WARREN BANCORP INC
SPECIAL TERMINATION AGREEMENT WITH LEO  C. DONAHUE
<DOCUMENT>
<TYPE>EX-10.3
<SEQUENCE>6
<FILENAME>b38211wbex10-3.txt
<DESCRIPTION>SPECIAL TERMINATION AGREEMENT WITH LEO  C. DONAHUE
<TEXT>

<PAGE>   1
                                  EXHIBIT 10.3


                          SPECIAL TERMINATION AGREEMENT


         AGREEMENT made as of the 17th day of May, 1989, by and among Warren
Bancorp, Inc., a Massachusetts Corporation (the "Company") and its subsidiary,
Warren Five Cents Savings Bank, a Massachusetts savings bank with its main
office in Peabody, Massachusetts (the "Bank") (the Bank and the Company shall be
hereinafter collectively referred to as the "Employers") and Leo C. Donahue,
Jr., an individual presently employed by the Bank as Senior Vice President (the
"Executive")

         WHEREAS, the Bank and the Executive entered into a Severance Agreement
dated as of April 6, 1987 (the "April 26, 1986 Agreement");

         WHEREAS, the Bank reorganized as of October 1, 1988 by having the
Company become the holding company of the Bank; and

         WHEREAS, the parties hereto intend that this Agreement be deemed to be
a restatement of the April 16, 1986 Agreement, and supersede the sme in all
respects.

         NOW, THEREFORE, in consideration of services performed and to be
performed in the future as well as of the mutual promises and covenants herein
contained, it is agreed as follows:

         1. Purpose. In order to allow the Executive to consider the prospect of
a Change in Control (as defined in Section 2) in an objective manner and in
consideration of the services to be rendered by the Executive to the Employers
and other good and valuable consideration, the receipt and sufficiency of which
is hereby acknowledged by the Employers, the Employers are willing to provide,
subject to the terms of this Agreement, certain severance benefits to protect
the Executive from the consequences of a Terminating Event (as defined in
Section 3) occurring subsequent to a Change in Control.

         2. Change in Control. A "Change in Control" shall be deemed to have
occurred in either of the following events: (i) if there has occurred a change
in control which the Company would be required to report in response to Item
6(e) of Schedule 14A promulgated under the Securities Exchange Act of 1934, as
amended (the "1934 Act"), or, if such regulation is no longer in effect, any
regulations promulgated by the Securities and Exchange Commission (or any
successor Act) which are of similar effect; (ii) when any "person" (as such term
is used in Sections 13(d) and 14(d)(2) of the 1934 Act) becomes a "beneficial
owner" (as such term is defined in Rule 13d-3 promulgated under the 1934 Act),
directly or indirectly, of securities of the Company representing twenty-five
percent (25%) or more of the total number of votes that may be cast for the
election of directors of the Company; (iii) the sale, transfer or other
disposition of all or substantially all of the assets


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of the Company to another person or entity; (iv) the election of Directors of
the Company equal to one-third or more of the total number of Directors then in
office who have not been nominated by the Company's Board of Directors or a
committee thereof; or (v) the signing of an agreement, contract or other
arrangement providing for any of the transactions described above in this
definition of Change in Control; and, in the case of (i), (ii), (iii), (iv), or
(v) above, the Board of Directors of the Company has not consented to such event
by a two-thirds vote of all of the members of such Board of Directors who were
Directors on the date hereof or on the date of any extension hereof, which vote
was adopted either prior to such event or within ninety (90) days thereafter.

         3. Terminating Event. A "Terminating Event" shall mean (a) termination
by either or both of the Employers of the employment of the Executive with
either or both of the Employers for any reason other than (i) death, (ii)
disability, (iii) deliberate dishonesty of the Executive with respect to either
of the Employers or any subsidiary or affiliate of either, or (iv) conviction of
the Executive of a crime involving moral turpitude, or (b) resignation of the
Executive from the employ of either of the Employers subsequent to the
occurrence of any of the following events:

                  (i)      A significant change in the nature or scope of the
                           Executive's responsibilities, authorities, powers,
                           functions or duties from the responsibilities,
                           authorities, powers, functions or duties exercised by
                           the Executive immediately prior to the Change in
                           Control; or

                  (ii)     A reasonable determination by the Executive that, as
                           a result of a Change in Control, the Executive is
                           unable to exercise the responsibilities, authorities,
                           powers, functions or duties exercised by the
                           Executive immediately prior to such Change in
                           Control; or

                  (iii)    A decrease in the total annual compensation payable
                           by the Employers to the Executive other than as a
                           result of a decrease in compensation payable to the
                           Executive and to all other executive officers of the
                           Employers on the basis of the Employers' financial
                           performance.

         4. Severance Payment. Subject to the provisions of Section 5 below, in
the event a Terminating Event occurs within three (3) years after a Change in
Control, the Employers shall pay, in one lump-sum payment on the date of
termination, to the Executive an aggregate amount equal to (x) three times the
"base amount" (as defined in Section 280G(b) (3) of the Internal Revenue Code of
1986, as from time to time amended (the "Code")) applicable to the Executive,
less (y) One Dollar ($1.00).


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         5. Limitation on Benefits.

                  (a) It is the intention of the Executive and of the Employers
that no payments by the Employers to or for the benefit of the Executive under
this Agreement shall be non-deductible to the Employers by reason of the
operation of Section 280G of the Code relating to parachute payments.
Accordingly, and notwithstanding any other provision of this Agreement, if by
reason of the operation of said Section 280G any such payments when combined
with any other payments under any other agreement exceed the amount which can be
deducted by the Employers, such payments shall be reduced to the maximum amount
which can be deducted by the Employers. To the extent that payments exceeding
such maximum deductible amount have been made to or for the benefit of the
Executive under this or any other agreement or arrangement between the Executive
and the Company, such excess payments shall be refunded to the Employers with
interest thereon at the applicable Federal Rate determined under Section 1274(d)
of the Code, compounded annually, or at such other rate as may be required in
order that no such payments shall be non-deductible to the Employers by reason
of the operation of said Section 280G. To the extent that there is more than one
method of reducing the payments to bring them within the limitations of said
Section 280G, the Executive shall determine which method shall be followed,
provided that if the Executive fails to make such determination within
forty-five days after the Employers have sent him written notice of the need for
such reduction, the Employers may determine the method of such reduction in
their sole discretion.

                  (b) If any dispute between the Employers and the Executive as
to any of the amounts to be determined under this Section 5, or the method of
calculating such amounts, cannot be resolved by the Employers and the Executive,
either the Employers or the Executive after giving three days written notice to
the other, may refer the dispute to a partner in the Massachusetts office of a
firm of independent certified public accountants selected jointly by the
Employers and the Executive. The determination of such partner as to the amount
to be determined under Section 5(a) and the method of calculating such amounts
shall be final and binding on both the Employers and the Executive. The
Employers shall pay, as they are incurred, the costs of any such determination.

         6. Employment Status. This Agreement is not an agreement for the
employment of the Executive and shall confer no rights on the Executive except
as herein expressly provided.

         7. Term. This Agreement shall take effect on the day first above
written, and shall terminate upon the earlier of (a) the termination by the
Employers of the employment of the Executive because of death, deliberate
dishonesty of the Executive with respect to either of the Employers or any
subsidiary or affiliate of either, or conviction of


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the Executive of a crime involving moral turpitude, (b) the resignation or
termination of the Executive for any reason prior to a Change in Control, or (c)
the resignation of the Executive after a Change in Control for any reason other
than the occurrence of any of the events enumerated in Section 3(b)(i)-(iii) of
this Agreement.

         8. Withholding. In making any payments under this Agreement the
Employers shall withhold any tax or other amounts required to be withheld by the
Employers under applicable law.

         9. Arbitration of Disputes. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of the Commonwealth of Massachusetts by three
arbitrators, one of whom shall be appointed by the Employers, one by the
Executive and the third by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the Commonwealth of
Massachusetts in accordance with the rules of the American Arbitration
Association, except with respect to the selection of arbitrators which shall be
as provided in this Section 9. Judgment upon the award rendered by the
arbitrators may be entered in any court having jurisdiction thereof. This
arbitration provision shall not be used for matters of the type referred to in
Section 5(b), except to settle the selection of the accounting partner described
in said section in the event that the Employers and the Executive cannot agree
on the selection.

         10. Assignment. Neither the Employers nor the Executive may make any
assignment of this Agreement or any interest herein, by operation of law or
otherwise, without the prior written consent of the other party; provided,
however, that the Employers may assign their rights and obligations under this
Agreement without the consent of the Executive in the event either of the
Employers shall hereafter effect a reorganization, consolidate with or merge
into any other person or entity, or transfer all or substantially all of its
properties or assets to any other entity or person. This Agreement shall inure
to the benefit of and be binding upon the Employers and the Executive, their
respective successors, executors, administrators, heirs and permitted assigns.
In the event of the Executive's death prior to the completion by the Employers
of all payments due to the Executive under this Agreement, the Employers shall
continue such payments to the Executive's beneficiary designated in writing to
the Employers prior to the Executive's death (or to the Executive's estate, if
the Executive fails to make such designation).

         11. Enforceability. If any portion or provision of this Agreement shall
to any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall


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not be affected thereby, and each portion and provision of this Agreement shall
be valid and enforceable to the fullest extent permitted by law; provided,
however, that the Employers shall not be obligated to make any payments under
this Agreement in the event that doing so would violate any law, regulation, or
regulatory directive applicable to the Company or the Bank.

         12. Waiver. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.

         13. Notices. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive maintained in the books and records
of the Employers; in the case of the Bank, at its main offices attention of the
Clerk; or in the case of the Company, at its main offices attention of the
Clerk.

         14. Election of Remedies. An election by the Executive to resign after
a Change in Control under the provisions of this Agreement shall not constitute
a breach by the Executive of any employment agreement between the Employers and
the Executive or a breach of any of the Executive's obligations as an employee
of the Employers and shall not be deemed a voluntary termination of employment
by the Executive for the purpose of interpreting the provisions of any of the
Employers' benefit plans, programs or policies. Nothing in this Agreement shall
be construed to limit the rights of the Executive under any employment agreement
the Executive may then have with the Employers, provided, however, that if there
is a Terminating Event under Section 3 hereof, the Executive may elect either to
receive the severance payment provided under Section 4 or such termination
benefits as the Executive may have under any such employment agreement, but may
not elect to receive both.

         15. Amendment. This Agreement may be amended or modified only by a
written instrument signed by the Executive and by duly authorized
representatives of each of the Company and the Bank.

         16. Allocation of Obligations Between Employers. The obligations of the
Employers under this Agreement are intended to be the joint and several
obligations of the Bank and the Company. The Employers shall, as between
themselves, allocate these obligations in a manner agreed by them.


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         17. Governing Law. This is a Massachusetts contract and shall be
construed under and be governed in all respects by the laws of the Commonwealth
of Massachusetts.

         IN WITNESS WHERETO, this Agreement has been executed as a sealed
instrument by the Company and the Bank, by their duly authorized officers, and
by the Executive, as of the date first above written.


WITNESS:

      /s/ Susan G. Ouellette                /s/ Leo C. Donahue, Jr.
-------------------------------      -------------------------------------


[Seal]

ATTEST:                              WARREN BANCORP, INC.


      /s/ Karen A. Kezerian          By:      /s/ Stephen F. O'Sullivan
-------------------------------          ---------------------------------
         Secretary                       Chairman of the Board, President,
                                     Title:   and Chief Executive Officer
                                           -------------------------------

[Seal]


ATTEST:                              WARREN FIVE CENTS SAVINGS BANK


      /s/ Karen A. Kezerian          By:       /s/ Stephen F. O'Sullivan
-------------------------------            -------------------------------
         Clerk
                                              Chairman of the Board, President,
                                     Title:   and Chief Executive Officer
                                           ------------------------------------

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