rising interest rates. In accordance with the Bank's asset-liability management strategies, investment securities are generally short-term with maturities of five years or less. (The remainder of this page intentionally left blank.) 12 15 LOANS A summary of the Bank's outstanding loan balances follows:
March 31, December 31, 1997 1996 --------- --------- (In thousands) Mortgage loans on real estate: Residential 1-4 family $380,695 $380,627 Commercial 123,095 123,158 Construction 16,348 18,155 Second mortgages 1,738 1,928 Equity lines of credit 21,094 21,169 --------- --------- 542,970 545,037 Less: Unadvanced loan funds (7,001) (9,436) --------- --------- 535,969 535,601 --------- --------- Other loans: Commercial loans 12,124 11,014 Personal loans 2,176 2,219 Education and other 19,327 18,329 --------- --------- 33,627 31,562 --------- --------- Add: Premium on loans acquired 316 354 Net deferred fees 677 569 --------- --------- Total loans 570,589 568,086 Less: Allowance for loan losses (6,942) (7,231) --------- --------- Loans, net $563,647 $560,855 ========= =========
The Bank's loan portfolio experienced a modest increase during the first three months of 1997 principally in the construction, commercial and education loans. All other loan categories remained stable from December 31, 1996 as new loan originations replaced amortization and payoffs for the period. The Bank continues to experience intense competition for loans within its geographic region. 13 16 NON-PERFORMING ASSETS It is the Bank's general policy to place on non-accrual status all loans when they become 90 days contractually delinquent or the collectability of principal or interest payments becomes doubtful. Interest accrual ceases, and all previously accrued but unpaid interest is reversed when a loan is placed on non-accrual status. Non-performing assets totaled $4.7 million at March 31, 1997, compared with $3.7 million at December 31, 1996. The principal balance of non-accrual loans was $4.4 million, or 0.42% of total assets, at March 31, 1997, compared to non-accrual loans of $3.4 million or 0.33% of total assets as December 31, 1996. The increase is the result of placing one borrower on non-accrual status as of March 31, 1997. Foreclosed real estate totaled $356,000 at March 31, 1997 compared to $276,000 at December 31, 1996. In accordance with SFAS No. 114, a loan is considered impaired, when, based on current information and events, it is probable that a borrower will be unable to meet the scheduled payments of principal or interest when due according to the original terms of the contractual loan agreement. It is the Bank's general policy to place impaired loans on non-accrual status when they become 90 days contractually delinquent. The principal balance of impaired loans was $3.6 million all of which were included in the balance of non-accrual loans at March 31, 1997. The loan loss reserve allocated to impaired loans at March 31, 1997 was $751,000. ALLOWANCE FOR LOAN LOSSES
Three Months Ended ------------------------ March 31, March 31, 1997 1996 ------- ------- (In thousands) Balance at the beginning of the period $ 7,231 $ 7,466 Provisions 75 60 Recoveries 28 68 Less: Charge-offs (392) (243) ------- ------- Balance at the end of the period $ 6,942 $ 7,351 ======= =======
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 generally, the level of non-performing loans, current economic conditions, trends in delinquency, and charge-offs, and the value of the underlying collateral. Ultimate loan losses may vary significantly from current estimates. 14 17 The allowance for loan losses was $6.9 million at March 31, 1997, a reserve coverage of 158% of non-accrual loans and 1.22% of total loans. At December 31, 1996, the allowance for loan losses was $7.2 million representing a 210.3% reserve coverage of non-accrual loans and 1.27% of total loans. Management considers the allowance for loan losses to be adequate at March 31, 1997, although there can be no assurance that the allowance is adequate or that additional provisions to the allowance for loan losses will not be necessary. DEPOSITS Total deposits increased $6.7 million from December 31, 1996 to $798.8 million at March 31, 1997. The Bank's strategy has been to maintain stable deposit rates and to grow deposit levels through selective core deposit and term deposit promotions. To retain core deposits, the Bank has been promoting the "ComboPlus" account which combines a statement savings and a demand account into one convenient account. This account has contributed to an increase in savings deposits by $5.0 million from December 31, 1996. The Bank put in place a special two-year term certificate promotion during the first quarter of 1997 intended to extend deposit maturities. As a result of this promotion, term certificates increased $6.9 million. Corporate money market deposits increased $1.6 million from December 31, 1996 as the Bank continues to offer competitive rates to attract new corporate accounts. Offsetting the increases in savings, money market and term certificate deposits was a decrease of $2.1 million in NOW accounts and $4.4 million in demand deposit accounts. The following table indicates the balances in various deposit accounts at the dates indicated.
March 31 December 31 1997 1996 -------- -------- (In thousands) Demand accounts $ 35,679 $ 40,124 NOW accounts 58,695 60,839 Savings & money market accounts 322,090 315,771 Term certificates 382,351 375,407 -------- -------- $798,815 $792,141 ======== ========
15 18 BORROWED FUNDS The Bank has selectively engaged in long-term borrowings from the FHLBB to fund loans and has entered into short-term repurchase agreements to fund investment securities purchases. Total borrowed funds increased to $156.4 million at March 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 and to increased net interest income. The Bank took advantage of relatively low interest rates to increase long term borrowings which were employed to fund the residential loan portfolio and purchases of mortgage-backed securities. STOCKHOLDERS' EQUITY The Bank's capital to assets ratio was 8.80% at March 31, 1997 compared with 8.90% at December 31, 1996. The FDIC imposes capital guidelines on the Bank. In addition to the capital ratio described above, 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 risk-weighted assets are then calculated. To be considered adequately capitalized, Banks must maintain a tier 1 risk-based capital ratio of 4.00% and a total risk-based capital ratio of 8.00%. At March 31, 1997, the Bank's tier 1 capital to risk-weighted assets was 14.76% and the Bank's tier 1 plus tier 2 capital, or total to risk-weighted assets was 15.93%. Massachusetts-chartered savings banks insured by the FDIC are required to maintain a leverage capital (tier 1 capital) to assets ratio of 3.00% to 5.00% of total assets, as adjusted, depending on the individual bank's rating. At March 31, 1997, the Bank's leverage capital ratio was 8.41% as defined by the FDIC. As a result of the foregoing leverage and risk-based capital ratios, the Bank is considered "well capitalized" under the FDIC's prompt corrective action guidelines. Book value at March 31, 1997 was $20.43 per share, compared with $20.40 per share at December 31, 1996. 16 19 RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED MARCH 31, 1997 AND 1996 INTEREST AND DIVIDEND INCOME Interest and dividend income from loans and investments for the first quarter in 1997 totaled $18.2 million, an increase of $1.4 million or 8.0% when compared to the same prior year quarter. Interest income for the three months ended March 31, 1996 was positively impacted by a $171,000 recovery of commercial real estate loan income on a loan that had been previously charged-off in a prior period. Average earning assets increased $90.7 million when the periods are compared, with $55.3 million of that amount from short and long term investment securities, and $35.4 million in loans. The yield on earning assets decreased to 7.19% for the first quarter in 1997 compared with 7.30% for the same quarter in 1996. The yield on investment securities increased to 6.22% from 6.20%, reflecting the purchase of additional investment securities and reinvestment of matured and sold investment securities at higher yields. Investment securities contributed $887,000 of additional interest and dividend income when comparing the first quarter of 1997 to the same prior year quarter. The increase in average balance on loans more than offset the decline in yield to 7.95% compared with 8.12%, contributing $466,000 of additional interest income on loans. The increase in interest income and average balance is primarily in residential 1-4 family mortgage loans, with a modest increase in commercial and education loans. Excluding the one-time commercial real estate interest income recovery in the first quarter of 1996, interest income on commercial real estate loans decreased $37,000, primarily as a result of a lower average balance. Changes in the mix of earning assets and higher funding costs reduced the net interest margin in the first quarter of 1997 to 3.29% from 3.47% in the same period in 1996. INTEREST EXPENSE Total interest expense for the three months ended March 31, 1997 was $9.7 million representing an increase of $953,000 or 10.8% over the same period in 1996. This is principally due to an increase of $80.0 million in average interest bearing liabilities. The average balance in deposits increased $2.6 million, and the average balance in borrowed funds increased $77.4 million. The Bank experienced a downward repricing on term certificates lowering the overall cost of deposits to 3.98% from 4.06% resulting in a savings of interest expense of $173,000 when comparing the first quarter in 1997 to the first quarter in 1996. As short-term borrowings with the FHLBB matured, they were replaced with longer term FHLBB borrowings to fund the growth in the residential loan portfolio. Repurchase agreements at favorable rates were used to fund increases in the investment portfolio. Interest expense on borrowings increased $1.1 million in the first quarter of 1997 when compared to the first quarter in 1996 due principally to the increase in average balance. The overall cost of interest bearing liabilities increased to 4.29% from 4.21% when the periods are compared, resulting in a reduction in the interest rate spread to 2.90% from 3.09%. 17 20
MEDFORD SAVINGS BANK INTEREST RATE SPREAD Three Months Ended March 31, --------- 1997 1996 ------- ------- Weighted average yield earned on: Short-term investments 5.01% 5.35% Investment securities 6.22 6.20 Loans 7.95 8.12 ------- ------- All earning assets 7.19% 7.30% ------- ------- Weighted average rate paid on: Deposits 3.98% 4.06% Borrowed funds 5.77 5.66 ------- ------- All interest-bearing liabilities 4.29% 4.21% ------- ------- Weighted average rate spread 2.90% 3.09% ------- ------- Net interest margin 3.29% 3.47% ======= ======= 18
21 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 generally, the level of non-performing loans, current economic conditions, trends in delinquency and charge-offs, and collateral values of the underlying security. Management considers the allowance for loan losses to be adequate at March 31, 1997, although there can be no assurance that the allowance is adequate or that additional provisions to the allowance for loan losses will not be necessary. The Bank recorded $75,000 in provisions for loan losses during the three months ended March 31, 1997, up from $60,000 for the comparable prior year period. Net loan charge-offs for the three months ended March 31, 1997 totalled to $364,000 as compared to $175,000 for the same prior year period. OTHER INCOME Other income, such as customer service fees and gains and losses on the sale of securities, increased 12.0% to $1.0 million in the first quarter of 1997 as compared to the first quarter of 1996, principally due to an increase in net gains on the sale of securities. OPERATING EXPENSES Operating expenses, including the net gain or loss from foreclosed real estate, was $4.6 million for the first quarter of 1997 compared with $4.4 million for the first quarter in 1996. Salary and benefit costs increased 6.6% from one year ago. Other increases include equipment depreciation resulting from the Bank's investment of $1.7 million in new technology in the third quarter of 1996. Despite the increase in operating expenses when comparing the two quarters, the efficiency ratio for the first quarter in 1997 was 47.5%, which is better than the industry average. 19 22 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 pledge U.S. Government securities to borrow from certain investment firms and the Mutual Savings Central Fund of Massachusetts. These various sources of liquidity are used to fund withdrawals, new loans, and investments. Management continually seeks to optimize 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 debt instruments maturing in five years or less reduces market risk in the bond portfolio while providing significant cash flow. For the three months ended March 31, 1997 cash flow from maturities and sales of securities was $33.4 million compared to cash flow from maturities and sales of securities of $37.9 million for the three months ended March 31, 1996. Principal payments on mortgage-backed investments during the three months ended March 31, 1997 and 1996 totalled $1.4 million and $1.2 million, respectively. During periods of high interest rates or active mortgage origination, maturities in the bond portfolio have provided significant liquidity at a lower cost than borrowings. Amortization and pay-offs of the loan portfolio contribute significant liquidity to the Bank. Traditionally, the amortization and payoffs have been reinvested into loans. When payoff rates exceed origination rates, excess liquidity from loan payoffs is shifted into the investment portfolio. The Bank also uses borrowed funds as a source of liquidity. These borrowings generally contribute toward funding over-all loan growth. At March 31, 1997 the Bank's outstanding borrowings from the FHLBB were $97.6 million, as compared to $67.1 million at March 31, 1996. The Bank also utilizes repurchase agreements as a source of funding when management deems market conditions to be conducive to such activities. The balance in repurchase agreements at March 31, 1997 was $57.2 million, as compared to $28.5 million at March 31, 1996. Commitments to originate residential and commercial real estate mortgage loans at March 31, 1997 excluding unadvanced construction funds of $7.0 million, was $12.6 million. Management believes that adequate liquidity is available to fund loan commitments utilizing deposits, loan amortization, maturities of securities, or borrowings. 20 23 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Purchases of securities during the three months ended March 31, 1997 totalled $52.6 million consisting of debt instruments maturing in less than five years and equities. This compares with purchases of $68.6 million for the three months ended March 31, 1996. Residential and commercial real estate mortgage loan origination for the three months ended March 31, 1997 totalled $13.5 million, compared with $11.6 million for the three months ended March 31, 1996. The Bank's capital position (total stockholders' equity) was $92.7 million or 8.80% of total assets at March 31, 1997 compared with $92.5 million or 8.90% of total assets at December 31, 1996. The Bank's capital position exceeds all regulatory requirements. (The remainder of this page intentionally left blank.) 21 24 ASSET-LIABILITY MANAGEMENT Through the Bank's Asset-Liability Management Committee ("ALCO"), which is comprised of certain senior and middle management personnel, the Bank 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 provide for optimum profitability and capital at prudent levels of liquidity and interest rate, credit, and market risk. It is ALCO's general policy to closely match the maturity or rate sensitivity of its assets and liabilities. In accordance with this policy, certain strategies have been implemented to improve the match between interest rate sensitive assets and liabilities. These strategies include, but are not limited to: daily monitoring of the Bank's changing cash requirements, with particular concentration on investment in short term securities; originating adjustable and fixed rate mortgage loans for the Bank's own portfolio; managing the cost and structure of deposits; and generally using matched borrowings to fund specific purchases of loan packages and large loan origination. Occasionally, management may choose to deviate from specific matching of maturities of assets and liabilities, if an attractive opportunity to enhance yields becomes available. The Bank actively manages its liability portfolio in order to effectively plan and manage growth and maturities of deposits. Management recognizes the need for strict attention to all deposits. Accordingly, plans for growth of all deposit types are reviewed regularly. Programs are in place which are designed to build multiple relationships with customers and to enhance the Bank's ability to retain deposits at controlled rates of interest, and management has adopted a policy of reviewing interest rates on an ongoing basis on all deposit accounts, in order to control deposit growth and interest costs. In addition to attracting deposits, the Bank has selectively borrowed funds using advances from the FHLBB and upon occasion, reverse repurchase agreements. These funds have generally been used to purchase loans typically having a matched repricing date. 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. 22 25 SIGNATURES Under to the requirements of the Securities Exchange Act of 1934, the Bank has duly caused this report to be on its behalf signed by the undersigned thereunto duly authorized. MEDFORD SAVINGS BANK Date: May 9, 1997 /s/ Arthur H. Meehan ------------------------------------------------ Arthur H. Meehan Chairman/President/CEO Date: May 9, 1997 /s/ Phillip W. Wong ------------------------------------------------- Phillip W. Wong Senior Vice President and Chief Financial Officer 23 EX-99.3 11 CURRENT REPORT ON FORM F-3 FILED ON 5/07/97 1 Exhibit 99.3 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. 20429 ----------------- FORM F-3 CURRENT REPORT Under Section 13 of the Securities Exchange Act of 1934 FOR THE MONTH OF APRIL, 1997 MEDFORD SAVINGS BANK (Exact name of bank as specified in charter) 29 HIGH STREET, MEDFORD, MASSACHUSETTS (Address of principal executive offices) (617) 395-7700 (Bank's telephone number, including area code) 2 Item 9 -- Submission of Matters to a Vote of Security Holders On April 28, 1997, Medford Savings Bank (the "Bank") held its Annual Meeting of Stockholders (the "Meeting"). There were 4,539,581 shares issued, outstanding and eligible to vote as of March 3, 1997. A total of 3,847,136 shares, or 84.746% of the eligible voting shares, were present in person or by proxy at the Meeting. At the Meeting, the stockholders elected the following three individuals as Directors of the Bank, with the following vote total for each nominee:
BROKER NON-VOTES NOMINEE FOR WITHHELD AND ABSTENTIONS - - - ------- --- -------- --------------- Edward D. Brickley 3,802,229.861 44,906.242 0 Robert A. Havern, III 3,806,958.157 40,177.946 0 Francis D. Pizzella 3,798,113.861 49,022.242 0
In addition to the above Directors elected at the Meeting, the Bank has seven Directors whose term of office as such continued after the Meeting: David L. Burke, Paul J. Crowley, Mary Lou Doherty, Edward J. Gaffey, Andrew D. Guthrie, Jr., Arthur H. Meehan, and Eugene R. Murray. At the Meeting, the stockholders also elected Eugene R. Murray as Clerk of the Bank. The number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes, as to Eugene R. Murray's election is as follows:
BROKER NON-VOTES FOR AGAINST AND ABSTENTIONS - - - --- ------- --------------- 3,801,282.168 25,760.866 20,093.069
1 3 SIGNATURES Under the requirements of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDFORD SAVINGS BANK Date: May 6, 1997 By: /s/ Arthur H. Meehan -------------------- Arthur H. Meehan Chairman, President and Chief Executive Officer 2 EX-99.4 12 QUARTERLY REPORT ON FORM F-4 QUARTER ENDED 6/30/97 1 EXHIBIT 99.4 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. 20429 FORM F-4 QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended June 30, 1997 F.D.I.C. Insurance Certificate No.23290 MEDFORD SAVINGS BANK (Exact name of bank as specified in its charter) MASSACHUSETTS (State or other jurisdiction of incorporation or organization) 04-1609330 (IRS Employer Identification Number) 29 HIGH STREET, MEDFORD, MASSACHUSETTS (Address of principal executive office) 02155 (Zip Code) (617) 395-7700 (Bank's telephone number, including area code) N/A (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the bank (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO The number of shares outstanding of the Bank's common stock as of August 12, 1997 - 4,541,148 2 TABLE OF CONTENTS
ITEM 1 - FINANCIAL STATEMENTS PAGE Consolidated Balance Sheets............................................................1 Consolidated Statements of Income .................................................. 2-5 Consolidated Statements of Changes in Stockholders' Equity ........................... 6 Consolidated Statements of Cash Flows................................................7-8 Notes to Consolidated Financial Statements.............................................9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Financial Condition........................................................10-18 Results of Operations..............................................................19-23 Liquidity and Capital Resources....................................................24-25 Asset and Liability Management........................................................26 Impact of Inflation...................................................................26 Other Events..........................................................................27 Signatures............................................................................28
3 MEDFORD SAVINGS BANK CONSOLIDATED BALANCE SHEETS
June 30, Dec. 31, 1997 1996 ---- ---- (In thousands) ASSETS Cash and due from banks $ 14,688 $ 11,900 Short-term investments 4,693 4,529 ----------- ----------- Cash and cash equivalents 19,381 16,429 ----------- ----------- Investment securities 451,731 424,966 Loans 572,304 568,086 Less allowance for loan losses (6,968) (7,231) ----------- ----------- Loans, net 565,336 560,855 ----------- ----------- Foreclosed real estate, net 79 276 Banking premises and equipment, net 10,734 10,896 Accrued interest receivable 9,001 9,291 Other assets 16,295 16,385 ----------- ----------- TOTAL ASSETS $ 1,072,557 $ 1,039,098 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 824,611 $ 792,141 Short-term borrowings 48,842 80,817 Long-term debt 97,439 67,647 Accrued taxes and expenses 3,449 3,701 Other liabilities 1,758 2,271 ----------- ----------- Total liabilities 976,099 946,577 ----------- ----------- Stockholders' equity: 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 28,924 28,848 Retained earnings 65,923 61,634 ----------- ----------- 97,118 92,749 Net unrealized loss on securities available for sale, after tax effects (660) (228) ----------- ----------- Total stockholders' equity 96,458 92,521 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,072,557 $ 1,039,098 =========== ===========
See accompanying notes to consolidated financial statements. 1 4 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 1997 1996 ---- ---- (Dollars in thousands, except per share amounts) Interest and dividend income: Interest and fees on loans $11,512 $10,696 Interest on debt securities 6,850 6,010 Dividend income 165 146 Interest on short-term investments 59 140 ------- ------- Total interest and dividend income 18,586 16,992 ------- ------- Interest expense: Interest on deposits 7,744 7,624 Interest on short-term borrowings 903 553 Interest on long-term debt 1,486 802 ------- ------- Total interest expense 10,133 8,979 ------- ------- Net interest income 8,453 8,013 Provision for loan losses 50 90 ------- ------- Net interest income, after provision for loan losses 8,403 7,923 ------- ------- Other income: Customer service fees 487 559 Gain on sales of securities, net 408 12 Gain on sales of loans, net 306 -- Miscellaneous 87 188 ------- ------- Total other income 1,288 759 ------- ------- Operating expenses: Salaries and employee benefits 2,529 2,430 Occupancy and equipment 549 475 Data Processing 369 436 Professional fees 153 138 Amortization of intangibles 302 312 Advertising and marketing 158 172 Other general and administrative 507 551 ------- ------- Total operating expenses 4,567 4,514 ------- ------- Income before income taxes 5,124 4,168 Provision for income taxes 2,032 1,632 ------- ------- Net income $ 3,092 $ 2,536 ======= =======
See accompanying notes to consolidated financial statements. (CONTINUED) 2 5 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF INCOME (concluded)
Three Months Ended June 30, 1997 1996 ---- ---- (Dollars in thousands, except per share amounts) Earnings per share: Primary $0.65 $0.54 Fully Diluted $0.65 $0.54 Cash dividends declared per share $0.18 $0.17 Weighted average shares outstanding Primary 4,752,688 4,716,570 Fully Diluted 4,764,222 4,727,419
See accompanying notes to consolidated financial statements. 3 6 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended June 30, 1997 1996 ---- ---- (Dollars in thousands, except per share amounts) Interest and dividend income: Interest and fees on loans $22,801 $21,519 Interest on debt securities 13,528 11,652 Dividend income 320 308 Interest on short-term investments 106 329 ------- ------- Total interest and dividend income 36,755 33.808 ------- ------- Interest expense: Interest on deposits 15,182 15,236 Interest on short-term borrowings 1,966 1,165 Interest on long-term debt 2,732 1,372 ------- ------- Total interest expense 19,880 17,773 ------- ------- Net interest income 16,875 16,035 Provision for loan losses 125 150 ------- ------- Net interest income, after provision for loan losses 16,750 15,885 ------- ------- Other income: Customer service fees 987 1,107 Gain on sales of securities, net 673 195 Gain on sales of loans, net 306 -- Miscellaneous 323 351 ------- ------- Total other income 2,289 1,653 ------- ------- Operating expenses: Salaries and employee benefits 5,094 4,836 Occupancy and equipment 1,155 984 Data Processing 699 795 Professional fees 263 274 Amortization of intangibles 606 632 Advertising and marketing 301 330 Other general and administrative 1,073 1,080 ------- ------- Total operating expenses 9,191 8,931 ------- ------- Income before income taxes 9,848 8,607 Provision for income taxes 3,925 3,374 ------- ------- Net income $ 5,923 $ 5,233 ======= =======
See accompanying notes to consolidated financial statements. (CONTINUED) 4 7 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF INCOME (concluded)
Six Months Ended June 30, 1997 1996 ---- ---- (Dollars in thousands, except per share amounts) Earnings per share: Primary $1.25 $1.11 Fully Diluted $1.24 $1.11 Cash dividends declared per share $0.36 $0.34 Weighted average shares outstanding Primary 4,754,384 4,713,499 Fully Diluted 4,763,757 4,722,536
See accompanying notes to consolidated financial statements. 5 8 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1997 AND 1996
Net Unrealized Additional Gain (Loss)on Common Paid-in Retained Securities Stock Capital Earnings Available for Sale Total ----- ------- -------- ------------------ ----- (In thousands) Balance at December 31, 1996 $2,267 $28,848 $ 61,634 $ (228) $ 92,521 Net income -- -- 5,923 5,923 Issuance of common stock under stock option plan and related income tax benefits 4 76 -- -- 80 Cash dividends declared ($.36 per share) -- -- (1,634) -- (1,634) Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- (432) (432) ------ ------- -------- ------- -------- Balance at June 30, 1997 $2,271 $28,924 $ 65,923 $ (660) $ 96,458 ====== ======= ======== ======= ========
Net Unrealized Additional Gain (Loss)on Common Paid-in Retained Securities Stock Capital Earnings Available for Sale Total ----- ------- -------- ------------------ ----- (In thousands) Balance at December 31, 1995 $2,212 $27,642 $ 54,966 $ 1,256 $ 86,076 Net income -- -- 5,233 -- 5,233 Issuance of common stock under stock option plan and related income tax benefits 54 1,129 -- -- 1,183 Cash dividends declared ($.34 per share) -- -- (1,540) -- (1,540) Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- (2,612) (2,612) ------ ------- -------- ------- -------- Balance at June 30, 1996 $2,266 $28,771 $ 58,659 $(1,356) $ 88,340 ====== ======= ======== ======= ========
See accompanying notes to consolidated financial statements. 6 9 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1997 1996 ---- ---- (In thousands) Cash flows from operating activities: $ 5,923 $ 5,233 Net income Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan losses 125 150 Depreciation and amortization, net 1,216 1,120 Foreclosed real estate losses and provisions, net (22) 31 Gain on sales of securities, net (673) (195) Gain on sales of loans, net (306) -- Loss on sale of fixed assets 53 9 Decrease (increase) in accrued interest receivable and other assets 159 (109) Decrease in accrued taxes and expenses and other liabilities (179) (986) --------- -------- Net cash provided by operating activities 6,296 5,253 --------- -------- Cash flows from investing activities: Maturities of investment securities available for sale 33,685 14,450 Purchases of investment securities available for sale (111,837) (79,076) Sales of investment securities available for sale 18,626 33,708 Maturities of investment securities held to maturity 30,034 24,778 Purchases of investment securities held to maturity and FHLBB stock (250) (34,611) Principal amortization of mortgage-backed investments 2,901 2,604 Proceeds from sale of loans, net 11,613 -- Loans originated and purchased, net of amortization and payoffs (16,187) (8,521) Purchases of bank premises and equipment, net (407) (165) Sales of, and principal payments received on, foreclosed real estate 425 300 --------- -------- Net cash used in investing activities (31,397) (46,533) --------- --------
(continued) 7 10 See accompanying notes to consolidated financial statements. MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
Six Months Ended June 30, 1997 1996 ---- ---- (In thousands) Cash Flows from financing activities: Net increase in deposits 32,470 13,317 Net decrease in borrowings with maturities of three months or less (31,975) (7,162) Proceeds from long-term debt 29,792 30,000 Issuance of common stock 34 659 Cash dividends paid (2,268) (1,964) -------- -------- Net cash provided by financing activities 28,053 34,850 -------- -------- Net change in cash and cash equivalents 2,952 (6,430) Cash and cash equivalents, beginning of period 16,429 28,770 -------- -------- Cash and cash equivalents, end of period $ 19,381 $ 22,340 ======== ========
See accompanying notes to consolidated financial statements. 8 11 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SIX MONTHS ENDED JUNE 30, 1997 AND 1996 NOTE 1. BASIS OF PRESENTATION Certain amounts have been reclassified in the June 30, 1996 financial statements to conform to the 1997 presentation. The consolidated interim financial statements of Medford Savings Bank (the "Bank") and subsidiary presented herein are intended to be read in conjunction with the consolidated financial statements presented in its annual report for the year ended December 31, 1996. The consolidated financial information for the three and six months ended June 30, 1997 and 1996 is unaudited; however, in the opinion of management, the consolidated financial information reflects all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation in accordance with generally accepted accounting principles. Interim results are not necessarily indicative of results to be expected for the entire year. NOTE 2. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE Primary earnings per share computations include common stock and dilutive common stock equivalents attributable to outstanding stock options. Fully diluted earnings per share computations reflect the higher market price of the Bank's common stock at the end of the period, if applicable, and assume further dilution applicable to outstanding stock options. NOTE 3. COMMITMENTS At June 30, 1997 the Bank had outstanding commitments to originate new residential and commercial real estate mortgage loans of approximately $19.9 million, which are not reflected on the consolidated balance sheet. Unadvanced funds on equity lines were $22.8 million, unadvanced construction loan funds were $7.8 million, and unadvanced funds on commercial lines of credit were $7.6 million at June 30, 1997. (Remainder of this page intentionally left blank) 9 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This form F-4 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 Bank'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. Consolidated net income was $3.1 million, or $.65 per share for the three months ended June 30, 1997, a 22% increase when compared to $2.5 million or $.54 per share for the same quarter in 1996. For the second quarter of 1997, the annualized return on assets was 1.16% and the annualized return on equity was 13.17%, compared to 1.04% and 11.66% for the comparable periods in 1996. Consolidated net income for the first six months of 1997 was $5.9 million or $1.25 per share ($1.24 per share on a fully diluted basis) reflecting a 13% increase when compared to $5.2 million or $1.11 per share for the comparable period last year. The annualized return on assets was 1.13% and the annualized return on equity was 12.73% for the six months ended June 30, 1997, compared to 1.08% and 12.07% for the comparable periods in 1996. The convergence of one-time, special events and continuing management of resources resulted in exceptional financial results for the quarter and year-to-date. During the second quarter of 1997, the Bank sold a former branch property resulting in a $53,000 loss and sold equity holdings in bank stocks producing net gains of $287,000. The Bank began a program to liquidate lower yielding U.S. Treasury securities, resulting in net gains of $121,000 and reinvested those proceeds into higher yielding mortgage-backed securities to improve net interest income The Bank also sold $11 million of education loans, and recorded net gains of $306,000. These special events during the quarter brought year-to-date net gains on the sale of assets to $926,000. The gains from the sale of assets in addition to increased net interest income for the quarter and year-to-date, more than offset the increase in operating expenses and income taxes. 10 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The provision for loan losses was decreased to $50,000 for the quarter and $125,000 for the six months ended June 30, 1997, compared to $90,000 and $150,000 for the three and six months ended June 30, 1996. Other real estate owned property decreased from $276,000 at December 31, 1996 to $79,000 at June 30, 1997. Total non-performing assets were $3.9 million at June 30, 1997 or .37% of total assets, compared to $3.7 million or .36% at December 31, 1996. The allowance for loans losses at June 30, 1997 was $7.0 representing 176% of non-performing assets compared with $7.2 million representing 196% of non-performing assets at December 31, 1996. As of June 30, 1997, loans increased $4.2 million, investments increased $26.8 million, deposits increased $32.5 million, short-term borrowings decreased $32.0 million, and long-term borrowings increased $29.8 million from December 31, 1996. The Bank had total assets of $1.1 billion, and total deposits of $824.6 million at June 30, 1997. Stockholders equity was $96.5 million representing a book value of $21.24 per share, and a capital to assets ratio of 8.99%, exceeding all regulatory requirements. A more detailed discussion and analysis of the Bank's financial condition and results of operations follows. (The remainder of this page intentionally left blank.) 11 14 INVESTMENT SECURITIES Investment securities consist of the following:
June 30, December 31, 1997 1996 ---- ---- (In thousands) Securities available for sale, at fair value $324,756 $268,379 Securities held to maturity, at amortized cost 120,729 150,591 Restricted equity securities: Federal Home Loan Bank stock 5,132 4,882 Massachusetts Savings Bank Life Insurance stock 1,114 1,114 -------- -------- $451,731 $424,966 ======== ========
The amortized cost and fair value of investment securities, excluding restricted securities, at June 30, 1997, and December 31, 1996 with gross unrealized gains and losses, follows:
June 30, 1997 --------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In thousands) Securities Available for Sale Debt securities: State and municipal $ 52 $ 1 $ -- $ 53 Mortgage - backed 75,979 2 (330) 75,651 U.S. Government and federal agency 82,338 122 (969) 81,491 Other 160,891 450 (412) 160,929 -------- ---- ------- -------- Total debt securities 319,260 575 (1,711) 318,124 Marketable equity securities 6,646 90 (104) 6,632 -------- ---- ------- -------- Total securities available for sale $325,906 $665 $(1,815) $324,756 ======== ==== ======= ======== Securities Held to Maturity U.S. Government and federal agency $111,982 $273 $ (210) $112,045 Other 8,747 17 (1) 8,763 -------- ---- ------- -------- Total securities held to maturity $120,729 $290 $ (211) $120,808 ======== ==== ======= ========
12 15
December 31, 1996 ----------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In thousands) Securities Available for Sale Debt securities: State and municipal $ 88 $ 1 $ -- $ 89 Mortgage - backed 28,101 82 (369) 27,814 U.S. Government and federal agency 83,301 280 (930) 82,651 Other 150,774 745 (350) 151,169 -------- ------ ------- -------- 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 Other 8,723 32 -- 8,755 -------- ------ ------- -------- Total securities held to maturity $150,591 $ 554 $ (299) $150,846 ======== ====== ======= ========
The amortized cost and fair value of debt securities by contractual maturity at June 30, 1997 is as follows:
June 30, 1997 ------------------------------------------------------- Available for Sale Held to Maturity ----------------------- ----------------------- Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- (In thousands) Within 1 year $ 44,615 $ 44,765 $ 62,923 $ 63,115 After 1 year through 5 years 198,666 197,708 57,806 57,693 -------- -------- -------- -------- 243,281 242,473 120,729 120,808 Mortgage - backed securities 75,979 75,651 -- -- -------- -------- -------- -------- $319,260 $318,124 $120,729 $120,808 ======== ======== ======== ========
13 16 The amortized cost and fair value of debt securities by contractual maturity at December 31, 1996 is as follows:
December 31, 1996 ------------------------------------------------------- Available for Sale Held to Maturity ------------------------- ------------------------ Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- (In thousands) Within 1 year $ 49,839 $ 50,084 $ 46,871 $ 47,068 After 1 year through 5 years 175,259 174,979 103,720 103,778 After 5 years through 10 years 9,065 8,846 -- -- -------- -------- -------- -------- 234,163 233,909 150,591 150,846 Mortgage - backed securities 28,101 27,814 -- -- -------- -------- -------- -------- $262,264 $261,723 $150,591 $150,846 ======== ======== ======== ========
Investment securities increased $26.8 million from $425.0 million at December 31, 1996 to $451.7 million at June 30, 1997. To improve the investment portfolio yield, management implemented a program of replacing U.S. Treasury securities as they matured or were sold, with mortgage-backed securities and corporate bonds. In addition to the sale of $11 million in student loans, borrowings from various sources were utilized to fund investment purchases. At June 30, 1997, the securities portfolio classified as "available for sale" reflected a $1.2 million depreciation in market value as a result of fluctuations in interest rates. In accordance with the Bank's asset-liability management strategies, investment securities are generally short-term with maturities of five years or less. (The remainder of this page intentionally left blank.) 14 17 LOANS A summary of the Bank's outstanding loan balances follows:
June 30, December 31, 1997 1996 ---- ---- (In thousands) Mortgage loans on real estate: Residential 1-4 family $ 390,731 $ 380,627 Commercial 122,058 123,158 Construction 16,975 18,155 Second mortgages 1,707 1,928 Equity lines of credit 21,532 21,169 --------- --------- 553,003 545,037 Less: Unadvanced construction loan funds (7,819) (9,436) --------- --------- 545,184 535,601 --------- --------- Other loans: Commercial loans 15,734 11,014 Personal loans 2,423 2,219 Education and other 7,945 18,329 --------- --------- 26,102 31,562 --------- --------- Add: Premium on loans acquired 301 354 Net deferred fees 717 569 --------- --------- Total loans 572,304 568,086 Less: Allowance for loan losses (6,968) (7,231) --------- --------- Loans, net $ 565,336 $ 560,855 ========= =========
Loans experienced a modest increase for the first six months of 1997, principally in residential 1-4 family and commercial loans. The 42.9% increase in commercial loans is the result of intensified marketing efforts for asset based lending opportunities. The Bank sold $11 million of education loans in the second quarter of 1997 and recorded a net gain on sale of $306,000. It is the Bank's intention to sell education loans in the repayment stage as conditions warrant. All other loan categories remained stable from December 31, 1996 as new loan originations replaced amortization and payoffs for the period. The Bank continues to experience intense competition for loans within its geographic region despite improvement in the regional economy. 15 18 NON-PERFORMING ASSETS It is the Bank's general policy to place on non-accrual status all loans when they become 90 days contractually delinquent or the collectability of principal or interest payments becomes doubtful. Interest accrual ceases, and all previously accrued but unpaid interest is reversed when a loan is placed on non-accrual status. Non-performing assets totaled $3.9 million at June 30, 1997, compared with $3.7 million at December 31, 1996. The principal balance of non-accrual loans was $3.9 million, or 0.36% of total assets, at June 30, 1997, compared to $3.4 million or 0.33% of total assets at December 31, 1996. Foreclosed real estate totaled $79,000 at June 30, 1997 compared to $276,000 at December 31, 1996. In accordance with SFAS No. 114, a loan is considered impaired, when, based on current information and events, it is probable that a borrower will be unable to meet the scheduled payments of principal or interest when due according to the original terms of the contractual loan agreement. The principal balance of impaired loans was $3.6 million all of which were included in the balance of non-accrual loans at June 30, 1997. The loan loss reserve allocated to impaired loans at June 30, 1997 was $762,000. ALLOWANCE FOR LOAN LOSSES
Six Months Ended ------------------------- June 30, June 30, 1997 1996 ---- ---- (In thousands) Balance at the beginning of the period $ 7,231 $ 7,466 Provisions 125 150 Recoveries 41 83 Less: Charge-offs (429) (329) ------- ------- Balance at the end of the period $ 6,968 $ 7,370 ======= =======
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 generally, the level of non-performing loans, current economic conditions, trends in delinquency, and charge-offs, and the value of the underlying collateral. Ultimate loan losses may vary significantly from current estimates. 16 19 The allowance for loan losses was $7.0 million at June 30, 1997, a reserve coverage of 180.1% of non-accrual loans and 1.22% of total loans. At December 31, 1996, the allowance for loan losses was $7.2 million representing a 210.3% reserve coverage of non-accrual loans and 1.27% of total loans. Management considers the allowance for loan losses to be adequate at June 30, 1997, although there can be no assurance that the allowance is adequate or that additional provisions to the allowance for loan losses will not be necessary. DEPOSITS Total deposits increased $32.5 million from December 31, 1996 levels to $824.6 million at June 30, 1997. The Bank's strategy has been to maintain stable deposit rates and to grow deposit levels through selective core deposit and term deposit promotions. To retain core deposits, the Bank has been promoting the "ComboPlus" account which combines a statement savings and a demand account into one convenient account. This account has contributed to an increase in savings and demand deposits. The Bank put in place a special two-year term certificate promotion during the first six months of 1997 intended to extend deposit maturities and attract new customer accounts. As a result of this promotion, term certificates of deposit increased $30.9 million. Money market deposits increased from December 31, 1996 as the Bank continues to offer competitive rates to attract new corporate accounts. The following table indicates the balances in various deposit accounts at the dates indicated.
June 30, December 31, 1997 1996 ---- ---- (In thousands) Demand accounts $ 42,495 $ 40,124 NOW accounts 57,489 60,839 Savings & money market accounts 318,288 315,771 Term certificates 406,339 375,407 -------- -------- $824,611 $792,141 ======== ========
17 20 BORROWED FUNDS The Bank has selectively engaged in long-term borrowings to fund loans and has entered into short-term repurchase agreements to fund investment securities purchases. Total borrowed funds decreased to $146.3 million at June 30, 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 shift into long-term borrowings which were employed to fund the residential loan portfolio and purchases of mortgage-backed securities. STOCKHOLDERS' EQUITY The Bank's capital to assets ratio was 8.99% at June 30, 1997 compared with 8.90% at December 31, 1996. The FDIC imposes capital guidelines on the Bank. In addition to the capital ratio described above, 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 risk-weighted assets are then calculated. To be considered adequately capitalized, Banks must maintain a tier 1 risk-based capital ratio of 4.00% and a total risk-based capital ratio of 8.00%. At June 30, 1997, the Bank's tier 1 capital to risk-weighted assets was 14.89% and the Bank's tier 1 plus tier 2 capital, or total to risk-weighted assets was 16.03%. Massachusetts-chartered savings banks insured by the FDIC are required to maintain a leverage capital (tier 1 capital) to assets ratio of 3.00% to 5.00% of total assets, as adjusted, depending on the individual bank's rating. At June 30, 1997, the Bank's leverage capital ratio was 8.54% as defined by the FDIC. As a result of the foregoing leverage and risk-based capital ratios, the Bank is considered "well capitalized" under the FDIC's prompt corrective action guidelines. Book value at June 30, 1997 was $21.24 per share, compared with $20.40 per share at December 31, 1996. 18 21 RESULTS OF OPERATIONS NET INTEREST INCOME Interest and dividend income from loans and investments increased 9.4% or $1.6 million to $18.6 million for the second quarter in 1997 when compared to the same quarter in 1996. Average earning assets increased $81.0 million, or 8.6% when the prior periods are compared with $44.4 million coming from short and long-term investment securities and $36.6 million coming from loans. The yield on earning assets which increased to 7.24% for the second quarter in 1997, was the result of higher yields on investment securities and loans. The yield on investment securities increased to 6.25% from 6.18%, reflecting the purchase of additional higher yielding investment securities and reinvestment of matured and sold investment securities at higher yields. Investment securities contributed $778,000 of additional interest and dividend income when comparing the second quarter of 1997 to the second quarter in 1996. The increase in the average balance on loans; coupled with an increase in the weighted average yield on loans to 8.04% from 7.98%, contributed $816,000 of additional interest income on loans. The principal increase in interest income was from residential 1-4 family mortgage loans as loans repriced upward and new loans were originated at higher rates. Increased levels of commercial and education loans also contributed to the increase in interest income on loans. Total interest expense for the three months ended June 30, 1997 was $10.1 million reflecting an increase of $1.1 million or 12.9% over the same period in 1996. This was principally due to an increase of $74.1 million in average interest bearing liabilities over the comparable prior year period. This increase can be attributed to the average balance in deposits increasing $9.3 million, and the average balance in borrowed funds increasing $64.8 million. The Bank experienced a downward repricing on term certificates offsetting a modest increase in the higher savings rate paid on "ComboPlus" statement savings deposits, thus maintaining the overall cost of deposits at 4.04%; level with the comparable prior year period. Overall, interest expense on deposits increased $120,000. As short-term borrowings matured, they were replaced with longer term FHLBB borrowings to fund the growth in the residential loan portfolio. Repurchase agreements at favorable rates were used to fund increases in the investment portfolio. Interest expense on borrowed funds increased $1.0 million in the second quarter of 1997 when compared to the second quarter in 1996. The overall cost of interest bearing liabilities increased to 4.36% from 4.21% when comparing the two quarters. Net interest income increased 5.5% or $440,000 to $8.5 million despite a decline in the interest rate spread and net interest margin when comparing the second quarter in 1997 to the same quarter in 1996. This is primarily due to increased levels of earning assets. While the yield on earning assets increased 5 basis points when comparing the second quarter in 1997 to the second quarter in 1996, this increase was more than offset by a 15 basis point increase in the cost of interest bearing liabilities. This resulted in a reduction of the net interest margin and interest rate spread to 3.30% and 2.88% respectively for the three months ended June 30, 1997, compared with 3.38% and 2.98% for the three months ended June 30, 1996. 19 22 RESULTS OF OPERATIONS (continued) NET INTEREST INCOME Interest and dividend income from loans and investments for the first six months of 1997 totalled $36.8 million, an increase of $2.9 million or 8.7% from the same prior year period. The increase in average earning assets of $85.9 million, or 9.2% can be attributed to a $49.9 million increase in short and long-term investment securities, and a $36.0 million increase in loans. The yield on earning assets declined from 7.24% for the six months ended June 30, 1996 to 7.21% for the six months ended June 30, 1997, principally due to a lower yield on commercial real estate loans. Nevertheless, interest income on loans for the six months ended June 30, 1997 increased $1.3 million over prior year. An increase in the yield on investment securities from 6.19% to 6.24%, in addition to higher balances, contributed $1.7 million of additional interest income over the prior year period. Interest income for the six months ending June 30, 1996 also was positively impacted by a $171,000 recovery of commercial real estate loan income on a loan that had been previously charged-off in a prior period. Total interest expense increased $2.1 million or 11.9% over the comparable period in 1996 to $19.9 million for the six months ended June 30, 1997. The increase is principally due to increased levels of borrowed funds. An increase over the comparable period in 1996 of $71 million for the average balance in borrowings, in addition to a 31 basis point increase in the rate paid, increased interest expense on borrowed funds by $2.2 million. The weighted average rate paid on deposits declined to 4.01% from 4.05% in the prior year. The lower rate paid on deposits more than offset the increased average balance, thus decreasing interest expense on deposits by $54,000 when comparing the six month periods year to year. The Bank's overall cost of funds for the six months ended June 30, 1997 increased to 4.33% from 4.21%. Net interest income increased 5.2% or $840,000 to $16.9 million despite a decline in the interest rate spread and net interest margin when comparing the six months ended June 30, 1997 to the six months ended June 30, 1996. This is primarily due to increased levels of earning assets. The decrease in the yield on earning assets of 3 basis points, in addition to a 12 basis point increase in the cost of funds resulted in a decline in the net interest margin and interest rate spread to 3.29% and 2.88%, respectively, for the first six months of 1997 compared to 3.42% and 3.03% for the prior year period. 20 23 MEDFORD SAVINGS BANK INTEREST RATE SPREAD
Three Months Ended June 30, ------------------- 1997 1996 ---- ---- Weighted average yield earned on: Short-term investments 5.38% 5.15% Investment securities 6.25 6.18 Loans 8.04 7.98 ---- ---- All earning assets 7.24% 7.19% ---- ---- Weighted average rate paid on: Deposits 4.04% 4.04% Borrowed funds 5.88 5.49 ---- ---- All interest-bearing liabilities 4.36% 4.21% ---- ---- Weighted average rate spread 2.88% 2.98% ---- ---- Net interest margin 3.30% 3.38% ==== ====
21 24 MEDFORD SAVINGS BANK INTEREST RATE SPREAD
Six Months Ended June 30, ------------------ 1997 1996 ---- ---- Weighted average yield earned on: Short-term investments 5.21% 5.26% Investment securities 6.24 6.19 Loans 7.99 8.05 ---- ---- All earning assets 7.21% 7.24% ---- ---- Weighted average rate paid on: Deposits 4.01% 4.05% Borrowed funds 5.84 5.53 ---- ---- All interest-bearing liabilities 4.33% 4.21% ---- ---- Weighted average rate spread 2.88% 3.03% ---- ---- Net interest margin 3.29% 3.42% ==== ====
22 25 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 generally, the level of non-performing loans, current economic conditions, trends in delinquency and charge-offs, and collateral values of the underlying security. Management considers the allowance for loan losses to be adequate at June 30, 1997, although there can be no assurance that the allowance is adequate or that additional provisions to the allowance for loan losses will not be necessary. The Bank recorded $50,000 and $125,000 in provisions for loan losses during the three and six months ended June 30, 1997, down from $90,000 and $150,000 for the comparable prior year periods. Net loan charge-offs for the three and six months ended June 30, 1997 totalled $24,000 and $388,000, as compared to $72,000 and $246,000 for the same periods in 1996. OTHER INCOME Other income, such as customer service fees and gains and losses on the sale of assets, increased $529,000 to $1.3 million in the second quarter of 1997 as compared to the second quarter of 1996. The increase was principally due to $396,000 in additional net gains on the sale of securities, and $306,000 in net gains on the sale of loans over the comparable period in 1996, partially offset by a $53,000 net loss on the sale of a former branch property, and a $72,000 reduction in customer service fees. Other income increased $636,000 to $2.3 million for the first six months of 1997 when compared to the first six months of 1996. The increase is principally attributable to $478,000 of additional net gains on the sale of securities and $306,000 in net gains on the sale of loans over the comparable period in 1996, offset by $44,000 increases in losses on the sale of fixed assets and a $120,000 reduction in customer service fees. OPERATING EXPENSES Operating expenses were $4.6 million and $9.2 million for the three and six months ended June 30, 1997 compared to $4.5 million and $8.9 million for the same periods in 1996. The most significant increases were in salary and benefit costs, which increased 4.1%, and 5.3%, respectively, when comparing the three and six month periods ended June 30, 1997 and 1996. Other increases within these periods include equipment depreciation resulting from the Bank's investment of $1.7 million in new technology in the third quarter of 1996 and an additional $175,000 in the second quarter of 1997 for a telephone banking center. The increased occupancy and equipment costs are for the most part offset by lower data processing costs as the Bank improves operating efficiencies. The Bank's annualized expense ratio which is the ratio of non-interest expense as a percentage of average assets was 1.73% for the six months ended June 30, 1997. The Bank continues to focus on cost containment with the intent to be a low cost provider 23 26 of high quality banking products 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 pledge U.S. Government securities to borrow from certain investment firms and the Mutual Savings Central Fund of Massachusetts. These various sources of liquidity are used to fund withdrawals, new loans, and investments. Management continually seeks to optimize 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 debt instruments maturing in five years or less reduces market risk in the bond portfolio while providing significant cash flow. For the first six months of 1997, cash flow from maturities and sales of securities was $82.3 million compared to cash flow from maturities and sales of securities of $72.9 million for the first six months of 1996. Principal payments received on mortgage-backed investments during the six months ended June 30, 1997 and 1996 totalled $2.9 million and $2.6 million, respectively. During periods of high interest rates maturities in the bond portfolio have provided significant liquidity at a lower cost than borrowings. Amortization and pay-offs of the loan portfolio contribute significant liquidity to the Bank. Traditionally, the amortization and payoffs have been reinvested into loans. When payoff rates exceed origination rates, excess liquidity from loan payoffs is shifted into the investment portfolio. The Bank also uses borrowed funds as a source of liquidity. These borrowings generally contribute toward funding over-all loan growth. At June 30, 1997 the Bank's outstanding borrowings from the FHLBB were $97.4 million, as compared to $87.1 million at June 30, 1996. The Bank also utilizes repurchase agreements as a source of funding when management deems market conditions to be conducive to such activities. The balance in repurchase agreements at June 30, 1997 was $47.6 million, as compared to $6.7 million at June 30, 1996. Commitments to originate residential and commercial real estate mortgage loans at June 30, 1997 excluding unadvanced construction funds of $7.8 million, was $19.9 million. Management believes that adequate liquidity is available to fund loan commitments utilizing deposits, loan amortization, maturities of securities, or borrowings. 24 27 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Purchases of securities during the six months ended June 30, 1997 totalled $112.1 million consisting of debt instruments maturing in less than five years and equities. This compares with purchases of $113.7 million for the six months ended June 30, 1996. Residential and commercial real estate mortgage loan origination for the six months ended June 30, 1997 totalled $46.9 million, compared with $44.7 million for the six months ended June 30, 1996. The Bank also purchased residential 1-4 family loans amounting to $1.2 million from a third party during the first six months of 1997. The Bank's capital position (total stockholders' equity) was $96.5 million or 8.99% of total assets at June 30, 1997 compared with $92.5 million or 8.90% of total assets at December 31, 1996. The Bank's capital position exceeds all regulatory requirements. (The remainder of this page intentionally left blank.) 25 28 ASSET-LIABILITY MANAGEMENT Through the Bank's Asset-Liability Management Committee ("ALCO"), which is comprised of certain senior and middle management personnel, the Bank 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 provide for optimum profitability and capital at prudent levels of liquidity and interest rate, credit, and market risk. It is ALCO's general policy to closely match the maturity or rate sensitivity of its assets and liabilities. In accordance with this policy, certain strategies have been implemented to improve the match between interest rate sensitive assets and liabilities. These strategies include, but are not limited to: daily monitoring of the Bank's changing cash requirements, with particular concentration on investment in short term securities; originating adjustable and fixed rate mortgage loans for the Bank's own portfolio; managing the cost and structure of deposits; and generally using matched borrowings to fund specific purchases of loan packages and large loan origination. Occasionally, management may choose to deviate from specific matching of maturities of assets and liabilities, if an attractive opportunity to enhance yields becomes available. The Bank actively manages its liability portfolio in order to effectively plan and manage growth and maturities of deposits. Management recognizes the need for strict attention to all deposits. Accordingly, plans for growth of all deposit types are reviewed regularly. Programs are in place which are designed to build multiple relationships with customers and to enhance the Bank's ability to retain deposits at controlled rates of interest, and management has adopted a policy of reviewing interest rates on an ongoing basis on all deposit accounts, in order to control deposit growth and interest costs. In addition to attracting deposits, the Bank has selectively borrowed funds using advances from the FHLBB and upon occasion, reverse repurchase agreements. These funds have generally been used to purchase loans typically having a matched repricing date. 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. 26 29 OTHER EVENTS The Board of Directors of the Bank has approved the establishment of a holding company for the Bank currently expected to be named Medford Bancorp, Inc. Proxy materials to obtain shareholder approval of the holding company formation were first mailed on August 4, 1997 to shareholders of record as of July 31, 1997. The reasons for the proposed establishment of the holding company were discussed in detail in the proxy materials. If the required shareholder and regulator approvals are obtained, the transaction is anticipated to be consummated in the fourth quarter of 1997. As is also detailed in the proxy materials pursuant to the reorganization, shares of Bank common stock (together with associated stock purchase rights) would be converted automatically into shares of holding company common stock (together with associated preferred stock purchase rights). 27 30 SIGNATURES Under to the requirements of the Securities Exchange Act of 1934, the Bank has duly caused this report to be on its behalf signed by the undersigned thereunto duly authorized. MEDFORD SAVINGS BANK Date: August 12, 1997 /s/ Arthur H. Meehan ------------------------------------------------ Arthur H. Meehan Chairman/President/CEO Date: August 12, 1997 /s/ Phillip W. Wong ------------------------------------------------- Phillip W. Wong Senior Vice President and Chief Financial Officer 28 EX-99.5 13 PROXY STATEMENT DATED AUGUST 4, 1997 1 Exhibit 99.5 MEDFORD SAVINGS BANK 29 HIGH STREET MEDFORD, MASSACHUSETTS 02155 TELEPHONE (617) 395-7700 Dear Stockholder: You are cordially invited to attend the Special Meeting of Stockholders (the "Special Meeting") of Medford Savings Bank (the "Bank") to be held at Five High Street, Suite 202, Medford, Massachusetts, at 10:00 a.m., local time, on Tuesday, September 16, 1997. The Special Meeting has been called for the following purposes: 1. To consider and vote upon the formation of a holding company for the Bank by approval of a Plan of Reorganization and Acquisition, dated as of July 29, 1997 (the "Plan of Reorganization") between the Bank and Medford Bancorp, Inc. ("Bancorp"), a newly-formed Massachusetts corporation organized at the direction of the Bank, and each of the transactions contemplated thereby, pursuant to which the Bank will become a wholly owned subsidiary of Bancorp, and each issued and outstanding share of common stock of the Bank, par value $0.50 per share (together with associated preferred stock purchase rights), other than shares held by stockholders, if any, exercising dissenters' rights, will be converted into and exchanged for one share of common stock of Bancorp, par value $0.50 (together with associated preferred stock purchase rights) per share (the "Reorganization"). A copy of the Plan of Reorganization is attached as Exhibit A to the accompanying Proxy Statement; and 2. To transact such other business as may properly come before the meeting and any adjournments or postponements thereof. The Board of Directors has fixed the close of business on July 31, 1997 as the record date for the determination of stockholders entitled to notice of and to vote at the Special Meeting. THE BOARD OF DIRECTORS OF THE BANK RECOMMENDS THAT AT THE SPECIAL MEETING YOU VOTE "FOR" PROPOSAL ONE. Very truly yours, /s/ Arthur H. Meehan ------------------------------- ARTHUR H. MEEHAN Chairman, President and Chief Executive Officer August 4, 1997 IT IS IMPORTANT THAT YOUR SHARES BE REPRESENTED AT THE SPECIAL MEETING. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE COMPLETE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING AND DESIRE TO WITHDRAW YOUR PROXY AND VOTE IN PERSON, YOU MAY DO SO. 2 MEDFORD SAVINGS BANK 29 HIGH STREET MEDFORD, MASSACHUSETTS 02155 TELEPHONE (617) 395-7700 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON SEPTEMBER 16, 1997 Notice Is Hereby Given that the Special Meeting of Stockholders (the "Special Meeting") of Medford Savings Bank (the "Bank") will be held at Five High Street, Suite 202, Medford, Massachusetts, at 10:00 a.m., local time, on Tuesday, September 16, 1997, for the following purposes: 1. To consider and vote upon the formation of a holding company for the Bank by approval of a Plan of Reorganization and Acquisition, dated as of July 29, 1997 (the "Plan of Reorganization") between the Bank and Medford Bancorp, Inc. ("Bancorp"), a newly-formed Massachusetts corporation organized at the direction of the Bank, and each of the transactions contemplated thereby, pursuant to which the Bank will become a wholly owned subsidiary of Bancorp, and each issued and outstanding share of common stock of the Bank, par value $0.50 per share ("Bank Common Stock") (together with associated preferred stock purchase rights), other than shares held by stockholders, if any, exercising dissenters' rights, will be converted into and exchanged for one share of common stock of Bancorp, par value $0.50 per share (together with associated preferred stock purchase rights) (the "Reorganization"). A copy of the Plan of Reorganization is attached as Exhibit A to the accompanying Proxy Statement; and 2. To transact such other business as may properly come before the meeting and any adjournments or postponements thereof. Pursuant to the By-laws, the Board of Directors has fixed the close of business on July 31, 1997 as the record date for the determination of stockholders entitled to notice of and to vote at the Special Meeting. Any holder of Bank Common Stock (i) who files with the Bank before the taking of the vote on the approval of the Plan of Reorganization written objection to the Plan of Reorganization, stating that he or she intends to demand payment for his shares if the Reorganization is consummated, and (ii) whose shares are not voted in favor of the Plan of Reorganization has or may have the right to demand in writing from the Bank, within 20 days after the date of mailing to him or her of notice in writing that the Reorganization has become effective, payment for his or her shares and an appraisal of the value thereof. The Bank and any such stockholder shall follow the procedures set forth in Sections 86 to 98, inclusive, of Chapter 156B of the General Laws of Massachusetts. See "Proposal One -- Formation of Holding Company -- Rights of Dissenting Stockholders" in the accompanying Proxy Statement for a description of procedures to be followed to exercise such rights. A copy of certain provisions of the General Laws of Massachusetts relating to the rights of dissenting stockholders is attached as Exhibit B to the accompanying Proxy Statement. The above matters are described in detail in the accompanying Proxy Statement. By Order of the Board of Directors /s/ Eugene R. Murray --------------------------------- EUGENE R. MURRAY Clerk August 4, 1997 WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE COMPLETE AND SIGN THE ENCLOSED PROXY AND RETURN IT PROMPTLY IN THE ENCLOSED ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE SPECIAL MEETING AND DESIRE TO WITHDRAW YOUR PROXY AND VOTE IN PERSON, YOU MAY DO SO. 3 MEDFORD SAVINGS BANK 29 HIGH STREET MEDFORD, MASSACHUSETTS 02155 TELEPHONE (617) 395-7700 ------------------------ PROXY STATEMENT SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON SEPTEMBER 16, 1997 VOTING, REVOCATION, AND SOLICITATION OF PROXIES SPECIAL MEETING This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Medford Savings Bank (the "Bank") for use at the Special Meeting of Stockholders of the Bank to be held at Five High Street, Suite 202, Medford, Massachusetts, at 10:00 a.m., local time, on Tuesday, September 16, 1997, and any adjournments or postponements thereof (the "Special Meeting"), for the purposes set forth in this Proxy Statement. At the Special Meeting, stockholders of the Bank will be asked to consider and vote upon the following matters: 1. To consider and vote upon the formation of a holding company for the Bank by approval of the Plan of Reorganization and Acquisition, dated as of July 29, 1997 (the "Plan of Reorganization") between the Bank and Medford Bancorp, Inc. ("Bancorp"), a newly-formed Massachusetts corporation organized at the direction of the Bank, and each of the transactions contemplated thereby, pursuant to which a newly formed Massachusetts corporation will be organized at the direction of the Bank, the Bank will become a wholly owned subsidiary of Bancorp, and each issued and outstanding share of common stock of the Bank, par value $0.50 per share ("Bank Common Stock")(together with associated preferred stock purchase rights), other than shares held by stockholders, if any, exercising dissenters' rights, will be converted into and exchanged for one share of common stock of Bancorp, par value $0.50 per share ("Bancorp Common Stock")(together with associated preferred stock purchase rights) (the "Reorganization"). A copy of the Plan of Reorganization is attached as Exhibit A to the accompanying Proxy Statement; and 2. To transact such other business as may properly come before the meeting and any adjournments or postponements thereof. RECORD DATE This Proxy Statement is first being mailed to stockholders of the Bank on or about August 4, 1997, in connection with the solicitation of proxies for the Special Meeting. The Board of Directors (the "Board") has fixed the close of business on July 31, 1997 as the record date for the determination of stockholders entitled to notice of and to vote at the Special Meeting and any adjournments or postponements thereof (the "Record Date"). Only holders of Bank Common Stock, at that time will be entitled to notice of and to vote at the Special Meeting and any adjournments or postponements thereof. As of the Record Date, there were 4,541,148 shares of Bank Common Stock outstanding and each such share is entitled to one vote at the Special Meeting. As of the Record Date, there were approximately 1,196 holders of record of the outstanding Bank Common Stock. PROXIES Stockholders of the Bank are requested to complete, date, sign and promptly return the accompanying form of proxy in the enclosed envelope. Bank Common Stock represented by properly executed proxies 4 received by the Bank and not revoked will be voted at the Special Meeting in accordance with the instructions contained therein. If instructions are not given therein, properly executed proxies will be voted FOR Proposal One. It is not anticipated that any matters other than those set forth in this Proxy Statement will be presented at the Special Meeting. If other matters are presented, proxies will be voted in accordance with the best judgment of the proxy holders. Any properly completed proxy may be revoked at any time before it is voted by filing a written notice of such revocation with, or by delivering a duly executed proxy bearing a later date to, the Clerk of the Bank, or by attending the Special Meeting and voting in person. Attendance at the Special Meeting will not in and of itself constitute revocation of a proxy. STOCKHOLDER VOTE REQUIRED The presence, in person or by proxy, of at least a majority in interest of the total number of the issued and outstanding shares of Bank Common Stock entitled to vote is necessary to constitute a quorum for transaction of business at the Special Meeting. A quorum being present, approval of Proposal One (Formation of Holding Company) requires the affirmative vote of the holders of at least 66 2/3% of the issued and outstanding shares of Bank Common Stock entitled to vote by stockholders of record at the close of business on the Record Date. Abstentions and "broker non-votes" will be counted as present for determining the presence or absence of a quorum for the transaction of business at the Special Meeting. A "broker non-vote" is a proxy from a broker or other nominee indicating that such person has not received instructions from the beneficial owner or other person entitled to vote the shares on a particular matter with respect to which the broker or other nominee does not have discretionary voting power. Abstentions and broker non-votes will not be counted as votes for Proposal One and, therefore, will have the effect of negative votes. BUSINESS OF THE BANK The Bank was chartered 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 Bank Common Stock. The Bank adopted a holding company structure on August 14, 1987, whereby the Bank became a wholly owned subsidiary of Regional Bancorp, Inc. ("Regional") and all Bank Common Stock was exchanged on a one-for-one basis for 100% of Regional's common stock. On July 22, 1993, the holding company structure was eliminated. Each share of Regional's common stock was exchanged for one share of Bank Common Stock. The Bank 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 Bank 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 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. Until January 1996, the Bank had two wholly owned subsidiaries: Medco Realty, Inc. ("Medco") and Medford Securities Corporation ("MSC"). Medco engaged in the ownership and maintenance of certain buildings leased to the Bank and, to the extent excess space was available, third parties. The Bank elected to dissolve Medco in January, 1996 and acquired all of its assets and liabilities. MSC was established as a wholly owned subsidiary of Medford Savings Bank in February, 1995. MSC engages exclusively in the buying, selling, dealing in, or holding of securities, and became operational on March 1, 1995. COPIES OF THE BANK'S 1996 ANNUAL REPORT, AND COPIES OF THE BANK'S FORM F-2 FOR THE YEAR ENDED DECEMBER 31, 1996 AND FORM F-4 FOR THE QUARTER ENDED JUNE 30, 1997 AS FILED WITH THE FEDERAL DEPOSIT INSURANCE CORPORATION (WITHOUT EXHIBITS), ARE AVAILABLE UPON REQUEST, WITHOUT CHARGE, FROM THE BANK. SUCH REQUESTS SHOULD BE DIRECTED TO: MEDFORD SAVINGS BANK, 29 HIGH STREET, MEDFORD, MASSACHUSETTS 02155, ATTENTION: SHAREHOLDER RELATIONS. 2 5 PROPOSAL ONE FORMATION OF HOLDING COMPANY The following descriptions are qualified in their entirety by reference and made subject to the Plan of Reorganization attached hereto as Exhibit A, certain provisions of the General Laws of Massachusetts relating to the rights of dissenting stockholders attached hereto as Exhibit B, and the form of Articles of Organization of Bancorp attached hereto as Exhibit C. DESCRIPTION OF THE PLAN OF REORGANIZATION Bancorp has been organized as a Massachusetts corporation at the direction of the Bank for the purpose of becoming the holding company of the Bank. Bancorp and the Bank have entered into the Plan of Reorganization, which provides, subject to the exercise of dissenters' rights, for the acquisition of all the outstanding shares of Bank Common Stock by Bancorp in exchange for an equal number of shares of Bancorp Common Stock pursuant to the provisions of Section 26B of Chapter 172 of the General Laws of Massachusetts. After consummation of the Reorganization, the Bank, as a subsidiary of Bancorp, will continue to serve the communities it presently serves from its existing office locations. The assets, property, rights and powers, debts, liabilities, obligations and duties of the Bank will not be changed by the Reorganization, except for the proposed initial transfer, subject to applicable law and any agreements of the Bank with regulatory agencies, of up to approximately $7 million from the Bank to Bancorp. See "Regulation of Bancorp and the Bank." Similarly, the Charter and By-laws of the Bank will not be affected by consummation of the Reorganization. The Medford Savings Bank 1993 Stock Option Plan and the Medford Savings Bank 1986 Stock Option Plan (collectively, the "Stock Option Plans") will become stock option plans of Bancorp. All other stock related benefit plans of the Bank will be unchanged by the Reorganization, except that any plan which refers to Bank Common Stock, such as the Employee Stock Ownership Plan (the "ESOP"), will, following the completion of the Reorganization, be deemed to refer instead to Bancorp Common Stock. The Directors, officers and other employees of the Bank will be unchanged by the Reorganization. The Directors of Bancorp will initially consist of the ten persons currently serving as members of the Board of Directors of the Bank. The President and Chief Executive Officer, Chief Financial Officer and the Clerk of the Bank will initially be the persons serving as the executive officers of Bancorp. Under the Plan of Reorganization, Bancorp will become the owner of all the outstanding shares of the Bank Common Stock, and each stockholder of the Bank who does not exercise dissenters' rights with respect to the Plan of Reorganization will become the owner of one share of Bancorp Common Stock for each share of Bank Common Stock held immediately prior to the consummation of the Reorganization, together with associated preferred stock purchase rights. See "Shareholder Rights Plan." On the effective date of the Reorganization, each share of Bank Common Stock (together with associated preferred stock purchase rights) will be automatically converted into and exchanged for one share of Bancorp Common Stock (together with associated preferred stock purchase rights). The Reorganization will become effective at 12:01 a.m. on a business day following the date on which the Bank and Bancorp advise the Massachusetts Commissioner of Banks (the "Commissioner" or the "Commissioner of Banks") in writing that all the conditions precedent to the Reorganization becoming effective have been satisfied and that the Plan of Reorganization has not been abandoned by the Bank or Bancorp (the "Effective Time"). As a condition to the consummation of the Reorganization, Bancorp and the Bank must receive certain regulatory approvals. See "Conditions of the Reorganization." Neither Bancorp nor the Bank can predict with any certainty whether such approvals on terms satisfactory to Bancorp and the Bank will be obtained, and, if so, the timing of such approvals. Accordingly, the consummation of the Reorganization may be subject to a delay, which may, under certain circumstances, be significant. If the stockholders approve the Plan of Reorganization at the Special Meeting, Bancorp and the Bank shall have the right to consummate the Reorganization at any time thereafter. The number of shares of Bancorp Common Stock (together with associated preferred stock purchase rights) to be issued at the Effective Time will equal the number of shares of Bank Common Stock (together with associated preferred stock purchase rights) issued and outstanding immediately prior thereto, less the 3 6 number of shares of Bank Common Stock held by dissenting stockholders. Shares of Bancorp Common Stock that would have been issued had dissenting stockholders not dissented will remain as authorized but unissued shares of Bancorp Common Stock. The shares of Bancorp Common Stock that are outstanding prior to the Effective Time, all of which are presently held by the Bank, will be canceled as part of the Reorganization. The outstanding stock certificates of Bank Common Stock that, prior to the Reorganization, represented shares of Bank Common Stock, will thereafter for all purposes represent an equal number of shares of Bancorp Common Stock, except for certificates held by dissenting stockholders and as further described below. After the Effective Time, Bancorp and the Bank will notify stockholders by mail at their addresses as shown on the Bank's records and by publication that they may present their certificates to the transfer agent (the "Transfer Agent") for exchange. However, stockholders need not surrender stock certificates representing Bank Common Stock to the Transfer Agent in exchange for new certificates representing Bancorp Common Stock. The Transfer Agent will treat certificates for Bank Common Stock as representing, for all purposes, an equal number of shares of Bancorp Common Stock, and the holders of those certificates will have all the other rights of stockholders of Bancorp. REASONS FOR THE HOLDING COMPANY FORMATION The Board of Directors of the Bank believes that a holding company structure will provide flexibility for meeting the future financial needs of the Bank or other subsidiaries of Bancorp and responding to competitive conditions in the financial services market. As a bank holding company, Bancorp will not be subject to the same regulatory restrictions as the Bank, and will be able to acquire and invest more freely in certain bank and bank-related activities as well as such other activities as might be permitted by regulatory authorities. In addition, Bancorp will not be subject to the same regulatory limitations on the amounts which it can invest in its subsidiaries and other businesses and will not be required to obtain regulatory approval before issuing shares of its capital stock, except under certain circumstances. See "Regulation of Bancorp and the Bank." Moreover, providing even further operational flexibility, the repurchase of stock by Bancorp will not be subject to the same significant adverse tax consequences as a repurchase of stock by the Bank, and except under certain circumstances, no regulatory approval is required for such repurchase by Bancorp. There are no current agreements or understandings with respect to any investments or the issuance of any additional shares of capital stock by either the Bank or Bancorp, except pursuant to options granted under the Stock Option Plans. The holding company structure will also facilitate the acquisition of other banks as well as other companies engaged in bank-related activities if and when opportunities arise. A holding company structure would permit an acquired entity to operate on a more autonomous basis as a wholly owned subsidiary of Bancorp rather than as a division of the Bank. For example, the acquired institution could retain its own directors, officers, corporate name and local identity. This more autonomous operation may be decisive in acquisition negotiations. In addition, the stock of Bancorp may serve as appropriate consideration in any such acquisition. While the Bank is, from time to time, exploring various acquisition possibilities, there are no current agreements or understandings for the acquisition of any financial institution or other company and there are no assurances that any such acquisitions will occur. It is recognized that some increased costs, including administrative expenses, will be incurred in the formation and operation of Bancorp. However, such increased costs are not expected to have a material adverse effect on the consolidated financial results of Bancorp and the Bank. BUSINESS OF BANCORP Bancorp is a business corporation organized under the laws of the Commonwealth of Massachusetts in July, 1997. The only office of Bancorp, and its principal place of business, is located at the main office of the Bank at 29 High Street, Medford, Massachusetts 02155, and its telephone number is (617) 395-7700. Bancorp was organized for the purpose of becoming the holding company of the Bank. Upon completion of the Reorganization, the Bank will be a wholly owned subsidiary of Bancorp, which will thereby become a bank holding company. Each stockholder of the Bank, upon completion of the Reorganization, will, subject to dissenters' appraisal rights, become a stockholder of Bancorp without change in the number of shares owned 4 7 or in respective ownership percentages. Bancorp has not yet undertaken any business activities and there are no operating business activities currently proposed for Bancorp. In the future, Bancorp may become an operating company or acquire banks or companies engaged in bank-related activities and may engage in or acquire such other business or activities as may be permitted by applicable law. Upon consummation of the Reorganization, Bancorp will own all of the outstanding Bank Common Stock. FINANCIAL RESOURCES OF BANCORP In connection with the Reorganization, the Bank currently intends, subject to applicable law and any agreements of the Bank with regulatory agencies, to transfer up to approximately $7.0 million to Bancorp, which amount does not exceed the accumulated earnings and profits for tax purposes of the Bank as of June 30, 1997. The actual amount of funds which may be transferred, however, is subject to change and may be greater or less than this amount, depending on a number of factors, including Bancorp's future financial requirements and applicable regulatory restrictions. Moreover, the amount of capital which will initially be transferred from the Bank to Bancorp may be reduced to the extent necessary to avoid any taxable income to the Bank. See "Income Tax Consequences." A transfer of $7.0 million to Bancorp would reduce the Bank's stockholders' equity as of June 30, 1997, to approximately $89.5 million. See "Capitalization." If such a transfer to Bancorp had been made on June 30, 1997, the leverage, Tier 1 risk-based, and total risk-based capital ratios of the Bank would have been approximately 7.93%, 14.14% and 15.32%, respectively. Upon consummation of the Reorganization, the currently outstanding shares of Bancorp, all of which are owned by the Bank, will be canceled. The Bank is contemplating contributing up to $7 million to Bancorp to provide its holding company with flexibility in its ongoing operations. This sum is anticipated to enable Bancorp, as market conditions warrant, to engage in general corporate activities, such as funding of regular quarterly dividends and stock repurchases, and also to establish nonbank subsidiaries to engage in new activities, without having to rely solely on new dividends from the Bank to support those activities. However, although it is contemplated that regular quarterly dividends will occur after Bancorp is the holding company of the Bank, no definite plans exist at this time as to any other of the corporate activities described above. It should also be noted, however that bank holding companies, such as Bancorp, have a much more extensive array of permissible investments than banks, such as the Bank. Of course, any contribution to Bancorp would be subject to receipt of all necessary federal and state bank regulatory approvals. Additional financial resources may be available to Bancorp in the future through borrowings, debt or equity financings, or dividends from the Bank, other acquired entities or new businesses. In addition, the Bank may lend amounts to Bancorp both prior to the consummation of the Reorganization and thereafter, subject to certain restrictions on transactions with insured bank affiliates under the Federal Reserve Act. There can be no assurance, however, as to the amount of additional financial resources which will be available to Bancorp. In particular, dividends from the Bank to Bancorp will be subject to tax considerations and regulatory limitations. See "Income Tax Consequences," "Regulation of Bancorp and the Bank -- Certain Federal Tax Matters," "Comparison of Stockholder Rights -- Common Stock -- Dividend Rights." 5 8 CAPITALIZATION The following table sets forth (i) the consolidated capitalization of the Bank as of June 30, 1997; (ii) the pro forma consolidated capitalization of the Bank as of June 30, 1997 after giving effect to the Reorganization (which reflects the proposed maximum transfer of $7 million from the Bank's retained earnings to Bancorp), and (iii) the pro forma capitalization of Bancorp on a consolidated basis after giving effect to the Reorganization. The pro forma consolidated capitalization of Bancorp as of June 30, 1997 will be the same as the consolidated capitalization of the Bank as of that date. However, the pro forma capitalization of the Bank is changed as a result of the $7 million proposed transfer by the Bank to Bancorp.
AS OF JUNE 30, 1997 --------------------------------------------- BANK BANK BANCORP (ACTUAL (PRO FORMA (PRO FORMA CONSOLIDATED) CONSOLIDATED) CONSOLIDATED) ------------- ------------- ------------- (IN THOUSANDS) Deposits................................................. $ 824,611 $ 824,611 $ 824,611 ======== ======== ======== Securities sold under agreements to repurchase........... $ 47,580 $ 47,580 $ 47,580 Federal Home Loan Bank advances.......................... 97,439 97,439 97,439 Federal Reserve Bank of Boston advances.................. 1,262 1,262 1,262 -------- -------- -------- 146,281 146,281 146,281 -------- -------- -------- Stockholders' equity: Serial preferred stock -- par value $0.50 per share; 5,000,000 shares authorized, none issued(1)....... $ -- $ -- $ -- Common stock -- par value $0.50 per share; 15,000,000 shares authorized, [4,541,148] issued(2)......................................... 2,271 2,271 2,271 Additional paid-in capital.......................... 28,924 28,924 28,924 Retained earnings................................... 65,923 58,923(3) 65,923 -------- -------- -------- 97,118 90,118 97,118 -------- -------- -------- Net unrealized gain (loss) on investment securities available for sale, after tax effects.................. (660) (660) (660) -------- -------- -------- Total stockholders' equity..................... $ 96,458 $ 89,458 $ 96,458 ======== ======== ========
- - - --------------- (1) Represents, in the case of Bancorp, 5,000,000 shares of authorized, but unissued, preferred stock, par value $0.50 per share. (2) Represents, in the case of Bancorp, 15,000,000 shares of authorized common stock, par value $0.50 per share of which 4,541,148 shares are to be issued to stockholders of the Bank in exchange for the equivalent number of shares of Bank Common Stock as part of the Reorganization, with the assumption that no holders of Bank Common Stock exercised dissenter's rights. Does not include the following shares of Bank Common Stock that were issuable as of the Record Date: 936,000 shares of Bank Common Stock reserved for issuance in the aggregate under the Stock Option Plans. Upon consummation of the Reorganization, the Stock Option Plans will become stock option plans of Bancorp and an identical number of shares will be reserved for issuance thereunder as are reserved immediately prior to the consummation of the Reorganization. (3) Reduction reflects contribution of $7 million to Bancorp. CONDITIONS OF THE REORGANIZATION The Plan of Reorganization provides that it shall not become effective, and thus the Reorganization will not occur, until all of the following first shall have occurred: (i) the Plan of Reorganization shall have been approved by a vote of the holders of two-thirds of the outstanding Common Stock of the Bank, (ii) the Plan of Reorganization shall have been approved by the Commissioner of Banks under Section 26B of Chapter 172 of the General Laws of Massachusetts, (iii) any approval, consent, waiver, or confirmation of no objection required by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") shall have 6 9 been received and any waiting period imposed by applicable law shall have expired, (iv) the Bank and Bancorp shall have received a favorable opinion from counsel concerning the federal income tax consequences of the Reorganization, (v) Bancorp Common Stock to be issued in exchange for Bank Common Stock shall have been registered or qualified, if necessary, for issuance under applicable state securities laws, and (vi) the Bank and Bancorp shall have obtained all other necessary consents or approvals required for the holding company formation. The Bank intends to file an application with the Commissioner of Banks to obtain approval of the Plan of Reorganization under Section 26B of Chapter 172 of the General Laws of Massachusetts after the date of this Proxy Statement. The Commissioner will not grant his approval until the Plan of Reorganization has been approved by the Bank's stockholders. In addition, the Bank intends to file, after the date hereof, a notice of one bank holding company formation with the Federal Reserve Board. Bancorp also currently intends to file an application to register with the Federal Reserve Board as a bank holding company under the Bank Holding Company Act of 1956, as amended (the "BHC Act"). Any delays which are encountered in seeking any of the foregoing regulatory approvals could result in a delay in the consummation of the Reorganization. See "Regulation of Bancorp and the Bank." If the Plan of Reorganization is approved by the Bank's stockholders at the Special Meeting, the formation of the holding company structure is currently expected to become effective as soon thereafter as the required regulatory approvals are received. Bank and Bancorp have the right under the terms of the Plan of Reorganization to abandon the Reorganization if, among other things, regulatory approvals cannot be obtained or if the conditions or obligations associated with such regulatory approvals make the Reorganization inadvisable in the opinion of the Bank or Bancorp. In addition, the Plan of Reorganization also provides that it may be abandoned by the Board of Directors of the Bank or Bancorp if, among other things (i) the number of shares of Bank Common Stock owned by dissenting stockholders will make consummation of the Reorganization inadvisable in the opinion of the Bank or Bancorp, (ii) any action, suit, proceeding or claim has been instituted, made or threatened relating to the Plan which will make consummation of the Reorganization inadvisable in the opinion of the Bank or Bancorp, or (iii) for any other reason consummation of the Reorganization is inadvisable in the opinion of the Bank or Bancorp. Moreover, the Plan of Reorganization may be amended by the mutual consent of the Boards of Directors of Bancorp and the Bank (i) prior to its approval by the stockholders of the Bank, in any respect, and (ii) subsequent to such approval, in any respect, provided that the Commission shall approve of such amendment or modification. If the Plan of Reorganization is not approved at the Special Meeting or all of the necessary regulatory approvals are not obtained, the Bank will continue to operate without a holding company structure. All expenses in connection with the Reorganization will be paid by the Bank whether or not the Plan of Reorganization is approved by its stockholders or the Reorganization is consummated. The Bank intends to seek approval for the listing of Bancorp Common Stock in substitution for Bank Common Stock on the NASDAQ National Market System using the symbol "MDBK" subject to completion of the holding company formation. The Bank expects that approval for this substitution will be received prior to consummation of the Reorganization. RIGHTS OF DISSENTING STOCKHOLDERS Any holder of Bank Common Stock (i) who files with the Bank before the taking of the vote on the approval of the Plan of Reorganization written objection to the Plan of Reorganization, stating that he or she intends to demand payment for his or her shares if the Reorganization is consummated, and (ii) whose shares are not voted in favor of the Plan of Reorganization, has or may have the right to demand in writing from the Bank, within 20 days after the date of mailing to him or her of notice in writing that the Reorganization has become effective, payment for his or her shares and an appraisal of the value thereof. The Bank and any such stockholder shall follow the procedures set forth in Sections 86 to 98, inclusive, of Chapter 156B of the General Laws of Massachusetts. A brief summary of those sections of the General Laws of Massachusetts is set forth below. However, this summary does not purport to be a complete statement of the procedures to be 7 10 followed by stockholders desiring to exercise their rights to dissent from the Reorganization and is qualified in its entirety by express reference to such sections, which are included in this Proxy Statement as Exhibit B. A holder of Bank Common Stock intending to exercise his or her dissenter's right to receive payment for his or her shares must file with the Bank, before the Special Meeting and the vote on the Plan of Reorganization, written objection to the proposed Plan of Reorganization, stating that he or she intends to demand payment for his or her shares if the Reorganization is consummated, and must not vote in favor of the Reorganization at the Special Meeting. Within ten days after the Reorganization becomes effective, the Bank will give written notice of such effectiveness by registered or certified mail to each holder of Bank Common Stock who filed such written objection and who did not vote in favor of the Plan of Reorganization. Such written notice of effectiveness will be addressed to the stockholder at his or her last known address as it appears in the stock record books of the Bank. Within 20 days after the mailing of such notice, any holder of Bank Common Stock to whom the Bank was required to give such notice may make written demand for payment for his or her shares from the Bank, and, in such event, the Bank will be required to pay to him or her the fair value of such shares within 30 days after the expiration of the period during which such demand may be made. If during such 30-day period the Bank and the dissenting stockholder fail to agree as to the fair value of such shares, the Bank or such stockholder may have the fair value of the stock of all dissenting stockholders determined by judicial proceedings by filing a bill in equity in the Superior Court in Suffolk County, Massachusetts, within four months after the expiration of such 30-day period. For the purposes of any such Superior Court determination, the value of the shares of the Bank is to be determined as of the day preceding the date of the vote of the stockholders approving the Plan of Reorganization and shall be exclusive of any element of value arising from the expectation or accomplishment of the Reorganization. Upon making such written demand for payment, the dissenting stockholder will not thereafter be entitled to notices of meetings of stockholders, to vote, or to dividends unless no suit is filed within four months after such 30-day period to determine the value of the stock, any such suit is dismissed as to that stockholder, or the stockholder withdraws his objection in writing with the written approval of the Bank. The enforcement by a dissenting stockholder of his or her right to receive payment for his Bank Common Stock in the manner provided by Sections 86 through 98 of Chapter 156B of the General Laws of Massachusetts will be his or her exclusive remedy, except that a stockholder shall not be excluded from bringing or maintaining an appropriate proceeding to obtain relief on the ground that consummation of the Reorganization will be or is illegal or fraudulent as to him or her. INCOME TAX CONSEQUENCES The Bank will not seek a ruling from the Internal Revenue Service concerning the federal income tax consequences of the proposed holding company formation, but will instead rely on an opinion of its counsel, Goodwin, Procter & Hoar LLP. Unlike a private letter ruling from the Internal Revenue Service, an opinion of counsel has no binding effect on the Internal Revenue Service. Based on such opinion, the material federal tax results of the Reorganization would be as follows: 1. No gain or loss will be recognized by the stockholders of the Bank upon the exchange of their Common Stock of the Bank solely for Bancorp Common Stock. 2. No gain or loss will be recognized by the Bank as a result of the proposed transaction (except to the extent that, as described below, the Bank may have taxable income as a result of payments to stockholders who exercise dissenters' rights and/or the transfer to Bancorp of an amount that exceeds the current and accumulated earnings and profits of the Bank). 3. No gain or loss will be recognized by Bancorp upon the receipt of shares of Bank Common Stock solely in exchange for Bancorp Common Stock. 4. The basis of the Bancorp Common Stock to be received by each stockholder of the Bank will be the same as the basis of Bank Common Stock surrendered in exchange therefor. 8 11 5. The holding period of the Bancorp Common Stock to be received by each stockholder of the Bank will include the holding period of Bank Common Stock surrendered in exchange therefor, provided that such Bank Common Stock was held as a capital asset in the hands of such stockholder. 6. Stockholders of the Bank who exercise their dissenters' appraisal rights and receive cash in exchange for their shares of Bank Common Stock will recognize taxable income or gain or loss for federal income tax purposes in connection with the transaction. The amount of that income or gain or loss and the character of that income or gain or loss (that is, whether it constitutes ordinary income, short-term capital gain or loss or long-term capital gain or loss) will turn upon a number of factual considerations peculiar to the individual stockholder. If a stockholder exercises his or her dissenter's appraisal rights with respect to all of his or her shares of Bank Common Stock, and if no shares are constructively owned by him under the rules of Section 318(a) (or if such constructive ownership is waived under the rules of Section 302(c)(2)), then the transaction should qualify as a sale or exchange of the stock under Section 302(a), rather than a dividend. If the shares of Bank Common Stock qualify as "capital assets" in the hands of such a stockholder and if the shares have been held for more than one year, then any gain recognized on the exchange should qualify for long-term capital gain treatment. If, however, a stockholder fails to exercise dissenters' appraisal rights as to all shares owned by him or her (or is considered to constructively own shares under Section 318(a)), then the transaction might be treated as a dividend to the stockholder, depending upon whether or not it qualifies as "not essentially equivalent to a dividend" within the meaning of Section 302(b)(1), or as "a substantially disproportionate redemption" within the meaning of Section 302(b)(2). If the transaction were treated as a dividend, then the entire payment could be taxable as ordinary income, depending upon the circumstances. Any stockholder of the Bank considering exercising his or her dissenter's appraisal rights with respect to any shares of Bank Common Stock should consult his personal income tax advisor for specific advice with respect to the federal income tax consequences of that exercise. Payments made by the Bank to stockholders who exercise their dissenters' appraisal rights may result in taxable income to the Bank to the extent the payments are deemed made out of the Bank's bad debt reserve. In addition, any dividend distributions by the Bank (including any distribution made to provide working capital to Bancorp and any payments to dissenting stockholders that are treated as dividends) that exceed the current and accumulated earnings and profits of the Bank will result in taxable income to the Bank to the extent that they are deemed made out of the Bank's bad debt reserve. The determination of current and accumulated earnings and profits turns upon the application of a complicated set of legal rules to a number of factual issues arising over an extended period of years. Because of the inherently factual issues associated with determining accumulated earnings and profits, Goodwin, Procter & Hoar LLP does not intend to confirm the amount of the Bank's earnings and profits and thus its opinion will not address whether or not the proposed transfer of funds to Bancorp will exceed the current and accumulated earnings and profits of Bancorp. ACCOUNTING TREATMENT It is anticipated that the Reorganization will be accounted for as similar to a "pooling of interests" transaction under generally accepted accounting principles. COMPARISON OF STOCKHOLDER RIGHTS As a result of the holding company formation, stockholders of the Bank, whose rights are presently governed by Massachusetts banking law, will become stockholders of Bancorp, a Massachusetts corporation, and as such their rights will be governed by Massachusetts corporate law. Certain differences in the rights of stockholders arise from this change in governing law, however, the provisions of the Bank's Restated Articles of Organization (the "Charter") and By-laws and Bancorp's Articles of Organization (the "Articles") and By-laws are substantively identical. Certain differences and similarities of the rights of stockholders of the Bank and Bancorp are discussed below. The following discussion does not purport to be a complete statement of such similarities and differences affecting the rights of stockholders of the Bank but is intended as a 9 12 summary only. The form of Articles of Bancorp attached as Exhibit C to this Proxy Statement should be reviewed carefully by each stockholder. Capital Stock Authorized and Issued Stock. The Bank had, as of the Record Date, 15,000,000 shares of authorized Common Stock of which 4,541,148 shares were issued and outstanding and 936,000 shares were reserved for issuance under the Stock Option Plans. As of such date, the Bank also had 5,000,000 shares of authorized but unissued preferred stock. The Articles of Bancorp will provide for 15,000,000 shares of authorized Bancorp Common Stock and 5,000,000 shares of preferred stock, of which 100 shares of Bancorp Common Stock are currently issued and outstanding, all of which are owned by the Bank. After the consummation of the Reorganization, and subject to the exercise of dissenters' appraisal rights, the number of issued and outstanding shares, shares reserved for issuance under the Stock Option Plans and non-reserved shares of Bancorp Common Stock available for future issuance by Bancorp will be the same as the number of such shares of Bank Common Stock immediately prior to the Effective Time. Issuance of Stock. Under the provisions of Massachusetts banking law, the issuance of capital stock by the Bank requires the prior approval of the Commissioner of Banks. In contrast, Bancorp is authorized to issue shares of capital stock without obtaining prior approval of the Commissioner of Banks. Although the issuance of Bancorp Common Stock in connection with the Reorganization is exempt from registration under the Securities Act, future issuances of Bancorp Common Stock would be subject to registration under the Securities Act, unless another exemption were available. See "Regulation of Bancorp and the Bank--Consequences of the Reorganization Under Federal Securities Laws." Bank Common Stock is exempt from registration under the Securities Act. There are no current agreements or understandings with respect to the issuance of any additional shares of Bancorp capital stock. Pre-emptive Rights. The stockholders of Bancorp, like the stockholders of the Bank, will not be entitled to pre-emptive rights with respect to any shares of capital stock which may be issued. Common Stock Dividend Rights. The stockholders of the Bank are entitled to dividends when and as declared by the Bank's Board of Directors. Under Massachusetts banking law, Massachusetts stock-form savings banks such as the Bank may pay dividends only out of net profits without impairing their capital stock and surplus accounts. Such dividend payments are also subject to a number of additional statutory limitations. Bancorp may pay dividends if, as, and when declared by its Board of Directors. The holders of Bancorp Common Stock will be entitled to receive and share equally in such dividends as may be declared by the Board of Directors out of funds legally available therefor. Although Massachusetts corporate law does not have a specific statute regulating the payment of dividends by Massachusetts corporations, the directors of a corporation are jointly and severally liable to the corporation if a payment of dividends (i) is made when the corporation is insolvent, (ii) renders the corporation insolvent, or (iii) violates the corporation's articles of organization. In any case, any issuance by the Bank or Bancorp of preferred stock with a preference over common stock as to dividends may affect the dividend rights of common stock holders. Voting Rights. All voting rights in the Bank are currently vested in the holders of the Bank's issued and outstanding Common Stock. Each share of Bank Common Stock is entitled to one vote on all matters, without any right to cumulative voting, without any right to cumulative voting in the election of Directors. Following the formation of the holding company, all voting rights in Bancorp will be vested in the holders of Bancorp Common Stock, and each share of Bancorp Common Stock will be entitled to one vote on all matters. In both cases, any issuance by the Bank or Bancorp of preferred stock with voting rights may affect the voting rights of holders of common stock. 10 13 Preferred Stock Both under the Charter of the Bank and under the Articles of Bancorp, the respective Boards of Directors (or a committee thereof in the case of Bancorp) of the Bank and Bancorp are authorized to issue preferred stock in series (and classes in the case of Bancorp) and to fix the powers, designations, preferences, or other rights of the shares of each such series (or class in the case of Bancorp) and the qualifications, limitations, and restrictions thereof. The issuance of preferred stock by the Bank, unlike the issuance of preferred stock by Bancorp, would be subject to approval by the Commissioner of Banks. Preferred stock issued by Bancorp after the Reorganization may rank prior to the Bancorp Common Stock as to dividend rights, liquidation preferences, or both, may have full or limited voting rights (including multiple voting rights and voting rights as a class), and may be convertible into shares of Bancorp Common Stock. Bancorp has no present plans or understandings for the issuance of any preferred stock. Directors Number and Staggered Terms. The By-laws of Bancorp provide that the Board of Directors shall consist of not less than seven directors. The Board of Directors of Bancorp will initially be composed of ten Directors. The By-laws of the Bank provide that the Board shall consist of not less than seven nor more than 25 Directors. The By-laws of the Bank and Bancorp provide that the Board of Directors may fix the number and classification of Directors, unless at the time there is an Interested Stockholder (as defined in the Bank's Charter and Bancorp's Articles, respectively), in which case a majority vote of the Continuing Directors (as defined in the Bank's Charter and Bancorp's Articles, respectively) is also required. Both the Bylaws of the Bank and the Bylaws of Bancorp provide for three classes of Directors with one class elected each year for three-year staggered terms, so that ordinarily no more than approximately one-third of the Directors will stand for election in any one year, and that there will be no cumulative voting in the election of Directors. Removal of Directors. The Bank's Charter and Bancorp's Articles provide that any Director (subject to the rights of any outstanding preferred stock) may be removed from office, with or without cause, by an affirmative vote of (i) at least 80% of the total votes eligible to be cast by stockholders at a duly constituted meeting of stockholders called expressly for such purpose, or (ii) at least 66 2/3% of the members of the Board of Directors then in office, unless at the time of such removal there shall be an Interested Stockholder, in which case the affirmative vote of not less than a majority of the Continuing Directors then in office shall instead be required for removal by vote of the Board of Directors. Vacancies. The By-laws of the Bank and the By-laws of Bancorp both provide that any vacancy occurring on the Board of Directors as a result of resignation, removal, disqualification or death or by reason of an increase in the number of Directors may be filled by vote of a majority of the remaining Directors, unless at the time of such action there is an Interested Stockholder, in which case a majority vote of the Continuing Directors then in office is required instead. Any Director of the Bank or Bancorp so appointed would serve for the remainder of the unexpired term of the class to which such Director was appointed and until such Director's successor shall have been duly elected or qualified or until his or her earlier resignation or removal. When the number of directors is increased, the Board of Directors determines the class or classes to which such number is apportioned. Massachusetts Law Regarding Directors. Under Section 50A of Massachusetts General Laws Chapter 156B, a publicly-held Massachusetts corporation which has not opted out of that statute must have a classified board of directors. In general, Section 50A provides that the board of directors of the corporation must be divided into three classes, each of which would contain approximately one-third of the total number of the members of the board of directors. Section 50A provides that each class shall serve a staggered term, with approximately one-third of the total number of directors being elected each year. The stockholders may remove a director from the board prior to the expiration of his term only for cause, upon the affirmative vote of the holders of a majority of the shares then entitled to vote in an election of directors. Section 50A provides that the number of directors shall be fixed by the board, and that any vacancy occurring on the board, including a vacancy created by an increase in the number of directors or resulting from death, resignation, 11 14 disqualification, removal from office or other cause, shall be filled for the remainder of the unexpired term exclusively by a majority vote of the directors then in office. Section 50A does not apply to the Bank by its terms and Massachusetts banking statutes under which the Bank is governed do not contain a similar provision. The Board of Directors of Bancorp has voted to expressly opt out of Section 50A, and the Board may at any time in the future vote to subject Bancorp to the express provisions of Section 50A. Notwithstanding such action, Bancorp's Articles (like the Bank's Charter) contain provisions substantially similar to that of Section 50A regarding a classified board of directors, as described above. Meetings of Stockholders The Bank's Charter and By-laws and Bancorp's Articles and By-laws provide that special meetings of the stockholders may be called 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. Both the Bank's By-laws and Bancorp's By-laws set forth certain advance notice and informational requirements and time limitations on any Director nomination or any new business that a stockholder wishes to propose for consideration at an annual or special meeting of stockholders. Any such nomination or new business must be stated in writing and must generally be filed with the Clerk at least 75 days, but no more than 120 days, before the date of the meeting prior to the anniversary date of the immediately preceding annual meeting. The Board of Directors of the Bank or Bancorp, as the case may be, or the officer presiding at the meeting of the stockholders of Bancorp or the Bank, as the case may be, may reject such nomination or new business proposal not timely made or supported by insufficient information. In addition, the By-laws of the Bank and the By-Laws of Bancorp provide that, if at the time there is an Interested Stockholder, any determination by the Board of Directors with respect to such nomination or new business proposal shall also require the concurrence of a majority of the Continuing Directors then in office. Stockholder Vote Required to Approve Mergers and Certain Business Combinations Stockholder Vote Required for Mergers. Massachusetts law provides that a vote of 66 2/3% of the shares of each class of stock outstanding and entitled to vote thereon is generally required to authorize a merger or the sale, lease or exchange of all or substantially all of a corporation's property and assets, except that the articles of organization of a Massachusetts corporation may provide for a different percentage vote, but not less than a majority. Fair Price Provision. The Bank's Charter and Bancorp's Articles contain a so-called "fair price" provision pursuant to which any Business Combination (as defined in the Bank's Charter and Bancorp's Articles) involving an Interested Stockholder or an affiliate of an Interested Stockholder and the Bank or Bancorp (or any subsidiary), as the case may be, would require approval by the affirmative vote of the holders of at least 80% of the voting power of the then outstanding shares of voting stock of the Bank or Bancorp, as the case may be, entitled to vote in the election of directors voting together as a single class. The fair price provision provides that the 80% stockholder vote is not required if the Business Combination is approved by a majority of the Continuing Directors or if certain procedures and price requirements are met. Massachusetts Law. Chapter 110F of the Massachusetts General Laws, entitled "Business Combinations with Interested Shareholders" ("Chapter 110F") provides that a Massachusetts corporation with more than 200 stockholders generally may not engage in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person becomes an interested stockholder, unless (i) the interested stockholder obtains the approval of the Board of Directors prior to becoming an interested stockholder, (ii) the interested stockholder acquires 90% of the outstanding voting stock of the corporation (excluding shares held by certain affiliates of the corporation) at the time it becomes an interested stockholder, or (iii) the business combination is approved by both the Board of Directors and the 12 15 holders of 66 2/3% of the outstanding voting stock of the corporation (excluding shares held by the interested stockholder) at an annual or special meeting of stockholders. An "interested stockholder" is a person who, together with affiliates and associates, owns (or, in certain cases, at any time within the prior three years did own) 5% or more of the outstanding voting stock of the corporation. A "business combination" includes a merger, certain stock or asset sales, and certain other specified transactions resulting in a financial benefit to the interested stockholder. Chapter 110F is by its terms applicable to both the Bank and Bancorp. A Massachusetts corporation is permitted to opt out of Chapter 110F, however, neither the Bank nor Bancorp has opted out of Chapter 110F. Provisions Relating to Exercise of Business Judgment by Board of Directors The Charter of the Bank provides that its Board of Directors, when evaluating any tender, exchange, merger, acquisition or similar offer of another person, must in connection with the exercise of its judgment in determining what is in the best interests of the Bank and its stockholders, give due consideration to all relevant factors including, without limitation, the social and economic effects of acceptance of such an offer on the Bank's present and future account holders, borrowers and employees, on the communities in which the Bank operates or is located, and on the ability of the Bank to fulfill its objectives as a Massachusetts-chartered stock form savings bank under applicable statutes and regulations. The Articles of Bancorp contain a substantially similar provision that states, in addition, that such evaluation shall include an examination of the effect of such a transaction on any subsidiary of Bancorp. Control Share Acquisition Statute Chapter 110D of the Massachusetts General Laws Chapter 110D, entitled "Regulation of Control Share Acquisitions" ("Chapter 110D") provides that any person who makes a bona fide offer to acquire, or acquires (the "acquiror") shares of stock of a corporation in an amount equal to or greater than one-fifth, one-third or a majority of the voting stock of the corporation (the "thresholds") must obtain the approval of a majority of shares of all stockholders except the acquiror and the officers and inside directors of the corporation in order to vote the shares that the acquiror acquires in crossing the thresholds. Chapter 110D does not apply to the Bank by its terms and Massachusetts banking statutes under which the Bank is governed do not contain a similar provision. As permitted under Chapter 110D, Bancorp's By-laws contain a provision opting out of Chapter 110D, making Chapter 110D inapplicable to Bancorp's stockholders. The Board of Directors of Bancorp may amend the By-laws at any time in the future to allow Bancorp to opt into this statute prospectively. Indemnification The By-laws of the Bank provide that Directors and officers of the Bank shall, and in the discretion of the Board of Directors, non-officer employees may, be indemnified by the Bank against liabilities and expenses arising out of service for or on behalf of the Bank. The By-laws of the Bank provide that such indemnification shall not be provided if it is determined that the action giving rise to the liability was not taken in good faith in the reasonable belief that the action was in the best interests of the Bank. The By-laws of the Bank provide that the indemnification provision in the By-laws does not limit any other right to indemnification existing independently of the By-laws. The By-laws of Bancorp contain a similar indemnification provision. Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "Securities Act"), may be permitted to Directors, officers or persons controlling Bancorp pursuant to the foregoing provisions, it is the position of the Securities and Exchange Commission (the "SEC") that such indemnification is against public policy as expressed in such Act and is therefore unenforceable. Shareholder Rights Plan In connection with the Reorganization, the Bank's Shareholder Rights Plan will be amended so that it will be assumed by Bancorp following the Reorganization. Accordingly, the outstanding Rights (as defined below) issued pursuant to the Shareholder Rights Plan will be assumed by, and deemed to be Rights issued 13 16 by, Bancorp. The Shareholder Rights Plan, as amended, will be substantially similar to the plan as currently in effect. The purpose of the Shareholder Rights Plan is, among other things, to enable stockholders to receive fair and equal treatment in the event of any proposed acquisition or other business combination transaction involving Bancorp. The Shareholder Rights Plan could make it more difficult for a third party to acquire, or could discourage a third party from acquiring, Bancorp or a large block of Bancorp's common stock. The following summary description of the Shareholder Rights Plan does not purport to be complete and is qualified in its entirety by reference to the Bank's Shareholder Rights Plan, a copy of which is available upon request. In connection with the adoption of the Shareholder Rights Plan, the Board of Directors of the Bank declared a dividend distribution of one preferred stock purchase right (a "Right") for each outstanding share of the Bank's common stock to stockholders of record as of the close of business on October 8, 1993. The Rights currently are not exercisable and are attached to and trade with the outstanding shares of the Bank's common stock. Under the Shareholder Rights Plan, the Rights become exercisable (i) if a person becomes an "acquiring person" by acquiring 15% or more of the outstanding shares of the Bank's common stock, (ii) if a person who owns 10% or more of the Bank's common stock is determined to be an "adverse person" by the Board of Directors, or (iii) if a person commences a tender offer that would result in that person owning 15% or more of the Bank's common stock. In the event that a person becomes an "acquiring person" or is declared an "adverse person" by the Board of Directors, each holder of a Right (other than the acquiring person or the adverse person) would be entitled to acquire such number of shares of the Bank's preferred stock which are convertible into such number of shares of common stock having a value of twice the then-current exercise price of the Right. If the Bank is acquired in a merger or other business combination transaction after any such event, each holder of a Right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company's common stock having a value of twice the exercise price of the Right. Amendment of Charter and Articles The Bank's Charter and Bancorp's Articles both provide that any amendment thereof must be first approved by a majority of the Board of Directors, and then approved by at least 66 2/3% of the total votes eligible to be cast at a duly constituted meeting (but only a majority of the stockholders in the case of amendments to provisions in the Bank's Charter or Bancorp's Articles, as the case may be, relating to the name, office, powers, and authorized capital stock) except that if at any time within the 60 day period immediately preceding the meeting at which the stockholder vote is to be taken on such amendment there is an Interested Stockholder, such amendment shall also require the vote of at least a majority of the Continuing Directors, prior to approval by the stockholders. Notwithstanding the foregoing, the Bank's Charter and Bancorp's Articles both state that to the extent any provision thereof requires approval by a vote of more than 66 2/3% of the total votes eligible to be cast by stockholders in the election of director, and if, at any time within the 60 day period immediately preceding the meeting at which a stockholder vote is to be taken there is an Interested Stockholder, such provision may only be amended after approval of the same vote required by such provision unless such amendment shall also have been approved by the affirmative vote of not less than a majority of the Continuing Directors then in office, in which case only the vote of 66 2/3% of the total votes eligible to be cast by the stockholders shall be required. Under Massachusetts law, certain amendments to a corporation's articles of organization require a vote of a majority of the outstanding shares of each class of stock entitled to vote thereon, while other amendments require a 66 2/3% vote. In either case, the articles of organization may provide for a greater or lesser percentage vote, but not less than a majority. Massachusetts law requires a class vote under certain circumstances when an amendment of the articles of organization will adversely affect the special rights of a class of stock. Amendment of By-laws The Charter of the Bank and the Articles of Bancorp provide that their respective By-laws may be adopted or amended either by their respective Board of Directors or stockholders. Such action by the Board of Directors of the Bank or Bancorp, as the case may be, shall require the affirmative vote of at least 66 2/3% of the Directors then in office, unless, in the case of both the Bank and Bancorp, at the time of such action there shall be an Interested Stockholder, in which case such action shall also require the affirmative vote of at least a 14 17 majority of the Continuing Directors. Such action by the stockholders of the Bank or Bancorp, as the case may be, shall require (i) approval by the majority of the Board of Directors of the Bank (and, if there is an Interested Stockholder at the time of such action, such action shall also require the affirmative vote of a majority of the Continuing Directors), (ii) unless waived by the majority of the Board of Directors (and, if applicable, the Continuing Directors), the submission by the stockholders of written proposals for amending the By-laws at least 60 days prior to the meeting at which the amendment is to be considered, and (iii) the vote of at least 66 2/3% of the total votes eligible to be cast by stockholders in the election of directors at a duly constituted meeting of stockholders called expressly for such purpose. EFFECT ON CURRENT MARKET VALUE OF OUTSTANDING BANK STOCK Although the Board of Directors does not know of any reason why implementation of the Plan of Reorganization would cause the market value of the stock of Bancorp to be different from the market value of the stock of the Bank immediately prior to consummation of the Reorganization, it is possible that the public trading market could perceive that the stock of Bancorp has a different value from the stock of the Bank. It is not known whether the public trading market will attribute any additional or lesser value to Bancorp Common Stock than it would attribute to Bank Common Stock. On July 28, 1997, the last trading day prior to the day on which the Board of Directors adopted a resolution approving the Plan of Reorganization, the high and low sale prices of Bank Common Stock as quoted on the NASDAQ National Market were $30 3/4 and $30 3/8 per share, respectively. ANTI-TAKEOVER PROVISIONS A number of provisions of the Bank's Charter and By-laws and similarly of Bancorp's Articles and By-laws deal with matters of corporate governance and rights of stockholders. Certain of those provisions discussed above may be deemed to have an "anti-takeover" effect, and may discourage takeover attempts not first approved by the Directors (including takeovers which certain stockholders might deem to be in their interests). Although the Board of Directors of Bancorp is not aware of any effort that might be made to gain control of Bancorp after the Reorganization, the Board of Directors believes that those provisions are appropriate to protect the interests of Bancorp and its stockholders from certain hostile takeovers that the Board of Directors believes would not be in the best interests of Bancorp and all of its stockholders. In addition, the Bank has entered into agreements with certain of its officers which require the Bank to make certain payments to such officers upon the termination of their employment under certain circumstances. LEGAL INVESTMENTS Under the laws of some jurisdictions, shares of Bank Common Stock may be legal investments for certain institutions and fiduciaries, whereas shares of Bancorp Common Stock may not be legal investments for such investors. REGULATION OF BANCORP AND THE BANK The following summaries of statutes and regulations affecting banks and holding companies do not purport to be complete. Such summaries are qualified in their entirety by reference to such statutes and regulations. Holding Company Regulation. As a bank holding company, Bancorp would be subject to regulation and supervision by the Federal Reserve Board under the BHC Act. The regulations of the Federal Reserve Board restrict or require prior approval for acquisitions of ownership or control of banks or other companies, restrict transactions between bank holding companies and their affiliates, restrict tying arrangements, limit nonbanking activities of bank holding companies and their subsidiaries, require the filing of annual and periodic reports and give the Federal Reserve Board supervisory authority over various activities of bank holding companies. The Bank is not currently subject to the regulations or authority of the Federal Reserve Board, except as certain of such regulations are made applicable to the Bank by law or regulations of the FDIC. Certain Federal and State Restrictions on Acquisition of Stock. Any attempt to acquire control of the Bank, currently, or Bancorp, following completion of the Reorganization, through the purchase of stock would 15 18 be subject to regulation under Massachusetts law, and the BHC Act or the federal Change in Bank Control Act of 1978, as amended (the "CBCA"). With respect to acquisitions of Common Stock of the Bank, Massachusetts law prohibits any person from acquiring voting stock of a bank that would result in such person having the power, directly or indirectly, to direct the management or policies of such bank or to vote 25% or more of such stock unless such person has provided the Commissioner with 60 days' prior notice and certain information in connection therewith, and the acquisition has not been disapproved by the Commissioner. An exemption from these requirements is provided for acquiring persons who have complied with substantially similar procedures under the federal law provisions outlined below. The Federal Reserve Board's regulations promulgated under the CBCA generally require persons who at any time intend to acquire control of a bank holding company to provide 60 days' prior written notice and certain financial and other information to the Federal Reserve Board. The 60-day notice period does not commence until the information is deemed to be substantially complete. Control for the purpose of the CBCA exists in situations in which the acquiring party would have voting control of at least 25% of any class of a holding company's voting stock. However, under Federal Reserve Board regulations, control would be presumed to exist where the acquiring party would have voting control of at least 10% of any class of the holding company's voting securities if (i) the holding company has a class of voting securities which is registered under Section 12 of the Exchange Act, or (ii) the acquiring party would be the largest holder of a class of voting shares of the holding company. The statute and underlying regulations authorize the Federal Reserve Board to disapprove the proposed acquisition on certain specified grounds. The FDIC has adopted substantially similar regulations under the CBCA which would apply to the acquisition of control of an FDIC-insured bank such as the Bank. Under the BHC Act, prior approval of the Federal Reserve Board is generally required for an acquisition of control of a bank by any "company" defined under the BHCA. Control for purposes of the BHCA would be based on a 25% voting stock test or on the ability of the acquiror otherwise to control the election of a majority of the Board of Directors of the Bank or Bancorp or on the ability of the acquiror to exert controlling influence over the management or policies of the Bank or Bancorp (as set forth in the BHCA). As part of such acquisition, the acquiring company (unless already so registered) would be required to register as a bank holding company under the BHCA. In addition, an existing bank holding company would have to obtain prior approval from the Federal Reserve Board under the BHCA if it sought to acquire in excess of 5% of any class of the voting stock of another bank holding company, such as Bancorp. A bank holding company's business activities are generally limited to those activities which the Federal Reserve Board determines to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Registration as a bank holding company would generally require divestiture or other termination of other business activities not approved for bank holding companies by the Federal Reserve Board under the foregoing test. In addition to the aforementioned state and federal laws governing the acquisition of stock of a bank or a bank holding company, there are various provisions of Massachusetts law which apply to the acquisition of stock of business corporations and banks. Bank Regulation. As a Massachusetts-chartered, FDIC-insured savings bank, the Bank is subject to regulation and supervision by the Commissioner and the FDIC. After the Reorganization, the Bank will continue to be subject to such regulation and supervision. Massachusetts Law. As a Massachusetts-chartered, stock form savings bank, the Bank now is, and following consummation of the Reorganization will continue to be, subject to regulation and examination by the Commissioner. The Massachusetts statutes and regulations govern, among other things, lending and investment powers, deposit activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings, and payment of dividends. The Bank is also subject to state regulatory provisions covering such matters as issuance of capital stock, branching, and mergers and acquisitions. Bancorp has been incorporated 16 19 as a business corporation under Massachusetts law. Thus, Bancorp is subject to regulation by the Secretary of State of Massachusetts and the rights of its stockholders are governed by Massachusetts corporate law. Proposed Legislation. From time to time, various types of federal and state legislation have been proposed that could result in additional regulation of, and restrictions on, the business of the Bank or Bancorp It cannot be predicted whether any legislation currently being considered will be adopted or how such legislation or any other legislation that might be enacted in the future would affect the business of the Bank or Bancorp. Certain Federal Tax Matters. If the Reorganization is consummated, Bancorp and the Bank intend to file consolidated federal income tax returns, which would have the effect of eliminating inter-company distributions, including dividends, in the computation of consolidated taxable income. Bancorp and the Bank are required to file unconsolidated state income tax returns. Although Bancorp and the Bank plan to file consolidated federal income tax returns, distributions from the Bank to Bancorp would have significant adverse tax consequences to the Bank to the extent that the distributions were deemed to be out of the Bank's bad debt reserve balance as of the close of its last taxable year beginning before January 1, 1988 (which amount otherwise generally is not subject to recapture notwithstanding the repeal in 1996 of the special thrift bad debt reserve tax rules) rather than its current or accumulated earnings and profits. The amount deemed distributed out of the bad debt reserve would increase the Bank's federal taxable income and be subject to federal income tax. However, a dividend distribution will be deemed to be out of the bad debt reserve only if it exceeds the sum of the current and accumulated earnings and profits of the Bank. Some or all of the Bank's accumulated earnings and profits for tax purposes is expected to be transferred to Bancorp by the Bank as part of the Reorganization. The actual amount of the distribution may be adjusted to the extent necessary to avoid any taxable income to the Bank. See "Financial Resources of Bancorp." Bancorp has no present intention of causing the Bank to pay cash dividends that would result in the Bank being required to recognize taxable income. Consequences of the Reorganization Under Federal Securities Laws. Upon consummation of the Reorganization, the reporting obligations of the Bank under the Exchange Act, as administered by the FDIC, will be replaced with substantially similar obligations of Bancorp under the Exchange Act, as administered by the SEC. Pursuant to the Exchange Act, Bancorp will file annual, quarterly and periodic reports with the SEC. Bancorp will also be subject to the insider trading requirements of Sections 16(a) and 16(b) of the 1934 Act as administered by the SEC. In connection with the Reorganization, the Bank will deregister the Bank's Common Stock under the Exchange Act. Upon consummation of the Reorganization, Bancorp intends to file a Registration Statement on Form S-8 to register the issuance of shares of Bancorp Common Stock under the Stock Option Plans. The issuance of Bancorp Common Stock (together with associated preferred stock purchase rights) in connection with the Reorganization is exempt from registration under the Securities Act, as a result of Section 3(a)(12) of the Securities Act. Section 3(a)(12) exempts securities issued in connection with the acquisition of a bank by a newly formed holding company from the registration requirements of the Securities Act. In order to qualify for the exemption (i) the acquisition must occur solely as part of a reorganization in which security holders exchange their shares of the bank for shares of a newly formed holding company with no significant assets other than securities of the bank and its existing subsidiaries, (ii) the security holders must receive the same proportional share interests in the holding company as they held in the bank (except for changes resulting from elimination of fractional interests and the exercise of dissenters' rights), (iii) the rights and interests of security holders in the holding company must be substantially the same as those in the bank prior to the transaction, other than as required by law, and (iv) the assets and liabilities of the holding company on a consolidated basis must be substantially the same assets and liabilities as the bank prior to the transaction. The exemption under Section 3(a)(12) would not apply to future issuances of Bancorp Common Stock. Such future issuances would be subject to the registration requirements of the Securities Act, unless another exemption under the Securities Act were available. In addition, the Section 3(a)(12) exemption does not cover the resale of any of Bancorp Common Stock issued in connection with the Reorganization. Bancorp 17 20 Common Stock received by persons who are not deemed to be "affiliates" (as such term is defined under the Securities Act) of the Bank or Bancorp may be resold without registration. Shares of Bancorp Common Stock received by persons who are deemed to be "affiliates" of the Bank or Bancorp in connection with the Reorganization will be subject to the resale restrictions of Rule 145 under the Securities Act (or Rule 144 under the Securities Act in the case of such persons who become affiliates of Bancorp), which are substantially the same as the restrictions of Rule 144. Persons who may be deemed to be "affiliates" of the Bank or Bancorp generally include individuals or entities that at the time the Plan of Reorganization is submitted for a vote of the stockholders of the Bank control, are controlled by, or are under common control with, such party and may include certain officers and directors of such party as well as principal stockholders of such party. Under the terms of the proposed Reorganization whereby the Bank will become a subsidiary of Bancorp, the Stock Option Plans will be continued as and become the stock option plans of Bancorp if the Reorganization is approved at the Special Meeting and consummated. Stock options with respect to shares of Bank Common Stock granted under the Stock Option Plans and outstanding prior to consummation of the Reorganization will automatically become options to purchase the same number of shares of Bancorp Common Stock following the Reorganization, upon identical terms and conditions and for an identical price, and Bancorp will assume all of the Bank's obligations with respect to such outstanding options. If the Plan of Reorganization is not approved by the stockholders of the Bank, then the Stock Option Plans will continue to be the stock option plans of the Bank. RELATED PARTY TRANSACTIONS Certain Directors and officers of the Bank and members of their immediate families are at present, as in the past, customers of the Bank and have transactions with the Bank in the ordinary course of business. In addition, certain of the Directors are at present, as in the past, also directors, officers or shareholders of corporations or members of partnerships which are customers of the Bank and which have transactions with the Bank in the ordinary course of business. Such transactions with Directors and officers of the Bank and with such corporations and partnership are on terms comparable to those charged to other customers of the Bank. Included in such transactions are loans to Directors and officers and their associates which were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and which did not involve more than the normal risk of collectability or present other features unfavorable to the Bank. EMPLOYMENT CONTRACT, SPECIAL TERMINATION AGREEMENTS The present employment agreement between the Chairman, President and Chief Executive Officer of the Bank, which provides for a specified minimum annual compensation and the continuation of benefits currently received, will be amended to include Bancorp as a party. Such employment may be terminated for cause, as defined, without incurring any continuing obligations. Similarly, amended special termination agreements with the President and Chief Executive Officer and certain senior executives currently in place with the Bank will be further amended to include Bancorp as a party. The amended special termination agreements generally provide for certain lump-sum severance payments within a three-year period following a "change in control," as defined therein. RECOMMENDATION OF DIRECTORS The Plan of Reorganization has been unanimously approved by the Board of Directors of the Bank and Bancorp. THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST 66 2/3% OF THE ISSUED AND OUTSTANDING SHARES OF COMMON STOCK ELIGIBLE TO BE CAST BY STOCKHOLDERS OF RECORD AT THE CLOSE OF BUSINESS ON THE RECORD DATE WILL BE REQUIRED TO APPROVE THE PLAN OF REORGANIZATION AND EACH OF THE TRANSACTIONS CONTEMPLATED THEREBY. THE BOARD OF DIRECTORS OF THE BANK BELIEVES THAT THE PLAN OF REORGANIZATION IS IN THE BEST INTERESTS OF THE BANK AND ITS STOCKHOLDERS. ACCORDINGLY, THE BOARD OF DIRECTORS RECOMMENDS THAT THE STOCKHOLDERS OF THE BANK VOTE FOR APPROVAL OF THE PLAN OF REORGANIZATION AND EACH OF THE TRANSACTIONS CONTEMPLATED THEREBY. 18 21 ACCOUNTANTS The firm of Wolf & Company, P.C. served as the Bank's independent public accountants for the year ended December 31, 1996 and is expected to serve as the Bank's independent public accountants for 1997. Representatives of Wolf & Company, P.C. are expected to be present at the Special Meeting to be available to respond to appropriate questions, and to have the opportunity to make a statement if they so desire. STOCKHOLDER PROPOSALS Proposals of stockholders intended to be presented at the 1998 Annual Meeting of Stockholders of Bancorp (or the Bank in the event the Reorganization does not occur) must be filed with the Clerk of Bancorp or the Bank, as the case may be, at least 75 days, but not more than 120 days, prior to the 1998 Annual Meeting of Stockholders, in the case of Bancorp, or the anniversary date of the prior meeting, in the case of the Bank, and no other nominations or proposals by stockholders shall be acted upon at the meeting; provided, however, in the case of the Bank, that if the Annual Meeting is scheduled to be held on a date more than 30 days before the Anniversary Date or more than 60 days after the Anniversary Date, notice by the stockholder must be so delivered or received no later than the close of business on the 75th day prior to the scheduled date of the Annual Meeting or the 15th day following the day on which public disclosure of the date of such meeting is first made by the Bank. Any such proposal should be mailed to: Clerk, Medford Savings Bank or Clerk, Medford Bancorp, Inc., as the case may be, 29 High Street, Medford, Massachusetts 02155. OTHER MATTERS At the time of the preparation of this proxy material, the Board of Directors of the Bank does not know of any other matter to be presented for action at the Annual Meeting. If any other matters should come before the meeting, proxy holders have discretionary authority to vote their shares according to their best judgment. The cost of soliciting proxies will be borne by the Bank. In addition to solicitation by mail, officers and regular employees of the Bank, who will receive no compensation for their services other than their salaries, may solicit proxies personally, by telephone or by telegraph. Brokerage houses, nominees, fiduciaries, and other custodians are requested to forward soliciting material to the beneficial owners of shares held of record by them and will be reimbursed for their expenses. The Bank also intends to employ the services of Corporate Investors Communications ("CIC") to solicit proxies. It is estimated that CIC will receive approximately $4,300, plus reimbursement of certain out-of-pocket expenses, for its service in connection with such solicitation of proxies. 19 22 EXHIBIT A PLAN OF REORGANIZATION AND ACQUISITION PURSUANT TO SECTION 26B OF CHAPTER 172 OF THE GENERAL LAWS OF MASSACHUSETTS This Plan of Reorganization and Acquisition (the "Plan") is dated as of July 29, 1997, and made between Medford Savings Bank, a Massachusetts guaranty (stock) savings bank (the "Bank"), and Medford Bancorp, Inc., a Massachusetts corporation ("Bancorp"). The Bank is a stock savings bank, duly organized and validly existing under the laws of the Commonwealth of Massachusetts, with its principal office at 29 High Street, Medford, Massachusetts 02155. As of the date hereof, the authorized capital stock of the Bank consists of (1) 15,000,000 shares of common stock, par value $0.05 per share (the "Bank Common Stock"), of which 4,541,148 shares are issued and outstanding, 200,000 shares are reserved for issuance under the Bank's 1993 Stock Option Plan (as the same may be renamed from time to time), and, 736,000 shares are reserved for issuance under the Bank's 1986 Stock Option Plan (the 1993 Stock Option Plan and the 1986 Stock Option Plan are collectively referred to herein as the "Stock Option Plans"), and (2) 5,000,000 shares of preferred stock, par value $0.50 per share, none of which shares are issued and outstanding. Bancorp is a corporation, duly organized and validly existing under the laws of the Commonwealth of Massachusetts, with its principal office at 29 High Street Medford, Massachusetts 02155. The articles of organization of Bancorp at the Effective Time (as defined herein) will provide for authorized capital stock consisting of 15,000,000 shares of common stock, par value $0.50 per share (the "Bancorp Common Stock"), and 5,000,000 shares of preferred stock, par value $0.50 per share. As of the date hereof, there are 100 shares of Bancorp Common Stock issued and outstanding, all of which are held by the Bank. The Bank and Bancorp have agreed that Bancorp will acquire all of the issued and outstanding shares of Bank Common Stock (together with associated preferred stock purchase rights) in exchange for shares of Bancorp Common stock (together with associated preferred stock purchase rights) pursuant to the provisions of Section 26B of Chapter 172 of the General Laws of Massachusetts and of this Plan. The Plan has been adopted and approved by a vote of a majority of all the members of the Board of Directors of the Bank, and by a vote of a majority of all the members of the Board of Directors of Bancorp. The officers of the Bank and of Bancorp whose respective signatures appear below have been duly authorized to execute and deliver this Plan. Now, THEREFORE, in consideration of these premises, the Bank and Bancorp agree as follows: 23 SECTION 1 - APPROVAL AND FILING OF PLAN 1.1 The Plan shall be submitted for approval by the holders of Bank Common Stock at a meeting to be called and held in accordance with the applicable provisions of law. Notice of such meeting shall be published at least once a week for two successive weeks in a newspaper of general circulation in the County of Suffolk, Commonwealth of Massachusetts. Both of said publications shall be at least fifteen days prior to the date of the meeting. 1.2 Upon approval of the Plan by the affirmative vote of the holders of 66 2/3% of the outstanding shares of Bank Common Stock as required by law, the Bank and Bancorp shall submit the Plan to the Commissioner of Banks of the Commonwealth of Massachusetts (the "Bank Commissioner") for his approval and filing in accordance with the provisions of Section 26B of Chapter 172 of the General Laws of Massachusetts. The Plan shall be accompanied by such certificates of the respective officers of the Bank and Bancorp as may be required by law and a written request from the Bank that the Plan not be filed by the Bank Commissioner until such future time as the Bank Commissioner shall have received from the Bank and Bancorp the written notice described in Subsection 2.1. 1.3 If the requisite approval of the Plan is obtained at the meeting of holders of Bank Common Stock referred to in Subsection 1.1, thereafter and until the Effective Time, as hereinafter defined, the Bank shall issue certificates for Bank Common Stock, whether upon transfer or otherwise, only if such certificates bear a legend indicating that the Plan has been approved and that shares of Bank Common Stock evidenced by such certificates are subject to acquisition by Bancorp pursuant to the Plan. SECTION 2 - DEFINITION OF EFFECTIVE TIME 2.1 The Plan shall become effective at 12:01 A.M. on the first business day following the date on which the Bank and Bancorp advise the Bank Commissioner in writing (i) that all the conditions precedent to the Plan becoming effective specified in Section 5 have been satisfied and (ii) that the Plan has not been abandoned by the Bank or Bancorp in accordance with the provisions of Section 6, or at such other date and time as is specified in such written notice to the Bank Commissioner. Such time is hereafter called the "Effective Time." SECTION 3 - ACTIONS AT THE EFFECTIVE TIME 3.1 At the Effective Time, Bancorp shall, without any further action on its part or on the part of the holders of Bank Common Stock, automatically and by operation of law acquire and become the owner for all purposes of all the then issued and outstanding shares of Bank Common Stock (together with associated preferred stock purchase rights) and shall be entitled to have issued to it by the Bank a certificate or certificates representing such shares. Thereafter, Bancorp shall have full and exclusive power to vote such shares of Bank Common Stock, to receive dividends thereon and to exercise all rights of an owner thereof. 2 24 3.2. At the Effective Time, the shares of Bancorp Common Stock which are outstanding immediately prior to the Effective Time shall be canceled. 3.3. At the Effective Time, the holders of the then issued and outstanding shares of Bank Common Stock (together with associated preferred stock purchase rights) shall, without any further action on their part or on the part of Bancorp, automatically and by operation of law cease to own such shares and shall instead become owners of one share of Bancorp Common Stock (together with associated preferred stock purchase rights) for each share of Bank Common Stock held by them immediately prior to the Effective Time. Thereafter, such persons shall have full and exclusive power to vote such shares of Bancorp Common Stock, to receive dividends thereon, except as otherwise provided herein, and to exercise all rights of an owner thereof. 3.4. At the Effective Time, all previously issued and outstanding certificates representing shares of Bank Common Stock (the "Old Certificates") shall automatically and by operation of law cease to represent shares of Bank Common Stock or any interest therein and each Old Certificate shall instead represent the ownership by the holder thereof of an equal number of shares of Bancorp Common Stock. No holder of an Old Certificate shall be entitled to vote the shares of Bank Common Stock formerly represented by such certificate, or to receive dividends thereon, or to exercise any other rights of ownership in respect thereof. 3.5. Notwithstanding any of the foregoing, any Dissenting Stockholder, as defined in Subsection 8.1, shall have such rights as are provided by Subsection 8.2 and by the laws of the Commonwealth of Massachusetts. SECTION 4 - ACTIONS AFTER THE EFFECTIVE TIME As soon as practicable and in any event not more than thirty days after the Effective Time: 4.1. Bancorp shall deliver to the transfer agent for the Bank and Bancorp (the "Transfer Agent"), as agent for the then holders of the Old Certificates (other than Old Certificates representing shares of Bank Common Stock as to which dissenters' appraisal rights shall have been exercised), a certificate or certificates for the aggregate number of shares of Bancorp Common Stock (the "New Certificates"), to which said holders shall be entitled. Each such holder may surrender his Old Certificate to the Transfer Agent and receive in exchange therefor a New Certificate for an equal number of shares of Bancorp Common Stock. However, holders of Old Certificates need not surrender Old Certificates to the transfer Agent in exchange for a New Certificate. The Transfer Agent shall treat Old Certificates as representing for all purposes an equal number of shares of Bancorp Common Stock. 4.2. Bancorp may publish a notice to the holders of all Old Certificates, specifying the Effective Time of the Plan and notifying such holders that they may present their Old Certificates to the Transfer Agent for exchange for a New Certificate representing an equal number of shares of Bancorp Common Stock. Such notice may likewise be given by mail to such holders at their addresses on the Bank's records. 3 25 SECTION 5--CONDITIONS PRECEDENT The Plan and the acquisition provided for herein shall not become effective unless all of the following first shall have occurred: 5.1 The Plan shall have been approved by the affirmative vote of the holders of two-thirds of the outstanding Bank Common Stock at a meeting of such stockholders called for such purpose. 5.2 The Plan shall have been approved by the Bank Commissioner and a copy of the Plan with his approval endorsed thereon shall have been filed in his office, all as provided in Section 26B of Chapter 172 of the General Laws of Massachusetts. 5.3 Any approval, consent, or waiver required by the Board of Governors of the Federal Reserve System shall have been received, and any waiting period imposed by applicable law shall have expired. 5.4 The Bank shall have received a favorable opinion from its counsel, satisfactory in form and substance to the Bank, with respect to the federal income tax consequences of the Plan and the acquisition contemplated thereby. 5.5 The shares of Bancorp Common Stock (together with associated preferred stock purchase rights) to be issued to the holders of Bank Common Stock pursuant to the Plan shall have been registered or qualified for such issuance to the extent required under all applicable state securities laws. 5.6 The Bank and Bancorp shall have obtained all other consents, permissions and approvals and taken all actions required by law or agreement, or deemed necessary by the Bank or Bancorp, prior to the consummation of the acquisition provided for by the Plan and to Bancorp's having and exercising all rights of ownership with respect to all of the outstanding shares of Bank Common Stock acquired by it thereunder. SECTION 6--ABANDONMENT OF PLAN 6.1 The Plan may be abandoned by either the Bank or Bancorp at any time before the Effective Time in the event that: (a) Necessary regulatory approvals cannot be obtained, or the conditions or obligations associated with such regulatory approvals make consummation of the acquisition contemplated by the Plan inadvisable in the opinion of Bank or Bancorp; (b) The number of shares of Bank Common Stock owned by Dissenting Stockholders, as defined in Subsection 8.1, shall make consummation of the acquisition contemplated by the Plan inadvisable in the opinion of the Bank or Bancorp; 4 26 (c) Any action, suit, proceeding or claim has been instituted, made or threatened relating to the Plan which shall make consummation of the acquisition contemplated by the Plan inadvisable in the opinion of the Bank or Bancorp; or (d) For any other reason consummation of the acquisition contemplated by the Plan is inadvisable in the opinion of the Bank or Bancorp. Such abandonment shall be effected by written notice by either the Bank or Bancorp to the other of them, and shall be authorized or approved by the Board of Directors of the party giving such notice. Upon the giving of such notice, the Plan shall be terminated and there shall be no liability hereunder or on account of such on the part of the Bank or Bancorp or the Directors, officers, employees, agents or stockholders of either of them. In the event of abandonment of the Plan, the Bank shall pay the fees and expenses incurred by itself and Bancorp in connection with the Plan and the proposed acquisition. If either party hereto gives written notice of termination to the other party pursuant to this section, the party giving such written notice shall simultaneously furnish a copy thereof to the Bank Commissioner. SECTION 7 -- AMENDMENT OF PLAN 7.1. The Plan may be amended or modified at any time by mutual agreement of the Boards of Directors of Bancorp and the Bank (i) prior to its approval by the stockholders of the Bank, in any respect, and (ii) subsequent to such approval, in any respect, provided that the Bank Commissioner shall approve of such amendment or modification. SECTION 8 -- RIGHTS OF DISSENTING STOCKHOLDERS 8.1. "Dissenting Stockholders" shall mean those holders of Bank Common Stock who file with the Bank before the taking of the vote on the Plan, written objection to the Plan, pursuant to Section 86 of Chapter 156B of the General Laws of Massachusetts, stating that they intend to demand payment for their shares of Bank Common Stock if the Plan is consummated and whose shares are not voted in favor of the Plan. 8.2. Dissenting Stockholders who comply with the provisions of Sections 86 to 98, inclusive, of Chapter 156B of the General Laws of Massachusetts and all other applicable provisions of law shall be entitled to receive from the Bank payment of the fair value of their shares of Bank Common Stock upon surrender by such holders of the certificates which previously represented shares of Bank Common Stock. Certificates so obtained by the Bank, upon payment of the fair value of such shares as provided by law, shall be canceled. Shares of Bancorp Common Stock, to which Dissenting Stockholders would have been entitled had they not dissented, shall be deemed to constitute authorized but unissued shares of Bancorp Common Stock and may be sold or otherwise disposed of by Bancorp at the discretion of, and on such terms as may be fixed by, its Board of Directors. 5 27 SECTION 9 -- STOCK OPTIONS By voting in favor of the Plan and by consummation of the acquisition contemplated by the Plan, Bancorp shall have approved adoption by Bancorp of the Stock Option Plans of the Bank as the Stock Option Plans of Bancorp and shall have agreed to issue Bancorp Common Stock in lieu of Bank Common Stock pursuant to stock options then outstanding under the Stock Option Plans. As of the Effective Time, the unexercised portion of the options outstanding under the existing Stock Option Plans shall be assumed by Bancorp and thereafter shall be exercisable only for shares of Bancorp Common Stock, with each such option being exercisable for a number of shares of Bancorp Common Stock equal to the number of shares of Bank Common Stock that were available thereunder immediately prior to the Effective Time, and with no change in the exercise price or any other term or condition of such option. Bancorp and the Bank shall make appropriate amendments to the Stock Option Plans to reflect the adoption of such plans as the Stock Option Plans of Bancorp without adverse effect upon the options outstanding under the Stock Option Plans. SECTION 10 -- GOVERNING LAW The Plan shall take effect as a sealed instrument and shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts. SECTION 11 -- COUNTERPARTS The Plan may be executed in several identical counterparts, each of which when executed and delivered by the parties hereto shall be an original, but all of which together shall constitute a single instrument. In making proof of the Plan, it shall not be necessary to produce or account for more than one such counterpart. 6 28 MEDFORD SAVINGS BANK By: /s/ Arthur H. Meehan --------------------------------- Arthur H. Meehan Chairman, President and Chief Executive Officer ATTEST: /s/ Eugene R. Murray - - - -------------------------------------- Eugene R. Murray Clerk MEDFORD BANCORP, INC. By: /s/ Arthur H. Meehan --------------------------------- Arthur H. Meehan Chairman, President and Chief Executive Officer ATTEST: /s/ Eugene R. Murray - - - -------------------------------------- Eugene R. Murray Clerk 7 29 EXHIBIT B PROVISIONS OF THE GENERAL LAW OF MASSACHUSETTS RELATING TO RIGHTS OF DISSENTING STOCKHOLDERS (Sections 86 to 98 of Chapter 156B of the General Laws of Massachusetts) SECTION 86. Sections Applicable To Appraisal; Prerequisites. If a corporation proposes to take a corporate action as to which any section of this chapter provides that a stockholder who objects to such action shall have the right to demand payment for his shares and an appraisal thereof, sections eighty-seven to ninety-eight, inclusive, shall apply except as otherwise specifically provided in any section of this chapter. Except as provided in sections eighty-two and eighty-three, no stockholder shall have such right unless (1) he files with the corporation before the taking of the vote of the shareholders on such corporate action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) his shares are not voted in favor of the proposed action. SECTION 87. Statement Of Rights Of Objecting Stockholder In Notice of Meeting; Form. The notice of the meeting of stockholders at which the approval of such proposed action is to be considered shall contain a statement of the rights of objecting stockholders. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand payment for his stock, and the directors may authorize the inclusion in any such notice of a statement of opinion by the management as to the existence or non-existence of the right of the stockholders to demand payment for their stock on account of the proposed corporate action. The notice may be in such form as the directors or officers calling the meeting deem advisable, but the following form of notice shall be sufficient to comply with this section: "If the action proposed is approved by the stockholders at the meeting and effected by the corporation, any stockholder (1) who files with the corporation before the taking of the vote on the approval of such action, written objection to the proposed action stating that he intends to demand payment for his shares if the action is taken and (2) whose shares are not voted in favor of such action has or may have the right to demand in writing from the corporation (or, in the case of a consolidation or merger, the name of the resulting or surviving corporation shall be inserted), within twenty days after the date of mailing to him of notice in writing that the corporate action has become effective, payment for his shares and an appraisal of the value thereof. Such corporation and any such stockholder shall in such cases have the rights and duties and shall follow the procedure set forth in Sections 88 to 98, inclusive, of Chapter 156B of the General Laws of Massachusetts." SECTION 88. Notice Of Effectiveness Of Action Objected To. The corporation taking such action, or in the case of a merger or consolidation the surviving or resulting corporation, shall, within ten days after the date on which such corporate action became effective, notify each stockholder who filed a written objection meeting the requirements of section eighty-six and whose shares were not voted in favor of the approval of such action, that the action approved at the meeting of the corporation of which he is a stockholder has become effective. The giving of such notice shall not be deemed to create any rights in any stockholder receiving the same to demand payment for his stock. The notice shall be sent by registered or certified mail, addressed to the stockholder at his last known address as it appears in the records of the corporation. SECTION 89. Demand For Payment; Time For Payment. If within twenty days after the date of mailing of a notice under subsection (e) of section eighty-two, subsection (f) of section eighty-three, or section eighty-eight, any stockholder to whom the corporation was required to give such notice shall demand in writing from the corporation taking such action, or in the case of a consolidation or merger from the resulting or surviving corporation, payment for his stock, the corporation upon which such demand is made shall pay to him 30 the fair value of his stock within thirty days after the expiration of the period during which such demand may be made. SECTION 90. Demand For Determination of Value; Bill In Equity; Venue. If during the period of thirty days provided for in section eighty-nine the corporation upon which such demand is made and any such objecting stockholder fail to agree as to the value of such stock, such corporation or any such stockholder may within four months after the expiration of such thirty-day period demand a determination of the value of the stock of all such objecting stockholders by a bill in equity filed in the superior court in the county where the corporation in which such objecting stockholder held stock had or has its principal office in the commonwealth. SECTION 91. Parties To Suit To Determine Value; Service. If the bill is filed by the corporation, it shall name as parties respondent all stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof. If the bill is filed by a stockholder, he shall bring the bill in his own behalf and in behalf of all other stockholders who have demanded payment for their shares and with whom the corporation has not reached agreement as to the value thereof, and service of the bill shall be made upon the corporation by subpoena with a copy of the bill annexed. The corporation shall file with its answer a duly verified list of all such other stockholders, and such stockholders shall thereupon be deemed to have been added as parties to the bill. The corporation shall give notice in such form and returnable on such date as the court shall order to each stockholder party to the bill by registered or certified mail, addressed to the last known address of such stockholder as shown in the records of the corporation, and the court may order such additional notice by publication or otherwise as it deems advisable. Each stockholder who makes demand as provided in section eighty-nine shall be deemed to have consented to the provisions of this section relating to notice, and the giving of notice by the corporation to any such stockholder in compliance with the order of the court shall be a sufficient service of process on him. Failure to give notice to any stockholder making demand shall not invalidate the proceedings as to other stockholders to whom notice was properly given, and the court may at any time before the entry of a final decree make supplementary orders of notice. SECTION 92. Decree Determining Value And Ordering Payments; Valuation Date. After hearing the court shall enter a decree determining the fair value of the stock of those stockholders who have become entitled to the valuation of and payment for their shares, and shall order the corporation to make payment of such value, together with interest, if any, as hereinafter provided, to the stockholders entitled thereto upon the transfer by them to the corporation of the certificates representing such stock if certificated or, if uncertificated, upon receipt of an instruction transferring such stock to the corporation. For this purpose, the value of the shares shall be determined as of the day preceding the date of the vote approving the proposed corporate action and shall be exclusive of any element of value arising from the expectation or accomplishment of the proposed corporate action. SECTION 93. Reference to Special Master. The court in its discretion may refer the bill or any question arising thereunder to a special master to hear the parties, make findings and report the same to the court, all in accordance with the usual practice in suits in equity in the superior court. SECTION 94. Notation On Stock Certificates Of Pendency Of Bill. On motion the court may order stockholder parties to the bill to submit their certificates of stock to the corporation for the notation thereon of the pendency of the bill and may order the corporation to note such pendency in its records with respect to any uncertificated shares held by such stockholder parties, and may on motion dismiss the bill as to any stockholder who fails to comply with such order. SECTION 95. Costs; Interest. The costs of the bill, including the reasonable compensation and expenses of any master appointed by the court, but exclusive of fees of counsel or of experts retained by any party, shall be determined by the court and taxed upon the parties to the bill, or any of them, in such manner as appears to be equitable, except that all costs of giving notice to stockholders as provided in this chapter shall B-2 31 be paid by the corporation. Interest shall be paid upon any award from the date of the vote approving the proposed corporate action, and the court may on application of any interested party determine the amount of interest to be paid in the case of any stockholder. SECTION 96. Dividends And Voting Rights After Demand For Payment. Any stockholder who has demanded payment for his stock as provided in this chapter shall not thereafter be entitled to notice of any meeting of stockholders or to vote such stock for any purpose and shall not be entitled to the payment of dividends or other distribution on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the date of the vote approving the proposed corporate action) unless: (1) A bill shall not be filed within the time provided in section ninety; (2) A bill, if filed, shall be dismissed as to such stockholder; or (3) Such stockholder shall with the written approval of the corporation, or in the case of a consolidation or merger, the resulting or surviving corporation, deliver to it a written withdrawal of his objections to and an acceptance of such corporate action. Notwithstanding the provisions of clauses (1) to (3), inclusive, said stockholder shall have only the rights of a stockholder who did not so demand payment for his stock as provided in this chapter. SECTION 97. Status Of Shares Paid For. The shares of the corporation paid for by the corporation pursuant to the provisions of this chapter shall have the status of treasury stock, or in the case of a consolidation or merger the shares or the securities of the resulting or surviving corporation into which the shares of such objecting stockholder would have been converted had he not objected to such consolidation or merger shall have the status of treasury stock or securities. SECTION 98. Exclusive Remedy; Exception. The enforcement by a stockholder of his right to receive payment for his shares in the manner provided in this chapter shall be an exclusive remedy except that this chapter shall not exclude the right of such stockholder to bring or maintain an appropriate proceeding to obtain relief on the ground that such corporate action will be or is illegal or fraudulent as to him. B-3 32 EXHIBIT C THE COMMONWEALTH OF MASSACHUSETTS - - - --------- Examiner William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 ARTICLES OF ORGANIZATION (General Laws, Chapter 156B) - - - --------- Name Approved ARTICLE I The exact name of the corporation is: Medford Bancorp, Inc. ARTICLE II The purpose of the corporation is to engage in the following business activities: See attached Addendum A to the Articles of Organization. C / / Note: If the space provided under any article or item on this form is P / / insufficient, additions shall be set forth on one side only of M / / separate 8 1/2 x 11 sheets of paper with a left margin of at least 1 R.A. / / inch. Additions to more than one article may be made on a single sheet so long as each article requiring each addition is clearly indicated. - - - ---------- P.C. 33 ARTICLE III State the total number of shares and par value, if any, of each class of stock which the corporation is authorized to issue.
WITHOUT PAR VALUE WITH PAR VALUE - - - ------------------------------- -------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - - - ---- ---------------- ---- ---------------- --------- Common: 0 Common: 15,000,000 $.50 - - - ------------------------------------------------------------------------------- Preferred: 0 Preferred: 5,000,000 $.50 - - - -------------------------------------------------------------------------------
ARTICLE IV If more than one class of stock is authorized, state a distinguishing designation for each class. Prior to the issuance of any shares of a class, if shares of another class are outstanding, the corporation must provide a description of the preferences, voting powers, qualifications, and special or relative rights or privileges of that class and of each other class of which shares are outstanding and of each series then established within any class. See attached Addendum B to the Articles of Organization. ARTICLE V The restrictions, if any, imposed by the Articles of Organization upon the transfer of shares of stock of any class are: None. ARTICLE VI **Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See attached Addendum C to the Articles of Organization. **If there are no provisions state "None". Note: The preceding six (6) articles are considered to be permanent and may ONLY be changed by filing appropriate Articles of Amendment. 34 ADDENDUM A TO THE ARTICLES OF ORGANIZATION OF MEDFORD BANCORP, INC. ARTICLE II A. To acquire, invest in or hold stock in any subsidiary permitted under (i) the Bank Holding Company Act of 1956, and (ii) Massachusetts General Laws, Chapter 167A, as such statutes may be amended from time to time, and to engage in any other activity or enterprise permitted to a bank holding company under said statutes or other applicable law. B. To buy, sell, invest in, hold and deal in property of every nature and description, real and personal, tangible and intangible permissible for such a corporation. C. To carry on any business or other activity which may be lawfully carried on by a corporation organized under the Business Corporation Law of the Commonwealth of Massachusetts, whether or not related to those referred to in the foregoing paragraphs. A-1 35 ADDENDUM B TO THE ARTICLES OF ORGANIZATION OF MEDFORD BANCORP, INC. ARTICLE IV. Capital Stock. The total number of shares of all classes of capital stock which Medford Bancorp, Inc. ("Bancorp") is authorized to issue is 20,000,000 shares, of which 15,000,000 shares shall be common stock, $.50 par value per share, and 5,000,000 shares shall be preferred stock, $.50 par value per share. The shares may be issued by Bancorp from time to time by a vote of its Board of Directors without the approval of its stockholders. Upon payment of lawful consideration, such shares shall be deemed to be fully paid and nonassessable. In the case of a stock dividend, that part of the surplus of Bancorp which is transferred to stated capital upon the issuance of shares as a stock dividend shall be deemed to be the consideration for their issuance. A description of the different classes and series of Bancorp's capital stock and a statement of the designations and the relative rights, preferences and limitation of the shares of each class and series of capital stock are as follows: A. Common Stock. Except as provided by law or in this Article IV (or in any supplemental sections hereto or in any certificate of establishment of any series of preferred stock), the holders of the common stock shall exclusively possess all voting power. Each holder of shares of common stock shall be entitled to one vote for each share held by such holder. There shall be no cumulative voting rights in the election of Directors. If there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of a sinking fund or a retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends; but only when and as declared by the Board of Directors. In the event of any liquidation, dissolution or winding up of Bancorp, after there shall have been paid to or set aside for the holders of any class having preference over the common stock in the event of liquidation, dissolution or winding up of Bancorp the full preferential amounts to which they are respectively entitled, the holders of the common stock, and of any class or series of stock entitled to participate in whole or in part therewith as to distribution of B-1 36 assets, shall be entitled, after payment or provision for payment of all debts and liabilities of Bancorp, to receive the remaining assets of Bancorp available for distribution, in cash or in kind, in proportion to their holdings. B. Preferred Stock. The Board of Directors of Bancorp is authorized by vote or votes, from time to time adopted, to provide for the issuance of preferred stock in one or more series and to fix and state the voting powers, designations, preferences and relative participating, optional or other special rights of the shares of each series and the qualifications, limitations, and restrictions thereof, including, but not limited to, determination of one or more of the following: (1) The distinctive serial designation and the number of shares constituting such series; (2) The dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends and the participating or other special rights, if any, with respect to dividends; (3) The voting powers, if any, of shares of such series; (4) Whether the shares of such series shall be redeemable and, if so, the price or prices at which, and the terms and conditions on which, such shares may be redeemed; (5) The amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of Bancorp; (6) Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemable or purchased through the application of such fund; (7) Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of Bancorp, and if so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; (8) The price or other consideration for which the shares of such series shall be issued; and B-2 37 (9) Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of preferred stock and whether such shares may be reissued as shares of the same or any other series of stock. Unless otherwise provided by law, any such vote shall become effective when Bancorp files with the Secretary of State of the Commonwealth of Massachusetts a certificate of establishment of one or more series of preferred stock signed by the President or any Vice President and by the Clerk, Assistant Clerk, Secretary or Assistant Secretary of Bancorp, setting forth a copy of the vote of the Board of Directors establishing and designating the series and fixing and determining the relative rights and preferences thereof, the date of adoption of such vote and a certification that such vote was duly adopted by the Board of Directors. B-3 38 ADDENDUM C TO THE ARTICLES OF ORGANIZATION OF MEDFORD BANCORP, INC. ARTICLE VI(A). Certain Business Combinations. SECTION 1. Vote Required for Certain Business Combinations. A. Required Vote for Certain Business Combinations. In addition to any affirmative vote required by the Massachusetts General Laws or by these Articles of Organization, and except as otherwise expressly provided in Section 2 of this Article VI(A): (1) any merger or consolidation of Bancorp or any Subsidiary (as hereinafter defined) with (a) any Interested Stockholder (as hereinafter defined) or (b) any other corporation or entity (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate (as hereinafter defined) of an Interested Stockholder; (2) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of Bancorp or any Subsidiary having an aggregate Fair Market Value (as hereinafter defined) of $1,000,000 or more; (3) the issuance or transfer by Bancorp or any Subsidiary (in one transaction or a series of transactions) or any securities of Bancorp or any Subsidiary to any Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities, or other property (or a combination thereof) having an aggregate Fair Market Value of $1,000,000 or more; (4) the adoption of any plan or proposal for the liquidation or dissolution of Bancorp proposed by or on behalf of any Interested Stockholder of any Affiliate of any Interested Stockholder; or (5) any reclassification of securities (including any reverse stock split), any recapitalization of Bancorp, any merger or consolidation of Bancorp with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving any Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportion of the outstanding shares of any class of equity or convertible securities of Bancorp or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder; C-1 39 shall require (subject to Section 2 or this Article VI(A)) the affirmative vote of the holders of at least eighty percent of the voting power of the then outstanding shares of capital stock of Bancorp entitled to vote generally in the election of directors (the "Voting Stock"), voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required or that a lesser percentage may be specified by law. B. Definition of "Business Combination." The term "Business Combination" as used in this Article VI(A) shall mean any transaction which is referred to in any one or more of clauses (1) through (5) of Paragraph A of this Section 1. SECTION 2. When Higher Vote is Not Required. The provisions of Section 1 of this Article VI(A) shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of these Articles of Organization, if all of the conditions specified in either of the following Paragraphs A or B are met: A. Approval by Continuing Directors. The Business Combination shall have been approved by a majority of the Continuing Directors then in office (as hereinafter defined); or B. Price and Procedure Requirements. All of the following conditions shall have been met: (1) The aggregate amount of cash and the Fair Market Value as of the date of the consummation of the Business Combination (the "Consummation Date") of any consideration other than cash to be received per share by holders of common stock in such Business Combination shall be at least equal to the highest of the following: (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of common stock acquired by it (i) within the two-year period immediately prior to and including the first public announcement of the proposed Business Combination (the "Announcement Date") or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) the highest Fair Market Value per share of common stock on any date during the one-year period prior to and including the Announcement Date; and (c) (if applicable) the price per share equal to the product of (i) the Fair Market Value per share of common stock on the Announcement Date or on the date on which the Interested Stockholder C-2 40 became an Interested Stockholder (such later date is referred to in this Article VI(A) as the "Determination Date"), whichever is higher, multiplied by (ii) the ratio of (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interest Stockholder for any shares of common stock acquired by it within the two-year period immediately prior to and including the Announcement Date to (y) the Fair Market Value per share of common stock on the first day in such two-year period upon which the Interested Stockholder acquired any shares of common stock. (2) The aggregate amount of the cash and the Fair Market Value as of the Consummation Date of the Business Combination of consideration other than cash to be received per share by holders of any other class of outstanding Voting Stock shall be at least equal to the highest of the following (it being intended that the requirements of this Paragraph B(2) shall be required to be met with respect to every other class of outstanding Voting Stock, whether or not the Interested Stockholder has previously acquired any shares of a particular class of Voting Stock): (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it (i) within the two-year period immediately prior to and including the Announcement Date or (ii) in the transaction in which it became an Interested Stockholder, whichever is higher; (b) (if applicable) the highest preferential amount per share which the holders of shares of such class of Voting Stock are entitled to receive from Bancorp in the event of any voluntary or involuntary liquidation, dissolution or winding up of Bancorp; (c) the highest Fair Market Value per share of such class of Voting Stock on any date during the one-year period prior to and including the Announcement Date; and (d) (if applicable) the price per share equal to the product of (i) the Fair Market Value per share of such class of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher, multiplied by (ii) the ratio of (x) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Stockholder for any shares of such class of Voting Stock acquired by it within the two-year period immediately prior to and including the Announcement Date to (y) the Fair Market Value per share of such class of Voting Stock on the first day in such two-year period C-3 41 upon which the Interested Stockholder acquired any shares of such class of Voting Stock. (3) The consideration to be received by holders of a particular class of outstanding Voting Stock (including common stock) shall be in cash or in the same form as the Interested Stockholder has previously paid for shares of such class of Voting Stock. If the Interested Stockholder has paid for shares of any class of Voting Stock with varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class of Voting Stock previously acquired by it. (4) After such Interested Stockholder has become an Interested Stockholder and prior to the consummation of any such Business Combination: (a) there shall have been (i) no failure to declare and pay at regular dates therefor the full amount of any dividends (whether or not cumulative) payable on any class or series having a preference over the common stock of Bancorp as to dividends or upon liquidation, except as approved by a majority of the Continuing Directors; (ii) no reduction in the annual rate of dividends paid on the common stock (except as necessary to reflect any subdivision of the common stock), except as approved by a majority of the Continuing Directors; and (iii) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the common stock, unless the failure to so increase such annual rate is approved by a majority of the Continuing Directors; and (b) such Interested Stockholder shall have not become the beneficial owner of any additional shares of Voting Stock except as part of the transaction which results in such Interested Stockholder's becoming an Interested Stockholder. (5) After such Interested Stockholder has become an Interested Stockholder, such Interested Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a stockholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by Bancorp, whether in anticipation of or in connection with such Business Combination or otherwise, unless such transaction shall have been approved or ratified by a majority of the Continuing Directors after such person shall have become an Interested Stockholder. C-4 42 (6) A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public stockholders of Bancorp at least twenty days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). SECTION 3. Certain Definitions. For the purpose of these Articles of Organization: A. A "person" shall mean an individual, a group acting in concert, a corporation, a partnership, a limited liability company, an association, a joint stock company, a trust, a business trust, a government or political subdivision, any unincorporated organization and any similar association or entity. B. "Interested Stockholder" shall mean any person (other than Bancorp or any Subsidiary) who or which: (1) is the beneficial owner, directly or indirectly, of more than ten percent of the voting power of the then outstanding shares of Voting Stock; (2) is an Affiliate of Bancorp and at any time within the two-year period immediately prior to and including the date in question was the beneficial owner, directly or indirectly, of ten percent of more of the voting power of the then outstanding shares of Voting Stock; or (3) is an assignee of or has otherwise succeeded to the beneficial ownership of any shares of Voting Stock which were at any time within the two-year period immediately prior to and including the date in question beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933 and such assignment or succession was not approved by a majority of the Continuing Directors. C. A person shall be a "beneficial owner" of any shares of Voting Stock: (1) which such person or any of its Affiliates or Associates, directly or indirectly, has or shares with respect to the Voting Stock (a) the right to acquire or direct the acquisition of (whether such right is exercisable immediately or only after the passage of time or upon the satisfaction of any conditions or both), pursuant to any agreement, arrangement or understanding or upon the exercise of any conversion rights, warrants, or options or otherwise; (b) the right to vote, or direct the voting of, C-5 43 pursuant to any agreement, arrangement or understanding or otherwise; or (c) the right to dispose of or transfer or direct the disposition or transfer of, pursuant to any agreement, arrangement, understanding or otherwise; or (2) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement, or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. D. For the purpose of determining whether a person is an Interested Stockholder pursuant to Paragraph B of this Section 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned by such person through application of Paragraph C of this Section 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options or otherwise. E. "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended. F. "Subsidiary" means any corporation of which a majority of any class of equity security is owned, directly or indirectly, by Bancorp; provided, however, that for the purposes of the definition of Interested Stockholder set forth in Paragraph B of this Section 3, the term "Subsidiary" shall mean only a corporation of which a majority of each class of equity security is owned, directly or indirectly, by Bancorp. G. "Continuing Director" means any member of the Board of Directors of Bancorp (the "Board") who is not an Affiliate or Associate of the Interested Stockholder and was a member of the Board prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Continuing Director who is not an Affiliate or Associate of the Interested Stockholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board. H. "Fair Market Value" means: (1) in the case of stock, the highest closing sale price during the thirty-day period immediately preceding the date in question of a share of such stock on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the thirty-day period preceding the date in question on the National Association of Securities Dealers Automated Quotation System or any comparable system then in use, or if no such quotations are available, the fair market value on the date in question of a C-6 44 share of such stock as determined by at least a majority of the Continuing Directors of the Board in good faith; and (2) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by at least a majority of the Continuing Directors of the Board in good faith. I. "Group Acting in Concert" shall mean persons seeking to combine or pool their voting or other interests in the securities of Bancorp for a common purpose, pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written, oral or otherwise, or any "group of persons" as defined under Section 13(d) of the Securities Exchange Act of 1934. When persons act together for any such purpose, their group is deemed to have acquired their stock. J. In the event of any Business Combination in which Bancorp survives, the phrase "other consideration to be received" as used in Paragraphs B(1) and (2) of Section 2 of this Article VI(A) shall include the shares of common stock and/or the shares of any other class of outstanding Voting Stock retained by the holders of such shares. SECTION 4. Powers of the Board of Directors. A majority of the Directors of Bancorp (or, if there is an Interested Stockholder, a majority of the Continuing Directors then in office) shall have the power to determine for the purposes of this Article VI(A), on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Stockholder, (B) the number or percentage of any class of securities beneficially owned by any person, (C) whether a person is an Affiliate or Associate of or is affiliated or associated with another, (D) whether the requirements of Section 2 of this Article VI(A) have been met with respect to any Business Combination, (E) whether the assets which are the subject of any Business Combination have, or the consideration to be received for the issuance or transfer of securities by Bancorp or any Subsidiary in any Business Combination has, an aggregate Fair Market Value of $1,000,000 or more and (F) any other matters of interpretation arising under this Article VI(A). The good faith determination of a majority of the Directors (or, if there is an Interested Stockholder, a majority of the Continuing Directors then in office) on such matters shall be conclusive and binding for all purposes of this Article VI(A). SECTION 5. No Effect on Fiduciary Obligations of Interested Stockholders. Nothing contained in this Article VI(A) shall be construed to relieve any Interested Stockholder from any fiduciary obligation imposed by law. ARTICLE VI(B). Standards for Board of Directors' Evaluation of Offers. C-7 45 The Board of Directors of Bancorp, when evaluating any offer of another person (as defined in Article VI(A) hereof) to (A) make a tender or exchange offer for any equity security of Bancorp or any Subsidiary (as defined in Article VI(A) hereof), (B) merge or consolidate Bancorp or any Subsidiary with another institution or (C) purchase or otherwise acquire all or substantially all of the properties and assets of Bancorp or any Subsidiary, shall, in connection with the exercise of its judgment in determining what is in the best interests of Bancorp and its stockholders, give due consideration to all relevant factors including, without limitation, the social and economic effects of acceptance of such offer on Bancorp's and/or any Subsidiaries' present and future account holders, borrowers and employees; on the communities in which Bancorp or any Subsidiary operates or is located; and on the ability of Bancorp and its Subsidiaries to fulfill their objectives under applicable statutes and regulations. ARTICLE VI(C). Pre-emptive Rights. Holders of the capital stock of Bancorp shall not be entitled to preemptive rights with respect to any shares of the capital stock of Bancorp which may be issued. ARTICLE VI(D). Directors. Bancorp shall be under the direction of a Board of Directors. The number of Directors shall not be fewer nor more than permitted by law. The Board of Directors shall be divided into three classes as nearly equal in number as possible, with one class to be elected annually. Any Director (including persons elected by Directors to fill vacancies in the Board of Directors) may be removed from office, with or without cause, by an affirmative vote of not less than (i) 80% of the total votes eligible to be cast by stockholders in the election of directors at a duly constituted meeting of stockholders called expressly for such purpose, or (ii) 66 2/3% of the members of the Board of Directors then in office, unless at the time of such removal there shall be an Interested Stockholder, in which case the affirmative vote of not less than a majority of the Continuing Directors then in office shall instead be required for removal by vote of the Board of Directors. At least thirty days prior to such meeting of stockholders, written notice shall be sent to the Director whose removal will be considered at the meeting. ARTICLE VI(E). Transactions with Interested Persons. SECTION 1. Unless entered into in bad faith or in violation of any provision of these Articles of Organization, no contract or transaction by Bancorp shall be void, voidable or in any way affected by reason of the fact that it is with an Interested Person. SECTION 2. For the purposes of this Article VI(E), "Interested Person" means any person or organization in any way interested in Bancorp whether as a director, officer, stockholder, employee or otherwise, and any other entity in which any such person or organization of Bancorp is in any way interested. C-8 46 SECTION 3. Unless such contract or transaction was entered into in bad faith or in violation of any provision of these Articles of Organization, no Interested Person, because of such interest, shall be liable to Bancorp or to any other person or organization for any loss or expense incurred by reason of such contract or transaction or shall be accountable for any gain or profit realized from such contract or transaction. SECTION 4. The provisions of this Article VI(E) shall be operative notwithstanding the fact that the presence of an Interested Person was necessary to constitute a quorum at a meeting of Directors or stockholders of Bancorp at which such contract or transaction was authorized or that the vote of an Interested Person was necessary for the authorization of such contract or transaction. ARTICLE VI(F). Acting as a Partner. Bancorp may be a partner in any business enterprise which it would have power to conduct by itself. ARTICLE VI(G). Stockholders' Meetings. Meetings of stockholders may be held at such place in the Commonwealth of Massachusetts or, if permitted by applicable law, elsewhere in the United States as the Board of Directors may determine. ARTICLE VI(H). Call of Special Meetings. 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 the affirmative vote of 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. ARTICLE VI(I). Amendment of By-Laws. The By-Laws of Bancorp may be adopted, altered, amended, changed or repealed by the Board of Directors or the stockholders of Bancorp. Such action by the Board of Directors shall require the affirmative vote of at least 66-2/3% of the Directors then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which case such action shall in addition require the affirmative vote of at least a majority of the Continuing Directors then in office, at such a meeting. Such action by the stockholders shall require (i) approval by the affirmative vote of a majority of the Board of Directors of Bancorp then in office at a duly constituted meeting of the Board of Directors, unless at the time of such action there shall be an Interested Stockholder, in which C-9 47 case such action shall in addition require the affirmative vote of at least a majority of the Continuing Directors then in office, at such meeting, (ii) unless waived by the affirmative vote of the Board of Directors (and, if applicable, Continuing Directors) specified in the preceding sentence, the submission by the stockholders of written proposals for adopting, altering, amending, changing or repealing the By-Laws at least sixty days prior to the meeting at which they are to be considered and (iii) the affirmative vote of at least 66 2/3% of the total votes eligible to be cast by stockholders in the election of directors at a duly constituted meeting of stockholders called expressly for such purpose. ARTICLE VI(J). Amendment of Articles of Organization. No amendment, addition, alteration, change or repeal of these Articles of Organization shall be made, unless the same is first approved by the affirmative vote of a majority of the Board of Directors of Bancorp then in office, and thereafter approved by the stockholders by not less than 66 2/3% of the total votes eligible to be cast at a duly constituted meeting, or, in the case of Articles I, II and VIII and the first sentence of Article IV as set forth in Addendum B to these Articles of Organization, by not less than a majority of the total votes eligible to be cast at a duly constituted meeting; provided, however, that if, at any time within the sixty day period immediately preceding the meeting at which the stockholder vote is to be taken, there is an Interested Stockholder, such amendment, addition, alteration, change or repeal shall also require the affirmative vote of not less than a majority of the Continuing Directors then in office, prior to approval by the stockholders. Notwithstanding the foregoing, to the extent that any provision of these Articles of Organization stipulates stockholder approval by a vote of more than 66 2/3% of the total votes eligible to be cast by stockholders in the election of directors, and if, at any time within the sixty day period immediately preceding the meeting at which the stockholder vote is to be taken there is an Interested Stockholder, such provision may only be amended, altered, changed or repealed after approval by the same vote required by such provision, unless such amendment, alteration or repeal shall also have been approved by the affirmative vote of not less than a majority of the Continuing Directors then in office, in which case only the vote of 66 2/3% of the total votes eligible to be cast by the stockholders shall be required. Unless otherwise provided by law, any amendment, addition, alteration, change or repeal so acted upon shall be effective on the date it is filed with the Secretary of State of the Commonwealth of Massachusetts or on such other date as specified in such amendment, addition, alteration, change or repeal or as the Secretary of State may specify. C-10 48 ADDENDUM D TO THE ARTICLES OF ORGANIZATION OF MEDFORD BANCORP, INC. ARTICLE VIII(B) The name, residential address and post office address of each director and officer of the corporation is as follows:
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS President: Arthur H. Meehan 5 Fox Run Road 29 High Street Dover, MA 02030 Medford, MA 02155 Treasurer: Phillip W. Wong 8 Kelly Street 29 High Street Medway, MA 02053 Medford, MA 02155 Clerk: Eugene R. Murray 14 Milton Street 29 High Street E. Falmouth, MA 02536 Medford, MA 02155 Directors: Paul J. Crowley 15 Old Weston Road 29 High Street Wayland, MA 01778 Medford, MA 02155 Edward J. Gaffey 43 High Street 29 High Street Medford, MA 02155 Medford, MA 02155 Andrew D. Guthrie Jr., 30 Cambridge Street 29 High Street M.D. Winchester, MA 01890 Medford, MA 02155 Edward D. Brickley 79 Mystic Valley Pkwy. 29 High Street Winchester, MA 01890 Medford, MA 02155 Robert A. Havern III 35 Bartlett Avenue 29 High Street Arlington, MA 02174 Medford, MA 02155 Francis D. Pizzella 13 Browning Road 29 High Street Somerville, MA 02145 Medford, MA 02155 David L. Burke 9 Wedgemere Ave. 29 High Street Winchester, MA 01890 Medford, MA 02155 Mary L. Doherty 87 Yale Street 29 High Street Medford, MA 02155 Medford, MA 02155 Arthur H. Meehan 5 Fox Run Road 29 High Street Dover, MA 02030 Medford, MA 02155 Eugene R. Murray 14 Milton Street 29 High Street E. Falmouth, MA 02536 Medford, MA 02155
D-1 49 ARTICLE VII The effective date of organization of the corporation shall be the date approved and filed by the Secretary of the Commonwealth. If a later effective date is desired, specify such date which shall not be more than thirty days after the date of filing. ARTICLE VIII The information contained in Article VIII is not a permanent part of the Articles of Organization. a. The street address (post office boxes are not acceptable) of the principal office of the corporation in Massachusetts is: 29 High Street, Medford Massachusetts 02155 b. The name, residential address and post office address of each director and officer of the corporation is as follows: NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS President: Treasurer: See attached Addendum D to the Articles of Organization Clerk: Directors: c. The fiscal year (i.e., tax year) of the corporation shall end on the last day of the month of: December d. The name and business address of the resident agent, if any, of the corporation is: Eugene R. Murray, Clerk 29 High Street, Medford, MA 02155 ARTICLE IX By-laws of the corporation have been duly adopted and the president, treasurer, clerk and directors whose names are set forth above, have been duly elected. IN WITNESS WHEREOF AND UNDER THE PAINS AND PENALTIES OF PERJURY, I/we, whose signature(s) appear below as incorporator(s) and whose name(s) and business or residential address(es) are clearly typed or printed beneath each signature do hereby associate with the intention of forming this corporation under the provisions of General Laws, Chapter 156B and do hereby sign these Articles of Organization as incorporator(s) this 23rd day of July, 1997. /s/ Arthur H. Meehan - - - ------------------------------------------------------------------------------ Arthur H. Meehan - - - ------------------------------------------------------------------------------ 29 High Street - - - ------------------------------------------------------------------------------ Medford, MA 02155 - - - ------------------------------------------------------------------------------ Note: If an existing corporation is acting as incorporator, type in the exact name of the corporation, the state or other jurisdiction where it was incorporated, the name of the person signing on behalf of said corporation and the title he/she holds or other authority by which such action is taken. 50 THE COMMONWEALTH OF MASSACHUSETTS ARTICLES OF ORGANIZATION (GENERAL LAWS, CHAPTER 156B) ================================================================================ I hereby certify that, upon examination of these Articles of Organization, duly submitted to me, it appears that the provisions of the General Laws relative to the organization of corporations have been complied with, and I hereby approve said articles; and the filing fee in the amount of $ having been paid, said articles are deemed to have been filed with me this day of July 1997. Effective date: July 1997 - - - ----------------------------------------------------------------------------- WILLIAM FRANCIS GALVIN Secretary of the Commonwealth FILING FEE: One tenth of one percent of the total authorized capital stock, but not less than $200.00. For the purpose of filing, shares of stock with a par value less than $1.00, or no par stock, shall be deemed to have a par value of $1.00 per share. TO BE FILLED IN BY CORPORATION PHOTOCOPY OF DOCUMENT TO BE SENT TO: Paul W. Lee, P.C. - - - -------------------------------------------------------------------------------- Goodwin, Procter & Hoar LLP - - - -------------------------------------------------------------------------------- Exchange Place, Boston, MA 02109 - - - -------------------------------------------------------------------------------- Telephone: (617) 570-1000 --------------------------------------------------------------------- EX-99.6 14 QUARTERLY REPORT ON FORM F-4 QUARTER ENDED 9/30/97 1 EXHIBIT 99.6 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. 20429 FORM F-4 QUARTERLY REPORT UNDER SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal quarter ended September 30, 1997 F.D.I.C. Insurance Certificate No. 23290 MEDFORD SAVINGS BANK (Exact name of bank as specified in its charter) MASSACHUSETTS (State or other jurisdiction of incorporation or organization) 04-1609330 (IRS Employer Identification Number) 29 HIGH STREET, MEDFORD, MASSACHUSETTS (Address of principal executive office) 02155 (Zip Code) (617) 395-7700 (Bank's telephone number, including area code) N/A (Former name, former address and former fiscal year if changed since last report) Indicate by check mark whether the bank (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Bank was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO The number of shares outstanding of the Bank's common stock as of November 7, 1997 - 4,541,148 2
TABLE OF CONTENTS ITEM 1 - FINANCIAL STATEMENTS PAGE Consolidated Balance Sheets............................................................1 Consolidated Statements of Income ...................................................2-5 Consolidated Statements of Changes in Stockholders' Equity.............................6 Consolidated Statements of Cash Flows................................................7-8 Notes to Consolidated Financial Statements.............................................9 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General Financial Condition........................................................10-18 Results of Operations..............................................................19-23 Liquidity and Capital Resources....................................................24-25 Asset and Liability Management........................................................26 Impact of Inflation...................................................................26 Other Events..........................................................................27 Signatures............................................................................28
3 MEDFORD SAVINGS BANK CONSOLIDATED BALANCE SHEETS
September 30, December 31, 1997 1996 ------------------------------------ (In thousands) ASSETS Cash and due from banks $ 11,439 $ 11,900 Short-term investments 5,605 4,529 ----------- ----------- Cash and cash equivalents 17,044 16,429 ----------- ----------- Investment securities 472,606 424,966 Loans 586,784 568,086 Less allowance for loan losses (6,601) (7,231) ----------- ----------- Loans, net 580,183 560,855 ----------- ----------- Foreclosed real estate, net 214 276 Banking premises and equipment, net 10,966 10,896 Accrued interest receivable 9,385 9,291 Other assets 15,947 16,385 ----------- ----------- TOTAL ASSETS $ 1,106,345 $ 1,039,098 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 824,183 $ 792,141 Short-term borrowings 64,509 80,817 Long-term debt 112,439 67,647 Accrued taxes and expenses 3,710 3,701 Other liabilities 1,766 2,271 ----------- ----------- Total liabilities 1,006,607 946,577 ----------- ----------- Stockholders' equity: 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 28,924 28,848 Retained earnings 67,815 61,634 ----------- ----------- 99,010 92,749 Net unrealized gain (loss) on securities available for sale, after tax effects 728 (228) ----------- ----------- Total stockholders' equity 99,738 92,521 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,106,345 $ 1,039,098 =========== ===========
See accompanying notes to consolidated financial statements 1 4 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 1997 1996 ------------------------ (Dollars in thousands, except per share amounts) Interest and dividend income: Interest and fees on loans $11,638 $10,823 Interest on debt securities 7,221 6,067 Dividend income 204 186 Interest on short-term investments 51 63 ------- ------- Total interest and dividend income 19,114 17,139 ------- ------- Interest expense: Interest on deposits 8,104 7,610 Interest on short-term borrowings 817 525 Interest on long-term debt 1,664 956 ------- ------- Total interest expense 10,585 9,091 ------- ------- Net interest income 8,529 8,048 Provision for loan losses -- 45 ------- ------- Net interest income, after provision for loan losses 8,529 8,003 ------- ------- Other income: Customer service fees 504 536 Gain on sales of securities, net 119 85 Miscellaneous 140 121 ------- ------- Total other income 763 742 ------- ------- Operating expenses: Salaries and employee benefits 2,589 2,467 Occupancy and equipment 571 498 Data processing 354 438 Professional fees 188 245 Amortization of intangibles 302 312 Advertising and marketing 156 177 Other general and administrative 636 458 ------- ------- Total operating expenses 4,796 4,595 ------- ------- Income before income taxes 4,496 4,150 Provision for income taxes 1,786 1,646 ------- ------- Net income $ 2,710 $ 2,504 ======= ======= (CONTINUED)
See accompanying notes to consolidated financial statements. 2 5 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF INCOME (concluded)
Three Months Ended September 30, 1997 1996 -------------------------- Earnings per share: Primary $0.57 $0.53 Fully diluted $0.57 $0.53 Cash dividends declared per share $0.18 $0.17 Weighted average shares outstanding Primary 4,774,826 4,722,614 Fully diluted 4,789,064 4,727,521
See accompanying notes to consolidated financial statements. 3 6 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended September 30, 1997 1996 ------------------------- (Dollars in thousands, except per share amounts) Interest and dividend income: Interest and fees on loans $34,439 $32,342 Interest on debt securities 20,749 17,719 Dividend income 524 494 Interest on short-term investments 157 392 ------- ------- Total interest and dividend income 55,869 50,947 ------- ------- Interest expense: Interest on deposits 23,286 22,846 Interest on short-term borrowings 2,783 1,690 Interest on long-term debt 4,396 2,328 ------- ------- Total interest expense 30,465 26,864 ------- ------- Net interest income 25,404 24,083 Provision for loan losses 125 195 ------- ------- Net interest income, after provision for loan losses 25,279 23,888 ------- ------- Other income: Customer service fees 1,491 1,643 Gain on sales of securities, net 792 280 Gain on sales of loans, net 306 -- Miscellaneous 463 472 ------- ------- Total other income 3,052 2,395 ------- ------- Operating expenses: Salaries and employee benefits 7,683 7,303 Occupancy and equipment 1,726 1,482 Data Processing 1,053 1,233 Professional fees 451 519 Amortization of intangibles 908 944 Advertising and marketing 457 507 Other general and administrative 1,709 1,538 ------- ------- Total operating expenses 13,987 13,526 ------- ------- Income before income taxes 14,344 12,757 Provision for income taxes 5,711 5,020 ------- ------- Net income $ 8,633 $ 7,737 ======= ======= (CONTINUED) See accompanying notes to consolidated financial statements. 4
7 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF INCOME (concluded)
Nine Months Ended September 30, 1997 1996 ----------------------------- Earnings per share: Primary $1.81 $1.64 Fully diluted $1.80 $1.64 Cash dividends declared per share $0.54 $0.51 Weighted average shares outstanding Primary 4,761,769 4,716,544 Fully diluted 4,788,089 4,725,277
See accompanying notes to consolidated financial statements. 5 8 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
Net Unrealized Additional Gain (Loss)on Common Paid-in Retained Securities Stock Capital Earnings Available for Sale Total ----- ------- -------- ------------------ ----- (In thousands) Balance at December 31, 1996 $ 2,267 $ 28,848 $ 61,634 $ (228) $ 92,521 Net income -- -- 8,633 8,633 Issuance of common stock under stock option plan and related income tax benefits 4 76 -- -- 80 Cash dividends declared ($.54 per share) -- -- (2,452) -- (2,452) Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- 956 956 -------- -------- -------- -------- -------- Balance at September 30, 1997 $ 2,271 $ 28,924 $ 67,815 $ 728 $ 99,738 ======== ======== ======== ======== ======== Net Unrealized Additional Gain (Loss)on Common Paid-in Retained Securities Stock Capital Earnings Available for Sale Total ----- ------- -------- ------------------ ----- (In thousands) Balance at December 31, 1995 $ 2,212 $ 27,642 $ 54,966 $ 1,256 $ 86,076 Net income -- -- 7,737 -- 7,737 Issuance of common stock under stock option plan and related income tax benefits 55 1,143 -- -- 1,198 Cash dividends declared ($.51 per share) -- -- (2,310) -- (2,310) Change in net unrealized gain (loss) on securities available for sale, after tax effects -- -- -- (2,166) (2,166) -------- -------- -------- -------- -------- Balance at September 30, 1996 $ 2,267 $ 28,785 $ 60,393 $ (910) $ 90,535 ======== ======== ======== ======== ======== See accompanying notes to consolidated financial statements. 6
9 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 1997 1996 ------------------------------ (In thousands) Cash flows from operating activities: $ 8,633 $ 7,737 Net income Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan losses 125 195 Depreciation and amortization, net 1,721 1,651 Foreclosed real estate (gains), losses and provisions, net (22) 31 Gain on sales of securities, net (792) (280) Gain on sales of loans, net (306) -- Loss on sale of fixed assets 53 41 Decrease in accrued interest receivable and other assets (1,170) (448) Increase (decrease) in accrued taxes and expenses and other liabilities 90 (771) --------- --------- Net cash provided by operating activities 8,332 8,156 --------- --------- Cash flows from investing activities: Maturities of investment securities available for sale 43,685 19,020 Purchases of investment securities available for sale (147,094) (117,089) Sales of investment securities available for sale 19,428 36,840 Maturities of investment securities held to maturity 34,034 40,786 Purchases of investment securities held to maturity and FHLBB stock (740) (34,611) Principal amortization of mortgage-backed investments 5,427 3,571 Proceeds from sale of loans 11,613 -- Loans originated and purchased, net of amortization and payoffs (31,127) (14,053) Purchases of bank premises and equipment, net (842) (580) Sales of, and principal payments received on, foreclosed real estate 425 300 --------- --------- Net cash used in investing activities (65,191) (65,816) --------- --------- (continued)
See accompanying notes to consolidated financial statements. 7 10 MEDFORD SAVINGS BANK CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
Nine Months Ended September 30, 1997 1996 --------------------------- (In thousands) Cash Flows from financing activities: Net increase (decrease) in deposits 32,042 (2,157) Net increase (decrease) in borrowings with maturities of three months or less (16,308) 20,136 Proceeds from long-term debt 44,792 30,500 Issuance of common stock 34 674 Cash dividends paid (3,086) (2,735) -------- -------- Net cash provided by financing activities 57,474 46,418 -------- -------- Net change in cash and cash equivalents 615 (11,242) Cash and cash equivalents, beginning of period 16,429 28,770 -------- -------- Cash and cash equivalents, end of period $ 17,044 $ 17,528 ======== ========
See accompanying notes to consolidated financial statements. 8 11 MEDFORD SAVINGS BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 NOTE 1. BASIS OF PRESENTATION Certain amounts have been reclassified in the September 30, 1996 financial statements to conform to the 1997 presentation. The consolidated interim financial statements of Medford Savings Bank (the "Bank") and subsidiary presented herein are intended to be read in conjunction with the consolidated financial statements presented in its annual report for the year ended December 31, 1996. The consolidated financial information for the three and nine months ended September 30, 1997 and 1996 is unaudited; however, in the opinion of management, the consolidated financial information reflects all adjustments (consisting solely of normal recurring accruals) necessary for a fair presentation in accordance with generally accepted accounting principles. Interim results are not necessarily indicative of results to be expected for the entire year. NOTE 2. STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE Primary earnings per share computations include common stock and dilutive common stock equivalents attributable to outstanding stock options. Fully diluted earnings per share computations reflect the higher market price of the Bank's common stock at the end of the period, if applicable, and assume further dilution applicable to outstanding stock options. NOTE 3. COMMITMENTS At September 30, 1997 the Bank had outstanding commitments to originate new residential and commercial real estate mortgage loans of approximately $20.2 million, which are not reflected on the consolidated balance sheet. Unadvanced funds on equity lines were $24.3 million, unadvanced construction loan funds were $8.0 million, and unadvanced funds on commercial lines of credit were $8.8 million at September 30, 1997. (Remainder of this page intentionally left blank) 9 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL This form F-4 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 Bank'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. Consolidated net income was $2.7 million, or $.57 per share for the three months ended September 30, 1997, an 8% increase when compared to $2.5 million or $.53 per share for the same quarter in 1996. For the third quarter of 1997, the annualized return on assets was 0.98% and the annualized return on equity was 10.98%, compared to 1.01% and 11.30% for the comparable period in 1996. Consolidated net income for the nine months ended September 30, 1997 was $8.6 million or $1.81 per share ($1.80 per share on a fully diluted basis) reflecting a 12% increase when compared to $7.7 million or $1.64 per share for the comparable period last year. The annualized return on assets was 1.08% and the annualized return on equity was 12.13% for the nine months ended September 30, 1997, compared to 1.06% and 11.76% for the comparable period in 1996. The increases in earnings for the three and nine months ended September 30, 1997 was the result, in large part, of improved net interest income due to an increase in average earning assets, a reduction in the provision for loan losses due to positive credit quality trends, and an increase in net gains on the sale of securities and loans in the second quarter. Net interest income totalled $8.5 million for the quarter ended September 30, 1997, with a net interest margin of 3.29%, compared to $8.0 million and a net interest margin of 3.42% for the quarter ended September 30, 1996. Net interest income for the nine months ended September 30, 1997 totalled $25.4 million with a net interest margin of 3.29%, compared with $24.1 million and a net interest margin of 3.42% for the same prior year period. 10 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Total operating expenses increased $201,000 or 4.4% when comparing the three months ended September 30, 1997 to the same period in 1996. Included in this increase was approximately $100,000 of expenses related to the formation of a holding company for the Bank. Year-to-date operating expenses increased $461,000 or 3.4% when comparing the nine months ended September 30, 1997 to the same prior year period. The provision for loan losses for the nine months ended September 30, 1997 was $125,000 compared with $195,000 for the nine months ended September 30, 1996. Total non-performing assets were $3.0 million or 0.27% of total assets at September 30, 1997, compared to $3.7 million or 0.36% of total assets at December 31, 1996. The allowance for loan losses at September 30, 1997 was $6.6 million, representing 219% of non-performing assets and 1.12% of total loans. At December 31, 1996, the allowance for loan losses was $7.2 million representing 196% of non-performing assets and 1.27% of total loans. Other real estate owned decreased to $214,000 at September 30, 1997 from $276,000 at December 31, 1996. The Bank had total assets of $1.1 billion and deposits of $824.2 million at September 30, 1997, and the capital to assets ratio was 9.02%, exceeding all regulatory requirements. When comparing balances from December 31, 1996, investment securities increased $47.6 million or 11.2% to $472.6 million, total loans increased $18.7 million or 3.3% to $586.8 million, and deposits and borrowings increased $60.5 million, or 6.4% to $1.0 billion. A more detailed discussion and analysis of the Bank's financial condition and results of operations follows. (The remainder of this page intentionally left blank.) 11 14 INVESTMENT SECURITIES Investment securities consist of the following:
September 30, December 31, 1997 1996 ---- ---- (In thousands) Securities available for sale, at fair value $349,084 $268,379 Securities held to maturity, at amortized cost 116,786 150,591 Restricted equity securities: Federal Home Loan Bank stock 5,622 4,882 Massachusetts Savings Bank Life Insurance stock 1,114 1,114 -------- -------- $472,606 $424,966 ======== ========
The amortized cost and fair value of investment securities, excluding restricted securities, at September 30, 1997, and December 31, 1996 with gross unrealized gains and losses, follows:
September 30, 1997 ------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Securities Available for Sale Debt securities: State and municipal $ 23 $ -- $ -- $ 23 Mortgage - backed 84,983 276 -- 85,259 U.S. Government and federal agency 92,304 266 (471) 92,099 Other 164,607 995 (133) 165,469 -------- ------ ----- -------- Total debt securities 341,917 1,537 (604) 342,850 Marketable equity securities 6,007 285 (58) 6,234 -------- ------ ----- -------- Total securities available for sale $347,924 $1,822 $(662) $349,084 ======== ====== ===== ======== Securities Held to Maturity U.S. Government and federal agency $108,027 $ 378 $ (79) $108,326 Other 8,759 26 -- 8,785 -------- ------ ----- -------- Total securities held to maturity $116,786 $ 404 $ (79) $117,111 ======== ====== ===== ======== 12
15
December 31, 1996 ------------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value (In thousands) Securities Available for Sale Debt securities: State and municipal $ 88 $ 1 $ -- $ 89 Mortgage - backed 28,101 82 (369) 27,814 U.S. Government and federal agency 83,301 280 (930) 82,651 Other 150,774 745 (350) 151,169 -------- ------ ------- -------- 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 Other 8,723 32 -- 8,755 -------- ------ ------- -------- Total securities held to maturity $150,591 $ 554 $ (299) $150,846 ======== ====== ======= ========
The amortized cost and fair value of debt securities by contractual maturity at September 30, 1997 is as follows:
September 30, 1997 --------------------------------------------------------------------- Available for Sale Held to Maturity Amortized Fair Amortized Fair Cost Value Cost Value ------- -------- -------- -------- (In thousands) Within 1 year $ 43,560 $ 43,687 $ 75,681 $ 75,796 After 1 year through 5 years 213,374 213,904 41,105 41,315 ------- -------- -------- -------- 256,934 257,591 116,786 117,111 Mortgage - backed securities 84,983 85,259 - - -------- -------- -------- -------- $341,917 $342,850 $116,786 $117,111 ======== ======== ======== ======== 13
16 The amortized cost and fair value of debt securities by contractual maturity at December 31, 1996 is as follows:
December 31, 1996 --------------------------------------------------------------------- Available for Sale Held to Maturity ------------------------- ---------------------------- Amortized Fair Amortized Fair Cost Value Cost Value ------- -------- -------- -------- (In thousands) Within 1 year $ 49,839 $ 50,084 $ 46,871 $ 47,068 After 1 year through 5 years 175,259 174,979 103,720 103,778 After 5 years through 10 years 9,065 8,846 - - -------- -------- -------- -------- 234,163 233,909 150,591 150,846 Mortgage - backed securities 28,101 27,814 - - -------- -------- -------- -------- $262,264 $261,723 $150,591 $150,846 ======== ======== ======== ========
Investment securities increased $47.6 million from $425.0 million at December 31, 1996 to $472.6 million at September 30, 1997. To improve the investment portfolio yield, management implemented a program of replacing U.S. Treasury securities as they matured or were sold, with mortgage-backed securities and corporate bonds. In addition to the sale of $11 million in student loans, borrowings from various sources were utilized to fund investment purchases. At September 30, 1997, the securities portfolio classified as "available for sale" reflected a $1.2 million appreciation in market value as a result of fluctuations in interest rates. In accordance with the Bank's asset-liability management strategies, investment securities are generally short-term with maturities of five years or less. (The remainder of this page intentionally left blank.) 14 17 LOANS A summary of the Bank's outstanding loan balances follows:
September 30, December 31, 1997 1996 --------- --------- (In thousands) Mortgage loans on real estate: Residential 1-4 family $ 400,836 $ 380,627 Commercial 121,947 123,158 Construction 19,398 18,155 Second mortgages 1,642 1,928 Equity lines of credit 22,326 21,169 --------- --------- 566,149 545,037 Less: Unadvanced construction loan funds (8,043) (9,436) --------- --------- 558,106 535,601 --------- --------- Other loans: Commercial loans 15,921 11,014 Personal loans 2,296 2,219 Education and other 9,387 18,329 --------- --------- 27,604 31,562 --------- --------- Add: Premium on loans acquired 285 354 Net deferred fees 789 569 --------- --------- Total loans 586,784 568,086 Less: Allowance for loan losses (6,601) (7,231) --------- --------- Loans, net $ 580,183 $ 560,855 ========= =========
Loans experienced a modest increase for the nine months ended September 30, 1997, principally in residential 1-4 family and commercial loans. Residential 1-4 family loans increased $20.2 million or 5.3%, with approximately 37% of the increase in 15 year fixed rate, and 63% in adjustable rate mortgages. The increase in commercial loans of 44.6% is the result of intensified marketing efforts for asset-based lending opportunities. The Bank sold $11 million of education loans in the second quarter of 1997 and recorded a net gain on sale of $306,000. It is the Bank's intention to sell education loans in the repayment stage as conditions warrant. All other loan categories remained stable from December 31, 1996 as new loan originations replaced amortization and payoffs for the period. The Bank continues to experience intense competition for loans within its geographic region despite improvement in the regional economy. 15 18 NON-PERFORMING ASSETS Total non-performing assets were $3.0 million at September 30, 1997, compared with $3.7 million at December 31, 1996. The principal balance of non-accrual loans was $2.8 million, or 0.25% of total assets, at September 30, 1997, compared to $3.4 million, or 0.33% of total assets, at December 31, 1996. Foreclosed real estate totaled $214,000 at September 30, 1997 compared to $276,000 at December 31, 1996. It is the Bank's general policy to place on non-accrual status all loans when they become 90 days contractually delinquent or the collectability of principal or interest payments becomes doubtful. Interest accrual ceases, and all previously accrued but unpaid interest is reversed when a loan is placed on non-accrual status. In accordance with SFAS No. 114, a loan is considered impaired when, based on current information and events, it is probable that a borrower will be unable to meet the scheduled payments of principal or interest when due according to the original terms of the contractual loan agreement. The principal balance of impaired loans was $2.2 million, all of which were included in the balance of non-accrual loans at September 30, 1997. The allowance for loan losses allocated to impaired loans at September 30, 1997 was $141,000. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses for the periods indicated is as follows:
Nine Months Ended -------------------------------------------- September 30, September 30, 1997 1996 ------ ----- (In thousands) Balance at the beginning of the period $ 7,231 $ 7,466 Provisions 125 195 Recoveries 59 106 Less: Charge-offs (814) ( 368) -------- ---------- Balance at the end of the period $ 6,601 $ 7,399 ======== ========
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 generally, the level of non-performing loans, current economic conditions, trends in delinquency, and charge-offs, and the value of the underlying collateral. Ultimate loan losses may vary significantly from current estimates. 16 19 The allowance for loan losses was $6.6 million at September 30, 1997, representing a 235.8% reserve coverage of non-accrual loans and 1.12% of total loans. At December 31, 1996, the allowance for loan losses was $7.2 million representing a 210.3% reserve coverage of non-accrual loans and 1.27% of total loans. Management considers the allowance for loan losses to be adequate at September 30, 1997, although there can be no assurance that the allowance is adequate or that additional provisions to the allowance for loan losses will not be necessary. DEPOSITS Total deposits increased $32.0 million from December 31, 1996 levels to $824.2 million at September 30, 1997. The Bank's strategy has been to maintain stable deposit rates and to grow deposit levels through selective core deposit and term deposit promotions. To retain core deposits, the Bank has been promoting the "ComboPlus" account which combines a statement savings and a demand account into one convenient account. This account has contributed to an increase in savings and demand deposits. The Bank put in place a special two-year term certificate promotion during the first six months of 1997 intended to extend deposit maturities and attract new customer accounts. As a result of this promotion, term certificates of deposit increased $23.9 million. Money market deposits increased from December 31, 1996 as the Bank continues to offer competitive rates to attract new corporate accounts. The following table indicates the balances in various deposit accounts at the dates indicated.
September 30, December 31, 1997 1996 ------ ----- (In thousands) Demand accounts $ 43,029 $ 40,124 NOW accounts 58,621 60,839 Savings & money market accounts 323,260 315,771 Term certificates 399,273 375,407 -------- -------- $824,183 $792,141 ======== ========
17 20 BORROWED FUNDS The Bank has selectively engaged in long-term borrowings to fund loans and mortgage-backed securities, and has entered into short-term repurchase agreements to fund investment securities purchases. Total borrowed funds increased to $176.9 million at September 30, 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 shift from short-term into long-term borrowings which were employed to fund the residential loan portfolio and purchases of mortgage-backed securities. STOCKHOLDERS' EQUITY The Bank's capital to assets ratio was 9.02% at September 30, 1997 compared with 8.90% at December 31, 1996. The FDIC imposes capital guidelines on the Bank. In addition to the capital ratio described above, 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 risk-weighted assets are then calculated. To be considered adequately capitalized, Banks must maintain a tier 1 risk-based capital ratio of 4.00% and a total risk-based capital ratio of 8.00%. At September 30, 1997, the Bank's tier 1 capital to risk-weighted assets was 14.85% and the Bank's tier 1 plus tier 2 capital, or total to risk-weighted assets was 15.90%. Massachusetts-chartered savings banks insured by the FDIC are required to maintain a leverage capital (tier 1 capital) to assets ratio of 3.00% to 5.00% of total assets, as adjusted, depending on the individual bank's examination rating. At September 30, 1997, the Bank's leverage capital ratio was 8.53% as defined by the FDIC. As a result of the foregoing leverage and risk-based capital ratios, the Bank is considered "well capitalized" under the FDIC's prompt corrective action guidelines. Book value at September 30, 1997 was $21.96 per share, compared with $20.40 per share at December 31, 1996. 18 21 RESULTS OF OPERATIONS NET INTEREST INCOME Interest and dividend income from loans and investments increased 11.5%, or $2.0 million, to $19.1 million for the third quarter in 1997 when compared to the same quarter in 1996. Average earning assets increased $100.7 million, or 10.6%, when comparing the third quarter of 1997 to the third quarter of 1996, with $69.2 million coming from short and long-term investment securities and $31.5 million coming from loans. The yield on earning assets increased to 7.27% from 7.21% and was the result of higher yields in all earning assets categories. The yield on investment securities increased to 6.32% from 6.25%, reflecting the purchase and reinvestment of additional higher yielding investment securities such as mortgage-backed securities and corporate bonds. Investments contributed $1.2 million of additional interest and dividend income when comparing the third quarter of 1997 to the third quarter of 1996. The increase in the average balance of loans, coupled with an increase in the weighted average yield on loans to 8.06% from 7.93%, contributed $815,000 of additional interest. An increase in 1-4 family mortgage loan volume contributed $595,000, commercial real estate contributed $141,000, and commercial loans contributed $131,000, respectively, to the increase in interest income on loans. Interest income on consumer loans decreased $52,000 when compared to the prior year period as a result of the sale of student loans. Total interest expense for the three months ended September 30, 1997 was $10.6 million reflecting an increase of $1.5 million or 16.4% over the same period in 1996. This was principally due to an increase of $91.2 million in average interest bearing liabilities over the comparable prior year period. This increase can be attributed to the average balance in deposits increasing $25.7 million, and the average balance in borrowed funds increasing $65.5 million. The Bank experienced migration from the lower rate passbook savings deposit into the higher rate "ComboPlus" statement savings deposit. This coupled with an increase in the rate paid on high balance money market accounts increased the overall cost of deposits 11 basis points to 4.10%. To manage interest expense on deposits, the Bank elected not to offer premium term deposit products during the quarter. Interest expense on deposits increased $494,000 when comparing the three months ended September 30, 1997 to the three months ended September 30, 1996. As short-term borrowings matured, they were replaced with longer term FHLBB borrowings to fund the growth in the residential loan portfolio. Repurchase agreements at favorable rates were used to fund increases in the investment portfolio. Interest expense on borrowed funds increased $1.0 million in the third quarter of 1997 when compared to the third quarter in 1996. The overall cost of interest bearing liabilities increased to 4.41% from 4.20% when comparing the two quarters. Net interest income increased $481,000 or 6.0% to $8.5 million when comparing the third quarter in 1997 to the same quarter in 1996 despite a decline in the interest rate spread and net interest margin. This is primarily due to increased levels of earning assets. While the yield on earning assets increased 6 basis points when comparing the third quarter in 1997 to the third quarter in 1996, this increase was more than offset by a 21 basis point increase in the cost of interest bearing liabilities. This resulted in a reduction 19 22 RESULTS OF OPERATIONS (CONTINUED) of the net interest margin and interest rate spread to 3.29% and 2.86%, respectively, for the three months ended September 30, 1997, compared with 3.42% and 3.01% for the three months ended September 30, 1996. Interest and dividend income from loans and investments for the first nine months of 1997 totalled $55.9 million, an increase of $4.9 million or 9.7% from the same prior year period. The increase in average earning assets of $90.9 million, or 9.7%, can be attributed to a $56.4 million increase in short and long-term investment securities, and a $34.5 million increase in loans. The yield on earning assets remained unchanged at 7.23% for the nine months ended September 30, 1997 and 1996. An increase in the yield on investment securities from 6.21% to 6.26%, in addition to higher average balances, contributed $2.8 million of additional interest income over the prior year period. Interest income on loans for the nine months ended September 30, 1997 increased $2.1 million over the same prior year period. Interest income for the nine months ended September 30, 1996 was positively impacted by a $171,000 recovery of commercial real estate loan income on a loan that had been previously charged-off in a prior period. Total interest expense increased $3.6 million or 13.4% over the comparable period in 1996 to $30.5 million for the nine months ended September 30, 1997. The increase is principally due to increased levels of borrowed funds. An increase over the comparable period in 1996 of $69.3 million for the average balance in borrowings, in addition to a 18 basis point increase in the rate paid, increased interest expense on borrowed funds by $3.2 million. The weighted average rate paid on deposits increased to 4.04% from 4.03% in the comparable prior year period. The Bank continues to focus on increasing core deposit accounts. As a result, pricing strategies were implemented increasing certain core deposit product rates while lowering term certificate rates. The increase in the weighted average rate paid on deposits is principally due to disintermediation from the lower rate passbook savings into the higher rate "ComboPlus" statement savings, an increase in the money market rates, and the 2 year certificate of deposit promotion during the first six months of the year. Interest expense on deposits increased $440,000 when comparing the nine month periods year to year. The Bank's overall cost of funds for the nine months ended September 30, 1997 increased to 4.35% from 4.21%. Net interest income increased $1.3 million or 5.5% to $25.4 million despite a decline in the interest rate spread and net interest margin when comparing the nine months ended September 30, 1997 to the nine months ended September 30, 1996. This is primarily due to increased levels of earning assets. The flat yield on earning assets, and the 14 basis point increase in the cost of funds resulted in a decline in the net interest margin and interest rate spread to 3.29% and 2.88%, respectively, for the first nine months of 1997 compared to 3.42% and 3.02% for the comparable prior year period. 20 23 MEDFORD SAVINGS BANK INTEREST RATE SPREAD
Three Months Ended September 30, 1997 1996 ---- ---- Weighted average yield earned on: Short-term investments 5.21% 5.12% Investment securities 6.32 6.25 Loans 8.06 7.93 ---- ---- All earning assets 7.27% 7.21% ----- ----- Weighted average rate paid on: Deposits 4.10% 3.99% Borrowed funds 5.88 5.80 ---- ---- All interest-bearing liabilities 4.41% 4.20% ----- ----- Weighted average rate spread 2.86% 3.01% ----- ----- Net interest margin 3.29% 3.42% ===== =====
Nine Months Ended September 30, 1997 1996 ---- ---- Weighted average yield earned on: Short-term investments 5.21% 5.24% Investment securities 6.26 6.21 Loans 8.02 8.01 ---- ---- All earning assets 7.23% 7.23% ----- ----- Weighted average rate paid on: Deposits 4.04% 4.03% Borrowed funds 5.85 5.67 ---- ---- All interest-bearing liabilities 4.35% 4.21% ----- ----- Weighted average rate spread 2.88% 3.02% ----- ----- Net interest margin 3.29% 3.42% ===== =====
21 24 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 generally, the level of non-performing loans, current economic conditions, trends in delinquency and charge-offs, and collateral values of the underlying security. Management considers the allowance for loan losses to be adequate at September 30, 1997, although there can be no assurance that the allowance is adequate or that additional provisions to the allowance for loan losses will not be necessary. The Bank did not record a provision for loan losses in the third quarter of 1997, while $45,000 was provided in the third quarter of 1996. The provision for loan losses for the nine months ended September 30, 1997, was $125,000 compared with $195,000 for the comparable prior year period. Net loan charge-offs for the three and nine months ended September 30, 1997 totalled $367,000 and $755,000 as compared to $16,000 and $262,000 for the same periods in 1996. At September 30, 1997, the allowance for loan losses represented a 235.8% reserve coverage of non-accrual loans and 1.12% of total loans compared to 210.3% and 1.27%, respectively at December 31, 1996. OTHER INCOME Other income increased $657,000 to $3.1 million for the nine months ended September 30, 1997 when compared to the nine months ended September 30, 1996. The increase is principally attributable to $512,000 of additional net gains on the sale of securities and $306,000 in net gains on the sale of loans, offset by a decrease of $161,000 in customer service fees and miscellaneous income as customers migrate to deposit products with lower fees such as the "ComboPlus". (Remainder of this page intentionally left blank) 22 25 OPERATING EXPENSES Operating expenses were $4.8 million and $14.0 million for the three and nine month periods ended September 30, 1997 compared to $4.6 million and $13.5 million for the same periods in 1996. Included in professional fees and other general and administrative operating expenses for the third quarter of 1997 was $100,000 associated with the formation of Medford Bancorp, as the holding company of the Bank. The most significant increases were in salary and benefit costs, which increased 4.9% and 5.2% respectively, when comparing the three and nine months ended September 30, 1997 and 1996. Other increases within these periods include equipment depreciation resulting from the Bank's investment of $1.7 million in new technology in the third quarter of 1996 and an additional $175,000 in the second quarter of 1997 for a telephone banking center. The increased occupancy and equipment costs are for the most part offset by lower data processing costs as a result of the investment in new technology. The Bank's annualized expense ratio which is the ratio of operating expenses as a percentage of average assets was 1.75% for the nine months ended September 30, 1997 compared to 1.84% for the prior year period. The Bank continues to focus on cost containment with the intent to be a low cost provider of high quality banking products and services. (Remainder of this page intentionally left blank) 23 26 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 pledge U.S. Government securities to borrow from certain investment firms and the Mutual Savings Central Fund of Massachusetts. These various sources of liquidity are used to fund withdrawals, new loans, and investments. Management continually seeks to optimize 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 debt instruments maturing in five years or less reduces market risk in the bond portfolio while providing significant cash flow. For the nine months ended September 30, 1997, cash flow from maturities and sales of securities was $97.1 million compared to cash flow from maturities and sales of securities of $96.6 million for the nine months ended September 30, 1996. Principal payments received on mortgage-backed investments during the nine months ended September 30, 1997 and 1996 totalled $5.4 million and $3.6 million, respectively. During periods of high interest rates maturities in the bond portfolio have provided significant liquidity at a lower cost than borrowings. Amortization and pay-offs of the loan portfolio contribute significant liquidity to the Bank. Traditionally, the amortization and payoffs have been reinvested into loans. When payoff rates exceed origination rates, excess liquidity from loan payoffs is shifted into the investment portfolio. The Bank also uses borrowed funds as a source of liquidity. These borrowings generally contribute toward funding over-all loan growth. At September 30, 1997 the Bank's outstanding borrowings from the FHLBB were $112.4 million, as compared to $87.6 million at September 30, 1996. The Bank also utilizes repurchase agreements as a source of funding when management deems market conditions to be conducive to such activities. The balance in repurchase agreements at September 30, 1997 was $62.8 million, as compared to $35.0 million at September 30, 1996. Commitments to originate residential and commercial real estate mortgage loans at September 30, 1997, excluding unadvanced construction funds of $8.0 million, was $20.2 million. Management believes that adequate liquidity is available to fund loan commitments utilizing deposits, loan amortization, maturities of securities, or borrowings. 24 27 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) Purchases of securities during the nine months ended September 30, 1997 totalled $147.8 million consisting of debt instruments maturing in less than five years and equities. This compares with purchases of $151.7 million for the nine months ended September 30, 1996. Residential and commercial real estate mortgage loan originations for the nine months ended September 30, 1997 totalled $80.5 million, compared with $68.4 million for the nine months ended September 30, 1996. The Bank also purchased residential 1-4 family loans amounting to $1.3 million from a third party during the first nine months of 1997. The Bank's capital position (total stockholders' equity) was $99.7 million or 9.02% of total assets at September 30, 1997 compared with $92.5 million or 8.90% of total assets at December 31, 1996. The Bank's capital position exceeds all regulatory requirements. (The remainder of this page intentionally left blank.) 25 28 ASSET-LIABILITY MANAGEMENT Through the Bank's Asset-Liability Management Committee ("ALCO"), which is comprised of certain senior and middle management personnel, the Bank 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 provide for optimum profitability and capital at prudent levels of liquidity and interest rate, credit, and market risk. It is ALCO's general policy to closely match the maturity or rate sensitivity of its assets and liabilities. In accordance with this policy, certain strategies have been implemented to improve the match between interest rate sensitive assets and liabilities. These strategies include, but are not limited to: daily monitoring of the Bank's changing cash requirements, with particular concentration on investment in short term securities; originating adjustable and fixed rate mortgage loans for the Bank's own portfolio; managing the cost and structure of deposits; and generally using matched borrowings to fund specific purchases of loan packages and large loan origination. Occasionally, management may choose to deviate from specific matching of maturities of assets and liabilities, if an attractive opportunity to enhance yields becomes available. The Bank actively manages its liability portfolio in order to effectively plan and manage growth and maturities of deposits. Management recognizes the need for strict attention to all deposits. Accordingly, plans for growth of all deposit types are reviewed regularly. Programs are in place which are designed to build multiple relationships with customers and to enhance the Bank's ability to retain deposits at controlled rates of interest, and management has adopted a policy of reviewing interest rates on an ongoing basis on all deposit accounts, in order to control deposit growth and interest costs. In addition to attracting deposits, the Bank has selectively borrowed funds using advances from the FHLBB and upon occasion, reverse repurchase agreements. These funds have generally been used to purchase loans typically having a matched repricing date. 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. 26 29 OTHER EVENTS At a special meeting on September 16, 1997 the shareholders of the Bank approved the establishment of a holding company to be named Medford Bancorp, Inc. The reasons for the proposed establishment of the holding company were discussed in detail in the proxy materials mailed out to all shareholders. More recently, the Bank received all necessary regulatory approvals to consummate the reorganization The transaction is anticipated to be completed in the fourth quarter of 1997. As is also detailed in the proxy materials pursuant to the reorganization, shares of Bank common stock (together with associated stock purchase rights) would be converted automatically into shares of holding company common stock (together with associated preferred stock purchase rights). 27 30 SIGNATURES Under to the requirements of the Securities Exchange Act of 1934, the Bank has duly caused this report to be on its behalf signed by the undersigned thereunto duly authorized. MEDFORD SAVINGS BANK Date: November 7, 1997 /s/ Arthur H. Meehan ------------------------------------------------ Arthur H. Meehan Chairman/President/CEO Date: November 7, 1997 /s/ Phillip W. Wong ------------------------------------------------- Phillip W. Wong Senior Vice President and Chief Financial Officer 28 EX-99.7 15 CURRENT REPORT ON FORM F-3 FILED ON 10/07/97 1 Exhibit 99.7 FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. 20429 ----------------- FORM F-3 CURRENT REPORT Under Section 13 of the Securities Exchange Act of 1934 FOR THE MONTH OF SEPTEMBER, 1997 MEDFORD SAVINGS BANK (Exact name of bank as specified in charter) 29 HIGH STREET, MEDFORD, MASSACHUSETTS (Address of principal office) (617) 395-7700 (Bank's telephone number, including area code) 2 Item 9 -- Submission of Matters to a Vote of Security Holders On September 16, 1997, Medford Savings Bank (the "Bank") held a Special Meeting of Stockholders (the "Meeting"). There were 4,541,077 shares issued, outstanding and eligible to vote as of July 31, 1997. A total of 3,212,259 shares, or 70.74% of the eligible voting shares, were present in person or by proxy at the Meeting. At the Meeting, the stockholders voted on the proposal to approve the Plan of Reorganization and Acquisition dated as of July 29, 1997 (the "Plan of Reorganization"), between the Bank and Medford Bancorp, Inc., providing for the formation of a holding company for the Bank, and each of the transactions contemplated thereby. The number of votes cast for or against the proposal, as well as the number of abstentions, is as follows: FOR: 3,142,285.013 AGAINST: 39,770.506 ABSTAIN: 30,203.877 Item 13 -- Financial Statements and Exhibits (a) Financial Statements None. (b) Exhibits 7. The description of the proposal in the proxy statement (the "Proxy Statement") with respect to the Meeting, filed with the FDIC on August 5, 1997, is incorporated herein by reference. Moreover, a copy of the Plan of Reorganization described in Item 9 is attached as Exhibit A to the Proxy Statement. 1 3 SIGNATURES Under the requirements of the Securities Exchange Act of 1934, the Bank has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. MEDFORD SAVINGS BANK Date: September 30, 1997 By: /s/ Arthur H. Meehan -------------------- Arthur H. Meehan Chairman, President and Chief Executive Officer 2 EX-99.8 16 NOTIFICATION FILED WITH THE FEDERAL RESERVE 1 Exhibit 99.8 NOTICE by MEDFORD BANCORP, INC. to the FEDERAL RESERVE BANK OF BOSTON pursuant to SECTION 225.17 OF REGULATION Y (12 C.F.R. Section 225.17) for a ONE-BANK HOLDING COMPANY FORMATION Medford Bancorp, Inc., Medford, Massachusetts, a Massachusetts corporation ("Bancorp"), hereby submits this notice (the "Notice") to the Federal Reserve Bank of Boston ("Reserve Bank") under Section 225.17 of Regulation Y ("Section 225.17") of the proposed acquisition by Bancorp of 100% of the voting shares of Medford Savings Bank, Medford, Massachusetts, a Massachusetts-chartered savings bank ("Medford") (the "Proposed Reorganization"). Medford currently is a publicly held bank, with its stock listed on the NASDAQ National Market System ("NASDAQ"). As is more fully discussed below, the Proposed Reorganization involves a change in the corporate structure of Medford by which Bancorp would become the holding company of Medford and a unitary bank holding company with its stock traded on NASDAQ. As is also discussed more fully below, Medford believes a holding company structure provides more flexibility to respond to market demands and thus will enable it to compete more effectively against the much larger competitors in its market. The first part of this Notice describes the parties, purposes and terms of the Proposed Reorganization. The second part then addresses each of the specific requirements of Section 225.17. All factual information stated herein has been provided by Medford. INTRODUCTION DESCRIPTION OF THE PARTIES Bancorp Bancorp was organized as a Massachusetts corporate subsidiary of Medford in July, 1997 for the sole purpose of becoming the holding company of Medford in accordance with Massachusetts law. Upon completion of the Proposed Reorganization, Medford will be a wholly owned subsidiary of Bancorp, and Bancorp will thereby become a bank holding company. 2 Bancorp currently is a shell subsidiary. When Bancorp becomes the holding company of Medford, its principal activities will be related to its holding of Medford stock. In the future, upon receipt of all necessary regulatory approvals, Bancorp may acquire banks or companies engaged in bank-related activities and may engage in such activities as may be permitted by applicable law, although no such activities or acquisitions are contemplated at this time. Medford Medford was organized in 1869 as a Massachusetts mutual savings bank. Medford converted from mutual to stock form on March 18, 1986 and issued 3,680,000 shares of common stock. Until January, 1996, Medford had two wholly-owned subsidiaries: Medco Realty, Inc. ("Medco") and Medford Securities Corporation ("MSC"). Medco engaged in the ownership and maintenance of certain buildings leased to Medford and, to the extent excess space was available, third parties. Medford elected to dissolve Medco in January, 1996, and acquired all of its assets and liabilities. MSC was established as a wholly owned subsidiary of Medford in February, 1995 and became operational on March 1, 1995. MSC is a securities corporation engaged exclusively in bank-permissible buying and selling of securities. Medford 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. Medford 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. Medford's primary market area includes these communities as well as other cities and towns in Middlesex County and the surrounding area north of Boston. Medford also offers savings bank life insurance ("SBLI") in accordance with Massachusetts law. Medford intends to continue offering SBLI after the Proposed Reorganization, and submits that such activity would continue to be permissible pursuant to Section 3(f) of the Bank Holding Company Act of 1956, as amended. At June 30, 1997, Medford had total assets of $1,072,557,000, total deposits of $824,611,000, and total stockholders' equity of $96,458,000. For the fiscal year ended December 31, 1996 and the six month period ended June 30, 1997, Medford had net income of $10,429,000 and $5,923,000 respectively. On June 30, 1997, Medford's leverage ratio was 8.49% and its Tier 1 risk-based and total risk-based capital ratios were 14.89% and 16.03%, respectively. As a result, Medford is considered "well-capitalized" under applicable prompt corrective action regulations. Copies of Medford's 1996 Annual Report and most recent quarterly report on Form F-4 are attached hereto as Exhibit 1. 2 3 PURPOSE OF THE TRANSACTION The Board of Directors of Medford believes that a holding company structure will provide flexibility for meeting the future financial needs of Medford and responding to competitive conditions in the financial services market. For example, although no transactions are presently contemplated, the holding company structure will facilitate the acquisition of other banks as well as other companies engaged in bank-related activities if and when opportunities arise. In this regard, a holding company structure would permit an acquired entity to operate on a more autonomous basis as a wholly-owned subsidiary of Bancorp rather than as a division of Medford. This more autonomous operation may be decisive in acquisition negotiations. In addition, the stock of Bancorp might serve as appropriate consideration in any such acquisition. Moreover, as a bank holding company, Bancorp will not be subject to the same regulatory restrictions as Medford, and will be able to acquire and invest more freely in certain bank and bank-related activities as well as such other activities as might be permitted by regulatory authorities. In addition, Bancorp will not be subject to the same regulatory limitations on the amounts which it can invest in its subsidiaries and other businesses and will not be required to obtain regulatory approval before issuing shares of its capital stock, except under certain circumstances. Moreover, providing even further operational flexibility, the repurchase of stock by Bancorp will not be subject to the same significant adverse tax consequences as a repurchase of stock by Medford, and, except under certain circumstances, no regulatory approval is required for such repurchase by Bancorp. DESCRIPTION OF THE PROPOSED REORGANIZATION The Proposed Reorganization will be effected pursuant to a Plan of Reorganization and Acquisition dated as of July 29, 1997, by and between Bancorp and Medford (the "Plan of Reorganization"), a copy of which is attached as Exhibit 2 hereto, in accordance with Massachusetts General Laws, Chapter 172, Section 26B ("Section 26B").(1) - - - -------- (1) The Plan of Reorganization provides that it shall not become effective until all of the following first shall have occurred: (i) the Plan of Reorganization shall have been approved by the affirmative vote of the holders of two-thirds of the outstanding common stock of Medford at a meeting of such stockholders called for such purpose, (ii) the Plan of Reorganization shall have been approved by the Massachusetts Commissioner of Banks and a copy of the Plan of Reorganization with his approval endorsed thereon shall have been filed in his office, all as provided in Section 26B, (iii) any approval, consent or waiver required by the Board of Governors of the Federal Reserve System shall have been received and any waiting period imposed by applicable law shall have expired, (iv) Medford shall have received a favorable opinion from its counsel, satisfactory in form and substance to Medford, with respect to the federal income tax consequences of the Plan of Reorganization and the acquisition contemplated thereby, (v) the shares of Bancorp common stock (together with associated preferred stock purchase rights) to be issued to the holders of common stock of Medford pursuant to the Proposed Reorganization shall have been registered or qualified for such issuance to the extent required under all applicable state securities laws, and (vi) Medford and Bancorp shall have obtained all other consents, permissions and approvals and taken all actions required by law or agreement, or deemed necessary by Medford or Bancorp, prior to the consummation of 3 4 In accordance with Section 26B, the Plan of Reorganization was approved by the Board of Directors of Bancorp and Medford on July 29, 1997. The Plan of Reorganization also was approved by the holders of more than two-thirds of the outstanding shares of Medford's common stock entitled to vote at a special meeting of Medford's stockholders held on September 16, 1997. A copy of the proxy statement delivered to the stockholders in connection with the Proposed Reorganization (the "Proxy Statement") is attached hereto as Exhibit 3. Under the Plan of Reorganization, Bancorp will become the owner of all the outstanding shares of the common stock of Medford, and each stockholder of Medford who does not exercise dissenters' rights with respect to the Plan of Reorganization will become the owner of one share of Bancorp common stock for each share of common stock of Medford held immediately prior to the consummation of the Proposed Reorganization, together with certain associated preferred stock purchase rights issued pursuant to Medford's Shareholder Rights Plan (see below in this section for a discussion of the Shareholder Rights Plan). On the effective date of the Proposed Reorganization, each share of common stock of Medford will be automatically converted into and exchanged for one share of Bancorp common stock (together with associated preferred stock purchase rights). The number of shares of Bancorp common stock to be issued at the effective time of the Proposed Reorganization will equal the number of shares of common stock of Medford issued and outstanding immediately prior thereto, less the number of shares of common stock of Medford held by dissenting stockholders.(2) Shares of Bancorp common stock that would have been issued had dissenting stockholders not dissented will remain as authorized but unissued shares of Bancorp common stock. The shares of Bancorp common stock that are outstanding prior to the effective time of the Proposed Reorganization, all of which are presently held by Medford, will be cancelled as part of the Proposed Reorganization. After consummation of the Proposed Reorganization, Medford, as a subsidiary of Bancorp, will continue to serve the communities it presently serves from its existing office locations. In connection with the Proposed Reorganization, Medford currently intends to transfer up to approximately $7 million to Bancorp, which amount does not exceed the accumulated earnings and profits for tax purposes of Medford as of June 30, 1997. If such a transfer to Bancorp had been made on June 30, 1997, the leverage, Tier 1 risk-based, and total risk-based capital ratios of Medford would have been approximately 7.88%, 13.89% and - - - -------- the acquisition provided for by the Plan of Reorganization and to Bancorp's having and exercising all rights of ownership with respect to all of the outstanding shares of common stock of Medford acquired by it thereunder. (2) Medford has received a letter from a single stockholder objecting to the Proposed Reorganization and demanding payment for his shares if the Proposed Reorganization is consummated. The stockholder holds 2,170 shares of Medford common stock, which represents less than 0.1% of the total number of shares outstanding. Medford is uncertain whether the stockholder intends to complete the statutory dissent process. 4 5 15.05%, respectively, resulting in it still being considered "well-capitalized" under the applicable prompt corrective action regulations.(3) The Charter and By-laws of Medford will not be affected by consummation of the Proposed Reorganization, and the Articles of Organization and By-laws of Bancorp are substantially identical to those of Medford. The Medford Savings Bank 1993 Stock Option Plan and the Medford Savings Bank 1986 Stock Option Plan will become stock option plans of Bancorp. All other stock related benefit plans of Medford will be unchanged by the Proposed Reorganization, except that any plan which refers to the common stock of Medford, such as the Employee Stock Ownership Plan, will, following the completion of the Proposed Reorganization, be deemed to refer instead to Bancorp common stock. Medford's Shareholder Rights Plan, pursuant to which the preferred stock purchase rights were provided to shareholders, will be amended so that it will be assumed by Bancorp following the Proposed Reorganization. Accordingly, the outstanding rights issued pursuant to the Shareholder Rights Plan will be assumed by, and deemed to be rights issued by, Bancorp. The Shareholder Rights Plan, as amended, will be substantially similar to the plan as currently in effect. The Shareholders Rights Plan is more fully described on page 13 of the Proxy Statement. The Directors, officers and other employees of Medford will be unchanged by the Proposed Reorganization. The Directors of Bancorp will initially consist of the ten persons currently serving as members of the Board of Directors of Medford. The President and Chief Executive Officer, Chief Financial Officer and the Clerk of Bancorp will initially be the persons serving identical roles with respect to Medford. NOTICE REQUIREMENTS Having provided in the Introduction a general description of the Proposed Reorganization, the parties thereto, and the purposes thereof, this Notice now specifically details why the Proposed Reorganization qualifies for eligibility under the notice procedures of Section 225.17(a), and further discusses why the Proposed Reorganization satisfies each of the requirements set forth in Section 225.17(b) and is worthy of Federal Reserve System approval. For ease of review, the text of each applicable item of Section 225.17 has been enclosed in a box. - - - -------- (3) Due to a recent update of financial information regarding Medford, these pro forma capital ratios differ immaterially from those stated in the Proxy Statement. As already mentioned, however, Medford will remain "well-capitalized" pursuant to applicable prompt corrective action regulations under the revised numbers. 5 6 SECTION 225.17(a) ELIGIBILITY REQUIREMENTS To qualify for the notice procedure under Section 225.17, a proposal must satisfy the criteria set forth at Section 225.17(a) of Regulation Y. As discussed below, the Proposed Reorganization satisfies each of the first seven conditions and will satisfy the eighth condition upon expiration of the 30-day period following notice to the Reserve Bank, assuming no objection or a request for an application under Section 225.15 of Regulation Y is received during such period. (1) THE SHAREHOLDER OR SHAREHOLDERS WHO CONTROL AT LEAST 67 PERCENT OF THE SHARES OF THE BANK WILL CONTROL, IMMEDIATELY AFTER THE REORGANIZATION, AT LEAST 67 PERCENT OF THE SHARES OF THE HOLDING COMPANY IN SUBSTANTIALLY THE SAME PROPORTION, EXCEPT FOR CHANGES IN SHAREHOLDERS' INTERESTS RESULTING FROM THE EXERCISE OF DISSENTING SHAREHOLDERS' RIGHTS UNDER STATE OR FEDERAL LAW; In accordance with the Plan of Reorganization, Bancorp will become the owner of all the outstanding shares of common stock of Medford and each stockholder of Medford who does not exercise dissenters' rights with respect to the Plan of Reorganization will become the owner of one share of Bancorp common stock for each share of common stock of Medford held immediately prior to the consummation of the Proposed Reorganization. As a result, this condition is satisfied. (2) NO SHAREHOLDER, OR GROUP OF SHAREHOLDERS ACTING IN CONCERT, WILL, FOLLOWING THE REORGANIZATION, OWN OR CONTROL 10 PERCENT OR MORE OF ANY CLASS OF VOTING SHARES OF THE BANK HOLDING COMPANY, UNLESS THAT SHAREHOLDER OR GROUP OF SHAREHOLDERS WAS AUTHORIZED, AFTER REVIEW UNDER THE CHANGE IN BANK CONTROL ACT OF 1978 (12 U.S.C. 1817(j)) BY THE APPROPRIATE FEDERAL BANKING AGENCY FOR THE BANK, TO OWN OR CONTROL 10 PERCENT OR MORE OF ANY CLASS OF VOTING SHARES OF THE BANK; Based on Medford's stockholders, a list of which as of the record date (July 31, 1997) of the special meeting of stockholders to consider the Proposed Reorganization is attached hereto as Confidential Exhibit 4, no stockholder, or group of stockholders acting in concert, is contemplated to own or control 10% or more of any class of voting shares of Bancorp following the Proposed Reorganization.(4) With respect to the footnote in Section 225.17 concerning this requirement, no company (other than Bancorp) will be required to register as a bank holding company as a result of the Proposed Reorganization. Furthermore, as indicated above, Bancorp is not being organized in mutual form. - - - -------- (4) Medford has not become aware of any information since the record date which would lead to a belief that any significant shifting in stock ownership has occurred since the record date or will occur prior to the consummation of the Proposed Reorganization. 6 7 (3) THE BANK IS ADEQUATELY CAPITALIZED (AS DEFINED IN SECTION 38 OF THE FEDERAL DEPOSIT INSURANCE ACT (12 U.S.C. 1831O)); As is discussed in the Introduction, Medford currently is well-capitalized under applicable prompt corrective action regulations. (4) THE BANK HAS RECEIVED AT LEAST A COMPOSITE "SATISFACTORY" RATING AT ITS MOST RECENT EXAMINATION, IN THE EVENT THAT THE BANK WAS EXAMINED; As demonstrated in the certificate attached hereto as Confidential Exhibit 5, the requirements of Section 225.17(a)(4) have been satisfied. (5) AT THE TIME OF THE REORGANIZATION, NEITHER THE BANK NOR ANY OF ITS OFFICERS, DIRECTORS, OR PRINCIPAL SHAREHOLDERS IS INVOLVED IN ANY UNRESOLVED SUPERVISORY OR ENFORCEMENT MATTERS WITH ANY APPROPRIATE FEDERAL BANKING AGENCY; Neither Medford nor any of its officers or directors is involved in any unresolved supervisory or enforcement matters with any appropriate federal banking agency. Medford had no principal shareholders (as defined in Section 225(2)(n)(2) of Regulation Y) as of July 31, 1997, and none are contemplated to exist at the consummation of the Proposed Reorganization. (6) THE COMPANY DEMONSTRATES THAT ANY DEBT THAT IT INCURS AT THE TIME OF THE REORGANIZATION, AND THE PROPOSED MEANS OF RETIRING THIS DEBT, WILL NOT PLACE UNDUE BURDEN ON THE HOLDING COMPANY OR ITS SUBSIDIARY ON A PRO FORMA BASIS; Bancorp will not assume any debt at the effective time of the Proposed Reorganization. (7) THE HOLDING COMPANY WILL NOT, AS A RESULT OF THE REORGANIZATION, ACQUIRE CONTROL OF ANY ADDITIONAL BANK OR ENGAGE IN ANY ACTIVITIES OTHER THAN THOSE OF MANAGING AND CONTROLLING BANKS; AND Bancorp, as a result of the Proposed Reorganization, will only directly acquire Medford and indirectly acquire Medford's existing subsidiary, MSC. Bancorp has no current plans to acquire any other banking or nonbanking interests. Attached as Exhibit 6 hereto is a pro forma organizational chart for Bancorp. (8) DURING THIS PERIOD, NEITHER THE APPROPRIATE RESERVE BANK NOR THE BOARD OBJECTED TO THE PROPOSAL OR REQUIRED THE FILING OF AN APPLICATION UNDER SECTION 225.15 OF THIS SUBPART. 7 8 Expiration of the 30-day period following receipt of this Notice by the Reserve Bank without such objection or request will satisfy this requirement. SECTION 225.17(b) NOTICE REQUIREMENTS Having detailed why the Proposed Reorganization qualifies for the notice procedure under Section 225.17, this Notice now demonstrates why the Proposed Reorganization would be worthy of Reserve Bank approval under Section 225.17(b) of Regulation Y. (1) CERTIFICATION BY THE NOTIFICANT'S BOARD OF DIRECTORS THAT THE REQUIREMENTS OF 12 U.S.C. 1842(a)(C) AND THIS SECTION ARE MET BY THE PROPOSAL; A copy of the required certification by Bancorp is attached as Exhibit 7 hereto. (2) A LIST IDENTIFYING ALL PRINCIPAL SHAREHOLDERS OF THE BANK PRIOR TO THE REORGANIZATION AND OF THE HOLDING COMPANY FOLLOWING THE REORGANIZATION, AND SPECIFYING THE PERCENTAGE OF SHARES HELD BY EACH PRINCIPAL SHAREHOLDER IN THE BANK AND PROPOSED TO BE HELD IN THE NEW HOLDING COMPANY; As discussed above, Medford had no principal shareholders (as defined in Section 225(2)(n)(2) of Regulation Y) as of July 31, 1997, and none are contemplated to exist at the consummation of the Proposed Reorganization. A list of all stockholders of Medford as of July 31, 1997, the record date for the special meeting of stockholders to consider the Proposed Reorganization, is attached hereto as Confidential Exhibit 4. (3) A DESCRIPTION OF THE RESULTING MANAGEMENT OF THE PROPOSED BANK HOLDING COMPANY AND ITS SUBSIDIARY BANK, INCLUDING (i) BIOGRAPHICAL INFORMATION REGARDING ANY SENIOR OFFICERS AND DIRECTORS OF THE RESULTING BANK HOLDING COMPANY WHO WERE NOT SENIOR OFFICERS OR DIRECTORS OF THE BANK PRIOR TO THE REORGANIZATION; AND (ii) A DETAILED HISTORY OF THE INVOLVEMENT OF ANY OFFICER, DIRECTOR, OR PRINCIPAL SHAREHOLDER OF THE RESULTING BANK HOLDING COMPANY IN ANY ADMINISTRATIVE OR CRIMINAL PROCEEDING, AND Management of Medford will remain unchanged after the effective time of the Proposed Reorganization. A list of the management of Bancorp after the effective time of the Proposed Reorganization is attached as Exhibit 8 hereto. As discussed above, the initial directors of Bancorp will consist of the ten persons currently serving as members of the Board of Directors of Medford. The President and Chief Executive Officer, Chief Financial Officer and the Clerk of Bancorp will initially be the persons serving identical roles with respect to 8 9 Medford. No officer is involved in any administrative or criminal proceeding. As discussed above, Medford did not have any principal shareholders as of July 31, 1997. (4) PRO FORMA FINANCIAL STATEMENTS FOR THE HOLDING COMPANY, AND A DESCRIPTION OF THE AMOUNT, SOURCE, AND TERMS OF DEBT, IF ANY, THAT THE BANK HOLDING COMPANY PROPOSES TO INCUR, AND INFORMATION REGARDING THE SOURCES AND TIMING FOR DEBT SERVICE AND RETIREMENT. Medford's 1996 year-end and most recent quarterly balance sheets and income statements are included in its annual report and quarterly report on Form F-4, attached as Exhibit 1. Attached as Confidential Exhibit 9 are a pro forma consolidated balance sheet at June 30, 1997 for Bancorp and pro forma capital ratios as of June 30, 1997 for Medford. As discussed more fully above, Bancorp will incur no debt at the effective time of the Proposed Reorganization. REQUEST FOR CONFIDENTIAL TREATMENT Bancorp requests the Federal Reserve System to accord confidential treatment to the materials in the separately bound Confidential Exhibits volume in accordance with Part 261 of the Rules of the Board of Governors Regarding Disclosure of Information and applicable exemptions from the Freedom of Information Act. The materials contained in the Confidential Exhibits volume include privileged and confidential commercial and financial information that is not otherwise publicly available and disclosure of which would likely cause significant competitive harm to Bancorp and Medford, and material that is contained in, or related to, confidential supervisory information prepared by a federal financial institution supervisory agency that deems such information confidential. Examples of this type of information include the pro forma financial statements for Bancorp and Medford, the list of stockholders of Medford, and a certificate regarding Medford's rating at its most recent examination. As such, these materials are exempt from public disclosure requirements and entitled to confidential treatment under Section 261.8(a)(2) and (a)(3) and Section 261.17 of the Board's Rules and the Freedom of Information Act, 5 U.S.C. Section 552(b). 9 10 We appreciate your attention to this Notice. Please confirm receipt of an original and 6 copies of this Notice, including the Confidential Exhibits volume provided herewith, by signing or date-stamping the enclosed receipt copy of this letter and returning it to the messenger. As always, if you require additional information or have any questions concerning this Notice, please do not hesitate to call me at 570-1329 or Josefina Rotman Childress at 570-1374. Sincerely, /s/ Gregory J. Lyons -------------------- Gregory J. Lyons cc: Arthur H. Meehan Chairman, President and Chief Executive Officer Phillip W. Wong Senior Vice President and Chief Financial Officer Paul W. Lee, P.C. EX-99.9 17 APPLICATION FOR ACQUISITION OF A BANK 1 Exhibit 99.9 THE COMMONWEALTH OF MASSACHUSETTS DIVISION OF BANKS LEVERETT SALTONSTALL BUILDING 100 CAMBRIDGE STREET, BOSTON, MASSACHUSETTS 02202 APPLICATION FOR ACQUISITION OF A BANK BY A COMPANY PURSUANT TO MASSACHUSETTS GENERAL LAWS CHAPTER 172, SECTION 26B, APPLICATION IS HEREBY MADE BY APPLICANT: Medford Bancorp, Inc. ADDRESS: 29 High Street Medford, MA 02155 MAILING ADDRESS, IF DIFFERENT: N/A TELEPHONE: (617) 395-7700 FOR WRITTEN APPROVAL OF THE COMMISSIONER OF BANKS TO ACQUIRE THE FOLLOWING BANK. BANK TO BE ACQUIRED: Medford Savings Bank ADDRESS: 29 High Street Medford, MA 02155 TELEPHONE: (617) 395-7700 THREE COPIES OF THIS APPLICATION MUST BE FILED WITH AN APPLICATION FEE IN THE AMOUNT OF $1,500.00 PAYABLE TO THE DIVISION OF BANKS. APPLICATION COORDINATOR: Gregory J. Lyons, Esq. and Josefina R. Childress, Esq. TITLE: Attorneys ADDRESS: Goodwin, Procter & Hoar Exchange Place Boston, MA 02109 TELEPHONE: (617) 570-1000 DATE: September 15, 1997 2 INTRODUCTORY STATEMENT Medford Bancorp, Inc., a corporation organized under the laws of the Commonwealth of Massachusetts ("Bancorp"), hereby applies to the Massachusetts Commissioner of Banks ("Commissioner of Banks") pursuant to Massachusetts General Laws, Chapter 172, Section 26B ("Section 26B") for approval of its acquisition of all of the capital stock of Medford Savings Bank, a Massachusetts-chartered savings bank in stock form ("Medford") (such acquisition hereinafter referred to as the "Proposed Reorganization"). All factual information stated herein has been provided by Medford. As is discussed more fully below, Medford believes a holding company structure provides more flexibility to respond to market demands and thus will enable it to compete more effectively against the much larger competitors in its market. Description of the Parties A. Bancorp Bancorp was organized as a Massachusetts corporate subsidiary of Medford, in July, 1997, for the sole purpose of becoming the holding company of Medford in accordance with Massachusetts law. Upon completion of the Proposed Reorganization, Medford will be a wholly owned subsidiary of Bancorp, and Bancorp will thereby become a bank holding company. Bancorp currently is a shell subsidiary. When Bancorp becomes the holding company of Medford, its principal activities will be related to its holding of Medford stock. In the future, upon receipt of all necessary regulatory approvals, Bancorp may acquire banks or companies engaged in bank-related activities and may engage in such activities as may be permitted by applicable law, although no such activities or acquisitions are contemplated at this time. In any event, in accordance with Section 26B, Bancorp will engage directly or indirectly only in such activities as are now or may hereafter be proper activities for bank holding companies registered under the Federal Bank Holding Company Act of 1956. B. Medford Medford was organized in 1869 as a Massachusetts mutual savings bank. Medford converted from mutual to stock form on March 18, 1986 and issued 3,680,000 shares of common stock. Until January, 1996, Medford had two wholly-owned subsidiaries: Medco Realty, Inc. ("Medco") and Medford Securities Corporation ("MSC"). Medco engaged in the ownership and maintenance of certain buildings leased to Medford and, to the extent excess space was available, third parties. Medford elected to dissolve Medco in January, 1996, and acquired all 3 of its assets and liabilities. MSC was established as a wholly owned subsidiary of Medford in February, 1995, and became operational on March 1, 1995. MSC is a securities corporation engaged exclusively in bank-permissible buying and selling of securities. Medford 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. Medford 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. Medford's primary market area includes these communities as well as other cities and towns in Middlesex County and the surrounding area north of Boston. Medford also offers savings bank life insurance ("SBLI") in accordance with Massachusetts law. Medford intends to continue offering SBLI after the Proposed Reorganization, a permissible activity pursuant to Section 3(f) of the Bank Holding Company Act of 1956, as amended. At June 30, 1997, Medford had total assets of $1,072,557,000, total deposits of $824,611,000, and total stockholders' equity of $96,458,000. For the fiscal year ended December 31, 1996 and the six month period ended June 30, 1997, Medford had net income of $10,429,000 and $5,923,000, respectively. On June 30, 1997, Medford's leverage ratio was 8.49% and its Tier 1 risk-based and total risk-based capital ratios were 14.89% and 16.03%, respectively. As a result, Medford is considered "well-capitalized" under applicable prompt corrective action regulations. Copies of Medford's most recent financial statements are attached hereto as Appendix H. Description of the Transaction The Proposed Reorganization will be effected pursuant to a Plan of Reorganization and Acquisition dated as of July 29, 1997, by and between Bancorp and Medford (the "Plan of Reorganization"), a copy of which is included in Appendix A hereto, in accordance with Section 26B.(1) - - - -------- (1) The Plan of Reorganization provides that it shall not become effective until all of the following first shall have occurred: (i) the Plan of Reorganization shall have been approved by the affirmative vote of the holders of two-thirds of the outstanding common stock of Medford at a meeting of such stockholders called for such purpose, (ii) the Plan of Reorganization shall have been approved by the Commissioner of Banks and a copy of the Plan of Reorganization with his approval endorsed thereon shall have been filed in his office, all as provided in Section 26B, (iii) any approval, consent or waiver required by the Board of Governors of the Federal Reserve System shall have been received and any waiting period imposed by applicable law shall have expired, (continued...) 2 4 In accordance with Section 26B, the Plan of Reorganization was approved by the Board of Directors of Bancorp and Medford on July 29, 1997. The Plan of Reorganization is anticipated to be approved by the holders of more than two-thirds of the outstanding shares of Medford's common stock entitled to vote at a special meeting of Medford's stockholders to be held on September 16, 1997. A copy of the proxy statement delivered to the stockholders in connection with the Proposed Reorganization (the "Proxy Statement") is attached hereto as Exhibit 2. Under the Plan of Reorganization, Bancorp will become the owner of all the outstanding shares of the common stock of Medford, and each stockholder of Medford who does not exercise dissenters' rights with respect to the Plan of Reorganization will become the owner of one share of Bancorp common stock for each share of common stock of Medford held immediately prior to the consummation of the Proposed Reorganization, together with certain associated preferred stock purchase rights issued pursuant to Medford's Shareholder Rights Plan (see below in this section for a discussion of the Shareholder Rights Plan). On the effective date of the Proposed Reorganization, each share of common stock of Medford will be automatically converted into and exchanged for one share of Bancorp common stock (together with associated preferred stock purchase rights). The number of shares of Bancorp common stock to be issued at the effective time of the Proposed Reorganization will equal the number of shares of common stock of Medford issued and outstanding immediately prior thereto, less the number of shares of common stock of Medford held by dissenting stockholders.(2) Shares of Bancorp common stock that would have been issued had dissenting stockholders not dissented will remain as authorized but unissued shares of Bancorp common stock. The shares of Bancorp common stock that are outstanding prior to the effective time of the Proposed Reorganization, all of which are presently held by Medford, will be cancelled as part of the Proposed Reorganization. - - - -------- (1)(continued...) (iv) Medford shall have received a favorable opinion from its counsel, satisfactory in form and substance to Medford, with respect to the federal income tax consequences of the Plan of Reorganization and the acquisition contemplated thereby, (v) the shares of Bancorp common stock (together with associated preferred stock purchase rights) to be issued to the holders of common stock of Medford pursuant to the Proposed Reorganization shall have been registered or qualified for such issuance to the extent required under all applicable state securities laws, and (vi) Medford and Bancorp shall have obtained all other consents, permissions and approvals and taken all actions required by law or agreement, or deemed necessary by Medford or Bancorp, prior to the consummation of the acquisition provided for by the Plan of Reorganization and to Bancorp's having and exercising all rights of ownership with respect to all of the outstanding shares of common stock of Medford acquired by it thereunder. (2) As of the date of this filing, Bancorp is not aware of any dissenting stockholders. In the event Bancorp becomes aware of any dissenting stockholders, it will promptly inform the Commissioner of Banks of the fact. 3 5 After consummation of the Proposed Reorganization, Medford, as a subsidiary of Bancorp, will continue to serve the communities it presently serves from its existing office locations. In connection with the Proposed Reorganization, Medford currently intends, to transfer up to approximately $7 million to Bancorp, which amount does not exceed the accumulated earnings and profits for tax purposes of Medford as of June 30, 1997. As detailed below, if such a transfer to Bancorp had been made on June 30, 1997, Medford would have been still considered "well-capitalized" under the applicable prompt corrective action regulations. The Charter and By-laws of Medford will not be affected by consummation of the Proposed Reorganization, and the Articles of Organization and By-laws of Bancorp are substantially identical to those of Medford. The Medford Savings Bank 1993 Stock Option Plan and the Medford Savings Bank 1986 Stock Option Plan (collectively, the "Stock Option Plans") will become stock option plans of Bancorp. All other stock related benefit plans of Medford will be unchanged by the Proposed Reorganization, except that any plan which refers to the common stock of Medford, such as the Employee Stock Ownership Plan, will, following the completion of the Proposed Reorganization, be deemed to refer instead to Bancorp common stock. Medford's Shareholder Rights Plan, pursuant to which the preferred stock purchase rights were provided to shareholders, will be amended so that it will be assumed by Bancorp following the Proposed Reorganization. Accordingly, the outstanding rights issued pursuant to the Shareholder Rights Plan will be assumed by, and deemed to be rights issued by, Bancorp. The Shareholder Rights Plan, as amended, will be substantially similar to the plan as currently in effect. The Shareholder Rights Plan is more fully described on page 13 of the Proxy Statement. The Directors, officers and other employees of Medford will be unchanged by the Proposed Reorganization. The Directors of Bancorp will initially consist of the ten persons currently serving as members of the Board of Directors of Medford. The President and Chief Executive Officer, Chief Financial Officer and the Clerk of Bancorp will initially be the persons serving identical roles with respect to Medford. In accordance with Section 26B, the expenses in connection with the Proposed Reorganization and the development of the Plan of Reorganization, in the aggregate, will not exceed 2% of the capital stock, surplus account and undivided profits of Medford. 4 6 APPLICATION FOR ACQUISITION OF A BANK BY A COMPANY UNDER MASSACHUSETTS GENERAL LAWS CHAPTER 172, SECTION 26B PART A 1. A written plan of acquisition. A copy of the Plan of Reorganization is included in Appendix A attached hereto. 2. A statement addressing the issues of whether competition among banking institutions will be unreasonably affected and whether public advantage will be promoted. Effect on Competition The Proposed Reorganization does not raise any competitive issues. The Proposed Reorganization will not result in the addition of a new banking presence to the markets presently served by Medford or in the consolidation of existing bank operations. Medford's relative market share will not be altered by the Proposed Reorganization. Following consummation of the Proposed Reorganization, Medford will continue to serve the same markets as it did prior to the Proposed Reorganization and each of those markets will continue to be served by a variety of significant financial institutions and will remain highly competitive. Indeed, the town of Medford is within seven miles of Boston, Massachusetts, the largest city in and financial services focal point of New England. Rather than raising competitive concerns, it is expected that the Proposed Reorganization will promote healthy competition in the geographic market areas now served by Medford. As in the remainder of the United States, the banking industry in the area serviced by Medford has experienced substantial consolidation, with Medford now facing significant competition from several competitors much larger in asset size and deposits. The bank holding company structure will provide flexibility for meeting the future financial needs of Medford and adequately responding to the increasing demands of the financial services market. Public Advantage The Proposed Reorganization is expected to promote public advantage and result in net new benefits in several respects. First, as a bank holding company, Bancorp will not be subject to the same regulatory restrictions as Medford, and will be able to acquire and invest more freely in certain bank and bank-related activities as well as such other activities as might be permitted by regulatory authorities. Second, although no new consumer and business services are currently contemplated, it is anticipated that the bank holding company structure will facilitate the provision of new, wide ranging financial services to consumers and businesses in Medford's market areas in response to market demands. 5 7 The anticipated operating efficiencies, financial strength and flexibility gained by the Proposed Reorganization should over time result in the following other "net new benefits": (1) capital investments; (2) job creation for Massachusetts citizens; and (3) a continued commitment by Medford to maintain and open branches in its delineated local community, as market conditions warrant. As to capital investments, although no significant capital investments are currently contemplated in connection with the Proposed Reorganization, Medford and Bancorp believe that the expanded business opportunities that will result from the bank holding company structure and any operating efficiencies gained thereby will lead to increased profits and retained earnings. This strengthened financial position will help meet the lending demands of Medford's communities and enhance Medford's ability to service the needs of both the citizens and the businesses of its communities. As to job creation, Bancorp's ability to invest in certain bank and bank-related activities may result in the expansion of its business which could translate into more job opportunities for Massachusetts citizens. Furthermore, in addition to the potential for internal capital investments and job creation, Medford's contemplated enhanced ability to act as a source of financial services for the communities it serves should assist the businesses and citizens in those communities to expand and create jobs in their markets. This community benefit is even further augmented by Medford's commitment to the low and middle income residents in those areas as demonstrated by its most recent satisfactory Community Reinvestment Act rating. A copy of Medford's CRA Statement and Notice is attached hereto as Appendix E. Finally, as to branch issues, Medford has historically demonstrated its commitment to maintain and open branches in its communities. No branch closings are expected to result from the Proposed Reorganization. Instead, it is anticipated that the flexibility and financial strength that will result from the Proposed Reorganization will enable Medford to continue to open or acquire additional branches within its communities, as market conditions warrant. As the foregoing demonstrates, the Proposed Reorganization is anticipated to have a positive effect on competition and is also anticipated to result in public advantage, including net new benefits. More generally, the proposed holding company structure is anticipated to permit Bancorp and Medford to effectively compete against competitors having a substantially larger percentage of deposits in its markets. 3. A statement on the financing plans for the company. As mentioned in the Introductory Statement, in connection with the Proposed Reorganization and in accordance with applicable law, Medford currently contemplates to transfer up to approximately $7 million to Bancorp, which amount does not exceed the accumulated earnings and profits for tax purposes of Medford as of June 30, 1997. A transfer 6 8 of $7 million to Bancorp would reduce Medford's stockholders' equity as of June 30, 1997, to approximately $89.5 million. If such a transfer to Bancorp had been made on June 30, 1997, the leverage, Tier 1 risk-based, and total risk-based capital ratios of Medford would have been approximately 7.88%, 13.90% and 15.06%, respectively, resulting in its still being considered "well-capitalized" under applicable prompt corrective action regulations.(3) Attached as Exhibit 1 hereto is a table which sets forth (i) the consolidated capitalization of Medford as of June 30, 1997; (ii) the pro forma consolidated capitalization of Medford as of June 30, 1997 after giving effect to the Proposed Reorganization (which reflects the proposed transfer of $7 million from Medford's retained earnings to Bancorp); and (iii) the pro forma capitalization of Bancorp on a consolidated basis after giving effect to the Proposed Reorganization. Neither Medford nor Bancorp plans to incur any debt in connection with the Proposed Reorganization. 4. A statement on the business objectives of the company. The Board of Directors of Medford believes that a holding company structure will provide flexibility for meeting the future financial needs of Medford and responding to competitive conditions in the financial services market. For example, although no transactions are presently contemplated, the holding company structure will facilitate the acquisition of other banks as well as other companies engaged in bank-related activities if and when opportunities arise. In this regard, a holding company structure would permit an acquired entity to operate on a more autonomous basis as a wholly owned subsidiary of Bancorp rather than as a division of Medford. This more autonomous operation may be decisive in acquisition negotiations. In addition, the stock of Bancorp might serve as appropriate consideration in any such acquisition. Moreover, as a bank holding company, Bancorp will not be subject to the same regulatory restrictions as Medford, and will be able to acquire and invest more freely in certain bank and bank-related activities as well as such other activities as might be permitted by regulatory authorities. In addition, Bancorp will not be subject to the same regulatory limitations on the amounts which it can invest in its subsidiaries and other businesses and will not be required to obtain regulatory approval before issuing shares of its capital stock, except under certain circumstances. Moreover, providing even further operational flexibility, the repurchase of stock by Bancorp will not be subject to the same significant adverse tax consequences as a repurchase of stock by Medford, and except under certain circumstances, no regulatory approval is required for such repurchase by Bancorp. - - - -------- (3) Due to a recent update of financial information regarding Medford, these pro forma capital ratios differ immaterially from those stated in the Proxy Statement. As already mentioned, however, Medford will remain "well-capitalized" pursuant to applicable prompt corrective action regulations under the revised numbers. 7 9 5. Provide a copy of a prospectus and any other information describing the transaction. A copy of the Proxy Statement, which includes a description of the Proposed Reorganization, is attached hereto as Exhibit 2. 6. Provide a corporate structure chart for the company and the bank which includes any subsidiaries. Indicate the relational structure of the corporate entities including all subsidiaries. A copy of an organizational chart for Bancorp and Medford, including Medford's only subsidiary, MSC, is attached hereto as Exhibit 3. 7. Provide information on all required regulatory approvals necessary to complete the transaction; include information on the status of each application and include a copy of any approvals received. In connection with the Proposed Reorganization, Bancorp is concurrently filing a notice with the Federal Reserve Bank of Boston pursuant to Section 225.17 of Regulation Y (12 C.F.R. Section 225.17) to form a bank holding company (the "FRB Notice"). A copy of the FRB Notice, excluding any confidential sections, is attached hereto as Appendix F. PART B If applicable, submit a request for approval to acquire more than ten percent of a savings bank or a co-operative bank in stock form pursuant to 209 CMR 33.08(6)(c) and include the date of such conversion. This item is not applicable. Medford converted from mutual form to stock form in 1986. Since more than three years have elapsed since the conversion, Bancorp's acquisition of more than ten percent of any class of common stock of Medford does not implicate 209 C.M.R. 33.08(6)(c). 8 10 LIST OF EXHIBITS 1. Pro Forma Capitalization Table. 2. Proxy Statement furnished in connection with the special meeting of the stockholders of Medford to be held on September 16, 1997. 3. An organizational chart for Bancorp, Medford and Medford's only subsidiary. 11 APPENDICES A. A CERTIFICATE OF THE PRESIDENT, SECRETARY OR CLERK OF THE COMPANY, CERTIFYING THAT THE PLAN WAS APPROVED BY A MAJORITY OF THE BOARD OF DIRECTORS OF THE COMPANY. B. A CERTIFICATE OF THE PRESIDENT, SECRETARY OR TREASURER OF THE BANK, CERTIFYING THAT THE PLAN WAS APPROVED BY A MAJORITY OF THE BOARD OF DIRECTORS AT THE BANK AND BY A 2/3 VOTE OF THE SHAREHOLDERS. C. A COPY OF NOTICE OF THE SHAREHOLDER MEETING THAT WAS PUBLISHED TWICE, ONE WEEK APART IN LOCAL NEWSPAPER. D. A COPY OF NOTICE OF THE SHAREHOLDER MEETING THAT WAS MAILED TO INDIVIDUAL SHAREHOLDERS. E. COMMUNITY REINVESTMENT ACT STATEMENT AND NOTICE OF THE BANK. F. COPIES OF ANY APPLICATION, EXCLUDING CONFIDENTIAL SECTION, SUBMITTED TO A FEDERAL AGENCY. G. IDENTIFY THE DAILY NEWSPAPER OR NEWSPAPERS OF GENERAL CIRCULATION PUBLISHING IN THE AREA OF THE BANK'S MAIN OFFICE. IF THERE IS MORE THAN ONE SUCH NEWSPAPER, LIST THE LATEST AUDIT BUREAU OF CIRCULATION'S STATEMENT FOR EACH NEWSPAPER. H. PROVIDE THE MOST RECENT INCOME STATEMENT AND BALANCE SHEET OF THE BANK. -----END PRIVACY-ENHANCED MESSAGE-----