Document:

<PAGE>   1
                               FOURTH AMENDMENT TO
                    WAREHOUSING CREDIT AND SECURITY AGREEMENT

     This Fourth Amendment to Warehousing Credit and Security Agreement (this
"Amendment"), is entered into as of the 31st day of May, 2000, by and between
HANOVER CAPITAL MORTGAGE HOLDINGS, INC., a Maryland corporation ("Company"),
HANOVER CAPITAL PARTNERS, LTD., a New York corporation ("HCP")(the Company and
HCP herein collectively called "Original Borrowers"), and HANOVER QRS-2 98-B,
INC., a Delaware corporation ("QRS-2"), HANOVER SPC-A, INC., a Delaware
corporation ("SPC"), and HANOVER CAPITAL REPO CORP., a Delaware corporation
("Repo")( QRS-2, SPC, and Repo herein collectively referred to as the "New
Borrowers", and Original Borrowers and New Borrowers herein collectively
referred to as the "Borrowers"); and BANK UNITED, a federal savings bank
("Lender"). Capitalized terms used but not defined herein have the meanings
assigned to them in that certain Warehousing Credit and Security Agreement
(Single-Family Mortgage Loans) (the "Credit Agreement") dated effective as of
April 30, 1999, by and between Original Borrowers and Lender, as the same has
been or may be amended or supplemented from time to time.

     Section 1. RECITALS. The Borrowers and Lender desire to amend the Credit
Agreement, subject to the terms and conditions of this Amendment. Therefore, The
Company and Lender hereby agree as follows, intending to be legally bound:

     Section 2. AMENDMENTS. The Credit Agreement is hereby amended and
supplemented as follows:

          (a) Section 1.1 of the Credit Agreement is hereby amended by the
     amendment or addition of the following definitions:

          "ADJUSTED TANGIBLE NET WORTH" shall mean, with respect to the Company
          at any date, the Tangible Net Worth of the Company at such date, minus
          the book value of any Non-Investment Grade Securities, minus the Net
          Equity in REMICs, plus 65% of the lesser of book value or market value
          (as determined by Lender or a third party acceptable to Lender, in
          Lender's sole discretion) of any Non-Investment Grade Securities as of
          such date, plus 65% of the Company's Net Equity in REMICs.

          "COMMITTED LINES OF CREDIT" shall mean lending arrangements wherein
          the lender is obligated to advance funds to the borrower upon
          borrower's compliance with the terms and conditions of the applicable
          credit documents.

          "REMICs" mean Real Estate Mortgage Investment Conduits.

          "NET EQUITY IN REMICS" means the book value of the REMICs held by the
          Borrower, less the non-recourse debt secured by such REMICs.

<PAGE>   2

          "TANGIBLE NET WORTH" means, with respect to any Person at any date,
          the sum of the total shareholders' equity in such Person (including
          capital stock, additional paid-in capital, and retained earnings, but
          excluding treasury stock, if any), on a consolidated basis; less the
          aggregate book value of all intangible assets of such Person (as
          determined in accordance with GAAP), including without limitation,
          goodwill, trademarks, trade names, service marks, copyrights, patents,
          licenses, franchises, capitalized excess servicing fees, and Servicing
          Rights, and less deferred financing fees and all other intangible
          assets of any unconsolidated Subsidiary, each to be determined in
          accordance with GAAP consistent with those applied in the preparation
          of the financial statements referred to in Section 5.3 hereof;
          provided that, for purposes of this Agreement there shall be excluded
          from total assets, advances or loans to shareholders, officers or
          Affiliates, investments in Affiliates, assets pledged to secure any
          liabilities not included in the Debt of such Person, and those other
          assets which would be deemed by HUD to be non-acceptable in
          calculating adjusted net worth in accordance with its requirements in
          the Audit Guide of Audit of Approved Non-Supervised Mortgagees," as in
          effect as of such date.

          "TERMINATION DATE" shall mean May 30, 2001, or such earlier date upon
          which Lender's obligation to fund shall be terminated pursuant to the
          terms of this Agreement.

          (b) Section 2.5(a) of the Credit Agreement is deleted in its entirety,
     and the following is substituted therefor:

               "(a) The outstanding unpaid principal amount of all advances
          shall be payable in full upon May 30, 2001."

          (c) Section 2.5 of the Credit Agreement is amended by the addition of
     the following subsection (d):

               "(d) With respect to Aged Mortgage Loans, the Company shall be
          obligated to pay to the Lender (and the Company authorizes the Lender
          to charge the Funding Account or any other accounts of the Company
          [excluding monies held by the Company in trust for third parties] in
          Lender's possession for the payment thereof) the principal payments in
          the amounts and on the dates specified below:

                    "(1) On the date an Eligible Mortgage Loan becomes an Aged
               Mortgage Loan, an amount equal to ten percent (10%) of the Par
               Value of such Aged Mortgage Loan;

                    "(2) On the date an Aged Mortgage Loan has been included in
               the Collateral for 270 days, an amount equal to any outstanding
               Advance against such Aged Mortgage Loan."

<PAGE>   3

          (e) Section 7.5 of the Credit Agreement is deleted in its entirety,
     and the following is substituted therefor:

               "7.5. MINIMUM ADJUSTED TANGIBLE NET WORTH. Permit Adjusted
          Tangible Net Worth of the Company (and their Subsidiaries, on a
          consolidated basis) to be less than TWENTY-FIVE MILLION AND NO/100
          DOLLARS ($25,000,000.00), computed as of the end of each calendar
          month."

          (f) Section 7.8 of the Credit Agreement is deleted in its entirety,
     and the following is substituted therefor:

               "7.8. MAXIMUM NON-INVESTMENT GRADE SECURITIES TO TANGIBLE NET
          WORTH RATIO. Permit the ratio of the book value of Non-Investment
          Grade Securities plus the Company's Net Equity in REMICs to Tangible
          Net Worth of the Company (and its Subsidiaries, on a consolidated
          basis) to exceed 1.00:1.00 computed as of the end of each calendar
          month.

          (g) Section 7.20 of the Credit Agreement is deleted in its entirety,
     and the following is substituted therefor::

               "7.20. MAXIMUM MORTGAGE LOANS AND MORTGAGE-BACKED SECURITIES TO
          COMMITTED LINES OF CREDIT. Permit the ratio of the book value of
          Mortgage Loans plus the book value of Mortgage-backed Securities
          warehoused with any lender, to Company's Committed Lines of Credit, to
          exceed 1.00:1.00 whether or not such Mortgage Loans and
          Mortgage-backed Securities are financed under such Committed Lines of
          Credit."

          (h) The promissory note ("Credit Note") dated as of May 31, 2000, in
     the original principal amount of $50,000,000, executed by the Borrowers and
     payable to the order of Lender, is given to Lender in replacement of the
     promissory note dated March 28, 2000, in the original principal amount of
     $50,000,000, executed by the Borrowers and payable to the order of Lender
     (the "(3/2000 Note"), is given to Lender in replacement of the promissory
     note dated May 12, 1999, in the original principal amount of $50,000,000,
     executed by the Borrowers and payable to the order of Lender (the "5/99
     Note"), which 5/99 Note was given to Lender in replacement of the
     promissory note dated April 30, 1999, in the original principal amount of
     $50,000,000, executed by the Original Borrowers and payable to the order of
     Lender (the "Original Note"), and not in novation or discharge thereof. The
     definition of the term "Note" in the Credit Agreement is hereby amended to
     mean the Credit Note and all renewals, extensions, modifications,
     increases, rearrangements, and replacements thereof.

     Section 3. EXTENSION FEE. In consideration for Lender's agreement to extend
the term of the Credit Agreement, and as a condition precedent to Lender's
agreement to enter into this Fourth

<PAGE>   4

Amendment, Borrowers agree to pay to Lender an extension fee equal to 0.25% of
the Commitment, payable on the date hereof ($125,000.00).

     Section 4. REPRESENTATIONS. The Borrowers represent and warrant that all of
the representations and warranties contained in the Credit Agreement and all
instruments and documents executed pursuant thereto or contemplated thereby are
true and correct in all material respects on and as of this date.

     Section 5. CONTINUED FORCE AND EFFECT. Except as specifically amended
herein, all of the terms and conditions of the Credit Agreement and all other
Loan Documents are and remain in full force and effect in accordance with their
respective terms. All of the terms used herein have the same meanings as set out
in the Credit Agreement, unless amended hereby or unless the context clearly
requires otherwise. References in the Credit Agreement to the "Agreement," the
"Loan Agreement," "hereof," "herein" and words of similar import shall be deemed
to be references to the Credit Agreement as amended hereby. Any reference in the
other Loan Documents to the "Agreement," the "Line of Credit Agreement,"
"Warehouse Agreement," or the "Loan Agreement" shall be deemed to be references
to the Credit Agreement as amended through the date hereof. Any references in
the Credit Agreement or any of the Loan Documents to the Note, or the Credit
Note shall be deemed to be references to the Credit Note.

     Section 6. REPRESENTATIONS AND RELEASE OF CLAIMS. Except as otherwise
specified herein, the terms and provisions hereof shall in no manner impair,
limit, restrict or otherwise affect the obligations of the Borrowers or any
third party to Lender, as evidenced by the Loan Documents. The Borrowers hereby
acknowledge, agree, and represent that (i) the Borrowers are indebted to Lender
pursuant to the terms of the Credit Note; (ii) the liens, security interests and
assignments created and evidenced by the Loan Documents are, respectively,
first, prior, valid and subsisting liens, security interests and assignments
against the Collateral and secure all indebtedness and obligations of the
Borrowers to Lender under the Credit Note, the Credit Agreement, all other Loan
Documents, as modified herein; (iii) there are no claims or offsets against, or
defenses or counterclaims to, the terms or provisions of the Loan Documents, and
the other obligations created or evidenced by the Loan Documents; (iv) the
Borrowers have no claims, offsets, defenses or counterclaims arising from any of
the Lender's acts or omissions with respect to the Loan Documents, or the
Lender's performance under the Loan Documents; (v) the representations and
warranties contained in the Loan Documents are true and correct representations
and warranties of the Borrowers, as of the date hereof; (vi) the Borrowers
promise to pay to the order of Lender the indebtedness evidenced by the Credit
Note according to the terms thereof; and (vii) the Borrowers are not in default
and no event has occurred which, with the passage of time, giving of notice, or
both, would constitute a default by the any of the Borrowers of such Borrower's
obligations under the terms and provisions of the Loan Documents. In
consideration of the modification of certain provisions of the Loan Documents,
all as herein provided, and the other benefits received by the Borrowers
hereunder, the Borrowers hereby RELEASE, RELINQUISH and forever DISCHARGE
Lender, its predecessors, successors, assigns, shareholders, principals,
parents, subsidiaries, agents, officers, directors, employees,

<PAGE>   5

attorneys and representatives (collectively, the "Lender Released Parties"), of
and from any and all claims, demands, actions and causes of action of any and
every kind or character, whether known or unknown, present or future, which the
Borrowers have, or may have against Lender Released Parties, arising out of or
with respect to any and all transactions relating to the Credit Agreement, the
Original Note, the 5/99 Note, the 3/2000 Note, the Credit Note, and the other
Loan Documents occurring prior to the date hereof, including any other loss,
expense and/or detriment, of any kind or character, growing out of or in any way
connected with or in any way resulting from the acts, actions or omissions of
the Lender Released Parties, and including any loss, cost or damage in
connection with any breach of fiduciary duty, breach of any duty of fair
dealing, breach of competence, breach of funding commitment, undue influence,
duress, economic coercion, conflict of interest, negligence, bad faith,
malpractice, violations of the Racketeer Influence and Corrupt Organizations
Act, intentional or negligent infliction of emotional or mental distress,
tortious interference with corporate governments or prospective business
advantage, tortious interference with contractual relations, breach of contract,
deceptive trade practices, libel, slander, conspiracy, the charging, contracting
for, taking, reserving, collecting or receiving of interest in excess of the
highest lawful rate applicable to the Loan Documents (i.e., usury), any
violations of federal or state law, any violations of federal or state banking
rules, laws or regulations, including, but not limited to, any violations of
Regulation B, Equal Credit Opportunity, bank tying act claims, any violation of
the Texas Free Enterprise Antitrust Act or any violation of federal antitrust
acts.

     Section 7. SEVERABILITY. In the event any one or more provisions contained
in the Credit Agreement, this Amendment, or any of the Loan Documents should be
held to be invalid, illegal or unenforceable in any respect, the validity,
enforceability and legality of the remaining provisions contained herein and
therein shall not be affected in any way or impaired thereby and shall be
enforceable in accordance with their respective terms.

     Section 8. EXPENSES. The Borrowers agree to pay all out-of-pocket costs and
expenses (including reasonable fees and expenses of legal counsel) of Lender in
connection with the preparation, operation, administration and enforcement of
this Amendment.

     Section 9. ACKNOWLEDGMENT. Except as amended hereby, the Borrowers ratify
and confirm that the Loan Documents are and remain in full force and effect in
accordance with their respective terms and that all Collateral is unimpaired by
this Amendment and secures the payment and performance of all indebtedness and
obligations of the Borrowers under the Credit Note, the Credit Agreement, and
all other Loan Documents, as modified hereby. Each of the undersigned officers
of the Borrowers represent and warrant that his or her execution and delivery of
this Amendment has been duly authorized, and that the resolutions and affidavits
previously delivered to Lender, in connection with the execution and delivery of
the Credit Agreement and the First Amendment thereto, are and remain in full
force and effect and have not been altered, amended or repealed in anywise.

<PAGE>   6

     Section 10. NO WAIVER. The Borrowers agree that no Event of Default and no
Default has been waived or remedied by the execution of this Amendment by
Lender, and any such Default or Event of Default heretofore arising and
currently continuing shall continue after the execution and delivery hereof.

     Section 11. GOVERNING LAW. This Amendment shall be governed by and
construed in accordance with the laws of the State of Texas and, to the extent
applicable, by federal law.

     Section 12. COUNTERPARTS. This Amendment may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument.

     SECTION 13. NO ORAL AGREEMENTS. THIS WRITTEN AMENDMENT, THE CREDIT
AGREEMENT, THE CREDIT NOTE, AND THE OTHER LOAN DOCUMENTS, ALL AS MODIFIED
HEREBY, REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR ORAL AGREEMENTS OF THE
PARTIES.

           THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

                         [SIGNATURES ON FOLLOWING PAGE]

<PAGE>   7

     EXECUTED and effective as of the dates first written above.

                                        HANOVER SPC-A, INC.,
BORROWERS:                              a Delaware corporation

HANOVER CAPITAL MORTGAGE                By:________________________________
HOLDINGS, INC.,                         Name:______________________________
a Maryland corporation                  Title: ____________________________

By: _________________________________   HANOVER CAPITAL SPC, INC.,
                                        a Delaware corporation
Name:________________________________
Title: ______________________________   By: _______________________________
                                        Name:______________________________
                                        Title:_____________________________
HANOVER CAPITAL PARTNERS, LTD.,
a New York corporation                  HANOVER REPO CORP.,
                                        a Delaware corporation
By: _________________________________   By: _______________________________
Name:________________________________   Name:______________________________
Title: ______________________________   Title: ____________________________

HANOVER QRS-2 98-B, INC.,
a Delaware corporation
                                        LENDER:
By:__________________________________
Name:________________________________   BANK UNITED,
Title:_______________________________   a federal savings bank
                                        By: _______________________________
                                        Name:______________________________
                                        Title:_____________________________

<PAGE>   8
                                 PROMISSORY NOTE

$50,000,000                      Houston, Texas               As of May 31, 2000
                         (Replaces March 28, 2000 Note)

     FOR VALUE RECEIVED, the undersigned, HANOVER CAPITAL MORTGAGE HOLDINGS,
INC., a Maryland corporation, HANOVER CAPITAL PARTNERS, LTD., a New York
corporation, HANOVER QRS-2 98-B, INC., a Delaware corporation, HANOVER SPC-A,
INC., a Delaware corporation, HANOVER CAPITAL SPC, INC., a Delaware corporation,
and HANOVER REPO CORP., a Delaware corporation (herein called the "Borrower"),
hereby promise to pay to the order of BANK UNITED, a federal savings bank (the
"Lender" or, together with its successors and assigns, the "Holder") whose
principal place of business is 3200 Southwest Freeway, Suite 2702, Houston,
Texas 77027, ATTN: Mortgage Banker Finance, or at such other place as the Holder
may designate from time to time, the principal sum of FIFTY MILLION AND NO/100
DOLLARS ($50,000,000.00) or so much thereof as may be outstanding from time to
time pursuant to the Warehousing Credit and Security Agreement (the "Agreement")
dated April 30, 1999, between Hanover Capital Mortgage Holdings, Inc., and
Hanover Capital Partners, Ltd., and the Lender, as the same has been amended and
supplemented or may be amended or supplemented from time to time, and to pay
interest on said principal sum or such part thereof as shall remain unpaid from
time to time, from the date of each Advance until repaid in full, and all other
fees and charges due under the Agreement, at the rate and at the times set forth
in the Agreement. All payments hereunder shall be made in lawful money of the
United States and in immediately available funds.

     This Note is given in replacement of that certain March 28, 2000,
promissory note executed by Borrower and payable to the order of Lender, in the
original principal amount of $50,000,000, which promissory note was given in
replacement of that certain May 12, 1999, promissory note executed by Borrower
and payable to the order of Lender, in the original principal amount of
$50,000,000, which promissory note was given in replacement of that certain
April 30, 1999, promissory note executed by Hanover Capital Mortgage Holdings,
Inc., and Hanover Capital Partners, Ltd., and payable to the order of Lender, in
the original principal amount of $50,000,000. This Note is given to evidence an
actual warehouse line of credit in the above amount and is the Note referred to
in the Agreement, and is entitled to the benefits thereof. Reference is hereby
made to the Agreement (which is incorporated herein by reference as fully and
with the same effect as if set forth herein at length) for a description of the
Collateral, required payments of principal and interest on this Note, a
statement of the covenants and agreements, a statement of the rights and
remedies and securities afforded thereby and other matters contained therein.
Capitalized terms used herein, unless otherwise defined herein, shall have the
meanings given them in the Agreement.

     The entire unpaid principal balance of this Note plus all accrued and
unpaid interest shall be due and payable in full on May 30, 2001.

     This Note may be prepaid in whole or in part at any time without premium or
penalty.

<PAGE>   9

     Should this Note be placed in the hands of attorneys for collection, the
Borrower agrees to pay, in addition to principal and interest, fees and charges
due under the Agreement, and all costs of collecting this Note, including
reasonable attorneys' fees and expenses.

     This Note shall be construed and enforced in accordance with the laws of
the State of Texas, without reference to its principles of conflicts of law, and
applicable federal laws of the United States of America.

     This Note is secured by all security agreements, collateral assignments,
deeds of trust and lien instruments executed by the Borrower in favor of Lender,
or executed by any other Person as security for this Note, including any
executed prior to, simultaneously with, or after the date of this Note and
including, without limitation, the Security Documents.

     This Note is the joint and several obligation of the Borrower.

     The Borrower and any and each co-maker, guarantor, accommodation party,
endorser or other Person liable for the payment or collection of this Note
expressly waive notice, presentment, demand for payment, protest, notice of
protest and non-payment or dishonor, notice of acceleration, notice of intent to
accelerate, notice of intent to demand, bringing of suit, and diligence in
taking any action to collect amounts called for hereunder and in the handling of
Collateral at any time existing as security in connection herewith, and shall be
directly and primarily liable for the payment of all sums owing and to be owing
hereon, regardless of and without any notice, diligence, act or omission as or
with respect to the collection of any amount called for hereunder or in
connection with any Lien at any time had or existing as security for any amount
called for hereunder.

     It is the intention of the parties hereto to conform strictly to usury laws
applicable to the Lender. Accordingly, if the transactions contemplated hereby
would be usurious under applicable law (including the laws of the United States
of America and the State of Texas), then, in that event, notwithstanding
anything to the contrary herein or in the Agreement or in any other Loan
Document or agreement entered into in connection with or as security for this
Note, it is agreed as follows: (i) the aggregate of all consideration which
constitutes interest under law applicable to the Lender that is contracted for,
taken, reserved, charged, or received herein or under the Agreement or under any
of the other aforesaid Loan Documents or agreements or otherwise in connection
herewith shall under no circumstances exceed the maximum amount allowed by such
applicable law, and any excess shall be credited by the Lender on the principal
amount of the Obligations (or, if the principal amount of the Obligations shall
have been paid in full, refunded by the Lender to the Borrower, as required);
and (ii) in the event that the maturity of this Note is accelerated by reason of
an election of the required or permitted prepayment, then such consideration
that constitutes interest under law applicable to the Lender may never include
more than the maximum amount allowed by such applicable law, and excess
interest, if any, provided for in the Agreement or otherwise shall be canceled
automatically as of the date of such acceleration or prepayment and, if
theretofore paid, shall be credited by the Lender on the principal amount of the
Obligations (or, if the principal amount of the Obligations shall have been paid
in full, refunded by the Lender to the Borrower, as required). Without limiting
the foregoing, all calculations of the rate of interest taken, reserved,
contracted for, charged, received or provided for under this Note or any of the
Loan Documents which are made for the purpose of determining whether the
interest rate exceeds the Maximum Rate

<PAGE>   10

shall be made, to the extent allowed by law, by amortizing, prorating,
allocating and spreading in equal parts during the period of the full stated
term of the loan evidenced hereby, all interest at any time taken, reserved,
contracted for, charged, received, or provided for under this Note or any of the
Loan Documents. To the extent that the Texas Credit Title is relevant for
purposes of determining the Maximum Rate, the Lender hereby elects to determine
the applicable rate ceiling under such statute by the weekly rate ceiling from
time to time in effect, subject to the Lender's right subsequently to change
such method in accordance with applicable law.

HANOVER CAPITAL MORTGAGE,                  HANOVER CAPITAL PARTNERS,
INC.,  A MARYLAND CORPORATION              LTD.,  A NEW YORK CORPORATION

By:                                        By:
   ----------------------------------         -----------------------------
Title:                                     Title:
      -------------------------------            --------------------------
Name:                                      Name:
     --------------------------------           ---------------------------

HANOVER QRS-2 98-B, INC.,                   HANOVER REPO CORP.,
A DELAWARE CORPORATION                      A DELAWARE CORPORATION

By:                                        By:
   ----------------------------------         -----------------------------
Title:                                     Title:
      -------------------------------            --------------------------
Name:                                      Name:
     --------------------------------           ---------------------------

HANOVER SPC-A, INC.,                       HANOVER CAPITAL SPC, INC.,
A DELAWARE CORPORATION                     A DELAWARE CORPORATION

By:                                        By:
   ----------------------------------         -----------------------------
Title:                                     Title:
      -------------------------------            --------------------------
Name:                                      Name:
     --------------------------------           ---------------------------<PAGE>   1
                                                                    Exhibit 10.1

                              EMPLOYMENT AGREEMENT

     AGREEMENT, dated as of July 1, 2000, by and between GLOUCESTER BANK AND
TRUST COMPANY., a Massachusetts trust company with its main office in
Gloucester, Massachusetts (the "Employer"), and DAVID L. MARSH, currently of
Gloucester, Massachusetts (the "Executive").

                                   WITNESSETH

     WHEREAS, the parties hereto desire to provide for the Executive's
employment by the Employer;

     NOW THEREFORE, in consideration of the mutual covenants contained herein,
the Employer and the Executive agree as follows:

     1.   EMPLOYMENT. The Employer agrees to employ the Executive and the
Executive agrees to continue in the employ of the Employer on the terms and
conditions hereinafter set forth.

     2.   CAPACITY. The Executive shall serve the Employer as President and
Chief Executive Officer, subject to his election by the Board of Directors of
the Employer. The Employer further agrees that it will not unreasonably reduce
the Executive's duties or responsibilities. In addition, the Employer agrees not
to relocate the Executive's office to a location in excess of 25 miles from its
present location unless consented to by the Executive.

     3.   EFFECTIVE DATE AND TERM. The commencement date (the "Commencement
Date") of this Agreement shall be the date first above written. Subject to the
provisions of Section 7, the term of the Executive's employment hereunder shall
be for three years from the Commencement Date. The last day of such term is
herein sometimes referred to as the "Expiration Date".

     4.   COMPENSATION AND BENEFITS. The compensation and benefits payable to
the Executive under this Agreement shall be as follows:

          (a)  SALARY. For all services rendered by the Executive under this
     Agreement, the Employers shall pay the Executive a total salary at the rate
     of $147,000 per year. The Executive's salary shall be payable in periodic
     installments in accordance with the Employer's usual practice for its
     senior executives.

          (b)  REGULAR BENEFITS. The Executive shall also be entitled to
     participate in any and all bonus incentive plans, stock option plans,
     employee stock ownership plans, employee benefit plans, medical insurance
     plans, life insurance plans, disability income plans, retirement plans, and
     other benefit plans from time to time in effect for senior executives of
     the Employer. Such participation shall be subject to (i) the terms of the
     applicable plan documents and applicable federal and state laws, (ii)
     generally applicable policies of the Employer, and (iii) the discretion of
     the Employer's sole stockholder or any administrative or other committee
     provided for or contemplated by such plan.

          (c)  BUSINESS EXPENSES. The Employers shall reimburse the Executive
     for all reasonable travel and other business expenses incurred by him in
     the performance of his duties and responsibilities, subject to such
     reasonable requirements with respect to substantiation and documentation as
     may be specified by the Employers.

          (d)  VACATION. The Executive shall be entitled to four weeks of
     vacation per year, to be taken at such times and intervals as shall be

                                       22
<PAGE>   2

     determined by the Executive with the approval of the Employers, which
     approval shall not be unreasonably withheld.

     5.   EXTENT OF SERVICE. During his employment hereunder, the Executive
shall, subject to the direction and supervision of the Board of Directors of the
Employer and the Employer's sole stockholder, devote his full business time,
best efforts and business judgment, skill and knowledge to the advancement of
the Employer's interests and to the discharge of his duties and responsibilities
hereunder. He shall not engage in any other business activity, except as
approved by the Employer's sole stockholder; PROVIDED, HOWEVER, that nothing
herein shall be construed as preventing the Executive from:

          (a)  investing his assets in a manner not prohibited by Section 9(a)
     hereof, and in such form or manner as shall not require any material
     services on his part in the operations or affairs of the companies or other
     entities in which such investments are made;

          (b)  serving on the board of directors of any company subject to the
     prohibition set forth in Section 9(a) and provided that he shall not be
     required to render any material services with respect to the operations or
     affairs of any such company; or

          (c)  engaging in religious, charitable or other community or nonprofit
     activities which do not impair his ability to fulfill his duties and
     responsibilities under this Agreement.

     7.   TERMINATION AND TERMINATION BENEFITS.

     Notwithstanding the provisions of Section 3, the Executive's employment
hereunder shall terminate under the following circumstances:

          (a)  DEATH. In the event of the Executive's death during the
     Executive's employment hereunder, the Executive's employment shall
     terminate on the date of his death; PROVIDED, HOWEVER, that the Executive's
     beneficiary or estate, as the case may be, shall be entitled to any unpaid
     amounts of compensation accrued to the date of death, plus the following
     benefits:

               (i)  For a period of six months subsequent to the date of the
          Executive's death, the Employer shall continue to pay an amount equal
          to the Executive's salary to the Executive's beneficiary designated in
          writing to the Employer prior to his death (or to his estate, if he
          fails to make such designation) at the salary rate in effect on the
          date of his death (unless an increased rate shall previously have been
          authorized to take effect as of a later date, in which case such
          increased rate shall apply), said payments to be made on the same
          periodic dates as salary payments would have been made to the
          Executive had he not died.

               (ii) For a period of six months subsequent to the date of the
          Executive's death, the Executive's beneficiary designated in writing
          to the Employer prior to his death (or to his estate, if he fails to
          make such designation) shall continue to receive all benefits
          described in Section 4(b) above existing on the date of death (except
          for any cash bonus plans which shall be pro-rated through the date of
          death). For purposes of application of such benefits, the Executive
          shall be treated as if he had remained in the employ of the Employer,
          with an annual total salary at the rate in effect on the date of death
          (unless an increased rate shall previously have been authorized to
          take effect as of a later date, in which case such increased rate
          shall apply), and service credits will continue to accrue during such
          period as if the Executive has remained in the employ of the Employer.

                                       23
<PAGE>   3

               (iii) If, in spite of the provisions of Section 7(a)(ii) above,
          benefits or service credits under any benefit plan shall not be
          payable or accrued under any such plan to the Executive, or to the
          Executive's beneficiary or estate, because the Executive is no longer
          deemed to be an employee of the Employer, the Employer itself shall
          pay or provide for payment of such benefits (calculated as if all such
          service credits had been accrued) to or for the benefit of the
          Executive, or to the Executive's beneficiary or estate.

          (b)  TERMINATION BY THE EMPLOYER FOR CAUSE. The Executive's employment
     hereunder may be terminated without further liability on the part of the
     Employer effective immediately by a resolution of the Board of Directors of
     the Employer or by the Employer's sole stockholder, as the case may be, for
     cause by written notice to the Executive setting forth in reasonable detail
     the nature of such cause. Only the following shall constitute "cause" for
     such termination:

               (i)  Deliberate dishonesty of the Executive with respect to the
          Employer or any subsidiary or affiliate thereof.
               (ii) Conviction of the Executive for a crime involving moral
          turpitude.
               (iii) Gross and willful failure to perform a substantial portion
          of his duties and responsibilities hereunder.

          (c)  TERMINATION BY THE EXECUTIVE. The Executive's employment
     hereunder may be terminated effective immediately by the Executive by
     written notice to the Employer's sole stockholder in the event of a
     material breach of any provision of this Agreement by the Employer. From
     and after the effective date of any termination by the Executive of his
     employment hereunder, in the absence of such a breach by the Employer, the
     Employer will have no further liability to the Executive for salary or
     other compensation or benefits, except as provided pursuant to any other
     agreement to which the Executive and the Employer are parties or any
     compensation or benefit plan of the Employer in which the Executive is a
     participant.

          (d)  TERMINATION BY THE EMPLOYER WITHOUT CAUSE. The Executive's
     employment with the Employer may be terminated without cause by a
     resolution of the Board of Directors of the Employer or by the Employer's
     sole stockholder, as the case may be, on written notice to the Executive.

          (e)  CERTAIN TERMINATION BENEFITS. In the event of termination
     pursuant to the first sentence of Section 7(c) or pursuant to Section 7(d),
     the Executive shall be entitled to the following benefits:

               (i)  The Employer shall pay the Executive the total salary, at
          the rate in effect on the date of termination, for the period
          subsequent to the date of termination until the Expiration Date.

               (ii) For the period subsequent to the date of termination until
          the Expiration Date, the Executive shall continue to receive all
          benefits described in Section 4(b) above existing on the date of
          termination (except for any cash bonus plans, which shall be pro-rated
          through the date of termination). For purposes of application of such
          benefits, the Executive shall be treated as if he had remained in the
          employ of the Employer, with an annual total salary at the rate in
          effect on the date of termination and service credits will continue to
          accrue during such period as if the Executive had remained in the
          employ of the Employer.

               (iii) If, in spite of the provisions of Section 7(e)(ii) above,
          benefits or service credits under any benefit plan shall not be
          payable

                                       24
<PAGE>   4

          or accrued under any such plan to the Executive, or to the Executive's
          dependents, beneficiaries or estate, because the Executive is no
          longer deemed to be an employee of the Employer, the Employer itself
          shall pay or provide for payment of such benefits (calculated as if
          all such service credits had been accrued) to or for the benefit of
          the Executive or the Executive's dependents, beneficiaries or estate.

     8.   DISABILITY. If, due to physical or mental illness, the Executive shall
be disabled so as to be unable to perform substantially all of his duties and
responsibilities hereunder, the Board of Directors of the Employer may designate
another executive to act in his place during the period of such disability
(subject to approval by the Employer's sole stockholder). Notwithstanding any
such designation, the Executive shall continue to receive his full salary and
benefits under Section 4 of this Agreement until he becomes eligible for
disability income under the Employer's disability income plan. While receiving
disability income payments under such plan, the Executive shall not receive any
salary under Section 4(a), but shall continue to participate in the Employer's
benefit plans and to receive other benefits as specified in Section 4 until the
Expiration Date. In the absence of a disability income plan at the time of such
disability, the Employer shall pay the Executive benefits equal to those the
Executive would have received if the Employer's current disability income plan
were in effect at such time. If any question shall arise as to whether during
any period the Executive was disabled so as to be unable to perform
substantially all of his duties and responsibilities hereunder due to physical
or mental illness, the Executive may, and at the request of the Employer will,
submit to the Employer a certification in reasonable detail by a physician
selected by the Executive or his guardian to whom the Employer have no
reasonable objection as to whether the Executive was so disabled and such
certification shall for the purposes of this Agreement be conclusive of the
issue. If such question shall arise and the Executive shall fail to submit such
certification, the Employer's determination of such issue shall be binding on
the Executive.

     9.   NONCOMPETITION AND CONFIDENTIAL INFORMATION.

          (a)  NONCOMPETITION. During the term of the Executive's employment
     hereunder, and either (i) a period of one year following the date of
     termination of the Executive's employment with the Employer by the
     Executive or by the Employer for cause pursuant to Section 7(b) hereof, or
     (ii) the period during which the Employer continues to provide benefits to
     the Executive pursuant to Sections 7(e)(i) - (iii) hereof in the event of
     termination pursuant to the first sentence of Section 7(c) or pursuant to
     Section 7(d), the Executive shall not directly or indirectly, whether as
     owner, partner, shareholder (other than as the owner of less than 2% of the
     outstanding capital stock of a publicly-traded corporation), consultant,
     agent, employee, co-venturer or otherwise, of or through any Person (as
     defined in Section 11) having its main office in the Employer's market area
     (defined as the Massachusetts communities of Manchester, Essex, Gloucester,
     Rockport, and Woburn) compete in said market area with the banking or any
     other business conducted by the Employer or its subsidiaries or affiliates
     during the period of his employment hereunder, nor will he attempt to hire
     any employee of the Employer or its subsidiaries or affiliates, assist in
     such hiring by any other Person, encourage any such employee to terminate
     his or her relationship with the Employer or its subsidiaries or
     affiliates, or solicit or encourage any customer of the Employer or its
     subsidiaries or affiliates to terminate its relationship with the Employer
     or its subsidiaries or affiliates or to conduct with any other Person any
     business or activity which such customer conducts or could conduct with
     such Employer or its subsidiaries or affiliates.

          (b)  CONFIDENTIAL INFORMATION. The Executive will not disclose to any
     other Person (except as required by applicable law or in connection with
     the performance of his duties and responsibilities hereunder), or use for
     his own

                                       25
<PAGE>   5

     benefit or gain, any confidential information of the Employer or its
     subsidiaries or affiliates obtained by him incident to his employment with
     the Employer. The term "confidential information" includes, without
     limitation, financial information, business plans, prospects and
     opportunities (such as lending relationships, financial product
     developments, or possible acquisitions or dispositions of businesses or
     facilities) which have been discussed or considered by the management of
     the Employer or its subsidiaries or affiliates but does not include any
     information which has become part of the public domain by means other than
     the Executive's non-observance of his obligations hereunder.
     Notwithstanding anything to the contrary herein, this provision shall
     survive any termination of this Agreement.

          (c)  RELIEF; INTERPRETATION. The Executive agrees that the Employer
     shall be entitled to injunctive relief for any breach by him of the
     covenants contained in Sections 9(a) or 9(b). In the event that any
     provision of this Section 9 shall be determined by any court of competent
     jurisdiction to be unenforceable by reason of its being extended over too
     great a period of time, too large a geographic area, or too great a range
     of activities, it shall be interpreted to extend only over the maximum
     period of time, geographic area, or range of activities as to which it may
     be enforceable.

     10.  CONFLICTING AGREEMENTS. The Executive hereby represents and warrants
that the execution of this Agreement and the performance of his obligations
hereunder will not breach or be in conflict with any other agreement to which he
is a party or is bound, and that he is not now subject to any covenants against
competition or similar covenants which would affect the performance of his
obligations hereunder.

     11.  DEFINITION OF "PERSON". For purposes of this Agreement, the term
"Person" shall mean an individual, a corporation, an association, a partnership,
an estate, a trust and any other entity or organization.

     12.  WITHHOLDING. All payments made by the Employer under this Agreement
shall be net of any tax or other amounts required to be withheld by the Employer
under applicable law.

     13.  ARBITRATION OF DISPUTES. Any controversy or claim arising out of or
relating to this Agreement or the breach thereof shall be settled by arbitration
in accordance with the laws of The Commonwealth of Massachusetts by three
arbitrators, one of whom shall be appointed by the Employer, one by the
Executive and the third by the first two arbitrators. If the first two
arbitrators cannot agree on the appointment of a third arbitrator, then the
third arbitrator shall be appointed by the American Arbitration Association in
the City of Boston. Such arbitration shall be conducted in the City of Boston in
accordance with the rules of the American Arbitration Association, except with
respect to the selection of arbitrators which shall be as provided in this
Section 13. Judgment upon the award rendered by the arbitrators may be entered
in any court having jurisdiction thereof. In the event that it shall be
necessary or desirable for the Executive to retain legal counsel and/or incur
other costs and expenses in connection with the enforcement of any or all of the
Executive's rights under this Agreement, the Employer shall pay (or the
Executive shall be entitled to recover from the Employer, as the case may be)
the Executive's reasonable attorneys' fees and other reasonable costs and
expenses in connection with the enforcement of said rights (including the
enforcement of any arbitration award in court) regardless of the final outcome,
unless and to the extent the arbitrators shall determine that under the
circumstances recovery by the Executive of all or a part of any such fees and
costs and expenses would be unjust.

     14.  ASSIGNMENT; SUCCESSORS AND ASSIGNS, ETC. Neither the Employer 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 Employer may assign its rights under this
Agreement

                                       26
<PAGE>   6

without the consent of the Executive in the event either the Employer shall
hereafter effect a reorganization, consolidate with or merge into any other
Person, or transfer all or substantially all of its properties or assets to any
other Person. This Agreement shall inure to the benefit of and be binding upon
the Employer 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 Employer of all payments due him under this
Agreement, the Employer shall continue such payments to the Executive's
beneficiary designated in writing to the Employer prior to his death (or to his
estate, if he fails to make such designation).

     15.  ENFORCEABILITY. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law. For purposes of enforcing the Executive's or
the Employer's rights under this Agreement, any action or decision taken by the
sole stockholder of the Employer under this Agreement shall be deemed to be an
action or decision taken by the Employer. The Executive acknowledges that his
sole recourse with respect to any dispute arising under or in connection with
this Agreement shall be against the Employer.

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

     17.  NOTICES. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, to the
Executive at the last address the Executive has filed in writing with the
Employer or, in the case of the Employer, at its main offices, attention of the
Clerk or, in the case of the Employer's sole stockholder, at its main office,
attention of the Secretary.

     18.  AMENDMENT. This Agreement may be amended or modified only by a written
instrument signed by the Executive and by a duly authorized representative of
each of the Employer.

     19.  GOVERNING LAW. This is a Massachusetts contract and shall be construed
under and be governed in all respects by the laws of The Commonwealth of
Massachusetts.

                                       27
<PAGE>   7

     IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument
by the Executive and by the Employer, by its duly authorized officer, as of the
date first above written.

                                              /s/ David L. Marsh
                                            ---------------------------
                                            DAVID L. MARSH

                                            GLOUCESTER BANK & TRUST COMPANY

                                            By: /s/ David L. Marsh
                                               ------------------------
                                               Name: David L. Marsh
                                               Title: President

                                       28
<PAGE>   8

                                   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.

                                          ANDOVER BANCORP, INC.

August 11, 2000                              /s/ Gerald T. Mulligan
                                             ----------------------
                                             Gerald T. Mulligan
                                             President and
                                             Chief Executive Officer

August 11, 2000                              /s/ Joseph F. Casey
                                             -------------------
                                             Joseph F. Casey
                                             Chief Financial Officer
                                             and Treasurer

                                       29

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