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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-A
FOR REGISTRATION OF CERTAIN CLASSES OF SECURITIES
PURSUANT TO SECTION 12(b) or 12(g) OF THE
SECURITIES EXCHANGE ACT OF 1934
MECH FINANCIAL, INC.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Connecticut 06-1500984
- ------------------------ ------------------------
(State of Incorporation) (I.R.S. Employer Number)
100 Pearl Street, Hartford, Connecticut 06103
- --------------------------------------- ------------
(Address of Principal Executive Office) (Zip Code)
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<S> <C>
If this form relates to the If this form relates to the
registration of a class of registration of a class of
securities pursuant to Section 12(b) securities pursuant to Section 12(g)
of the Exchange Act and is of the Exchange Act and is
effective pursuant to General effective pursuant to General
Instruction A.(C), please Instruction A.(d), please check
check the following box. [_] the following box. [X]
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Securities Act registration file number to which this form
relates: N/A
----------------
(if applicable)
Securities to be registered pursuant to Section 12(b) of the Act:
NONE
Securities to be registered pursuant to Section 12(g) of the Act:
Title of Each Class to be Name of Each Exchange on Which
so registered Each Class is to be registered
Common Stock, par value, $0.01 NASDAQ - National Market
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INFORMATION REQUIRED IN REGISTRATION STATEMENT
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ITEM 1. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED
- ----------------------------------------------------------------
a. Capital Stock
-------------
The securities of MECH Financial, Inc. (the "Company") to be registered
consist of 15,000,000 shares of common stock, par value of $0.01 per share
("Common Stock"). No shares of Common Stock are presently issued or
outstanding. The Common Stock will be issued in accordance with that certain
Agreement and Plan of Reorganization dated November 25, 1997 (the "Plan of
Reorganization"), attached hereto as Exhibit 2, between the Company and its
---------
wholly owned subsidiary, Mechanics Savings Bank (the "Bank"). The following
statements are summaries of certain provisions of the Plan of Reorganization,
the Company's Certificate of Incorporation and Bylaws and the Connecticut
Business Corporation Act ("CBCA"). The statements made herein do not purport to
be complete in all respects and are qualified in their entirety by reference to
the full Certificate of Incorporation, Bylaws and CBCA, the first two of which
have been filed as Exhibit 3(i) and Exhibit 3(ii), respectively, to this
------------ -------------
Registration Statement.
(1) Dividends may be paid on Common Stock if and when declared by
the Company's Board of Directors out of funds legally available for such
purpose. Under present Federal Reserve Board policy, the Company may pay cash
dividends only if payment of dividends does not undermine the Company's ability
to serve as a source of strength to its subsidiary bank. In addition, the
Federal Reserve Board allows dividends to be paid (1) only out of the
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Company's past year's net income, and (2) only if prospective earnings retention
is consistent with the Company's expected capital needs, asset quality, and
overall financial condition.
When the Common Stock is issued and delivered in accordance with the Plan,
it will be validly issued, fully paid, non-assessable, and not subject to any
further calls by the Company. Holders of Common Stock will possess voting power
for the election of directors of the Company and for all other purposes, each
holder being entitled to one vote for each share of Common Stock held. Holders
of the Common Stock do not have cumulative voting rights, preemptive rights, or
conversion rights with respect to any such shares. The Common Stock is not
presently subject to any sinking fund or restrictions on transferability or
alienability. In the event of a liquidation of the Company, holders of Common
Stock are entitled to a pro-rata share in all assets of the Company after
payment of all amounts due to creditors.
The Company is legally entitled to repurchase or redeem shares of Common
Stock but must give the Federal Reserve Board prior notice of any such
repurchase or redemption if the gross consideration for the purchase or
redemption, when combined with the net consideration paid by the Company for all
such purchases or redemptions during the preceding twelve months, exceeds 10% of
the Company's consolidated net worth. The Federal Reserve Board may disapprove
such a purchase or redemption if it determines that the proposal would
constitute an unsafe or unsound practice or would violate any law, regulation,
Federal Reserve Board order, or any
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condition imposed by, or written agreement with, the Federal Reserve Board. This
prior notice requirement, however, will not apply to the Company if the Bank
continues to maintain its "well capitalized" status in accordance with
applicable Federal Reserve Board regulations, if it continues to maintain a "1"
or "2" rating in its most recent safety and soundness regulatory examination and
if there continues to be no unresolved regulatory issues concerning the Company
or the Bank. Except as described above, there are no other restrictions on the
repurchase or redemption of Common Stock by the Company.
The Certificate of Incorporation of the Company provides for a staggered
Board of Directors as it divides the directors into three classes, as nearly
equal in number as possible, with one class elected each year. Each director of
the Company holds office for a three year term.
The Certificate of Incorporation of the Company prohibits any person from
directly or indirectly offering to acquire, or acquiring, beneficial ownership
of more than 5% of the Company's Common Stock until June 25, 1999, and more than
10% of the Common Stock thereafter, without the prior written approval of the
Company's Board of Directors and the Connecticut Banking Commissioner and unless
all applicable approvals required under the Change in Bank Control Act of 1978,
the Bank Holding Company Act of 1956, Connecticut law and all regulations of the
FDIC, Federal Reserve Board and Connecticut Banking Commissioner have been
obtained. Any shareholder owning 5% or more of the Common Stock
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until June 25, 1999 and owning 10% or more of the Common Stock thereafter may
not vote any shares that exceed 5% or 10%, respectively, on any matter that is
submitted for a vote of the shareholders.
Moreover, no person may make an offer to acquire 10% or more of the then-
outstanding Voting Stock unless such person has notified the Company's Board of
Directors of such intent and the Board of Directors has not within fifteen days
after receipt of such notice, disapproved of such offer, or before the offer is
made, obtained prior approval of the acquisition by the FDIC or FRB and the
Banking Commissioner.
The Certificate of Incorporation also prohibits any direct or indirect
purchase or other acquisition by the Company of Common Stock from an "Interested
Securityholder" for a period of two years after the date the person became an
Interested Securityholder unless at least a majority of the outstanding shares
of Common Stock vote in favor of such a transaction, excluding shares held by
the Interested Securityholder. For purposes of this provision, an "Interested
Securityholder's" is any person who beneficially owns, directly or indirectly,
3% or more of the Company's Common Stock. Connecticut law additionally prohibits
the Company from engaging in certain transaction(s) with any Interested
Securityholder for a period of five years from the date of the Interested
Securityholder's stock acquisition unless a majority of the Company's Board of
Directors approves the transaction(s).
The Certificate of Incorporation of the Company provides that
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a "super-majority" vote of shareholders must approve certain business
combinations, including mergers, consolidations, share exchanges, sales of all
or substantially all assets, liquidations, dissolutions or reclassifications,
between the Company and an "Interested Shareholder" (as such term is defined
below) or any other corporation (whether or not itself an Interested
Shareholder) which is or after such merger or consolidation would be, an
affiliate or associate of any Interested Shareholder unless the transaction is
approved by the Board of Directors of the Company or unless certain fair price
procedural requirements are satisfied. An "Interested Shareholder" is generally
defined as a person or entity who is the beneficial owner, directly or
indirectly, of 10% or more of the voting power of the outstanding shares of
voting stock of the Company.
Such transactions must first be approved by the Company's Board of
Directors and then by the affirmative vote of the holders of at least 80% of the
voting power of the then outstanding shares of the voting stock, and by two-
thirds of the voting power of the outstanding shares of the voting stock
exclusive of shares held by or on behalf of the Interested Shareholder, unless:
(1) the transaction is approved by the Board of Directors before the Interested
Shareholder first became an Interested Shareholder; or (2) in the case of a
merger, consolidation or share exchange, and in all other business combinations,
certain fair price and procedural provisions are met.
The fair price provisions generally require that shareholders
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whose stock is acquired in a business combination be paid at least as much as
the highest price the Interested Shareholder paid for shares within the two
prior years or the price that the Interested Shareholder paid in the transaction
by which the Interested Shareholder first became an Interested Shareholder,
whichever is higher. The procedural provisions include prohibitions against
omissions of dividends on preferred stock, reductions in dividends on the Common
Stock and acquisitions by the Interested Shareholder of more stock of the
Company.
In the event that the fair price and procedural requirements are met or the
requisite approval of the Board of Directors is given with respect to a
particular business combination, the normal voting requirements of Connecticut
law would apply. Under Connecticut law, a merger, consolidation, sale of
substantially all of the assets of the Company and the adoption of a plan of
dissolution of the Company would generally require the approval of a majority of
the issued and outstanding shares of the Company's capital stock entitled to
vote thereon.
A reclassification of the Company's securities involving an amendment to
its Certificate of Incorporation and other issues requiring shareholder approval
would also require the approval of the holders of a majority of the voting power
of the Company's capital stock entitled to vote thereon. Other issues requiring
shareholder approval generally require the vote of a majority of the shares
entitled to vote thereon. A sale of less than substantially all of the assets of
the Company, a merger of the
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Company with a company in which it owns not less than 90% of the outstanding
capital stock or a reclassification of the Company's securities not involving an
amendment to its Certificate of Incorporation would not require shareholder
approval.
(2) The rights of holders of Common Stock may not be modified in
any event or for any purpose except by a vote of a majority or more of the
holders of outstanding shares of Common Stock.
(3) No preferred stock is to be registered.
(4) The rights of holders of Common Stock may, under certain
circumstances, be limited by the holders of serial preferred stock of the
Company. The Certificate of Incorporation of the Company authorizes 1,000,000
shares of serial preferred stock, none of which is issued or outstanding.
(5) Information regarding provisions in the Company's Certificate
of Incorporation and Bylaws that would have the effect of delaying, deferring,
or preventing a change in control or that would relate to extraordinary
transactions such as a merger, reorganization, tender offer, sale or transfer of
substantially of the Company's assets, can be found at Section (a)(1) to this
Registration Statement.
b. Debt Securities
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No debt securities are to be registered hereunder.
c. Warrants and Rights
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The Common Stock will not be offered pursuant to warrants or rights.
8.
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d. Other Securities
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No securities other than the Common Stock are to be registered
hereunder.
e. Market Information for Securities other than Common Equity
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No securities other than the Common Stock are to be registered
hereunder.
f. American Depository Receipts
----------------------------
No Depository Shares will be registered hereunder.
g. Security Rating
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The Company has not obtained a security rating from a nationally
recognized statistical rating organization with respect to its
securities.
ITEM 2. EXHIBITS
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Exhibit 2: Agreement and Plan of Reorganization
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Exhibit 3(i): Certificate of Incorporation of MECH Financial, Inc.
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Exhibit 3(ii): Bylaws of MECH Financial, Inc.
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Exhibit 10.1: Change of Control Agreement between the Bank and Edgar C.
------------ Gerwig
Exhibit 10.2: Change of Control Agreement between the Bank and Thomas M.
------------ Wood
Exhibit 10.3: Change of Control Agreement between the Bank and Richard W.
------------ Stout
Exhibit 10.4: Change of Control Agreement between the Bank and Eugene B.
------------ Marinelli
Exhibit 10.5: Change of Control Agreement between the Bank and Marcy D.
------------ Negro
Exhibit 10.6: Change of Control Agreement between the Bank
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and Brian A. Orenstein
Exhibit 10.7: Change of Control Agreement between the Bank and Gary J.
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Roman
Exhibit 10.8: Employment Agreement between the Bank and Edgar C. Gerwig
------------
Exhibit 21: Subsidiaries of MECH Financial, Inc.
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Exhibit 27: Financial Data Schedule - See Exhibits 99.1 and 99.2.
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Exhibit 99.1: Annual Report of Mechanics Savings Bank for the year ended
------------ December 31, 1996.
Exhibit 99.2: Quarterly Report of Mechanics Savings Bank on Form F-4 for
------------ the quarter ended September 30, 1997.
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Company has duly caused this Registration Statement to be signed on
its behalf by the undersigned thereto duly authorized.
MECH FINANCIAL, INC.
Registrant
Date: December 24, 1997 By: /s/ Edgar C. Gerwig
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Edgar C. Gerwig
Its President
10.
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EXHIBIT 2
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AGREEMENT AND PLAN OF REORGANIZATION
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This Agreement and Plan of Reorganization (the "Plan of Reorganization"),
dated as of November 25, 1997, is made and entered into by and between MECHANICS
SAVINGS BANK, a Connecticut stock savings bank (the "Bank") and MECH FINANCIAL,
INC., a newly formed capital stock corporation organized at the direction of the
Bank (the "Holding Company") pursuant to Section 36a-181 of the Connecticut
General Statutes.
WHEREAS, the authorized capital stock of the Bank consists of (a) 7,000,000
shares of Common Stock, par value $0.01 per share (the "Bank Common Stock"), of
which 5,293,266 shares are issued and outstanding 529,000 shares are reserved
for issuance pursuant to the Bank's various stock option and benefit plans, and
(b) 1,000,000 shares of Preferred Stock, par value $0.01 (the "Bank Preferred
Stock"), none of which are issued or outstanding or reserved for issuance.
WHEREAS, the authorized capital stock of the Holding Company shall consist
of (a) 15,000,000 shares of Common Stock, par value $0.01 per share (the
"Holding Company Common Stock"), none of which are issued and outstanding or
reserved for issuance, and (b) 1,000,000 shares of Preferred Stock, $0.01 (the
"Holding Company Preferred Stock"), none of which are issued and outstanding.
WHEREAS, the Bank and the Holding Company wish to enter into the Plan of
Reorganization whereby the Holding Company will acquire all of the issued and
outstanding shares of the Bank Common Stock (other than shares held by the
Dissenting Shareholders, as hereinafter defined) in exchange for an equal number
of shares of Holding Company Common Stock (such exchange is hereinafter referred
to as the "Reorganization").
WHEREAS, each Shareholder of Bank Common Stock (other than Dissenting
Shareholders who have validly exercised their rights under Section 36a-181(c) of
the Connecticut General Statutes) will receive one share of Holding Company
Common Stock for each share of Bank Common Stock held as of the Effective Time
(as hereinafter defined).
WHEREAS, the Bank believes that the Reorganization is desirable and in the
best interests of its shareholders.
WHEREAS, the Bank and the Holding Company intend the Reorganization to
constitute a non-taxable event to each entity and to their respective
shareholders pursuant to the
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Internal Revenue Code of 1986, as amended (the "Code").
WHEREAS, this Plan of Reorganization has been approved by the Board of
Directors of the Bank which has duly authorized the executive officer(s) whose
respective signature(s) appear below to execute and deliver the Plan of
Reorganization.
NOW, THEREFORE, in consideration of the mutual promises, representations,
and covenants herein contained, the Bank and the Holding Company agree as
follows:
Section 1. Approval and Filing of Plan of Reorganization.
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1.1 The Plan of Reorganization shall be submitted for the approval of
holders of Bank Common Stock at a meeting to be duly called and held on November
25, 1997, or such other date as the Bank's Board of Directors may determine in
accordance with the Bylaws of the Bank and all applicable laws and regulations
(the "Special Meeting"). Notice of the Special Meeting shall be mailed directly
to all shareholders at their last known addresses as contained on the records of
the Bank.
1.2 Subject to the approval of this Plan of Reorganization by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
shares of Bank Common Stock, this Plan of Reorganization shall be submitted, in
accordance with Section 36a-181 of the Connecticut General Statutes, for the
approval of the Commissioner of Banking of the State of Connecticut (the
"Banking Commissioner"). This Plan of Reorganization shall be accompanied by a
certificate from the Bank that this Plan of Reorganization has been submitted to
and approved by two-thirds of the holders of Bank Common Stock eligible to vote
and such other documentation as may be required by law or by regulation of the
Banking Commissioner.
1.3 If the Plan of Reorganization is approved by the holders of at least
two-thirds of the shares of Bank Common Stock entitled to vote at the Special
Meeting, 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 this Plan of
Reorganization has been approved and that shares of Bank Common Stock evidenced
by such certificates are subject to the acquisition by the Holding Company
pursuant to this Plan of Reorganization.
Section 2. The Closing.
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2.1 Subject to the terms and conditions of this Plan of
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Reorganization, the closing of the Reorganization (the "Closing") shall take
place on January 1, 1998 if, on or prior to that date, this Plan of
Reorganization is filed in the Office of the Secretary of the State of
Connecticut (the "Secretary of State"), which filing shall not occur until all
of the conditions to Closing set forth in Section 6 hereof have been satisfied.
The Plan of Reorganization shall be effective on January 1, 1998, provided
however, that in the event that the Closing does not occur on or before January
1, 1998, the President or, in his absence, any other executive officer of the
Bank may designate another time at which this Plan of Reorganization shall
become effective (the "Effective Time").
2.2 At the Closing, the Holding Company and the Bank shall deliver to
each other such certificates and other documents as are required pursuant to
this Plan of Reorganization and as are necessary and appropriate, in the
reasonable opinion of counsel for the Bank and the Holding Company, to
consummate the Reorganization.
Section 3. Actions at the Effective Time.
-----------------------------
3.1 At the Effective Time, the Holding Company shall, without any further
action by it, by the Bank, or by holders of the Bank Common Stock, automatically
and by operation of law, acquire and become the owner of all issued and
outstanding shares of Bank Common Stock (excluding shares held by the Bank as
treasury stock, all of which shall be canceled and extinguished as of the
Effective Time) and shall be entitled to have issued to it by the Bank a
certificate or certificates representing such shares. Thereafter, the Holding
Company 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.
3.2 At the Effective Time, each share of Bank Common Stock or fraction
thereof issued and outstanding prior to the Effective Time shall, without any
further action by Shareholders, by the Bank, or by the Holding Company,
automatically and by operation of law, be converted into an equal number of
shares of Holding Company Common Stock. Holders of the issued and outstanding
shares of Bank Common Stock (except for holders exercising dissenters' rights)
shall, automatically and by operation of law, cease to own such shares and shall
instead become the owners of an equal number of shares of Holding Company Common
Stock. Thereafter, such persons holding Holding Company Common Stock shall have
full and exclusive power to vote such shares, to receive dividends thereon,
except as otherwise provided herein, and to
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exercise all rights of an owner thereof. Notwithstanding any of the foregoing,
any Dissenting Shareholder shall have such rights as provided for in Section 7
hereof and by the laws of the State of Connecticut.
3.3 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
Holding Company 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.
Section 4. Stock Option and Benefit Plans.
------------------------------
4.1 At the Effective Time, the Holding Company shall automatically and
without further action on its part adopt and assume the rights and obligations
of the Bank under the Bank's 1996 Officer Stock Option Plan and the Bank's 1996
Director Stock Option Plan, each as amended from time to time (collectively, the
"Stock Plans"), as the Stock Plans are then in effect (subject to certain
conforming amendments necessitated by or appropriate for the change in
sponsorship of such Stock Plans). The Stock Plans shall, pursuant to their
terms, thereafter apply only to shares of Holding Company Common Stock in the
same manner as they therefore applied to shares of Bank Common Stock. The
Holding Company shall reserve for issuance a sufficient number of shares of
Holding Company Common Stock in order to fulfill its obligations pursuant to
this Section 4.1 and shall take such action as it deems necessary or advisable
to permit the issuance of such shares under applicable state and federal
securities laws and rules and regulations thereunder. Approval of the
Reorganization by the shareholders of the Bank shall be deemed to be approval of
the Stock Plans and any grants of Holding Company Common Stock thereunder by the
Holding Company.
4.2 At the Effective Time, all options then outstanding under any of the
Stock Plans, which immediately prior thereto had given the holder thereof the
right to purchase shares of Bank Common Stock shall, automatically and without
further action on the part of the holder thereof, be converted into options
giving the holder thereof the right to purchase the same number of shares of
Holding Company Common Stock at the same exercise price per share, and in
accordance with such other terms and conditions, as pertained under the options
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outstanding under the Stock Plans immediately prior to the Effective Time.
Section 5. Actions After the Effective Time.
--------------------------------
As soon as practicable and in any event not more than thirty days after the
Effective Time:
5.1 The Holding Company shall deliver to the transfer agent for the Bank
and the Holding Company (the "Transfer Agent"), as agent for the holders of the
Old Certificates (other than Old Certificates representing shares of Bank Common
Stock as to which Dissenting Shareholders' appraisal rights shall have been
properly exercised, if any), a certificate or certificates for the aggregate
number of shares of Holding Company Common Stock (the "New Certificates"), to
which such holders shall be entitled. Each such holder may, but shall not be
required to, surrender his or her Old Certificates to the Transfer Agent and
receive in exchange therefor New Certificates for an equal number of shares of
Holding Company Common Stock. Until so surrendered, each Old Certificate shall
be deemed, for all corporate purposes, to evidence the ownership of the number
of shares of Holding Company Common Stock which the holder thereof would be
entitled to receive upon its surrender, except that the Holding Company may in
its sole discretion, deny the holders of such shares voting rights thereon and
withhold from the holder of shares represented by such Old Certificate,
distribution of any or all dividends declared by the Holding Company on such
shares until such time as such Old Certificate shall be surrendered in exchange
for one or more New Certificates, at which time dividends so withheld by the
Holding Company with respect to such shares shall be delivered (without interest
thereon and less the amount of taxes, if any, which may have been imposed or
paid thereon or which are required by law to be withheld in respect thereof), to
the shareholder to whom such New Certificates are issued.
5.2 If any certificate for shares of Holding Company Common Stock is to
be issued in a name other than that in which the certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the certificate so surrendered shall be properly endorsed and otherwise in
proper form for transfer as the Holding Company in its sole discretion may
specify and that such transfer otherwise be proper and that the person
requesting such transfer pay to the Transfer Agent any transfer or other taxes
or other fee payable by reason of the issuance of such New Certificate in any
name other than the registered holder of the certificate surrendered, or
establish to the
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satisfaction of the Transfer Agent that such tax has been paid or is not payable
or that any fee has been paid to the party to which it is due and waived by such
party.
5.3 The Holding Company, in accordance with applicable law, shall provide
written notice to the holders of all Old Certificates, specifying the Effective
Time of this Plan of Reorganization and notifying such holders that they may
present their Old Certificates to the Transfer Agent for exchange. Such notice
shall be given by mail to such holders at their last known addresses as
contained on the Bank's records.
Section 6. Conditions Precedent.
--------------------
6.1 The Plan of Reorganization and the transactions provided for herein
shall not become effective unless all of the following conditions shall have
occurred, none of which may be waived:
(a) This Plan of Reorganization and the transactions contemplated
hereby shall have been approved by the affirmative vote of at least two-thirds
of the issued and outstanding voting Shares of Bank Common Stock at the Special
Meeting or at any adjournment thereof.
(b) The Plan of Reorganization shall have been approved by the Banking
Commissioner, and the Reorganization and the other transactions contemplated
hereby shall have been approved by any other bank regulatory agency of competent
jurisdiction, and all notice and waiting periods after the granting of any such
approval shall have expired.
(c) The Holding Company shall have provided notice to the Federal
Reserve Bank of Boston (the "Reserve Bank") in accordance with 12 C.F.R. 225.17
and the Reserve Bank shall not have objected to the consummation of the
transaction contemplated under this Plan of Reorganization within thirty days
after the Reserve Bank's receipt of such notice or, alternatively, the Reserve
Bank or the Board of Governors of the Federal Reserve System pursuant to section
3(a)(1) of the Bank Holding Company Act of 1956, as amended, shall have approved
the application of the Holding Company to become a bank holding company upon
consummation of the Reorganization and any and all applicable waiting periods
shall have expired.
(d) Unless otherwise waived, all approvals from any other state or
federal government agency having jurisdiction for the lawful consummation of the
transactions contemplated by this Plan of Reorganization shall have been
obtained, all conditions imposed by such regulatory approvals shall have
16.
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been satisfied, and all waiting periods required in connection with such
approvals shall have expired.
(e) The Shares of Holding Company Common Stock to be issued to holders
of Bank Common Stock pursuant to the Plan of Reorganization shall have been
registered or qualified for such issuance without registration to the extent
required under the Securities Act of 1933 and under all applicable state
securities laws and regulations.
(f) The Holding Company and the Bank shall have received an opinion
from the Bank's independent accountant to the effect that the Reorganization
will qualify for pooling-of-interests accounting treatment.
(g) The number of shares of Bank Common Stock as to which the
Dissenting Shareholders shall have exercised their rights to be paid the value
of such Bank Common Stock shall not exceed the number of shares of Bank Common
Stock issued and outstanding at the Effective Time.
Section 7. Rights of Dissenting Shareholders.
---------------------------------
7.1 "Dissenting Shareholders" shall mean those holders of Bank Common
Stock who file with the Bank, before the taking of the vote on this Plan of
Reorganization and the transactions contemplated hereby, written objection
thereto, in accordance with the procedure set forth in Section 36a-181(c) of the
Connecticut General Statutes, which written objection states that they intend to
demand payment for their shares of Bank Common Stock if the Reorganization is
consummated and whose shares are not voted in favor of the Reorganization.
7.2 Dissenting Shareholders who comply with the provisions of Section 36a-
181(c) of the Connecticut General Statutes and all other applicable provisions
of law shall be entitled to receive from the Bank payment of the 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 value of such shares as provided by
law, shall be canceled. Shares of Holding Company Common Stock to which
Dissenting Shareholders would have been entitled had they not dissented, shall
be deemed to constitute authorized but unissued shares of Holding Company Common
Stock and may be sold or otherwise disposed of by the Holding Company at the
discretion of, and at such time and on such terms as may be fixed by, its Board
of Directors.
Section 8. Termination, Abandonment, Amendment and Waiver.
----------------------------------------------
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8.1 This Plan of Reorganization may be abandoned or terminated by either
the Bank or the Holding Company, in the sole discretion of each entity, at any
time before the Effective Time in the event that:
(a) The number of shares of Bank Common Stock owned by Dissenting
Shareholders, as defined in Section 7 hereof, shall make consummation of the
transactions contemplated by the Plan of Reorganization inadvisable in the
opinion of the Bank or the Holding Company;
(b) Any action, suit, proceeding or claim has been instituted, made or
threatened relating to this Plan of Reorganization which shall make consummation
of the transactions contemplated by the Plan of Reorganization inadvisable in
the opinion of the Bank or the Holding Company;
(c) The Reorganization shall not have been consummated by January 1,
1998; or
(d) For any other reason consummation of the transactions contemplated
by the Plan of Reorganization is inadvisable in the opinion of the Bank or the
Holding Company.
8.2 In the event of termination or abandonment of the Plan of
Reorganization in any manner, the Plan of Reorganization shall be terminated and
shall be of no further force or effect and there shall be no liability hereunder
or on account of such abandonment or termination on the part of the Bank or the
Holding Company or the Directors, officers, employees, agents or shareholders of
either entity. In the event of such abandonment or termination of the Plan of
Reorganization, the Bank shall pay all expenses incurred in connection with the
Plan of Reorganization and the proposed transactions contemplated hereby. If
either party hereto gives written notice of abandonment or termination to the
other party pursuant to this, the party giving such written notice shall
simultaneously furnish a copy thereof to the Banking Commissioner.
8.3 The Plan of Reorganization may be amended by the parties hereto, by
action taken by or on behalf of their respective Boards of Directors, at any
time before or after approval of the Reorganization by the Shareholders of the
Bank; provided, however, that any material change in the Plan of Reorganization
subsequent to the approval thereof by Shareholders shall require the additional
approval of Shareholders of any such material change or amendment, and, provided
further, that after the initial Shareholder approval, no such amendment shall be
submitted for the approval of Shareholders which has the effect of reducing the
amount or
18.
<PAGE>
change the form of the consideration to be delivered to the Bank's Shareholders
as contemplated by the Plan of Reorganization. The Plan of Reorganization may
not be amended except by an instrument in writing signed on behalf of each of
the parties hereto.
Section 9. Governing Law.
-------------
9.1 The Plan of Reorganization shall be governed by and construed in
accordance with the laws of the State of Connecticut.
19.
<PAGE>
IN WITNESS WHEREOF, the parties have executed the Plan of Reorganization as
of the date first written above.
MECHANICS SAVINGS BANK
By: /s/ Edgar C. Gerwig
-----------------------------
Edgar C. Gerwig
Its President
MECH FINANCIAL, INC.
By: /s/ Edgar C. Gerwig
----------------------------
Edgar C. Gerwig
Its President
20.
<PAGE>
EXHIBIT 3(i)
CERTIFICATE OF INCORPORATION OF MECH FINANCIAL, INC.
FIRST: Corporate Name. The name of the Corporation is Mech Financial,
--------------
Inc. The principal office of the Corporation shall be located in the City of
Hartford, County of Hartford and State of Connecticut.
SECOND: Powers. The nature of the business to be transacted, and the
------
purposes to be promoted, carried out or engaged in by the Corporation are the
following activities:
(A) To acquire, invest in, or hold stock in any subsidiary permitted under
the Bank Holding Company Act of 1956 or Sections 36a-180 et seq. of the
-- ---
Connecticut General Statutes, as such statutes may be amended from time to
time, and to engage in any other enterprise or activity which may be
lawfully conducted by a bank holding company under said statutes; and
(B) To engage generally in any business that may be conducted and carried
on by a corporation organized under the Connecticut Business Corporation
Act.
THIRD: Capital Stock. The amount of the capital stock of the Corporation
-------------
hereby authorized is sixteen million (16,000,000) shares, consisting of fifteen
million (15,000,000) shares of Common Stock, par value $0.01 per share, and one
million (1,000,000) shares of Serial Preferred Stock, par value $0.01 per share.
A description of the different classes and series of the Corporation's
capital stock and a statement of the powers, designations, preferences,
limitations and relative rights of the shares of each class of and series of
capital stock are as follows:
A. Common Stock. Except as provided in this Article Third (or in
------------
any resolution or resolutions adopted by the Board of Directors pursuant
hereto), 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. Each share of Common Stock shall have the same
relative rights as and be identical in all respects with all other shares of
Common Stock.
Whenever there shall have been paid, or declared and
21.
<PAGE>
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 or sinking fund or 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 the
Corporation, after there shall have been paid to or set aside for the holders of
any class having preferences over the Common Stock in the event of liquidation,
dissolution or winding up of the Corporation the full preferential amounts of
which they are respectively entitled, the holders of the Common Stock, and of
any class or series of stock entitled to participate therewith, in whole or in
part, as to distribution of assets, shall be entitled after payment or provision
for payment of all debts and liabilities of the Corporation, to receive the
remaining assets of the Corporation available for distribution, in cash or in
kind.
B. Serial Preferred Stock. The Board of Directors of the
----------------------
Corporation is authorized, subject to limitations prescribed by law and the
provisions of this Article Third, to provide by resolution for the issuance of
Serial Preferred Stock in series, including convertible preferred Stock, and by
filing a certificate pursuant to the applicable law of the State of Connecticut,
to establish from time to time the number of shares to be included in each such
series, and to fix the designations, powers, preferences and relative,
participating, optional and other special rights of the shares of each such
series and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and
the relative rights of priority, if any, of payment of dividends
on shares of that series;
22.
<PAGE>
(3) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and if so, the terms of such
voting rights, including but not limited to providing voting
rights that are more or less heavily weighted than other series
of Preferred Stock and/or of Common Stock.
(4) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision
for adjustment of the conversion rate in such events as the Board
of Directors shall determine;
(5) Whether or not the shares of that series shall be redeemable,
and, if so, the terms and conditions of such redemption,
including the date or dates upon or after which they shall be
redeemable, and the amount per share payable in case of
redemption, which amount may vary under different conditions and
at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption
or purchase of shares of that series, and, if so, the terms and
amounts of such sinking fund;
(7) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution, or winding up of the
Corporation, and the relative rights of priority, if any, of
payment of shares of that series; and
(8) Any other relative rights, preferences, and limitations of that
series.
To the extent that this Certificate of Incorporation does not fix or
determine the terms, limitations and relative rights and preferences of any
shares of Preferred Stock, or does not establish series and fix and determine
the variations as among series, the Board of Directors shall have the authority
to do so from time to time.
FOURTH: Quorum. Unless otherwise provided in this Certificate of
------
Incorporation or in the bylaws of the Corporation, to constitute a quorum for
the transaction of business on any matter at a meeting of the shareholders,
there must be present, in person or by proxy, a majority of the shares of voting
stock of the Corporation entitled to vote
23.
<PAGE>
thereon. The shareholders present at a duly held meeting at which a quorum is
present may continue to transact business notwithstanding the withdrawal of
enough shares to leave less than a quorum.
FIFTH: Directors; Bylaws. All the powers of the Corporation, insofar as
-----------------
the same may be lawfully vested by this Certificate of Incorporation in the
Board of Directors, are hereby conferred upon the Board of Directors of the
Corporation. In furtherance and not in limitation of that power, the Board of
Directors shall have the power to make, adopt, alter, amend and repeal from time
to time Bylaws of the Corporation, subject to the right of the shareholders
entitled to vote with respect thereto to adopt, alter, amend and repeal Bylaws
made by the Board of Directors. Any shareholder action effecting an amendment
or repeal of or an adoption of a provision inconsistent with the Corporation's
Bylaws shall require (i) the affirmative vote of the holders of not less than
sixty percent (60%) of the voting power of the issued and outstanding shares
entitled to vote for the election of Directors, and (ii) if there is an
Interested Shareholder (as defined in Articles Seventh or Thirteenth hereof),
the affirmative vote of not less than sixty percent (60%) of the voting power of
the issued and outstanding shares entitled to vote for the election of Directors
held by shareholders other than the Interested Shareholder.
The business, property and affairs of the Corporation shall be managed by
and under the direction of its Board of Directors. The number of directors
shall be not less than seven (7) and not more than fifteen (15) as fixed from
time to time by the Board of Directors pursuant to the Corporation's Bylaws,
except as a greater number may be required to give effect to the rights of the
holders of the Preferred Stock or any series thereof to elect additional
Directors.
The Board of Directors, other than those who may be elected by the holders
of Preferred Stock or any series thereof, shall be divided into three classes,
as nearly equal in number as possible. At each annual meeting of the
shareholders of the Corporation, the successors of the class of directors whose
terms expire at that meeting shall be elected to hold office for a term expiring
at the annual meeting of shareholders held in the third year following their
year of election. Each director shall hold office until his successor shall
have been duly elected and qualified. The election of directors need not be by
ballot unless the Bylaws so provide. No decrease in the number of directors
shall shorten the term of any incumbent director.
24.
<PAGE>
The names of those persons of each class to serve initially on the Board of
Directors and the year of expiration of their respective initial terms (which
should expire on the date of the annual meeting in the year shown below) shall
be as follows:
Class One: 2000
Alfred R. Rogers
Richard C. Booth
Barbara Brown Zikmund
Class Two: 1998
David Freeman
Kevin A. North
Robert G. Rayve
John L. Way 2nd
Class Three: 1999
Edgar C. Gerwig
John J. Meehan
Donald K. Wilson, Jr.
The terms, classifications, qualifications, and election of the Board of
Directors, and the method of filling vacancies thereon shall be as provided
herein and in the Bylaws.
SIXTH: Business Combinations. The shareholder vote required to approve
---------------------
any Business Combination shall be as set forth in this Article Sixth. The term
"Business Combination" is used as defined in Section B of this Article Sixth.
All other capitalized terms used in this Article Sixth not otherwise defined in
this Article Sixth or elsewhere in this Certificate of Incorporation are used as
defined in Section D of this Article Sixth, provided however, that capitalized
terms defined in this Article Sixth shall, for purposes of this Article Sixth,
be used as defined herein.
A. Higher Vote for Business Combinations. In addition to any affirmative
-------------------------------------
vote required by law or this Certificate of Incorporation, and except as
otherwise expressly provided in Section C of this Article Sixth;
1. any merger or consolidation of the Corporation or any Subsidiary
with (a) any Interested Shareholder or (b) any other corporation (whether or not
itself an Interested Shareholder) which is or after such merger or consolidation
25.
<PAGE>
would be, an Affiliate or Associate of an Interested Shareholder that was an
Interested Shareholder prior to the transaction; or
2. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition other than in the usual and regular course of business, in one
transaction or a series of transactions in any twelve-month period to or with
any Interested Shareholder or any Affiliate or Associate of any Interested
Shareholder, other than the Corporation or any of its Subsidiaries of any assets
of the Corporation or any subsidiary having, measured at the time the
transaction or transactions are approved by the Board of Directors of the
Corporation, an aggregate book value as of the end of the Corporation's most
recent fiscal quarter of ten percent (10%) or more of the total Market Value of
the outstanding shares of the Corporation or of its retained earnings as of the
end of its most recent fiscal quarter; or
3. the issuance or transfer by the Corporation or any Subsidiary in
one transaction or a series of transactions of any equity securities of the
Corporation or any Subsidiary having an aggregate Market Value of five percent
(5%) or more of the total Market Value of the outstanding shares of the Common
Stock of the Corporation to any Interested Shareholder or any Affiliate or
Associate of any Interested Shareholder, other than the Corporation or any of
its Subsidiaries, except pursuant to the exercise of warrants, rights or options
to subscribe to or purchase securities offered, issued or granted pro rata to
all holders of the Voting Stock of the Corporation or any other method affording
substantially proportionate treatment to the holders of Voting Stock; or
4. the adoption of any resolution for the liquidation or dissolution
of the Corporation or any Subsidiary proposed by or on behalf of an Interested
Shareholder or any Affiliate or Associate of any Interested Shareholder, other
than the Corporation or any of its Subsidiaries; or
5. any reclassification of securities, including any reverse stock
split, or recapitalization of the Corporation, or any merger, consolidation or
share exchange of the Corporation with any of its Subsidiaries which has the
effect, directly or indirectly, in one transaction or a series of transactions,
of increasing by five percent (5%) or more of the total number of outstanding
shares, the proportionate amount of the outstanding shares of any class of
equity or convertible securities of the Corporation or any Subsidiary which is
directly or indirectly owned by any Interested Shareholder or any Affiliate or
Associate of any Interested
26.
<PAGE>
Shareholder, other than the Corporation or any of its Subsidiaries;
shall first be approved by the Board of Directors and then be approved by the
affirmative vote of (i) the holders of at least eighty percent (80%) of the
voting power of the then outstanding shares of Voting Stock of the Corporation,
and (ii) the holders of at least two-thirds (2/3) of the voting power of the
then outstanding shares of Voting Stock, exclusive of any shares of Voting Stock
held by or on behalf of such Interested Shareholder or any Affiliate or
Associate of such Interested Shareholder. Such affirmative votes shall be
required notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law, in any agreement with any national
securities exchange, or otherwise.
B. Definition of "Business Combination". The term "Business Combination"
------------------------------------
as used in this Article Sixth shall mean any transaction which is referred to in
any one or more of paragraphs 1 through 5 of Section A of this Article Sixth.
C. When Higher Vote is Not Required. The provisions of Section A of this
--------------------------------
Article Sixth shall not be applicable to any particular Business Combination,
and such Business Combination shall require only such affirmative vote as is
required by law, any other provision of this Certificate of Incorporation, or
otherwise, if in the case of any Business Combination defined in paragraph 1 of
Section A of this Article Sixth the conditions specified in either of the
following paragraphs 1 or 2 are met, or in the case of any other Business
Combination the condition specified in the following paragraph 1 is met:
1. Approval by Board of Directors. If such Business Combination
------------------------------
involves transactions with a particular Interested Shareholder or its existing
or future Affiliates, or Associates, such Business Combination shall have been
approved by a resolution of the Board of Directors at any time prior to the time
that the Interested Shareholder first became an Interested Shareholder.
2. Price and Procedure Requirements. All of the following
--------------------------------
conditions shall have been met:
(a) The aggregate amount of the cash and the Market Value as of the
Valuation Date of the consideration other than cash to be received per
share by holders of Common Stock in such Business Combination shall be an
amount at least equal to the highest of the following (it being intended
that the requirements of this paragraph (a) shall be required to be met
with
27.
<PAGE>
respect to all shares of Common Stock outstanding, whether or not the
Interested Shareholder has previously acquired any shares of the Common
Stock):
(i) the highest per share price, including any brokerage
commissions, transfer taxes and soliciting dealers'
fees, paid by the Interested Shareholder for any shares
of Common Stock acquired by it (a) within the two-year
period immediately prior to the first public
announcement of the proposed Business Combination (the
"Announcement Date") or (2) in the transaction in which
it became an Interested Shareholder, whichever is
higher; or
(ii) the Market Value per share of Common Stock on the
Announcement Date or on the date on which the
Interested Shareholder became an Interested Shareholder
(the "Determination Date"), whichever is higher; or
(iii) the price per share equal to the Market Value per
share of Common Stock determined pursuant to subsection
(a)(ii) hereof, multiplied by the fraction of (1) the
highest per share price, including any brokerage
commission, transfer taxes and soliciting dealers'
fees, paid by the Interested Shareholder for any shares
of Common Stock acquired by it within the two-year
period immediately prior to the Announcement Date, over
(2) the Market Value per share of Common Stock on the
first day in such two-year period on which the
Interested Shareholder acquired any shares of Common
Stock.
(b) The aggregate amount of the cash and the Market Value as of the
Valuation Date of the consideration other than cash to be received per
share by holders of shares of any class or series of outstanding Voting
Stock, other than the Common Stock, shall be an
28.
<PAGE>
amount at least equal to the highest of the following:
(i) the highest per share price including any brokerage
commissions, transfer taxes and soliciting dealers'
fees, paid by the Interested Shareholder for any shares
of such class or series of Voting Stock acquired by it
(1) within the two-year period immediately prior to the
Announcement Date or (2) in the transaction in which it
becomes an Interested Shareholder, whichever is higher;
or
(ii) the highest preferential amount per share to which the
holders of shares of such class or series of Voting
Stock are entitled in the event of any voluntary or
involuntary liquidation, dissolution or winding up of
the Corporation; or
(iii) the Market Value per share of such class or series
of Voting Stock on the Announcement Date or on the
Determination Date, whichever is higher; or
(iv) the price per share equal to the Market Value per share
of such class or series of stock determined pursuant to
subsection (b)(iii) hereof multiplied by the fraction
of (1) the highest per share price, including any
brokerage commissions, transfer taxes and soliciting
dealers' fees, paid by the Interested Shareholder for
any shares of any class or series of Voting Stock
acquired by it within the two-year period immediately
prior to the Announcement Date, over (2) the Market
Value per share of the same class or series of Voting
Stock on the first day in such two-year period on which
the Interested Shareholder acquired any shares of the
same class or series of Voting Stock.
29.
<PAGE>
(c) The consideration to be received by holders of a particular class
or series of outstanding Voting Stock shall be in cash or in the same form
as the Interested Shareholder has previously paid for shares of such class
or series of Voting Stock. If the Interested Shareholder has paid for
shares of any class or series of Voting Stock with varying forms of
consideration, the form of consideration for such class or series of voting
Stock shall be either cash or the form used to acquire the largest number
of shares of such class or series of Voting Stock previously acquired by
it.
(d) After such Interested Shareholder has become an Interested
Shareholder and prior to the consummation of such Business Combination:
(i) there shall have been no failure to declare and pay at the regular date
therefor any full quarterly dividends (whether or not cumulative) on any
outstanding Preferred Stock; (ii) there shall have been no reduction in the
annual rate of dividends paid on the Common Stock, except as necessary to
reflect any subdivision of the Common Stock; and there shall have been 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 Common Stock; and (iii) such Interested
Shareholder shall not have become the beneficial owner of any additional
shares of Voting Stock except as part of the transaction which resulted in
such Interested Shareholder becoming an Interested Shareholder or by virtue
of proportionate stock splits or stock dividends.
The provisions of subdivisions (d)(i) and (d)(ii) of this subsection do not
apply if no Interested Shareholder and no Affiliate or Associate of any
Interested Shareholder voted as a director of the Corporation in a manner
inconsistent with such subdivisions and the Interested Shareholder, within ten
(10) days after any act or failure to act inconsistent with such subdivisions,
notifies the Board of Directors of the Corporation in writing that the
Interested Shareholder disapproves thereof and requests in good faith that the
Board of Directors rectify such act or failure to act.
(e) After such Interested Shareholder has become an Interested
Shareholder, such Interested Shareholder shall not have received the
benefit, directly or indirectly, except proportionately as a shareholder,
of any loans, advances, guarantees, pledges or other financial assistance
or any tax credits or other tax advantages provided by the Corporation or
any of its
30.
<PAGE>
Subsidiaries, whether in anticipation of or in connection with such
Business Combination or otherwise.
(f) 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 the shareholders of the Corporation at least thirty (30) days
prior to the consummation of such Business Combination, whether or not such
proxy or registration statement is required to be mailed pursuant to such
Act or subsequent provisions.
D. Definitions. For the purposes of this Article Sixth:
-----------
1. "Affiliate" means a person that directly or indirectly through
one or more intermediaries controls, or is controlled by, or is under common
control with, a specified person.
2. "Associate", when used to indicate a relationship with any
person, means: (1) any domestic or foreign corporation or organization, other
than the Corporation or a subsidiary of the Corporation, of which such person is
an officer, director or partner or is, directly or indirectly, the beneficial
owner of ten percent (10%) or more of any class of equity securities; (2) any
trust or other estate in which such person has a substantial beneficial interest
or as to which such person serves as a trustee or in a similar fiduciary
capacity; and (3) any relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a director or officer of
the Corporation or any of its Affiliates.
3. "Beneficial Owner", when used with respect to any Voting Stock,
means a person:
(a) which, or any of its Affiliates or Associates of which,
beneficially owns Voting Stock directly or indirectly; or
(b) which has (i) the right to acquire Voting Stock, whether such
right is exercisable immediately or only after passage of time, pursuant to
any agreement, arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or options, or otherwise; or
(ii) the right to vote or direct the voting of Voting Stock pursuant to any
agreement,
31.
<PAGE>
arrangement or understanding; or (iii) the right to dispose of or to direct
the disposition of Voting Stock pursuant to any agreement, arrangement or
understanding; or
(c) which, or any of its Affiliates or Associates of which, has an
agreement, arrangement or understanding for the purposes of acquiring,
holding, voting or disposing of Voting Stock with any other person that
beneficially owns, or whose Affiliates or Associates beneficially own,
directly or indirectly, such shares of Voting Stock.
4. "Interested Shareholder" means any person, other than the
Corporation or any Subsidiary, who or which:
(a) is the beneficial owner, directly or indirectly, of ten percent
(10%) or more of the voting power of the then outstanding Voting Stock; or
(b) is an Affiliate of the Corporation and at any time within the
two-year period immediately prior to the date in question was the
beneficial owner, directly or indirectly, of ten percent (10%) or more of
the combined voting power of the then outstanding Voting Stock; or
(c) is an assignee of or has otherwise succeeded to any shares of
Voting Stock which were at any time within the two-year period immediately
prior to the date in question beneficially owned by any person described in
(i) or (ii) above, if such assignment or succession shall have occurred in
the course of a transaction or series of transactions not involving one of
the following: a public offering within the meaning of the Securities Act
of 1933, a transfer of shares on the open market, or a transfer of shares
made with the approval of the Connecticut Banking Commissioner.
5. For the purposes of determining whether a person is an Interested
Shareholder pursuant to paragraph 4 of this Section D, the number of shares of
Voting Stock deemed to be outstanding shall include shares deemed owned through
application of paragraph 3 of this Section D, but shall not include any other
shares of Voting Stock which may be issuable to persons other than the person in
question pursuant to any agreement, arrangement or understanding, or upon
exercise of conversion rights, warrants or options, or otherwise.
6. "Market Value" as of any date means: (a) in the case of stock,
the highest closing sale price during the 30-day period immediately preceding
the date in question of a
32.
<PAGE>
share of such stock on the composite tape for New York Stock Exchange-Listed
Stocks, or, if such stock is not quoted on the composite tape, on the New York
Stock Exchange, or, if such stock is not listed on such exchange, 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 or last sale 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, Inc. Automated
Quotations System or any similar 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 a majority of the Board of Directors in good faith; and
(b) 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 a majority of the Board
of Directors in good faith.
7. A "person" means any natural person, company, partnership, trust,
unincorporated organization or other entity, and any two or more of the
foregoing acting together or in concert.
8. "Subsidiary" means any corporation of which Voting Stock having a
majority of the votes entitled to be cast is owned, directly or indirectly, by
the Corporation.
9. "Valuation Date" means: (a) for a Business Combination voted on
by shareholders, the latter of the day prior to the date of the shareholders
vote or the date twenty (20) days prior to the consummation of the Business
Combination; and (b) for a Business Combination not voted upon by the
shareholders, the date of the consummation of the Business Combination.
10. "Voting Stock" means the then outstanding shares of capital stock
of the Corporation entitled to vote generally in the election of directors.
11. In the event of any Business Combination in which the Corporation
is the surviving corporation, the phrase "consideration other than cash to be
received" as used in paragraph B(i) and B(ii) of Section 3 of this Article Sixth
shall include the shares of Common Stock and/or the shares of any other class or
series of outstanding Voting Stock retained by the holders of such shares.
E. Powers of the Board of Directors. A majority of the Board of
--------------------------------
Directors of the Corporation shall have the power and duty to determine, on the
basis of information known to them
33.
<PAGE>
after reasonable inquiry, all facts necessary to determine compliance with this
Article Sixth, including without limitation (1) whether a person is an
Interested Shareholder, (2) the number of shares of Voting Stock beneficially
owned by any person; (3) whether a person is an Affiliate or Associate of
another; and (4) whether the requirements of paragraph 2 of Section C have been
met with respect to any Business Combination; and the good faith determination
of a majority of the Board of Directors on such matters shall be conclusive and
binding for all the purposes of this Article Sixth.
F. No Effect on Fiduciary Obligations of Interested Shareholders.
-------------------------------------------------------------
Nothing contained in this Article Sixth shall be construed to relieve the Board
of Directors or any Interested Shareholder from any fiduciary obligation imposed
by law.
SEVENTH: Special Meeting of Shareholders. Special meetings of
-------------------------------
Shareholders may be called at any time but only by the Chairman, the President
or a majority of the Board of Directors of the Corporation, unless otherwise
required by law.
EIGHTH: Vacancies on the Board. A vacancy on the Board of Directors may
----------------------
be filled by a concurring vote of a majority of the Directors remaining in
office even though the number of Directors at the meeting may be less than a
quorum and even though such majority may be less than a quorum. Any Director
elected in accordance with the preceding sentence shall hold office until the
next meeting at which Directors are elected and until such Director's successor
shall have been elected and qualified or until there is a decrease in the number
of Directors. No decrease in the number of Directors constituting the Board of
Directors shall shorten the term of any incumbent Director.
NINTH: Director Liability. The personal liability to the Corporation or
------------------
its shareholders of a person who is or was a director of the Corporation for
monetary damages for breach of duty as a director shall be limited to the amount
of the compensation received by the director for serving the Corporation during
the year of the violation if such breach did not (1) involve a knowing and
culpable violation of law by the director, (2) enable the director or an
associate, as defined in subdivision (3) of Section 33-843 or any similar
successor provision of the Connecticut General Statutes, to receive an improper
personal economic gain, (3) show a lack of good faith and a conscious disregard
for the duty of the director to the Corporation under circumstances in which the
director was aware that his conduct or omission created an unjustifiable risk of
serious injury to the Corporation, (4)
34.
<PAGE>
constitute a sustained and unexcused pattern of inattention that amounted to an
abdication of the director's duty to the Corporation, or (5) create liability
under Section 33-757, as amended, or Section 36a-58 of the Connecticut General
Statutes. This paragraph shall not limit or preclude the liability of a person
who is or was a director for any act or omission occurring prior to the
effective date hereof. Any lawful repeal or modification of this paragraph or
the adoption of any provision inconsistent herewith by the Board of Directors
and the shareholders of the Corporation shall not, with respect to a person who
is or was a director, adversely affect any limitation of liability, right or
protection existing at or prior to the effective date of such repeal,
modification or adoption of a provision inconsistent herewith.
TENTH: Removal of Directors. Any Director may be removed from office at
--------------------
any time for cause by the affirmative vote of at least two-thirds (2/3) of the
Directors then in office.
ELEVENTH: Nominations for Director. Not less than twenty (20) days
------------------------
advance notice of nominations for the election of Directors, other than by the
Board of Directors or a committee thereof, shall be given in the manner provided
in the Bylaws.
TWELFTH: Action By Shareholders. Any action required or permitted to be
----------------------
taken by the shareholders of the Corporation must be effected at a duly called
annual or special meeting of such holders and may not be effected by any consent
in writing by such holders.
THIRTEENTH: Any direct or indirect purchase or other acquisition by the
Corporation of any Equity Security (as hereinafter defined) of any class from
any Interested Securityholder (as hereinafter defined) who has beneficially
owned such securities for less than two years prior to the date of such purchase
or any agreement in respect thereof shall, except as hereinafter expressly
provided, require the affirmative vote of the holders of at least a majority of
the voting power of the issued and outstanding shares entitled to vote generally
in the election of directors (the "Voting Stock"), excluding Voting Stock
beneficially owned by such Interested Securityholder, voting together as a
single class (it being understood that for the purposes of this Article
Thirteenth, each share of the Voting Stock shall have the number of votes
granted to it pursuant to Article Third of this Certificate of Incorporation).
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
35.
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or any agreement with any national securities exchange, or otherwise, but no
such affirmative vote shall be required with respect to any purchase or other
acquisition of securities made as part of a tender or exchange offer by the
Corporation to purchase securities of the same class made on the same terms to
all holders of such securities and complying with the applicable requirements of
the Securities Exchange Act of 1934 and the rules and regulations thereunder (or
any subsequent provisions replacing such Act, rules or regulations).
For the purposes of this Article Thirteenth:
A. A "person" shall mean any individual, firm, corporation or other
entity.
B. "Interested Securityholder" shall mean any person (other than the
Corporation or any corporation of which a majority of any class of Equity
Security is owned, directly or indirectly, by the Corporation) who or which
(i) is the beneficial owner, directly or indirectly, of three percent or
more of the class of securities to be acquired; or
(ii) is an Affiliate of the Corporation and at any time within the two-
year period immediately prior to the date in question was the beneficial
owner, directly or indirectly, of three percent or more of the class of
securities to be acquired; or
(iii) is an assignee or has otherwise succeeded to any shares of the class
of securities to be acquired which were at any time within the two-year
period immediately prior to the date in question beneficially owned by an
Interested Securityholder, if such assignment or succession shall have
occurred in the course of a transaction or transactions not involving a
public offering within the meaning of the Securities Act of 1933.
C. A person shall be a "beneficial owner" of any security of any class
of the Corporation
(i) which such person or any of its Affiliates or Associates (as
hereinafter defined) beneficially owns, directly or indirectly; or
(ii) which such person or any of its Affiliates or Associates has (a) the
right to acquire (whether such right is exercisable immediately or only
after the passage of time), pursuant to any agreement, arrangement
36.
<PAGE>
or understanding or upon the exercise of conversion rights, exchange
rights, warrants or options, or otherwise, or (b) any right to vote
pursuant to any agreement, arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly, by any person
with which such person or any of its Affiliates or Associates has any
agreement, arrangement or understanding for the purposes of acquiring,
holding, voting or disposing of any security of any class of the
Corporation.
D. For the purposes of determining whether a person is an Interested
Securityholder pursuant to paragraph B of this Article Thirteenth, the relevant
class of securities outstanding shall be deemed to comprise all such securities
deemed owned through application of paragraph C of this Article Thirteenth, but
shall not include other securities of such class 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 in effect as of the date hereof.
F. "Equity Security" shall have the meaning ascribed to such term in
Section 3(a)(11) of the Securities Exchange Act of 1934, as in effect as of the
date hereof.
FOURTEENTH: Approval for Certain Acquisitions and Offers to Acquire Voting
--------------------------------------------------------------
Stock. No person, acting singly or together with any Affiliates, Associates or
- -----
group of persons acting in concert with such person, shall acquire ten percent
(10%) or more of the issued and outstanding stock of the Corporation entitled to
vote for the election of directors ("Voting Stock") at any time, unless (a) such
acquisition has been approved prior to its consummation by the affirmative vote
of the holders of at least two-thirds (2/3) of the outstanding Voting Stock
entitled to vote at a duly constituted meeting of shareholders called for such
purpose, and (b) all federal and state regulatory approvals required under the
Change in Bank Control Act of 1978 (the "Change in Control Act"), the Bank
Holding Company Act of 1956 (the "Holding Company Act") and any similar
Connecticut law (including but not limited to the Connecticut Bank Holding
Company and Bank Acquisition Act) and in the manner provided by all applicable
regulations of the Federal Deposit Insurance Corporation (the "FDIC"), the
Federal Reserve Board (the "FRB") and the Connecticut Banking Commissioner have
been obtained (or, as applicable, with
37.
<PAGE>
regard to each such agency, any required filings have not been disapproved
within the applicable time period). Notwithstanding any provision of this
Certificate of Incorporation, nothing in this Certificate shall be construed to
restrict any authority of the Connecticut Banking Commissioner to authorize an
acquisition as provided in the Connecticut Bank Holding Company and Bank
Acquisition Act. The Corporation shall be entitled to institute a private right
of action to enforce such statutory and regulatory provisions.
For a period of three (3) years from the effective date of the conversion
of the Corporation's subsidiary, Mechanics Savings Bank (the "Bank"), from a
mutual savings bank to a capital stock savings bank (the "Conversion") which
three-year period shall expire on June 25, 1999, no person, acting singly or
together with any affiliates, associates, or group of persons acting in concert
with such person, shall directly or indirectly offer to acquire or acquire more
than (i) five percent (5%) of the then outstanding Voting Stock of the
Corporation without the prior written approval of the Board of Directors or (ii)
ten percent (10%) of the then outstanding Voting Stock of the Corporation
without the prior written approval of the Banking Commissioner of the State of
Connecticut. For purposes of the preceding sentence, "person" shall not include
any tax qualified employee benefit plan of the Bank or the Corporation.
Moreover, no person may make an offer to acquire ten percent (10%) or more
of the then outstanding Voting Stock of the Corporation unless such person has
notified the Board of Directors of the Corporation in writing of its intention
to do so and the Board of Directors has not, within fifteen (15) days after
receipt of such notice, disapproved such offer before the offer is made, and
obtained prior approval of the acquisition by the FDIC or the FRB and the
Banking Commissioner (or, as applicable, with regard to each such agency, any
required filings with such regulatory agency have been made in a timely fashion
and the action or proposed action set forth therein has not been disapproved
within applicable time period.).
All shares of Voting Stock owned by any person violating the foregoing
provisions of this Article Fourteenth shall be considered from and after the
date of the acquisition by such Person to be "excess shares" to the extent such
shares exceed ten percent (10%) of the Voting Stock issued and outstanding.
Such excess shares shall thereafter no longer be entitled to vote on any matter
or to take other shareholder action or be counted in determining the total
number of outstanding shares for purposes of any matter involving shareholder
action, and the Board of Directors may cause such excess shares to be
38.
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transferred to an independent trustee for sale on the open market or otherwise,
with the expenses of such trustee to be paid out of the proceeds from such sale.
The term "person" shall include any individual, group acting in concert,
firm, corporation, partnership, association, joint stock company, trust,
unincorporated organization thereof, syndicate, or other entity. When any
person, directly or indirectly, acquires beneficial ownership of more than ten
percent (10%) of the then outstanding voting stock of the Corporation without
the prior written approval of said Commissioner as required by this Article
Fourteenth, any voting stock beneficially owned by said person in excess of said
ten percent (10%) shall not be counted as shares of voting stock entitled to
notice, to vote or to take any other shareholder action and shall not be voted
by any person or be counted in determining the total number of outstanding
shares for purposes of any matter involving shareholder action. The term "group
acting in concert" includes persons seeking to combine or pool their voting or
other interests in the securities of the Corporation for a common purpose,
pursuant to any contract, trust, understanding, relationship, agreement, or
other arrangement, whether written or otherwise. The term "offer" includes
every offer to buy or acquire, solicitation of an offer to sell, tender offer
for, or request or invitation for tender of, a security or interest in a
security for value.
FIFTEENTH: Considerations for Merger, Consolidation or Other Offers. The
--------------------------------------------------------
Board of Directors of the Corporation, when evaluating any tender or exchange
offer for stock of the Corporation, offer or proposal to merge or consolidate
the Corporation with another institution, or an offer or proposal to purchase or
otherwise acquire all or substantially all of the properties and assets of the
Corporation, shall, in connection with the exercise of its judgment in
determining what is in the best interests of the Corporation and its
shareholders, give due consideration to all relevant factors, including without
limitation (1) the long-term as well as the short-term interests of the
Corporation, (2) the interests of the shareholders, long-term as well as short-
term, including the possibility that those interests may be best served by the
continued independence of the Corporation, (3) the interests of the
Corporation's employees, customers, creditors and suppliers, and (4) community
and societal considerations including those of any community in which any office
or other facility of the Corporation is located. A director may also in his
discretion consider any other factors he reasonably considers appropriate in
determining what he reasonably believes to be in the best interests of the
Corporation. A person who performs his duties in accordance with this
39.
<PAGE>
subsection shall be deemed to have no liability by reason of being or having
been a director of the Corporation.
SIXTEENTH: Limitations on Certain Combination Transactions.
-----------------------------------------------
1. All capitalized terms used in this Article Sixteenth not otherwise
defined elsewhere in this Certificate of Incorporation are used as defined in
Section 4 of this Article Sixteenth, provided however, that capitalized terms
defined in this Article Sixteenth and in Article Seventh or Article Thirteenth
shall, for the purposes of this Article Sixteenth, be used as defined herein.
2. In addition to, and without regard to any restrictions or limitations
on Business Combinations, as defined in Article Seventh, the Corporation shall
not engage in any Combination Transaction with an Interested Stockholder for a
period of five years following such Interested Stockholder's Stock Acquisition
Date unless (i) such Combination Transaction or (ii) the purchase of Stock by
such Interested Stockholder on such Interested Stockholder's Stock Acquisition
Date, is approved, prior to such Interested Stockholder's Stock Acquisition
Date, by a resolution of the Board of Directors and by a majority of the
Corporation's Directors who are not employees of the Corporation, of which there
must be at least two.
3. If a good faith proposal is made in writing to the Board of Directors
regarding a proposed Combination Transaction, the Board of Directors shall
respond, in writing, within forty-five days or such shorter period, if any, as
may be required by the Exchange Act, setting forth its reasons for its decision
regarding such proposal. If a good faith proposal to purchase Stock is made in
writing to the Board of Directors, the Board of Directors shall be deemed to
have disapproved such Stock purchase unless it responds affirmatively in writing
within forty-five days or such shorter period, if any, as may be required by the
Exchange Act.
4. For the purposes of this Article Sixteenth:
A. "Affiliate" means a person that directly, or indirectly through
one or more intermediaries, Controls or is Controlled By, or is Under
Common Control With, a specified person.
B. "Announcement Date", when used in reference to any Combination
Transaction means the date of the first public announcement of the final,
definitive proposal for
40.
<PAGE>
such Combination Transaction.
C. "Associate", when used to indicate a relationship with any
Person, means (i) any corporation or organization of which such Person is
an officer or partner or is, directly or indirectly, the Beneficial Owner
of ten percent or more of any class of Voting Stock, (ii) any trust or
other estate in which such Person has at least a ten percent beneficial
interest or as to which such Person serves as trustee or in a similar
fiduciary capacity, and (iii) any relative or spouse of such Person, or any
relative of such spouse, who has the same home as such Person.
D. "Beneficial Owner", when used with respect to any Voting Stock,
means a Person:
(i) that, individually or with or through any of its Affiliates
or Associates, beneficially owns such Stock, directly or indirectly;
(ii) that, individually or with or through any of its Affiliates
or Associates, has (a) the right to acquire such Stock, whether such
right is exercisable immediately or only after the passage of time or
upon the occurrence of a specified event, pursuant to any agreement,
arrangement or understanding whether or not in writing, or upon the
exercise of conversion rights, exchange rights, warrants or options,
or otherwise; provided, a Person shall not be deemed the Beneficial
Owner of Stock tendered pursuant to a tender or exchange offer made by
such Person or any of such Person's Affiliates or Associates until
such tendered Stock is accepted for purchase or exchange; (b) the
right to vote Stock pursuant to any agreement, arrangement or
understanding whether or not in writing; provided, a Person shall not
be deemed the Beneficial Owner of any Stock under this subparagraph if
the agreement, arrangement or understanding to vote such Stock arises
solely from a revocable proxy or consent given in response to a proxy
or consent solicitation made in accordance with the applicable rules
and regulations under the Exchange Act and is not then reportable on
Schedule 13D under the Exchange Act or any comparable or successor
report; or (c) the right to dispose of such Stock pursuant to any
agreement, arrangement or understanding whether or not in writing; or
(iii) that, individually or with or through
41.
<PAGE>
any of its Affiliates or Associates, has any agreement, arrangement or
understanding whether or not in writing for the purpose of acquiring,
except pursuant to a tender or exchange offer until such tendered
Stock is accepted for purchase or exchange described in subparagraph
(ii)(a) of this subdivision, holding, voting, except voting pursuant
to a revocable proxy or consent as described in subparagraph (ii)(b)
of this subdivision, or disposing of such Stock with any other person
that beneficially owns, or whose Affiliates or Associates beneficially
own, directly or indirectly, such Stock.
E. "Combination Transaction", when used in reference to the
Corporation and any Interested Stockholder, means:
(i) any merger or consolidation of the Corporation or any
Subsidiary with or into (a) such Interested Stockholder or (b) any
other corporation whether or not itself an Interested Stockholder
which is, or after such merger or consolidation would be, an Affiliate
or Associate of such Interested Stockholder;
(ii) any sale, lease, exchange, mortgage, pledge, transfer or
other disposition in one transaction or a series of transactions to or
with such Interested Stockholder or any Affiliate or Associate of such
Interested Stockholder of assets of the Corporation or any subsidiary
(a) having an aggregate market value equal to ten percent or more of
the aggregate market value of all the assets, determined on a
consolidated basis, of the Corporation, (b) having an aggregate market
value equal to ten percent or more of the aggregate market value of
all the outstanding Stock of the Corporation, or (c) representing ten
percent or more of the earning power or net income, determined on a
consolidated basis, of the Corporation, except pursuant to a dividend
or distribution paid or made pro rata to the holders of all of the
Corporation's Common Stock and to all holders of the Preferred Stock,
if any, entitled to participate with the holders of the common stock
in the receipt of such dividend or distribution;
(iii) the issuance or transfer by the Corporation or any
Subsidiary in one transaction or a series of transactions of any Stock
of the
42.
<PAGE>
Corporation or any Subsidiary which has an aggregate market value
equal to five percent or more of the aggregate market value of all the
outstanding Stock of the Corporation to such Interested Stockholder or
any Affiliate or Associate of such Interested Stockholder, except (a)
pursuant to a dividend or distribution paid or made pro rata to the
holders of the Common Stock of the Corporation and to all holders of
the Preferred Stock, if any, of the Corporation entitled to
participate with the holders of Common Stock in the receipt of such
dividend or distribution, or (b) pursuant to the exercise of warrants
or rights to purchase Stock or pursuant to the conversion of
convertible securities;
(iv) the adoption of any plan or proposal for the complete or
partial liquidation or dissolution of the Corporation or any
Subsidiary, or declarations or payments of dividends and distributions
to the holders of the Stock of the Corporation in any twelve-month
period having an aggregate market value of more than five percent of
the aggregate market value of all assets, determined on the
consolidated basis, of the Corporation as of the beginning of such
twelve-month period, which plan or proposal is, or declarations or
payments are, proposed by, or pursuant to any agreement, arrangement
or understanding whether or not in writing with, such Interested
Stockholder or any Affiliate or Associate of such Interested
Stockholder, at any time following such Interested Stockholder's Stock
Acquisition Date;
(v) any reclassification of securities including, without
limitation, any Stock split, Stock dividend or other distribution of
Stock in respect of Stock or any reverse stock split, or
recapitalization of the Corporation, or any merger or consolidation of
the Corporation with any subsidiary, or any other transaction whether
or not with or into or otherwise involving such Interested
Stockholder, which reclassification, merger, consolidation or other
transaction (a) has the effect, directly or indirectly, of increasing
the proportionate share of the outstanding shares of any class or
series of Voting Stock or securities convertible into Voting Stock of
the Corporation or any Subsidiary which is directly or indirectly
owned by such Interested Stockholder or any
43.
<PAGE>
Affiliate or Associate of such Interested Stockholder except as a
result of immaterial changes due to fractional share adjustments, and
(b) is proposed by, or pursuant to any agreement, arrangement or
understanding whether or not in writing with, such Interested
Stockholder or any Affiliate or Associate of such Interested
Stockholder at any time following such Interested Stockholder's Stock
Acquisition Date; or
(vi) any receipt by such Interested Stockholder or any Affiliate
or Associate of such Interested Stockholder of the benefit, directly
or indirectly, except proportionately as a shareholder of the
Corporation, of any loans, advances, guarantees, pledges of other
financial assistance or any tax credits or other tax advantages
provided by or through the Corporation or any Subsidiary; provided,
for purposes of subparagraphs (i), (ii) and (iii) of this subdivision,
another corporation, which has entered into a definitive agreement or
an agreement in principle or has an arrangement or understanding,
whether formal or informal, in writing or not, with the Corporation or
any Subsidiary providing for any of the transactions contemplated in
subparagraphs (i), (ii) and (iii) of this subdivision between the
Corporation or any Subsidiary and the other corporation or any
subsidiary of the other corporation shall not be deemed to be an
Associate of such Interested Stockholder solely by reason of the fact
that, after the date of such definitive agreement or agreement in
principle or arrangement or understanding or Announcement Date or
disclosure of such transaction, whichever is earlier, such Interested
Stockholder becomes, or after such transaction would become, directly
or indirectly the Beneficial Owner of ten percent or more of any class
of Voting Stock of the other corporation.
F. "Control", including the terms "Controlling", "Controlled By" and
"Under Common Control With", means the possession, directly or indirectly,
of the power to direct or cause the direction of the management and
policies of a Person, whether through the ownership of Voting Stock, by
contract or otherwise. A Person's beneficial ownership of ten percent or
more of the voting power of a corporation's outstanding Voting Stock shall
create a presumption that such person has Control of such corporation.
Notwithstanding the foregoing, a presumption of Control shall not apply
where a person
44.
<PAGE>
holds Voting Stock in good faith and not for the purpose of circumventing
this Article Sixteenth, as an agent, bank, broker, nominee, custodian or
trustee for one or more Beneficial Owners who do not individually or as a
group have Control of such corporation.
G. "Exchange Act" means the Act of Congress known as the Securities
Exchange Act of 1934, as the same has been or hereafter may be amended from
time to time.
H. "Interested Stockholder" means any Person, other than the
Corporation or any Subsidiary that: (i) is the Beneficial Owner, directly
or indirectly of ten percent or more of the voting power of the outstanding
Voting Stock of the Corporation or (ii) is an Affiliate or Associate of the
Corporation and at any time within the five-year period immediately prior
to the date in question was the Beneficial Owner, directly or indirectly,
of ten percent or more of the voting power of the then outstanding Voting
Stock of the Corporation; provided, for the purposes of determining whether
a person is an Interested Stockholder, the number of shares of Voting Stock
of the Corporation deemed to be outstanding shall include shares deemed to
be beneficially owned by the Person but shall not include any other
unissued shares of Voting Stock of the Corporation which may be issuable
pursuant to any agreement, arrangement or understanding, or upon exercise
of conversion rights, warrants or options, or otherwise, and provided
further, that a Person shall not be an Interested Stockholder if such
Person (a) inadvertently met the criteria set forth in (i) or (ii) above,
and such Person (b) as soon as practicable, divests itself of a sufficient
amount of Voting Stock of the Corporation so that such Person is no longer
the Beneficial Owner, directly or indirectly, of ten percent or more of the
outstanding Voting Stock of the Corporation, and (c) would not at any time
within the five-year period preceding the Announcement Date with respect to
such Combination Transaction have been an Interested Stockholder but for
such inadvertent acquisition.
I. "Person" means a natural person, company, partnership, foreign or
domestic corporation, trust, unincorporated organization, government or any
other entity or political subdivision, agency or instrumentality of a
government. The term also includes two or more of the foregoing acting as
a partnership, limited partnership, syndicate, joint venture or other
formal or informal group for the purpose of acquiring, holding, voting or
disposing of securities of an issuer.
45.
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J. "Stock" means:
(i) any stock or similar security, any certificate of interest,
any participation in any profit-sharing agreement, any voting trust
certificate, or any certificate of deposit for stock; and
(ii) any security convertible, with or without consideration
into stock, or any warrant, call or other option or privilege of
buying Stock without being bound to do so, or any other security
carrying any right to acquire, subscribe to or purchase stock.
K. "Stock Acquisition Date", with respect to any Person, means the
date such Person first becomes an Interested Stockholder of the
Corporation.
L. "Subsidiary" of the Corporation means any other corporation of
which Voting Stock having a majority of the voting power of the outstanding
Voting Stock of such other corporation, is owned, directly or indirectly,
by the Corporation.
M. "Voting Stock" means shares of capital stock of a corporation
entitled to vote generally in the election of directors.
SEVENTEENTH: Certain Amendments. Notwithstanding the provisions of
------------------
Article Eighteenth, the provisions set forth in this Article Seventeenth and in
Articles Sixth, Seventh, Eighth, Ninth, Tenth, Eleventh, Twelfth, Thirteenth,
Fourteenth, Fifteenth and Sixteenth herein may not be repealed or amended in any
respect and no article imposing cumulative voting in the election of Directors
may be added, nor may any other provision be amended, adopted or repealed which
would have the effect of modifying or permitting circumvention of such
provisions or which would be inconsistent with such provisions, unless such
action is approved by, in addition to any vote specified by law or the Bylaws or
this Certificate of Incorporation (i) the affirmative vote of the holders of
not less than sixty percent (60%) of the voting power of the issued and
outstanding shares of the Corporation entitled to vote for the election of
directors, and (ii) if there is an Interested Shareholder (as defined in Article
Sixth) an Interested Securityholder (as defined in Article Thirteenth) or an
Interested Stockholder (as defined in Article Sixteenth), the affirmative vote
of not less than sixty percent (60%) of the voting power of the issued and
outstanding shares of the Corporation entitled to vote for the
46.
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election of Directors held by shareholders other than the Interested
Shareholder, Interested Securityholder, or Interested Stockholder, or two or
more of the foregoing, as applicable.
EIGHTEENTH: Amendments. Subject to the provisions of Article
----------
Seventeenth, the Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Certificate of
Incorporation, and all rights conferred upon shareholders herein are granted
subject to this reservation.
NINETEENTH: Registered Agent. The registered agent for the Corporation
----------------
shall be Edgar C. Gerwig, having a business address of Mechanics Savings Bank,
100 Pearl Street, Hartford, Connecticut 06103 and having a residence of 19
Chelsea Lane, West Hartford, Connecticut 06119.
The undersigned incorporator hereby declares, under the penalties of false
statement, that the statements made in the foregoing Certificate are true.
Dated at Hartford, Connecticut, this 20th day of November, 1997.
MECHANICS SAVINGS BANK
By: /s/ Edgar C. Gerwig
-------------------
Edgar C. Gerwig
Chairman, President and Chief
Executive Officer
I, EDGAR C. GERWIG, hereby consent to my appointment as the registered
agent of the Corporation and agree serve as such until duly removed or replaced.
/s/ Edgar C. Gerwig
-----------------------------------------
Edgar C. Gerwig
Registered Agent
47.
<PAGE>
EXHIBIT 3(ii)
BY-LAWS
OF
MECH FINANCIAL, INC.
Effective November 25, 1997
48.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
ARTICLE I - Offices...................................................... 1
Section 1. Location............................................. 1
ARTICLE II - Shareholders' Meetings...................................... 1
Section 1. Place of Meetings.................................... 1
Section 2. Annual Meeting....................................... 1
Section 3. Special Meetings..................................... 2
Section 4. Notice of Meetings................................... 2
Section 5. Quorum............................................... 2
Section 6. Adjournment of Meetings.............................. 3
Section 7. Voting Requirements.................................. 3
Section 8. Record Date.......................................... 3
Section 9. Proxies.............................................. 3
Section 10. Committee on Proxies................................. 4
Section 11. Presiding Officer.................................... 4
Section 12. Number of Votes for Each Shareholder................. 4
ARTICLE III - Directors.................................................. 4
Section 1. Authority and Term of Office......................... 4
Section 2. Nominations.......................................... 5
Section 3. Vacancies............................................ 6
Section 4. Removal of Directors................................. 6
Section 5. Place of Meetings.................................... 6
Section 6. Regular Meetings..................................... 6
Section 7. Special Meetings..................................... 6
Section 8. Waiver of Notice..................................... 7
Section 9. Action by Directors Without a Meeting................ 7
Section 10. Telephonic Participation in Directors Meetings....... 7
Section 11. Quorum and Voting Requirement........................ 7
Section 12. Voting............................................... 7
Section 13. Committees; Appointment and Authority................ 7
Section 14. Compensation of Directors............................ 8
Section 15. Presiding at Board Meetings.......................... 8
ARTICLE IV - Officers.................................................... 8
Section 1. Election of Officers................................. 8
Section 2. Vacancies............................................ 9
Section 3. Removal.............................................. 9
Section 4. President............................................ 9
Section 5. Vice Presidents...................................... 9
Section 6. Treasurer............................................ 9
Section 7. Secretary............................................ 10
ARTICLE V - Indemnification 10
Section 1. Indemnification...................................... 10
</TABLE>
49.
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<TABLE>
<S> <C>
ARTICLE VI - Stock....................................................... 10
Section 1. Issuance by the Board of Directors................... 10
Section 2. Certificates of Stock................................ 10
Section 3. Transfer of Stock.................................... 11
Section 4. Cancellation of Certificate.......................... 11
Section 5. Lost Certificates.................................... 11
Section 6. Closing of Stock Transfer Book....................... 11
ARTICLE VII - Finance and Dividends...................................... 11
Section 1. Fiscal Year.......................................... 11
Section 2. Dividends............................................ 11
ARTICLE VIII - Amendment of By-laws...................................... 12
</TABLE>
<PAGE>
BYLAWS
of
MECH FINANCIAL, INC.
November 25, 1997
ARTICLE I
Offices
-------
Section 1. Location. The principal office of the Company shall be
--------- --------
located in the City of Hartford, County of Hartford and State of Connecticut,
but the Company may maintain such branch office or offices within or without the
State of Connecticut as authorized by the Board of Directors and any other
regulatory body that might have jurisdiction over the Company.
ARTICLE II
Shareholders' Meetings
----------------------
Section 1. Place of Meetings. Every meeting of the shareholders of the
--------- -----------------
Company shall be held at the principal office of the Company or at such other
place either within or without the State of Connecticut as shall be specified in
the notice of said meeting given as hereinafter provided.
Section 2. Annual Meeting. The annual meeting of the shareholders
--------- --------------
shall be held on such day and at such time and place in the month of April or
such other month of each year as the Board of Directors may determine from time
to time. At such meetings, the shareholders shall elect Directors and transact
such other business as may properly be brought before the meeting. Failure to
hold an annual meeting as herein prescribed shall not affect otherwise valid
corporate acts. In the event of such failure, a substitute annual meeting may
be called in the same manner as a special meeting.
Except for nominations of Directors as provided in Article III, Section 2
of these Bylaws, business is properly brought before an annual meeting if it is
(a) specified in the notice of meeting (or any supplement thereto) given by or
at the direction of the Board, (b) otherwise properly brought before the meeting
by or at the direction of the Board, or (c) otherwise properly brought before
the meeting by a shareholder. For business to be properly brought before an
annual meeting by a shareholder, the shareholder must have given timely notice
thereof in writing to the
51.
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Secretary. To be timely, a shareholder's notice must be delivered to or mailed
and received at the principal executive offices of the Company not less than
twenty (20) days nor more than one hundred thirty (130) days prior to the
meeting. A shareholder's notice to the Secretary shall set forth as to each
matter the shareholder proposes to bring before the annual meeting (w) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (x) the name and
address, as they appear on the Company's books, of the shareholder proposing
such business, (y) the class and number of shares of the Company which are
beneficially owned by the shareholder, and (z) any material interest of the
shareholder in such business. The Secretary may also require, in writing and
prior to the meeting, any and all information about the shareholder or the
proposed matter which the Secretary determines in his discretion to be
appropriate using the then current requirements of the Securities Exchange
Commission Rule 14a as a guide. Notwithstanding anything in the Bylaws to the
contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this paragraph. The presiding
officer of an annual meeting shall, if the facts warrant, determine and declare
to the meeting that business was not properly brought before the meeting and in
accordance with the provisions of this paragraph, and if he should so determine,
he shall so declare to the meeting and any such business not properly brought
before the meeting shall not be transacted.
Section 3. Special Meetings. Special meetings of the shareholders
--------- ----------------
shall be called in accordance with the provisions of the Certificate of
Incorporation.
Section 4. Notice of Meetings. Notice of the time and place of all
--------- ------------------
annual and special meetings of shareholders and the purpose thereof shall be
handed or mailed, postage prepaid, by or at the direction of the Secretary, not
less than ten (10) nor more than sixty (60) days before such meeting, to each
shareholder of record and at such address as shall appear on the books of the
Company. Whenever notice is required to be given to any person, a written
waiver of notice signed by the person or persons entitled to such notice,
whether before or after the time stated therein, and filed with the Secretary,
shall be equivalent to the giving of such notice. Any shareholder who attends
any shareholders' meeting without protesting the lack of proper notice, prior to
or at the commencement of the meeting, shall be deemed to have waived such
notice. Failure of any shareholder to receive notice of any meeting shall not
invalidate the meeting.
52.
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Section 5. Quorum. To constitute a quorum for the transaction of business
--------- ------
at any meeting of shareholders, there must be present, in person or by proxy,
the holders of a majority of the issued and outstanding shares of stock of the
Company entitled to vote thereat. The shareholders present at a duly held
meeting at which a quorum was present may continue to transact business
notwithstanding the withdrawal of enough shares to leave less than a quorum.
Section 6. Adjournment of Meetings. The holders of a majority of the
--------- -----------------------
voting power of the shares present, in person or by proxy, and entitled to vote,
whether or not a quorum is present, may adjourn the meeting to a future date as
may be agreed. Notice of such adjournment need not be given to the shareholders
of the new date, time, or place if the new date, time and place is announced at
the meeting before adjournment. Notice need be given, however, if a new record
date for the adjourned meeting is or must be fixed in accordance with
Connecticut law (which presently would be required if the meeting is adjourned
to a date more than 120 days after the date fixed for the original meeting).
Section 7. Voting Requirements. Except as may be otherwise specifically
--------- -------------------
provided in these Bylaws, in the Certificate of Incorporation, or in the
Connecticut Business Corporation Act, Connecticut banking laws, or other
applicable law, the vote requirements provided for in the Connecticut Business
Corporation Act, the Connecticut Banking laws or other applicable law shall be
the vote requirements for an act of the shareholders.
Section 8. Record Date. For the purpose of determining the shareholders
--------- -----------
entitled to notice of or to vote at a meeting of shareholders, or entitled to
receive a payment of any dividend, the Board of Directors may set a record date
which shall not be a date earlier than the date on which such action is taken by
the Board of Directors, nor more than seventy (70) nor less than ten (10) days
before the particular event requiring such determination is to occur. If no
record date is fixed by the Board of Directors, the date on which the notice of
the meeting is mailed or if no notice is given, the day preceding the meeting
shall be the record date for determination of shareholders entitled to vote at
such meeting, and the date on which the resolution of the Board of Directors
declaring a dividend is adopted shall be the record date for determination of
shareholders entitled to receive such distribution.
Section 9. Proxies. At all meetings of shareholders, any shareholder
--------- -------
entitled to vote may vote
53.
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either in person or by proxy. All proxies shall be in writing, signed and dated
and shall be filed with the Secretary of the Company before or at the time of
the meeting. No proxy shall be valid for more than eleven (11) months after its
execution, unless otherwise provided therein and in no event shall a proxy be
valid for more than ten (10) years after its execution.
Section 10. Committee on Proxies. The Board, in advance of any
---------- --------------------
shareholders' meeting, shall appoint not less than two inspectors to act as a
Committee on Proxies and as tellers at the meeting or any adjournment thereof.
In case the Board does not so act or any person appointed to be an inspector
fails to appear or act, the vacancy may be filled by appointment made by the
Board in advance of the meeting or at the meeting by the presiding officer. The
inspectors shall receive and take in charge the proxies and ballots, shall
decide all questions concerning the qualification of voters, the validity of
proxies and the acceptance or rejection of votes, and shall count the ballots
cast and report to the presiding officer the result of the vote.
Section 11. Presiding Officer. The President of the Company, or such
---------- -----------------
Director as he may designate, shall preside over all meetings of the
shareholders.
Section 12. Number of Votes for Each Shareholder. Each shareholder
---------- ------------------------------------
shall be entitled to one vote for each share of stock standing in his name on
the books of the Company as of the record date unless, and except to the extent
that, voting rights of shares of any class are increased, limited, or denied
pursuant to the Certificate of Incorporation.
ARTICLE III
Directors
---------
Section 1. Authority and Term of Office. The business, property and
--------- ----------------------------
affairs of the Company shall be managed by, and under the direction of, the
Board of Directors.
The Board of Directors is empowered to engage the Company in any activity
authorized by the Connecticut Business Corporations Act, and by applicable State
and Federal banking laws. The Board of Directors shall have charge of the care
and management of the affairs and property of the Company.
The Board of Directors shall, pursuant to the laws of the State of
Connecticut, as the same may be amended from
54.
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time to time, be empowered to make rules and regulations essential to the
performance of its duties of caring for and managing the property and affairs of
the Company, to elect the officers, to fill the vacancy of any elected officer,
to elect or appoint such assistants and committees as it may deem necessary for
the business of the Company and to prescribe their duties, to determine the
amount and sufficiency of the bonds and to prescribe the duties of all the
officers and employees, to fix the compensation of the Directors, officers, and
employees of the Company, to declare dividends, to prescribe the rate, method of
computation and time of payment of such dividends and to take or to prescribe
the taking of such other action as may be necessary to the performance of its
duties.
Directors need not be residents of Connecticut. At the time of election,
however, each Director must own in his individual capacity one or more shares of
stock of the Company. No Director attaining the age of seventy (70) years shall
be eligible for election or reelection.
Section 2. Nominations. Subject to any rights of the holders of
--------- -----------
Preferred Stock to elect Directors under specified circumstances, only persons
who are nominated in accordance with the procedures set forth in this section
shall be eligible for election as Directors. Nominations of persons for
election to the Board may be made at a meeting of shareholders by or at the
direction of the Board or by any shareholder of the Company who is entitled to
vote for the election of Directors at the meeting and who complies with the
notice procedures set forth in this section. Such nominations by a shareholder
shall be made only if written notice of such shareholder's intent to make such
nomination or nominations has been given to the Secretary, delivered to or
mailed and received at the principal executive offices of the Company not less
than twenty (20) days nor more than one hundred thirty (130) days prior to the
meeting. Such shareholder's notice shall set forth (1) as to each person whom
the shareholder proposes to nominate for election as a Director, (a) the name,
age, business address and residence address of such person, (b) the principal
occupation or employment of such person, (c) the class and number of shares of
the Company which are beneficially owned by such person, and (d) any other
information relating to such person that is required to be disclosed in
solicitations of proxies for election of Directors, or is otherwise required, in
each case pursuant to applicable law and regulations (including without
limitation such person's written consent to being named in the proxy statement
as a nominee and to serving as a Director if elected); and (2) as to the
shareholder giving the notice, (a) the name and address, as
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they appear on the Company's books, of such shareholder, (b) the class and
number of shares of the Company which are beneficially owned by such
shareholder, (c) representation that the shareholder is a holder of record of
stock of the Company entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to nominate the person or persons specified in
the notice, and (d) a description of all arrangements or understandings between
the shareholder 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 the shareholder. At the requirement of the Board, any person nominated
by the Board for election as a Director shall furnish to the Secretary that
information which would be required to be set forth in a shareholder's notice of
nomination which pertains to the nominee. The presiding officer of the meeting
shall refuse to acknowledge the nomination of any person not made in compliance
with this section, and the defective nomination shall be disregarded.
Section 3. Vacancies. Except as otherwise fixed by or pursuant to the
--------- ---------
provisions of law or the Certificate of Incorporation and subject to the rights
of holders of the Preferred Stock, if any, to elect additional Directors under
specified circumstances, vacancies in the Board resulting from any increase in
the number of directors or any vacancies resulting from death, resignation,
disqualification, removal from office or other cause shall be filled by a
majority vote of the Directors then in office even though such remaining
Directors may be less than a quorum of the Board and such majority may be less
than a quorum. Any Director chosen in accordance with the preceding sentence
shall hold office until the next shareholders meeting at which Directors are
elected and until such Director's successor shall have been elected and
qualified.
Section 4. Removal of Directors. Subject to the rights of the holders
--------- --------------------
of the Preferred Stock, if any, to elect Directors under specified
circumstances, any Director may be removed from office at any time for cause in
accordance with the provisions of the Certificate of Incorporation or
applicable provisions of the Connecticut Business Corporation Act. In addition,
the office of any Director who fails to attend six (6) consecutive meetings of
the Board, special or regular, shall become vacant if the majority of the Board
of Directors determines that such absence was without good cause.
Section 5. Place of Meetings. The Board of Directors shall hold its
--------- -----------------
meetings at the principal office of
56.
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the Company or at such place or places within or without the State of
Connecticut as it may determine from time to time.
Section 6. Regular Meetings. Regular meetings of the Board of
--------- ----------------
Directors shall be held at least monthly, at such times and places as shall be
fixed by the Directors, or with such other frequency as the Board of Directors
may determine.
Section 7. Special Meetings. Special meetings of the Board of
--------- ----------------
Directors may be called only by the President, or in his absence or disability,
by a Vice President, or in writing by three (3) of the Directors. Notice
thereof, oral or written, specifying the date, time, place and object of such
meeting, shall be given to each Director at least two (2) days prior to such
meeting. If notice is given by mail, the Secretary shall address notices to the
Directors at their usual place of business or such address as may appear on the
Company's books.
Section 8. Waiver of Notice. Whenever notice is required to be given
--------- ----------------
to any person, a written waiver of notice signed by the person or persons
entitled to such notice, whether before or after the time stated therein, and
filed with the Secretary, shall be equivalent to the giving of such notice. If
any Director present at a meeting of the Board of Directors does not protest the
lack of proper notice prior to or at the commencement of the meeting such
Director shall be deemed to have waived notice of such meeting.
Section 9. Action by Directors Without a Meeting. Any resolution in
--------- -------------------------------------
writing concerning action to be taken by the Company, which resolution is
approved and signed by all of the Directors, severally or collectively, shall
have the same force and effect as if such action were authorized at a meeting of
the Board of Directors duly called and held for that purpose, and such
resolution together with the Directors' written approval thereof, shall be
recorded by the Secretary in the minute book of the Company.
Section 10. Telephonic Participation in Directors Meetings. A Director
---------- ----------------------------------------------
or member of a committee of the Board of Directors may participate in a meeting
of the Board of Directors or of such committee by means of a conference
telephone or similar communications equipment enabling all Directors
participating in the meeting to simultaneously hear one another, and
participation in such a meeting shall constitute presence in person at such
meeting.
Section 11. Quorum and Voting Requirement. A
---------- -----------------------------
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majority of the directors shall constitute a quorum for the transaction of
business at all meetings of the Board of Directors. The act of a majority of the
Directors present at a meeting at which a quorum is present shall be the act of
the Board, unless a higher percentage vote is required by law, the Certificate
of Incorporation, or these Bylaws.
Section 12. Voting. At meetings of the Board of Directors, each
---------- ------
Director shall have one vote.
Section 13. Committees; Appointment and Authority. The Board of
---------- -------------------------------------
Directors, by resolution adopted by the affirmative vote of a majority of the
directors, may designate two or more Directors, as set forth below in this
Section 13, to constitute committees, which committees shall have and may
exercise all such authority of the Board as shall be provided in such resolution
and may be permitted by law.
The Board of Directors, by resolution adopted by the affirmative vote of a
majority of the Directors, shall designate three or more Directors to constitute
an Audit Committee. At least one member of the Audit Committee shall be
"independent", as that term is defined in Connecticut General Statutes Section
33-753(c) (or any similar, successor provision), and all of whom shall be
"independent of management" as that term is used in 12 C.F.R. Section 363.5 (or
any similar, successor provision). The Audit Committee shall at least annually
review, evaluate and advise the Board of Directors with respect to the
engagement of certified public accountants to audit thoroughly the books,
records, accounts, and affairs of the Company, and also make recommendations
concerning operating procedures.
Directors may be removed from committee memberships by resolution adopted
by the affirmative vote of a majority of the Directors. Vacancies on any
committee shall be filled by the Board of Directors at any regular or special
meeting. All committees shall perform such duties as may be assigned to them
and shall report to the Board of Directors at such time and in such manner as
the Board shall direct. A majority of any committee shall constitute a quorum.
If the Board of Directors does not designate a Chairman of the committee, the
committee shall elect its own Chairman.
Section 14. Compensation of Directors. The Board of Directors shall
---------- -------------------------
have authority to fix the compensation for Directors, including reasonable
allowance for expenses actually incurred in connection with their duties.
58.
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Section 15. Presiding at Board Meetings. The President of the Company
---------- ---------------------------
shall preside at all Board meetings. In the absence of the President, the
remaining directors shall elect one of their members to preside at that meeting.
ARTICLE IV
Officers
--------
Section 1. Election of Officers. At the next regular meeting of the
--------- --------------------
Board of Directors, following the annual meeting of the shareholders, or at
another time as determined by the Board, the Board of Directors shall elect a
President, one or more Vice Presidents (who may be designated "Executive,"
"Senior," or other to distinguish them from other Vice Presidents), a Secretary,
a Treasurer and shall designate a Chief Executive Officer for the ensuing year.
The Board may, in its discretion, from time to time, appoint such other
officers and assistants as it shall deem necessary who shall have such authority
and such designation and shall perform such duties as the Board of Directors or
the President from time to time prescribe.
The same person may be elected or appointed to serve simultaneously in more
than one office.
The officers need not be shareholders, and need not be residents of
Connecticut. The duties of the officers of the Company shall be such as are
imposed by these Bylaws and from time to time prescribed by the Board of
Directors or the President.
Section 2. Vacancies. Vacancies in any office may be filled at any
--------- ---------
regular or special meeting of the Board of Directors.
Section 3. Removal. Any officer may be removed, without cause, from
--------- -------
office by the President or by the affirmative vote of a majority of the whole
Board of Directors at any regular or special meeting, or as may otherwise be
provided in any agreement between the Company and the officer. Any officer
below the level of Vice President may be removed from office in the discretion
and at the discretion of the President unless such officer's duties require that
he report directly to the Board.
Section 4. President. The President shall have the general charge,
--------- ---------
supervision, and control of the business and affairs of the Company subject to
the direction of the Board
59.
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of Directors. The President shall have such other powers and perform such other
duties as are generally incident to the office of President and as may be
assigned to the President by the Board of Directors. The President shall be an
ex-officio member of all committees of the Board, except the Audit Committee.
Section 5. Vice Presidents. The Vice Presidents shall perform such
--------- ---------------
executive and administrative duties as from time-to-time may be assigned to them
by the President. In the absence of the President, the Vice Presidents
(Executive Senior, if applicable), in the order of their ranking in the
Company's management hierarchy, shall perform the duties of the President.
Section 6. Treasurer. The Treasurer shall be responsible for the
--------- ---------
custody and safekeeping of all of the assets of the Company and shall perform
all acts incident to the position of Treasurer and shall submit such reports and
statements as may be required by law or by the President and perform such other
duties as are assigned to the Treasurer from time-to-time by the Board of
Directors or the President.
Section 7. Secretary. The Secretary shall perform such executive and
--------- ---------
administrative duties as from time-to-time may be assigned to the Secretary by
the Board of Directors or the President. The Secretary shall have charge of the
seal of the Company and shall have such other powers and perform such other
duties as designated in these Bylaws or as are generally incident to the office
of Secretary. The Secretary shall notify the shareholders and Directors of all
meetings and shall keep the minutes of meetings of the shareholders and of the
Board of Directors.
ARTICLE V
Indemnification
---------------
Section 1. Indemnification. The Company shall indemnify the Directors,
--------- ---------------
officers, employees and agents of the Company to the maximum extent permitted
and/or required by the Certificate of Incorporation or applicable law. Without
otherwise limiting the foregoing, Section 33-770 to 33-778 of the Connecticut
Business Corporation Act, as from time to time amended or superseded, governs
and applies to certain matters of indemnification of Directors, officers,
employees and agents of the Company, and is incorporated herein by reference as
a part of these Bylaws.
60.
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ARTICLE VI
Stock
-----
Section 1. Issuance by the Board of Directors. The Board of Directors
--------- ----------------------------------
may issue at one time, or from time to time, all or a portion of the authorized
but unissued shares of the capital stock of the Company, including treasury
stock, as in their opinion and discretion may be deemed in the Company's best
interests. The Board may accept, in consideration for such shares, money,
promissory notes, other securities and other property of any description
actually received by the Company, provided however, that such consideration
----------------
equals or exceeds in value the par value of said shares, if any, and that the
consideration is legally acceptable for the issue of said shares.
Section 2. Certificates of Stock. Certificates of stock shall be in a
--------- ---------------------
form adopted by the Board of Directors and shall be signed by the President or
the Vice President and by the Secretary or Assistant Secretary, or by facsimile
signature of any or all of the foregoing, and shall carry the corporation seal
of the Company. All certificates shall be consecutively numbered and the name
of the person owning the shares represented thereby and the number of such
shares and the date of issue shall be entered on the Company's books.
Section 3. Transfer of Stock. Shares of stock shall be transferred
--------- -----------------
only on the books of the Company by the holder thereof in person or by his
attorney, upon surrender of the certificate of stock properly endorsed. The
Company shall issue a new certificate to the person entitled thereto for all
shares surrendered.
Section 4. Cancellation of Certificate. All surrendered certificates
--------- ---------------------------
properly endorsed, shall be marked "canceled" with the date of cancellation and
a notation of such cancellation made in the shareholder book.
Section 5. Lost Certificates. The President or any officer designated
--------- -----------------
by the President may, in case any share certificate is lost, stolen, destroyed,
or mutilated, authorize the issuance of a new certificate in lieu thereof, upon
such terms and conditions, including reasonable indemnification of the Company,
as the President or any designated officer shall determine, and notation of the
transaction made in the shareholder book.
Section 6. Closing of Stock Transfer Book. The stock transfer book may
--------- ------------------------------
be closed, if so ordered by the Board, for not exceeding twenty (20) days before
any
61.
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dividend payment date or any meeting of the shareholders.
ARTICLE VII
Finance and Dividends
---------------------
Section 1. Fiscal Year. The fiscal year of the Company shall begin on
--------- -----------
the first day of January in each year.
Section 2. Dividends. Dividends may be voted by the Directors as
--------- ---------
prescribed by applicable law, as from time to time amended. Such dividends will
be payable to shareholders of record at the close of business on such subsequent
days as the Directors may designate and to be paid on a named day not more than
seventy (70) days thereafter, and the Directors may further close the transfer
books during the period from the day as of which the right to such dividend is
determined through the day upon which the same is to be paid. No dividend shall
be paid unless duly voted by the Directors of the Company and the name of each
Director voting for any dividend shall be entered by the Secretary on the
records of the Company. Dividends may be paid in cash, property, or shares of
the Company.
ARTICLE VIII
Amendment of Bylaws
-------------------
These Bylaws may be altered or amended by the Board at any meeting by a
majority vote of the directors on the entire Board or at any meeting of the
shareholders, whether annual or special, by a majority in interest of the stock
entitled to vote, provided however, that in order to amend or repeal or to adopt
--------
any provision inconsistent with Article II, Article III (other than sections 5,
6, 14, the last paragraph of section 1 thereof and the last sentence of section
4 thereof) or this Article VIII, any vote of shareholders shall require (i) the
affirmative vote of the holders of at least sixty percent (60%) of the voting
power of all of the issued and outstanding shares of the Company then entitled
to vote for the election of Directors, and (ii) if there is an "Interested
Shareholder" or an "Interested Securityholder" (as those terms are defined in
the Certificate of Incorporation), or an "interested shareholder" (as described
in Connecticut General Statutes Section 33-840) the affirmative vote of sixty
percent (60%) of the voting powers of all of the issued and outstanding shares
of the Company entitled to vote for the election of Directors held by
shareholders other than the Interested Shareholder, the Interested
Securityholder, or an "interested shareholder" (as described in Connecticut
62.
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General Statutes Section 33-840) any two or more of the foregoing, as
applicable, and any action of Directors shall require the affirmative vote of a
majority of the Directors then in office.
Any notice of a meeting of the shareholders or the Board at which the
Bylaws are to be altered or amended shall include notice of such proposed
action.
CERTIFICATION
These Bylaws were adopted at a meeting of the Directors of the Company on
the 25th day of November, 1997.
/s/ Lael K. Noel
------------------------------
Lael K. Noel
Secretary
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EXHIBIT 10.1
------------
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT (the "Agreement"), made as of June 28,
1996, by and between MECHANICS SAVINGS BANK, a banking corporation organized and
existing by virtue of the laws of the State of Connecticut (the "Bank"), and
Edgar C. Gerwig (the "Executive"). This Agreement will become effective when and
if the Bank completes its currently contemplated conversion from a mutual
savings bank to a capital stock savings bank in accordance with Connecticut law.
WHEREAS, the Executive is currently rendering services to the Bank;
WHEREAS, the Bank considers the performance and dedication of its
management team to be significant for its overall corporate strategy and to be
essential to protecting and enhancing the best interests of the Bank;
WHEREAS, the banking industry is a dynamic one with independent public
institutions, as the Bank will be upon conversion, subject to unexpected changes
in ownership;
WHEREAS, the performance by the Executive of services to the Bank may be
negatively affected by his uncertainty over the possibility of a change in
ownership of the Bank and possible affect thereof on his employment with the
Bank; and
WHEREAS, the Bank wishes to mitigate the fears of the Executive regarding a
potential Bank ownership change, so as to avoid a negative effect on his
performance of services to the Bank, and in that interest the Bank desires to
afford certain protection to the Executive in the event of dismissal or
substantial change in duties or compensation upon the occurrence of certain
events as specified herein.
NOW, THEREFORE, to further the above recited corporate objective, and for
other good and valuable consideration, the receipt and adequacy of which each
party hereby acknowledges, the Bank and the Executive agree as follows:
1. (a) If, at any time while the Executive is a full-time officer of the
Bank, there is a "Change of Control" of the Bank (as hereinafter defined),
the Executive shall be entitled to receive a severance payment (the
"Severance Amount") in consideration of services previously rendered to the
Bank. The Severance Amount shall be made as a lump sum cash payment and
shall be equal to three (3)
64.
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times the greater of the following: (A) the Executive's compensation (the
"Compensation") from the Bank for services rendered for the last full
calendar year immediately preceding the Change of Control, or (B) the
Executive's average annual Compensation with respect to the three (3) most
recent taxable years ending before the date on which the Change of Control
occurs. Compensation as described above shall include the amount of base
salary and bonus, if any, paid to the Executive for services rendered for
the time period in question, including any and all of said amounts as may
have been deferred by the Executive under Bank deferral plans, if any, and
shall include long-term compensation which, by its terms, is accelerated
upon a Change of Control or, if not, shall by this Agreement be so
accelerated and determined as the present value (determined at the discount
rate provided in Section 280G(d)(4) of the Internal Revenue Code of 1986,
as amended, or its successor provision) of any cash or non-cash long-term
incentive compensation (whether in the form of performance units or
otherwise) previously awarded to the Executive but not yet paid, measured
at the time of award with the assumption that the award would be 100%
earned over the performance period. Notwithstanding the provisions hereof,
in no event shall the Severance Amount (taken together with all other
payments, rights, options and benefits payable to the Executive under this
or any other agreement or arrangement which is payable contingent upon a
change in the ownership or effective control of the Bank, as contemplated
by Section 280G) exceed one dollar ($1.00) less than an aggregate amount
which would cause all or any portion of the Severance Amount to be deemed
an "parachute payment" under Section 280G.
(b) Payment under this Section 1 shall be paid in full within ninety (90)
days following the date of the Change of Control and shall not be reduced
by any compensation which the Executive may receive from the Bank or from
other employment with another employer should Executive's employment with
the Bank terminate.
(c) "Change of Control" shall be deemed to have occurred if:
(1) a Person (as defined below) beneficially owns (i.e. directly,
indirectly or acting through one or more other persons owns,
controls or has power to vote) 25% or more of any class of voting
securities of Bank, without the prior approval of at
65.
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least 75% of the members of the Bank's Board of Directors prior
to such Person attaining such percentage interest;
(2) a proxy contest to which the Bank is a party takes place, as a
consequence of which members of the Bank's Board of Directors in
office immediately prior to such event constitute less than 75%
of the Board of Directors after such event;
(3) the Bank shall consummate a merger or consolidation with another
bank, corporation, association or business entity ("Party"), or
the Bank shall sell, exchange, liquidate or transfer all or
substantially all of its respective assets to a Party, except in
any such case in a transaction in which immediately after such
merger or consolidation or such sale, exchange, liquidation or
transfer, the shareholders of the Bank, in their capacities as
such and as a result thereof, shall own at least 50 percent in
voting power of the then outstanding securities of the Bank or of
any surviving corporation or business entity pursuant to any such
merger (or of its parent), the consolidated corporation or
business entity in any such consolidation, or of the Party to
which such sale, liquidation, exchange or transfer of assets is
made; or
(4) the Board of Directors of Bank otherwise determines that a Person
directly or indirectly exercises a controlling influence over the
management or policies of Bank.
A "Change of Control" shall be deemed not to have occurred if (A) such
event is mandated or directed by a regulatory body having jurisdiction over
the Bank's operations; or (B) it occurs pursuant to the terms of a plan for
the acquisition of the capital stock of the Bank by a newly formed bank
holding company if in the consummation of such plan the shareholders of
Bank will receive, pro rata, all of the common stock of such bank holding
company; unless, in such transaction, a Person satisfies sub-paragraph (1),
(2) or (4) above.
66.
<PAGE>
A "Person" shall include a natural person, corporation, or other
entity. When two or more persons act as a partnership, limited partnership,
syndicate, or other group for the purpose of acquiring, holding or
disposing of Bank capital stock, such partnership, syndicate or group shall
be considered a Person. Beneficial ownership shall be determined under the
then current provisions of Rule 13d-3 of the Securities Exchange Act of
1934, as amended, Reg. Section 240.13d-3, or their successor provision(s).
The filing of a Form F-11 or F-11A by a Person shall not in and of itself
be deemed a Change of Control.
(d) If, after a Change of Control of the Bank, the Executive incurs any
fees and expenses of counsel to enforce this Agreement, the Bank agrees to
pay such fees and expenses to the Executive. The Executive's choice of
counsel and his decision to retain counsel shall be in his discretion,
provided any such fees and expenses must be reasonable.
(e) Notwithstanding any other provision of this Agreement or of any other
agreement, understanding or compensation plan, the Bank shall not be
obligated to pay any amounts the payment of which violate restrictions
imposed, or which may in the future be imposed, on such payments by the
Bank pursuant to Section 18(k)(1) of the Federal Deposit Insurance Act, or
any regulations or orders which are or may be promulgated thereunder; nor
shall any payments be made which would constitute an "unsafe or unsound
banking practice" pursuant to 12 U.S.C. Section 1818(b).
(f) It is expressly understood and agreed that payment of the Severance
Amount may not include amounts which are deemed to be "excess parachute
payments" under Section 280G of the Internal Revenue Code of 1986, as
amended. The calculation of the maximum Severance Amount shall be
performed by the Bank's independent auditing firm at the time of Change of
Control, or such other qualified party in the Bank's discretion; provided
that , if the maximum Severance Amount so determined is later challenged
successfully by Executive, by court decision or negotiation with the Bank,
the Bank shall be additionally liable for all costs and expenses incurred
by Executive in that challenge, including reasonable attorney fees.
(g) This Agreement shall survive and continue for as long as the Executive
is a full-time officer of the Bank.
2. This Agreement contains the entire agreement between the
67.
<PAGE>
parties with respect to the subject matter herein, and there are no other
representations, warranties, conditions or agreements relating to the subject
matter of this Agreement.
3. This Agreement may not be changed orally but only by an agreement in
writing duly executed on behalf of the party against which enforcement of any
waiver, change, modification, consent or discharge is sought.
4. This Agreement shall be binding upon and inure to the benefit of the Bank
and the Executive and their respective successors, assigns, heirs and legal
representatives. Without otherwise limiting the foregoing, "Bank" as used
herein shall refer to any successor institution whether by merger,
consolidation, acquisition or otherwise.
5. Each of the parties agrees to execute all further instruments and documents
and to take all further action as the other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. If any term or provision of this Agreement is held or deemed to be invalid
or unenforceable, in whole or in part, by a court of competent jurisdiction,
such term or provision shall be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECHANICS SAVINGS BANK
By: /s/ Donald K. Wilson
---------------------------------------
Name: Donald K. Wilson
Title: Chairman, Organization and
Compensation Committee
EXECUTIVE
/s/ Edgar C. Gerwig
----------------------------------
Edgar C. Gerwig
68.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
69.
<PAGE>
EXHIBIT 10.2
------------
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT (the "Agreement"), made as of June 28,
1996, by and between MECHANICS SAVINGS BANK, a banking corporation organized and
existing by virtue of the laws of the State of Connecticut (the "Bank"), and
Thomas M. Wood (the "Executive"). This Agreement will become effective when and
if the Bank completes its currently contemplated conversion from a mutual
savings bank to a capital stock savings bank in accordance with Connecticut law.
WHEREAS, the Executive is currently rendering services to the Bank;
WHEREAS, the Bank considers the performance and dedication of its
management team to be significant for its overall corporate strategy and to be
essential to protecting and enhancing the best interests of the Bank;
WHEREAS, the banking industry is a dynamic one with independent public
institutions, as the Bank will be upon conversion, subject to unexpected changes
in ownership;
WHEREAS, the performance by the Executive of services to the Bank may be
negatively affected by his uncertainty over the possibility of a change in
ownership of the Bank and possible affect thereof on his employment with the
Bank; and
WHEREAS, the Bank wishes to mitigate the fears of the Executive regarding a
potential Bank ownership change, so as to avoid a negative effect on his
performance of services to the Bank, and in that interest the Bank desires to
afford certain protection to the Executive in the event of dismissal or
substantial change in duties or compensation upon the occurrence of certain
events as specified herein.
NOW, THEREFORE, to further the above recited corporate objective, and for
other good and valuable consideration, the receipt and adequacy of which each
party hereby acknowledges, the Bank and the Executive agree as follows:
1. (a) If, at any time while the Executive is a full-time officer of the
Bank, there is a "Change of Control" of the Bank (as hereinafter defined),
the Executive shall be entitled to receive a severance payment (the
"Severance Amount") in consideration of services previously rendered to the
Bank. The Severance Amount shall be made as a
70.
<PAGE>
lump sum cash payment and shall be equal to three (3) times the greater of
the following: (A) the Executive's compensation (the "Compensation") from
the Bank for services rendered for the last full calendar year immediately
preceding the Change of Control, or (B) the Executive's average annual
Compensation with respect to the three (3) most recent taxable years
ending before the date on which the Change of Control occurs. Compensation
as described above shall include the amount of base salary and bonus, if
any, paid to the Executive for services rendered for the time period in
question, including any and all of said amounts as may have been deferred
by the Executive under Bank deferral plans, if any, and shall include long-
term compensation which, by its terms, is accelerated upon a Change of
Control or, if not, shall by this Agreement be so accelerated and
determined as the present value (determined at the discount rate provided
in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended, or
its successor provision) of any cash or non-cash long-term incentive
compensation (whether in the form of performance units or otherwise)
previously awarded to the Executive but not yet paid, measured at the time
of award with the assumption that the award would be 100% earned over the
performance period. Notwithstanding the provisions hereof, in no event
shall the Severance Amount (taken together with all other payments, rights,
options and benefits payable to the Executive under this or any other
agreement or arrangement which is payable contingent upon a change in the
ownership or effective control of the Bank, as contemplated by Section
280G) exceed one dollar ($1.00) less than an aggregate amount which would
cause all or any portion of the Severance Amount to be deemed an "parachute
payment" under Section 280G.
(b) Payment under this Section 1 shall be paid in full within ninety (90)
days following the date of the Change of Control and shall not be reduced
by any compensation which the Executive may receive from the Bank or from
other employment with another employer should Executive's employment with
the Bank terminate.
(c) "Change of Control" shall be deemed to have occurred if:
(1) a Person (as defined below) beneficially owns (i.e. directly,
indirectly or acting through one or more other persons owns,
controls or has power to vote) 25% or more of any class of voting
securities of
71.
<PAGE>
Bank, without the prior approval of at least 75% of the members
of the Bank's Board of Directors prior to such Person attaining
such percentage interest;
(2) a proxy contest to which the Bank is a party takes place, as a
consequence of which members of the Bank's Board of Directors in
office immediately prior to such event constitute less than 75%
of the Board of Directors after such event;
(3) the Bank shall consummate a merger or consolidation with another
bank, corporation, association or business entity ("Party"), or
the Bank shall sell, exchange, liquidate or transfer all or
substantially all of its respective assets to a Party, except in
any such case in a transaction in which immediately after such
merger or consolidation or such sale, exchange, liquidation or
transfer, the shareholders of the Bank, in their capacities as
such and as a result thereof, shall own at least 50 percent in
voting power of the then outstanding securities of the Bank or of
any surviving corporation or business entity pursuant to any such
merger (or of its parent), the consolidated corporation or
business entity in any such consolidation, or of the Party to
which such sale, liquidation, exchange or transfer of assets is
made; or
(4) the Board of Directors of Bank otherwise determines that a Person
directly or indirectly exercises a controlling influence over the
management or policies of Bank.
A "Change of Control" shall be deemed not to have occurred if (A) such
event is mandated or directed by a regulatory body having jurisdiction over
the Bank's operations; or (B) it occurs pursuant to the terms of a plan for
the acquisition of the capital stock of the Bank by a newly formed bank
holding company if in the consummation of such plan the shareholders of
Bank will receive, pro rata, all of the common stock of such bank holding
company; unless, in such transaction, a Person
72.
<PAGE>
satisfies sub-paragraph (1), (2) or (4) above.
A "Person" shall include a natural person, corporation, or other
entity. When two or more persons act as a partnership, limited
partnership, syndicate, or other group for the purpose of acquiring,
holding or disposing of Bank capital stock, such partnership, syndicate or
group shall be considered a Person. Beneficial ownership shall be
determined under the then current provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, Reg. Section 240.13d-3, or
their successor provision(s). The filing of a Form F-11 or F-11A by a
Person shall not in and of itself be deemed a Change of Control.
(d) If, after a Change of Control of the Bank, the Executive incurs any
fees and expenses of counsel to enforce this Agreement, the Bank agrees to
pay such fees and expenses to the Executive. The Executive's choice of
counsel and his decision to retain counsel shall be in his discretion,
provided any such fees and expenses must be reasonable.
(e) Notwithstanding any other provision of this Agreement or of any other
agreement, understanding or compensation plan, the Bank shall not be
obligated to pay any amounts the payment of which violate restrictions
imposed, or which may in the future be imposed, on such payments by the
Bank pursuant to Section 18(k)(1) of the Federal Deposit Insurance Act, or
any regulations or orders which are or may be promulgated thereunder; nor
shall any payments be made which would constitute an "unsafe or unsound
banking practice" pursuant to 12 U.S.C. Section 1818(b).
(f) It is expressly understood and agreed that payment of the Severance
Amount may not include amounts which are deemed to be "excess parachute
payments" under Section 280G of the Internal Revenue Code of 1986, as
amended. The calculation of the maximum Severance Amount shall be
performed by the Bank's independent auditing firm at the time of Change of
Control, or such other qualified party in the Bank's discretion; provided
that , if the maximum Severance Amount so determined is later challenged
successfully by Executive, by court decision or negotiation with the Bank,
the Bank shall be additionally liable for all costs and expenses incurred
by Executive in that challenge, including reasonable attorney fees.
(g) This Agreement shall survive and continue for as long as the Executive
is a full-time officer of the Bank.
73.
<PAGE>
2. This Agreement contains the entire agreement between the parties with
respect to the subject matter herein, and there are no other representations,
warranties, conditions or agreements relating to the subject matter of this
Agreement.
3. This Agreement may not be changed orally but only by an agreement in
writing duly executed on behalf of the party against which enforcement of any
waiver, change, modification, consent or discharge is sought.
4. This Agreement shall be binding upon and inure to the benefit of the Bank
and the Executive and their respective successors, assigns, heirs and legal
representatives. Without otherwise limiting the foregoing, "Bank" as used
herein shall refer to any successor institution whether by merger,
consolidation, acquisition or otherwise.
5. Each of the parties agrees to execute all further instruments and documents
and to take all further action as the other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. If any term or provision of this Agreement is held or deemed to be invalid
or unenforceable, in whole or in part, by a court of competent jurisdiction,
such term or provision shall be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECHANICS SAVINGS BANK
By: /s/ Donald K. Wilson
------------------------------------------
Name: Donald K. Wilson
Title: Chairman, Organization and
Compensation Committee
EXECUTIVE
74.
<PAGE>
/s/ Thomas M. Wood
----------------------------------
Thomas M. Wood
75.
<PAGE>
EXHIBIT 10.3
-------------
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT (the "Agreement"), made as of June 28,
1996, by and between MECHANICS SAVINGS BANK, a banking corporation organized and
existing by virtue of the laws of the State of Connecticut (the "Bank"), and
Richard W. Stout, Jr. (the "Executive"). This Agreement will become effective
when and if the Bank completes its currently contemplated conversion from a
mutual savings bank to a capital stock savings bank in accordance with
Connecticut law.
WHEREAS, the Executive is currently rendering services to the Bank;
WHEREAS, the Bank considers the performance and dedication of its
management team to be significant for its overall corporate strategy and to be
essential to protecting and enhancing the best interests of the Bank;
WHEREAS, the banking industry is a dynamic one with independent public
institutions, as the Bank will be upon conversion, subject to unexpected changes
in ownership;
WHEREAS, the performance by the Executive of services to the Bank may be
negatively affected by his uncertainty over the possibility of a change in
ownership of the Bank and possible affect thereof on his employment with the
Bank; and
WHEREAS, the Bank wishes to mitigate the fears of the Executive regarding a
potential Bank ownership change, so as to avoid a negative effect on his
performance of services to the Bank, and in that interest the Bank desires to
afford certain protection to the Executive in the event of dismissal or
substantial change in duties or compensation upon the occurrence of certain
events as specified herein.
NOW, THEREFORE, to further the above recited corporate objective, and for
other good and valuable consideration, the receipt and adequacy of which each
party hereby acknowledges, the Bank and the Executive agree as follows:
1. (a) If, at any time while the Executive is a full-time officer of the
Bank, there is a "Change of Control" of the Bank (as hereinafter defined),
the Executive shall be entitled to receive a severance payment (the
"Severance Amount") in consideration of services previously rendered to the
Bank. The Severance Amount shall be made as a
76.
<PAGE>
lump sum cash payment and shall be equal to three (3) times the greater of
the following: (A) the Executive's compensation (the "Compensation") from
the Bank for services rendered for the last full calendar year immediately
preceding the Change of Control, or (B) the Executive's average annual
Compensation with respect to the three (3) most recent taxable years ending
before the date on which the Change of Control occurs. Compensation as
described above shall include the amount of base salary and bonus, if any,
paid to the Executive for services rendered for the time period in
question, including any and all of said amounts as may have been deferred
by the Executive under Bank deferral plans, if any, and shall include long-
term compensation which, by its terms, is accelerated upon a Change of
Control or, if not, shall by this Agreement be so accelerated and
determined as the present value (determined at the discount rate provided
in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended, or
its successor provision) of any cash or non-cash long-term incentive
compensation (whether in the form of performance units or otherwise)
previously awarded to the Executive but not yet paid, measured at the time
of award with the assumption that the award would be 100% earned over the
performance period. Notwithstanding the provisions hereof, in no event
shall the Severance Amount (taken together with all other payments, rights,
options and benefits payable to the Executive under this or any other
agreement or arrangement which is payable contingent upon a change in the
ownership or effective control of the Bank, as contemplated by Section
280G) exceed one dollar ($1.00) less than an aggregate amount which would
cause all or any portion of the Severance Amount to be deemed an "parachute
payment" under Section 280G.
(b) Payment under this Section 1 shall be paid in full within ninety (90)
days following the date of the Change of Control and shall not be reduced
by any compensation which the Executive may receive from the Bank or from
other employment with another employer should Executive's employment with
the Bank terminate.
(c) "Change of Control" shall be deemed to have occurred if:
(1) a Person (as defined below) beneficially owns (i.e. directly,
indirectly or acting through one or more other persons owns,
controls or has power to vote) 25% or more of any class of
voting securities of
77.
<PAGE>
Bank, without the prior approval of at least 75% of the members
of the Bank's Board of Directors prior to such Person attaining
such percentage interest;
(2) a proxy contest to which the Bank is a party takes place, as a
consequence of which members of the Bank's Board of Directors
in office immediately prior to such event constitute less than
75% of the Board of Directors after such event;
(3) the Bank shall consummate a merger or consolidation with
another bank, corporation, association or business entity
("Party"), or the Bank shall sell, exchange, liquidate or
transfer all or substantially all of its respective assets to a
Party, except in any such case in a transaction in which
immediately after such merger or consolidation or such sale,
exchange, liquidation or transfer, the shareholders of the
Bank, in their capacities as such and as a result thereof,
shall own at least 50 percent in voting power of the then
outstanding securities of the Bank or of any surviving
corporation or business entity pursuant to any such merger (or
of its parent), the consolidated corporation or business entity
in any such consolidation, or of the Party to which such sale,
liquidation, exchange or transfer of assets is made; or
(4) the Board of Directors of Bank otherwise determines that a
Person directly or indirectly exercises a controlling influence
over the management or policies of Bank.
A "Change of Control" shall be deemed not to have occurred if (A)
such event is mandated or directed by a regulatory body having jurisdiction
over the Bank's operations; or (B) it occurs pursuant to the terms of a
plan for the acquisition of the capital stock of the Bank by a newly formed
bank holding company if in the consummation of such plan the shareholders
of Bank will receive, pro rata, all of the common stock of such bank
holding company; unless, in such transaction, a Person
78.
<PAGE>
satisfies sub-paragraph (1), (2) or (4) above.
A "Person" shall include a natural person, corporation, or other
entity. When two or more persons act as a partnership, limited partnership,
syndicate, or other group for the purpose of acquiring, holding or
disposing of Bank capital stock, such partnership, syndicate or group shall
be considered a Person. Beneficial ownership shall be determined under the
then current provisions of Rule 13d-3 of the Securities Exchange Act of
1934, as amended, Reg. Section 240.13d-3, or their successor provision(s).
The filing of a Form F-11 or F-11A by a Person shall not in and of itself
be deemed a Change of Control.
(d) If, after a Change of Control of the Bank, the Executive incurs any
fees and expenses of counsel to enforce this Agreement, the Bank agrees to
pay such fees and expenses to the Executive. The Executive's choice of
counsel and his decision to retain counsel shall be in his discretion,
provided any such fees and expenses must be reasonable.
(e) Notwithstanding any other provision of this Agreement or of any other
agreement, understanding or compensation plan, the Bank shall not be
obligated to pay any amounts the payment of which violate restrictions
imposed, or which may in the future be imposed, on such payments by the
Bank pursuant to Section 18(k)(1) of the Federal Deposit Insurance Act, or
any regulations or orders which are or may be promulgated thereunder; nor
shall any payments be made which would constitute an "unsafe or unsound
banking practice" pursuant to 12 U.S.C. Section 1818(b).
(f) It is expressly understood and agreed that payment of the Severance
Amount may not include amounts which are deemed to be "excess parachute
payments" under Section 280G of the Internal Revenue Code of 1986, as
amended. The calculation of the maximum Severance Amount shall be performed
by the Bank's independent auditing firm at the time of Change of Control,
or such other qualified party in the Bank's discretion; provided that , if
the maximum Severance Amount so determined is later challenged successfully
by Executive, by court decision or negotiation with the Bank, the Bank
shall be additionally liable for all costs and expenses incurred by
Executive in that challenge, including reasonable attorney fees.
(g) This Agreement shall survive and continue for as long as the
Executive is a full-time officer of the Bank.
79.
<PAGE>
2. This Agreement contains the entire agreement between the parties with
respect to the subject matter herein, and there are no other representations,
warranties, conditions or agreements relating to the subject matter of this
Agreement.
3. This Agreement may not be changed orally but only by an agreement in
writing duly executed on behalf of the party against which enforcement of any
waiver, change, modification, consent or discharge is sought.
4. This Agreement shall be binding upon and inure to the benefit of the Bank
and the Executive and their respective successors, assigns, heirs and legal
representatives. Without otherwise limiting the foregoing, "Bank" as used herein
shall refer to any successor institution whether by merger, consolidation,
acquisition or otherwise.
5. Each of the parties agrees to execute all further instruments and documents
and to take all further action as the other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. If any term or provision of this Agreement is held or deemed to be invalid
or unenforceable, in whole or in part, by a court of competent jurisdiction,
such term or provision shall be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement.
80.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECHANICS SAVINGS BANK
By /s/ Donald K. Wilson
---------------------------------------
Name: Donald K. Wilson
Title: Chairman, Organization and
Compensation Committee
EXECUTIVE
/s/ Richard W. Stout, Jr.
-----------------------------------
Richard W. Stout, Jr.
81.
<PAGE>
EXHIBIT 10.4
------------
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT (the "Agreement"), made as of June 28,
1996, by and between MECHANICS SAVINGS BANK, a banking corporation organized and
existing by virtue of the laws of the State of Connecticut (the "Bank"), and
Eugene B. Marinelli (the "Executive"). This Agreement will become effective when
and if the Bank completes its currently contemplated conversion from a mutual
savings bank to a capital stock savings bank in accordance with Connecticut law.
WHEREAS, the Executive is currently rendering services to the Bank;
WHEREAS, the Bank considers the performance and dedication of its
management team to be significant for its overall corporate strategy and to be
essential to protecting and enhancing the best interests of the Bank;
WHEREAS, the banking industry is a dynamic one with independent public
institutions, as the Bank will be upon conversion, subject to unexpected changes
in ownership;
WHEREAS, the performance by the Executive of services to the Bank may be
negatively affected by his uncertainty over the possibility of a change in
ownership of the Bank and possible affect thereof on his employment with the
Bank; and
WHEREAS, the Bank wishes to mitigate the fears of the Executive regarding a
potential Bank ownership change, so as to avoid a negative effect on his
performance of services to the Bank, and in that interest the Bank desires to
afford certain protection to the Executive in the event of dismissal or
substantial change in duties or compensation upon the occurrence of certain
events as specified herein.
NOW, THEREFORE, to further the above recited corporate objective, and for
other good and valuable consideration, the receipt and adequacy of which each
party hereby acknowledges, the Bank and the Executive agree as follows:
1. (a) If, at any time while the Executive is a full-time officer of the
Bank, there is a "Change of Control" of the Bank (as hereinafter defined),
the Executive shall be entitled to receive a severance payment (the
"Severance Amount") in consideration of services previously rendered to the
Bank. The Severance Amount shall be made as a
82.
<PAGE>
lump sum cash payment and shall be equal to three (3) times the greater of
the following: (A) the Executive's compensation (the "Compensation") from
the Bank for services rendered for the last full calendar year immediately
preceding the Change of Control, or (B) the Executive's average annual
Compensation with respect to the three (3) most recent taxable years ending
before the date on which the Change of Control occurs. Compensation as
described above shall include the amount of base salary and bonus, if any,
paid to the Executive for services rendered for the time period in
question, including any and all of said amounts as may have been deferred
by the Executive under Bank deferral plans, if any, and shall include long-
term compensation which, by its terms, is accelerated upon a Change of
Control or, if not, shall by this Agreement be so accelerated and
determined as the present value (determined at the discount rate provided
in Section 280G(d)(4) of the Internal Revenue Code of 1986, as amended, or
its successor provision) of any cash or non-cash long-term incentive
compensation (whether in the form of performance units or otherwise)
previously awarded to the Executive but not yet paid, measured at the time
of award with the assumption that the award would be 100% earned over the
performance period. Notwithstanding the provisions hereof, in no event
shall the Severance Amount (taken together with all other payments, rights,
options and benefits payable to the Executive under this or any other
agreement or arrangement which is payable contingent upon a change in the
ownership or effective control of the Bank, as contemplated by Section
280G) exceed one dollar ($1.00) less than an aggregate amount which would
cause all or any portion of the Severance Amount to be deemed an "parachute
payment" under Section 280G.
(b) Payment under this Section 1 shall be paid in full within ninety (90)
days following the date of the Change of Control and shall not be reduced
by any compensation which the Executive may receive from the Bank or from
other employment with another employer should Executive's employment with
the Bank terminate.
(c) "Change of Control" shall be deemed to have occurred if:
(1) a Person (as defined below) beneficially owns (i.e. directly,
indirectly or acting through one or more other persons owns,
controls or has power to vote) 25% or more of any class of
voting securities of
83.
<PAGE>
Bank, without the prior approval of at least 75% of the members
of the Bank's Board of Directors prior to such Person attaining
such percentage interest;
(2) a proxy contest to which the Bank is a party takes place, as a
consequence of which members of the Bank's Board of Directors
in office immediately prior to such event constitute less than
75% of the Board of Directors after such event;
(3) the Bank shall consummate a merger or consolidation with
another bank, corporation, association or business entity
("Party"), or the Bank shall sell, exchange, liquidate or
transfer all or substantially all of its respective assets to a
Party, except in any such case in a transaction in which
immediately after such merger or consolidation or such sale,
exchange, liquidation or transfer, the shareholders of the
Bank, in their capacities as such and as a result thereof,
shall own at least 50 percent in voting power of the then
outstanding securities of the Bank or of any surviving
corporation or business entity pursuant to any such merger (or
of its parent), the consolidated corporation or business entity
in any such consolidation, or of the Party to which such sale,
liquidation, exchange or transfer of assets is made; or
(4) the Board of Directors of Bank otherwise determines that a
Person directly or indirectly exercises a controlling influence
over the management or policies of Bank.
A "Change of Control" shall be deemed not to have occurred if (A)
such event is mandated or directed by a regulatory body having jurisdiction
over the Bank's operations; or (B) it occurs pursuant to the terms of a
plan for the acquisition of the capital stock of the Bank by a newly formed
bank holding company if in the consummation of such plan the shareholders
of Bank will receive, pro rata, all of the common stock of such bank
holding company; unless, in such transaction, a Person
84.
<PAGE>
satisfies sub-paragraph (1), (2) or (4) above.
A "Person" shall include a natural person, corporation, or other
entity. When two or more persons act as a partnership, limited partnership,
syndicate, or other group for the purpose of acquiring, holding or
disposing of Bank capital stock, such partnership, syndicate or group shall
be considered a Person. Beneficial ownership shall be determined under the
then current provisions of Rule 13d-3 of the Securities Exchange Act of
1934, as amended, Reg. Section 240.13d-3, or their successor provision(s).
The filing of a Form F-11 or F-11A by a Person shall not in and of itself
be deemed a Change of Control.
(d) If, after a Change of Control of the Bank, the Executive incurs any
fees and expenses of counsel to enforce this Agreement, the Bank agrees to
pay such fees and expenses to the Executive. The Executive's choice of
counsel and his decision to retain counsel shall be in his discretion,
provided any such fees and expenses must be reasonable.
(e) Notwithstanding any other provision of this Agreement or of any other
agreement, understanding or compensation plan, the Bank shall not be
obligated to pay any amounts the payment of which violate restrictions
imposed, or which may in the future be imposed, on such payments by the
Bank pursuant to Section 18(k)(1) of the Federal Deposit Insurance Act, or
any regulations or orders which are or may be promulgated thereunder; nor
shall any payments be made which would constitute an "unsafe or unsound
banking practice" pursuant to 12 U.S.C. Section 1818(b).
(f) It is expressly understood and agreed that payment of the Severance
Amount may not include amounts which are deemed to be "excess parachute
payments" under Section 280G of the Internal Revenue Code of 1986, as
amended. The calculation of the maximum Severance Amount shall be performed
by the Bank's independent auditing firm at the time of Change of Control,
or such other qualified party in the Bank's discretion; provided that , if
the maximum Severance Amount so determined is later challenged successfully
by Executive, by court decision or negotiation with the Bank, the Bank
shall be additionally liable for all costs and expenses incurred by
Executive in that challenge, including reasonable attorney fees.
(g) This Agreement shall survive and continue for as long as the
Executive is a full-time officer of the Bank.
85.
<PAGE>
2. This Agreement contains the entire agreement between the parties with
respect to the subject matter herein, and there are no other representations,
warranties, conditions or agreements relating to the subject matter of this
Agreement.
3. This Agreement may not be changed orally but only by an agreement in
writing duly executed on behalf of the party against which enforcement of any
waiver, change, modification, consent or discharge is sought.
4. This Agreement shall be binding upon and inure to the benefit of the Bank
and the Executive and their respective successors, assigns, heirs and legal
representatives. Without otherwise limiting the foregoing, "Bank" as used herein
shall refer to any successor institution whether by merger, consolidation,
acquisition or otherwise.
5. Each of the parties agrees to execute all further instruments and documents
and to take all further action as the other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. If any term or provision of this Agreement is held or deemed to be invalid
or unenforceable, in whole or in part, by a court of competent jurisdiction,
such term or provision shall be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECHANICS SAVINGS BANK
By /s/ Donald K. Wilson
---------------------------------------
Name: Donald K. Wilson
Title: Chairman, Organization and
Compensation Committee
EXECUTIVE
86.
<PAGE>
/s/ Eugene B. Marinelli
-----------------------------------------
Eugene B. Marinelli
87.
<PAGE>
EXHIBIT 10.5
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT (the "Agreement"), made as of December 30,
1996, by and between MECHANICS SAVINGS BANK, a banking corporation organized and
existing by virtue of the laws of the State of Connecticut (the "Bank"), and
Marcy D. Negro (the "Executive").
WHEREAS, the Executive is currently rendering services to the Bank as its
Senior Vice President;
WHEREAS, the Bank considers the performance and dedication of its
management team to be significant for its overall corporate strategy and to be
essential to protecting and enhancing the best interests of the Bank;
WHEREAS, the banking industry is a dynamic one with independent public
institutions such as the Bank, subject to unexpected changes in ownership;
WHEREAS, the performance by the Executive of services to the Bank may be
negatively affected by her uncertainty over the possibility of a change in
ownership of the Bank and possible affect thereof on her employment with the
Bank; and
WHEREAS, the Bank wishes to mitigate the fears of the Executive regarding a
potential Bank ownership change, so as to avoid a negative effect on her
performance of services to the Bank, and in that interest the Bank desires to
afford certain protection to the Executive in the event of dismissal or
substantial change in duties or compensation upon the occurrence of certain
events as specified herein.
NOW, THEREFORE, to further the above recited corporate objective, and for
other good and valuable consideration, the receipt and adequacy of which each
party hereby acknowledges, the Bank and the Executive agree as follows:
1. (a) If, at any time while the Executive is a full-time officer of the
Bank, there is a "Change of Control" of the Bank (as hereinafter defined),
the Executive shall be entitled to receive a severance payment (the
"Severance Amount") in consideration of services previously rendered to the
Bank. The Severance Amount shall be made as a lump sum cash payment and
shall be equal to three (3) times the greater of the following: (A) the
Executive's
88.
<PAGE>
compensation (the "Compensation") from the Bank for services rendered for
the last full calendar year immediately preceding the Change of Control, or
(B) the Executive's average annual Compensation with respect to the three
(3) most recent taxable years ending before the date on which the Change of
Control occurs. Compensation as described above shall include the amount of
base salary and bonus, if any, paid to the Executive for services rendered
for the time period in question, including any and all of said amounts as
may have been deferred by the Executive under Bank deferral plans, if any,
and shall include long-term compensation which, by its terms, is
accelerated upon a Change of Control or, if not, shall by this Agreement be
so accelerated and determined as the present value (determined at the
discount rate provided in Section 280G(d)(4) of the Internal Revenue Code
of 1986, as amended, or its successor provision) of any cash or non-cash
long-term incentive compensation (whether in the form of performance units
or otherwise) previously awarded to the Executive but not yet paid,
measured at the time of award with the assumption that the award would be
100% earned over the performance period. Notwithstanding the provisions
hereof, in no event shall the Severance Amount (taken together with all
other payments, rights, options and benefits payable to the Executive under
this or any other agreement or arrangement which is payable contingent upon
a change in the ownership or effective control of the Bank, as contemplated
by Section 280G) exceed one dollar ($1.00) less than an aggregate amount
which would cause all or any portion of the Severance Amount to be deemed a
"parachute payment" under Section 280G.
(b) Payment under this Section 1 shall be paid in full within ninety (90)
days following the date of the Change of Control and shall not be reduced
by any compensation which the Executive may receive from the Bank or from
other employment with another employer should Executive's employment with
the Bank terminate.
(c) "Change of Control" shall be deemed to have occurred if:
(1) a Person (as defined below) beneficially owns (i.e. directly,
indirectly or acting through one or more other persons owns,
controls or has power to vote) 25% or more of any class of
voting securities of Bank, without the prior approval of at
least 75% of the members of the Bank's
89.
<PAGE>
Board of Directors prior to such Person attaining such
percentage interest;
(2) a proxy contest to which the Bank is a party takes place, as a
consequence of which members of the Bank's Board of Directors
in office immediately prior to such event constitute less than
75% of the Board of Directors after such event;
(3) the Bank shall consummate a merger or consolidation with
another bank, corporation, association or business entity
("Party"), or the Bank shall sell, exchange, liquidate or
transfer all or substantially all of its respective assets to a
Party, except in any such case in a transaction in which
immediately after such merger or consolidation or such sale,
exchange, liquidation or transfer, the shareholders of the
Bank, in their capacities as such and as a result thereof,
shall own at least 50 percent in voting power of the then
outstanding securities of the Bank or of any surviving
corporation or business entity pursuant to any such merger (or
of its parent), the consolidated corporation or business entity
in any such consolidation, or of the Party to which such sale,
liquidation, exchange or transfer of assets is made; or
(4) the Board of Directors of Bank otherwise determines that a
Person directly or indirectly exercises a controlling influence
over the management or policies of Bank.
A "Change of Control" shall be deemed not to have occurred if (A)
such event is mandated or directed by a regulatory body having jurisdiction
over the Bank's operations; or (B) it occurs pursuant to the terms of a
plan for the acquisition of the capital stock of the Bank by a newly formed
bank holding company if in the consummation of such plan the shareholders
of Bank will receive, pro rata, all of the common stock of such bank
holding company; unless, in such transaction, a Person satisfies sub-
paragraph (1), (2) or (4) above.
90.
<PAGE>
A "Person" shall include a natural person, corporation, or other
entity. When two or more persons act as a partnership, limited partnership,
syndicate, or other group for the purpose of acquiring, holding or
disposing of Bank capital stock, such partnership, syndicate or group shall
be considered a Person. Beneficial ownership shall be determined under the
then current provisions of Rule 13d-3 of the Securities Exchange Act of
1934, as amended, Reg. Section 240.13d-3, or their successor provision(s).
The filing of a Form F-11 or F-11A by a Person shall not in and of itself
be deemed a Change of Control.
(d) If, after a Change of Control of the Bank, the Executive incurs any
fees and expenses of counsel to enforce this Agreement, the Bank agrees to
pay such fees and expenses to the Executive. The Executive's choice of
counsel and her decision to retain counsel shall be in her discretion,
provided any such fees and expenses must be reasonable.
(e) Notwithstanding any other provision of this Agreement or of any other
agreement, understanding or compensation plan, the Bank shall not be
obligated to pay any amounts the payment of which violate restrictions
imposed, or which may in the future be imposed, on such payments by the
Bank pursuant to Section 18(k)(1) of the Federal Deposit Insurance Act, or
any regulations or orders which are or may be promulgated thereunder; nor
shall any payments be made which would constitute an "unsafe or unsound
banking practice" pursuant to 12 U.S.C. Section 1818(b).
(f) It is expressly understood and agreed that payment of the Severance
Amount may not include amounts which are deemed to be "excess parachute
payments" under Section 280G of the Internal Revenue Code of 1986, as
amended. The calculation of the maximum Severance Amount shall be performed
by the Bank's independent auditing firm at the time of Change of Control,
or such other qualified party in the Bank's discretion; provided that , if
the maximum Severance Amount so determined is later challenged successfully
by Executive, by court decision or negotiation with the Bank, the Bank
shall be additionally liable for all costs and expenses incurred by
Executive in that challenge, including reasonable attorney fees.
(g) This Agreement shall survive and continue for as long as the
Executive is a full-time officer of the Bank.
2. This Agreement contains the entire agreement between the
91.
<PAGE>
parties with respect to the subject matter herein, and there are no other
representations, warranties, conditions or agreements relating to the subject
matter of this Agreement.
3. This Agreement may not be changed orally but only by an agreement in
writing duly executed on behalf of the party against which enforcement of any
waiver, change, modification, consent or discharge is sought.
4. This Agreement shall be binding upon and inure to the benefit of the Bank
and the Executive and their respective successors, assigns, heirs and legal
representatives. Without otherwise limiting the foregoing, "Bank" as used herein
shall refer to any successor institution whether by merger, consolidation,
acquisition or otherwise, and/or, except with respect to the definition of
"Change of Control", to any wholly-owned subsidiary of the Bank.
5. Each of the parties agrees to execute all further instruments and documents
and to take all further action as the other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. If any term or provision of this Agreement is held or deemed to be invalid
or unenforceable, in whole or in part, by a court of competent jurisdiction,
such term or provision shall be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECHANICS SAVINGS BANK
By /s/ Donald K. Wilson
---------------------------------------
Name: Donald K. Wilson
Title: Chairman, Organization and
Compensation Committee
92.
<PAGE>
EXECUTIVE
/s/ Marcy D. Negro
-----------------------------------------
Marcy D. Negro
93.
<PAGE>
EXHIBIT 10.6
------------
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT (the "Agreement"), made as of June 28,
1996, by and between MECHANICS SAVINGS BANK, a banking corporation organized and
existing by virtue of the laws of the State of Connecticut (the "Bank"), and
Brian A. Orenstein (the "Executive"). This Agreement will become effective when
and if the Bank completes its currently contemplated conversion from a mutual
savings bank to a capital stock savings bank in accordance with Connecticut law.
WHEREAS, the Executive is currently rendering services to the Bank;
WHEREAS, the Bank considers the performance and dedication of its
management team to be significant for its overall corporate strategy and to be
essential to protecting and enhancing the best interests of the Bank;
WHEREAS, the banking industry is a dynamic one with independent public
institutions, as the Bank will be upon conversion, subject to unexpected changes
in ownership;
WHEREAS, the performance by the Executive of services to the Bank may be
negatively affected by his uncertainty over the possibility of a change in
ownership of the Bank and possible affect thereof on his employment with the
Bank; and
WHEREAS, the Bank wishes to mitigate the fears of the Executive regarding a
potential Bank ownership change, so as to avoid a negative effect on his
performance of services to the Bank, and in that interest the Bank desires to
afford certain protection to the Executive in the event of dismissal or
substantial change in duties or compensation upon the occurrence of certain
events as specified herein.
NOW, THEREFORE, to further the above recited corporate objective, and for
other good and valuable consideration, the receipt and adequacy of which each
party hereby acknowledges, the Bank and the Executive agree as follows:
1. (a) If, at any time while the Executive is a full-time officer of the
Bank, there is a "Change of Control" of the Bank (as hereinafter defined),
the Executive shall be entitled to receive a severance payment (the
"Severance Amount") in consideration of services previously rendered
94.
<PAGE>
to the Bank. The Severance Amount shall be made as a lump sum cash payment
and shall be equal to three (3) times the greater of the following: (A)
the Executive's compensation (the "Compensation") from the Bank for
services rendered for the last full calendar year immediately preceding the
Change of Control, or (B) the Executive's average annual Compensation with
respect to the three (3) most recent taxable years ending before the date
on which the Change of Control occurs. Compensation as described above
shall include the amount of base salary and bonus, if any, paid to the
Executive for services rendered for the time period in question, including
any and all of said amounts as may have been deferred by the Executive
under Bank deferral plans, if any, and shall include long-term compensation
which, by its terms, is accelerated upon a Change of Control or, if not,
shall by this Agreement be so accelerated and determined as the present
value (determined at the discount rate provided in Section 280G(d)(4) of
the Internal Revenue Code of 1986, as amended, or its successor provision)
of any cash or non-cash long-term incentive compensation (whether in the
form of performance units or otherwise) previously awarded to the Executive
but not yet paid, measured at the time of award with the assumption that
the award would be 100% earned over the performance period.
Notwithstanding the provisions hereof, in no event shall the Severance
Amount (taken together with all other payments, rights, options and
benefits payable to the Executive under this or any other agreement or
arrangement which is payable contingent upon a change in the ownership or
effective control of the Bank, as contemplated by Section 280G) exceed one
dollar ($1.00) less than an aggregate amount which would cause all or any
portion of the Severance Amount to be deemed an "parachute payment" under
Section 280G.
(b) Payment under this Section 1 shall be paid in full within ninety (90)
days following the date of the Change of Control and shall not be reduced
by any compensation which the Executive may receive from the Bank or from
other employment with another employer should Executive's employment with
the Bank terminate.
(c) "Change of Control" shall be deemed to have occurred if:
(1) a Person (as defined below) beneficially owns (i.e. directly,
indirectly or acting through one or more other persons owns,
controls or has power to vote) 25% or
95.
<PAGE>
more of any class of voting securities of Bank, without the prior
approval of at least 75% of the members of the Bank's Board of
Directors prior to such Person attaining such percentage
interest;
(2) a proxy contest to which the Bank is a party takes place, as a
consequence of which members of the Bank's Board of Directors in
office immediately prior to such event constitute less than 75%
of the Board of Directors after such event;
(3) the Bank shall consummate a merger or consolidation with another
bank, corporation, association or business entity ("Party"), or
the Bank shall sell, exchange, liquidate or transfer all or
substantially all of its respective assets to a Party, except in
any such case in a transaction in which immediately after such
merger or consolidation or such sale, exchange, liquidation or
transfer, the shareholders of the Bank, in their capacities as
such and as a result thereof, shall own at least 50 percent in
voting power of the then outstanding securities of the Bank or of
any surviving corporation or business entity pursuant to any such
merger (or of its parent), the consolidated corporation or
business entity in any such consolidation, or of the Party to
which such sale, liquidation, exchange or transfer of assets is
made; or
(4) the Board of Directors of Bank otherwise determines that a Person
directly or indirectly exercises a controlling influence over the
management or policies of Bank.
A "Change of Control" shall be deemed not to have occurred if (A) such
event is mandated or directed by a regulatory body having jurisdiction over
the Bank's operations; or (B) it occurs pursuant to the terms of a plan for
the acquisition of the capital stock of the Bank by a newly formed bank
holding company if in the consummation of such plan the shareholders of
Bank will receive, pro rata, all of the common stock of such bank
96.
<PAGE>
holding company; unless, in such transaction, a Person satisfies sub-
paragraph (1), (2) or (4) above.
A "Person" shall include a natural person, corporation, or other
entity. When two or more persons act as a partnership, limited
partnership, syndicate, or other group for the purpose of acquiring,
holding or disposing of Bank capital stock, such partnership, syndicate or
group shall be considered a Person. Beneficial ownership shall be
determined under the then current provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, Reg. Section 240.13d-3, or
their successor provision(s). The filing of a Form F-11 or F-11A by a
Person shall not in and of itself be deemed a Change of Control.
(d) If, after a Change of Control of the Bank, the Executive incurs any
fees and expenses of counsel to enforce this Agreement, the Bank agrees to
pay such fees and expenses to the Executive. The Executive's choice of
counsel and his decision to retain counsel shall be in his discretion,
provided any such fees and expenses must be reasonable.
(e) Notwithstanding any other provision of this Agreement or of any other
agreement, understanding or compensation plan, the Bank shall not be
obligated to pay any amounts the payment of which violate restrictions
imposed, or which may in the future be imposed, on such payments by the
Bank pursuant to Section 18(k)(1) of the Federal Deposit Insurance Act, or
any regulations or orders which are or may be promulgated thereunder; nor
shall any payments be made which would constitute an "unsafe or unsound
banking practice" pursuant to 12 U.S.C. Section 1818(b).
(f) It is expressly understood and agreed that payment of the Severance
Amount may not include amounts which are deemed to be "excess parachute
payments" under Section 280G of the Internal Revenue Code of 1986, as
amended. The calculation of the maximum Severance Amount shall be
performed by the Bank's independent auditing firm at the time of Change of
Control, or such other qualified party in the Bank's discretion; provided
that , if the maximum Severance Amount so determined is later challenged
successfully by Executive, by court decision or negotiation with the Bank,
the Bank shall be additionally liable for all costs and expenses incurred
by Executive in that challenge, including reasonable attorney fees.
(g) This Agreement shall survive and continue for as
97.
<PAGE>
long as the Executive is a full-time officer of the Bank.
2. This Agreement contains the entire agreement between the parties with
respect to the subject matter herein, and there are no other representations,
warranties, conditions or agreements relating to the subject matter of this
Agreement.
3. This Agreement may not be changed orally but only by an agreement in
writing duly executed on behalf of the party against which enforcement of any
waiver, change, modification, consent or discharge is sought.
4. This Agreement shall be binding upon and inure to the benefit of the Bank
and the Executive and their respective successors, assigns, heirs and legal
representatives. Without otherwise limiting the foregoing, "Bank" as used
herein shall refer to any successor institution whether by merger,
consolidation, acquisition or otherwise.
5. Each of the parties agrees to execute all further instruments and documents
and to take all further action as the other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. If any term or provision of this Agreement is held or deemed to be invalid
or unenforceable, in whole or in part, by a court of competent jurisdiction,
such term or provision shall be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement.
98.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECHANICS SAVINGS BANK
By /s/ Donald K. Wilson
--------------------------------------
Name: Donald K. Wilson
Title: Chairman, Organization and
Compensation Committee
EXECUTIVE
/s/ Brian A. Orenstein
----------------------------------------
Brian A. Orenstein
99.
<PAGE>
EXHIBIT 10.7
------------
CHANGE IN CONTROL AGREEMENT
THIS CHANGE IN CONTROL AGREEMENT (the "Agreement"), made as of June 28,
1996, by and between MECHANICS SAVINGS BANK, a banking corporation organized and
existing by virtue of the laws of the State of Connecticut (the "Bank"), and
Gary J. Roman (the "Executive"). This Agreement will become effective when and
if the Bank completes its currently contemplated conversion from a mutual
savings bank to a capital stock savings bank in accordance with Connecticut law.
WHEREAS, the Executive is currently rendering services to the Bank;
WHEREAS, the Bank considers the performance and dedication of its
management team to be significant for its overall corporate strategy and to be
essential to protecting and enhancing the best interests of the Bank;
WHEREAS, the banking industry is a dynamic one with independent public
institutions, as the Bank will be upon conversion, subject to unexpected changes
in ownership;
WHEREAS, the performance by the Executive of services to the Bank may be
negatively affected by his uncertainty over the possibility of a change in
ownership of the Bank and possible affect thereof on his employment with the
Bank; and
WHEREAS, the Bank wishes to mitigate the fears of the Executive regarding a
potential Bank ownership change, so as to avoid a negative effect on his
performance of services to the Bank, and in that interest the Bank desires to
afford certain protection to the Executive in the event of dismissal or
substantial change in duties or compensation upon the occurrence of certain
events as specified herein.
NOW, THEREFORE, to further the above recited corporate objective, and for
other good and valuable consideration, the receipt and adequacy of which each
party hereby acknowledges, the Bank and the Executive agree as follows:
1. (a) If, at any time while the Executive is a full-time officer of the
Bank, there is a "Change of Control" of the Bank (as hereinafter defined),
the Executive shall be entitled to receive a severance payment (the
"Severance Amount") in consideration of services previously rendered to the
Bank. The Severance Amount shall be made as a lump sum cash payment and
shall be equal to three (3) times the greater of the following: (A) the
Executive's
100.
<PAGE>
compensation (the "Compensation") from the Bank for services rendered for
the last full calendar year immediately preceding the Change of Control, or
(B) the Executive's average annual Compensation with respect to the three
(3) most recent taxable years ending before the date on which the Change of
Control occurs. Compensation as described above shall include the amount
of base salary and bonus, if any, paid to the Executive for services
rendered for the time period in question, including any and all of said
amounts as may have been deferred by the Executive under Bank deferral
plans, if any, and shall include long-term compensation which, by its
terms, is accelerated upon a Change of Control or, if not, shall by this
Agreement be so accelerated and determined as the present value (determined
at the discount rate provided in Section 280G(d)(4) of the Internal Revenue
Code of 1986, as amended, or its successor provision) of any cash or non-
cash long-term incentive compensation (whether in the form of performance
units or otherwise) previously awarded to the Executive but not yet paid,
measured at the time of award with the assumption that the award would be
100% earned over the performance period. Notwithstanding the provisions
hereof, in no event shall the Severance Amount (taken together with all
other payments, rights, options and benefits payable to the Executive under
this or any other agreement or arrangement which is payable contingent upon
a change in the ownership or effective control of the Bank, as contemplated
by Section 280G) exceed one dollar ($1.00) less than an aggregate amount
which would cause all or any portion of the Severance Amount to be deemed
an "parachute payment" under Section 280G.
(b) Payment under this Section 1 shall be paid in full within ninety (90)
days following the date of the Change of Control and shall not be reduced
by any compensation which the Executive may receive from the Bank or from
other employment with another employer should Executive's employment with
the Bank terminate.
(c) "Change of Control" shall be deemed to have occurred if:
(1) a Person (as defined below) beneficially owns (i.e. directly,
indirectly or acting through one or more other persons owns,
controls or has power to vote) 25% or more of any class of voting
securities of Bank, without the prior approval of at least 75% of
the members of the Bank's
101.
<PAGE>
Board of Directors prior to such Person attaining such percentage
interest;
(2) a proxy contest to which the Bank is a party takes place, as a
consequence of which members of the Bank's Board of Directors in
office immediately prior to such event constitute less than 75%
of the Board of Directors after such event;
(3) the Bank shall consummate a merger or consolidation with another
bank, corporation, association or business entity ("Party"), or
the Bank shall sell, exchange, liquidate or transfer all or
substantially all of its respective assets to a Party, except in
any such case in a transaction in which immediately after such
merger or consolidation or such sale, exchange, liquidation or
transfer, the shareholders of the Bank, in their capacities as
such and as a result thereof, shall own at least 50 percent in
voting power of the then outstanding securities of the Bank or of
any surviving corporation or business entity pursuant to any such
merger (or of its parent), the consolidated corporation or
business entity in any such consolidation, or of the Party to
which such sale, liquidation, exchange or transfer of assets is
made; or
(4) the Board of Directors of Bank otherwise determines that a Person
directly or indirectly exercises a controlling influence over the
management or policies of Bank.
A "Change of Control" shall be deemed not to have occurred if (A) such
event is mandated or directed by a regulatory body having jurisdiction over
the Bank's operations; or (B) it occurs pursuant to the terms of a plan for
the acquisition of the capital stock of the Bank by a newly formed bank
holding company if in the consummation of such plan the shareholders of
Bank will receive, pro rata, all of the common stock of such bank holding
company; unless, in such transaction, a Person satisfies sub-paragraph (1),
(2) or (4) above.
102.
<PAGE>
A "Person" shall include a natural person, corporation, or other
entity. When two or more persons act as a partnership, limited
partnership, syndicate, or other group for the purpose of acquiring,
holding or disposing of Bank capital stock, such partnership, syndicate or
group shall be considered a Person. Beneficial ownership shall be
determined under the then current provisions of Rule 13d-3 of the
Securities Exchange Act of 1934, as amended, Reg. Section 240.13d-3, or
their successor provision(s). The filing of a Form F-11 or F-11A by a
Person shall not in and of itself be deemed a Change of Control.
(d) If, after a Change of Control of the Bank, the Executive incurs any
fees and expenses of counsel to enforce this Agreement, the Bank agrees to
pay such fees and expenses to the Executive. The Executive's choice of
counsel and his decision to retain counsel shall be in his discretion,
provided any such fees and expenses must be reasonable.
(e) Notwithstanding any other provision of this Agreement or of any other
agreement, understanding or compensation plan, the Bank shall not be
obligated to pay any amounts the payment of which violate restrictions
imposed, or which may in the future be imposed, on such payments by the
Bank pursuant to Section 18(k)(1) of the Federal Deposit Insurance Act, or
any regulations or orders which are or may be promulgated thereunder; nor
shall any payments be made which would constitute an "unsafe or unsound
banking practice" pursuant to 12 U.S.C. Section 1818(b).
(f) It is expressly understood and agreed that payment of the Severance
Amount may not include amounts which are deemed to be "excess parachute
payments" under Section 280G of the Internal Revenue Code of 1986, as
amended. The calculation of the maximum Severance Amount shall be
performed by the Bank's independent auditing firm at the time of Change of
Control, or such other qualified party in the Bank's discretion; provided
that , if the maximum Severance Amount so determined is later challenged
successfully by Executive, by court decision or negotiation with the Bank,
the Bank shall be additionally liable for all costs and expenses incurred
by Executive in that challenge, including reasonable attorney fees.
(g) This Agreement shall survive and continue for as long as the Executive
is a full-time officer of the Bank.
2. This Agreement contains the entire agreement between the
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parties with respect to the subject matter herein, and there are no other
representations, warranties, conditions or agreements relating to the subject
matter of this Agreement.
3. This Agreement may not be changed orally but only by an agreement in
writing duly executed on behalf of the party against which enforcement of any
waiver, change, modification, consent or discharge is sought.
4. This Agreement shall be binding upon and inure to the benefit of the Bank
and the Executive and their respective successors, assigns, heirs and legal
representatives. Without otherwise limiting the foregoing, "Bank" as used
herein shall refer to any successor institution whether by merger,
consolidation, acquisition or otherwise.
5. Each of the parties agrees to execute all further instruments and documents
and to take all further action as the other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. If any term or provision of this Agreement is held or deemed to be invalid
or unenforceable, in whole or in part, by a court of competent jurisdiction,
such term or provision shall be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement.
104.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECHANICS SAVINGS BANK
By /s/ Donald K. Wilson
-----------------------------------------
Name: Donald K. Wilson
Title: Chairman, Organization and
Compensation Committee
EXECUTIVE
/s/ Gary Roman
-------------------------------------------
Gary Roman
105.
<PAGE>
EXHIBIT 10.8
------------
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "Agreement") dated June 28, 1996 by and
between MECHANICS SAVINGS BANK, a Connecticut chartered savings bank (the
"Bank") having its executive offices at 100 Pearl Street, Hartford, Connecticut
06103, and EDGAR C. GERWIG, an individual residing at 19 Chelsea Lane, West
Hartford, Connecticut 06119 (the "Executive"). This Agreement shall become
effective upon the completion of the Bank's currently contemplated conversion
from a mutual savings bank to a capital stock savings bank, in accordance with
Connecticut law (the "Conversion").
WHEREAS, the Bank currently employs the Executive as its Chairman,
President and Chief Executive Officer (the "Position");
WHEREAS, the Bank and the Executive are currently parties to an Employment
Agreement dated May 21, 1985, which Agreement is not deemed appropriate by the
parties for various reasons relating to the Conversion, the passage of time and
intervening events;
WHEREAS, the Bank desires to secure the services of the Executive in the
Position on a post-Conversion basis; and
WHEREAS, the Executive is agreeable to extending his employment with the
Bank on a post-Conversion basis in accordance with the terms hereof.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the Bank and the Executive, each intending legally to be bound, agree as
follows:
Section 1. CONTRACT OF EMPLOYMENT AND TERM.
-------------------------------
The Bank employs the Executive and the Executive accepts his employment in
the Position, the responsibilities and other incidents of which are described in
Section 2 of this Agreement. The initial term of employment of the Executive
hereunder shall commence on July 1, 1996 (the "Effective Date") and shall
continue until June 30, 1998 (the "Employment Period"), unless earlier
terminated as set forth below or pursuant to Section 7 hereof; provided that, if
the Conversion shall not have been completed by July 1, 1996, the Effective Date
shall be postponed until the date of Conversion completion, which alternative
date shall be memorialized by an
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amendment to this Agreement executed by both parties. Commencing on July 1,
1998, and on the first day of July of each year thereafter, the Employment
Period shall be automatically extended by successive one (1) year terms unless
Notice (as defined below) has been properly given. "Notice" shall mean a
writing from the Bank or the Executive to the other indicating its or his
intention to terminate this Agreement at the expiration of the then-remaining
Employment Period. Such notice must be delivered on or before April 1 of each
year or the automatic one year extension will go into effect. Notwithstanding
the above, in any and all events, unless sooner terminated, this Agreement shall
terminate on the 65th birthday of the Executive.
Section 2. POSITION, AUTHORITY AND RESPONSIBILITIES.
----------------------------------------
During the Employment Period, Executive shall serve in and shall occupy the
Position or, irrespective of the office, title, or other designation, if any,
ascribed to Executive's association with the Bank, the corporate governance
equivalent of the Position, and shall be vested with all the powers and
responsibilities incident to that office as prescribed by the Bank's Bylaws,
applicable law, and custom at the Bank, and as may be necessary to the
convenient and effective discharge of the duties thereof. The Executive shall
report directly to the Bank's Board of Directors (the "Board"). During the
Employment Period, the Executive shall continue to be nominated to serve on the
Board, unless he has been removed for cause in accordance with the Bank's
Bylaws.
Section 3. TIME AND EFFORT.
---------------
Throughout the Employment Period, the Executive shall devote to the
Position the Executive's full time, attention, skill and abilities, during usual
business hours and at such other times as on occasion exigencies may dictate,
and as are reasonably required to carry out the Executive's responsibilities.
Section 4. INDEMNIFICATION.
---------------
In relation to the Executive's serving in the Position, the Executive shall
be indemnified on a basis no less favorable to the Executive than is required by
the Connecticut Stock Corporation Act or the Banking Law of Connecticut, as
amended and in effect from time to time, or is accorded by any contract of
directors' and officers' liability or indemnity insurance obtained by the Bank
and in effect from time to time.
Section 5. FAIR DEALING AND RELATED MATTERS.
--------------------------------
107.
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The Executive shall also fulfill the following promises:
5(a) Exclusivity of Employment. During the Employment Period, the
Executive shall not, without the permission of the Compensation Committee (as
defined in Section 6(a) hereof), directly or indirectly engage in, provide, or
commit to provide, any significant personal services to or for the benefit of
any business or commercial activity other than the business of the Bank except
for personal services to or for the benefit of civic, charitable and like not-
for-profit organizations, provided that the Executive's rendering such services
does not interfere with the performance of the Executive's duties under this
Agreement.
5(b) Disclosure and Fair Dealing. During the Employment Period, the
Executive shall:
(1) promptly disclose to the Board or appropriate committee of the
Board information of significant opportunities, developments and
other events coming to the Executive's attention that pertain or
are relevant to the Board's governance responsibilities; and
(2) openly communicate, fully cooperate and, in all respects, deal
fairly and openly with the Board.
5(c) Protection of Ideas and Information.
(1) During the Employment Period, all ideas for new financial
products and all creative works pertaining to the business of
the Bank, whether or not susceptible to copyright protection,
conceived or developed by the Executive, alone or with others,
shall be exclusively the property of the Bank.
(2) During the Employment Period and at all times after it
terminates, irrespective of the circumstances in which such
termination may occur, the Executive will treat as confidential
all non-public information pertaining to the Bank or any of its
subsidiaries or to any customer or other person whose
information or identity the Bank is required to hold in
confidence. The Executive shall not use any of such information
in any way that could be detrimental to the interests of the
Bank.
108.
<PAGE>
Nothing in this Section 5(c), however, shall be construed as imposing a
restraint upon the Executive's use of any general or specialized knowledge
gained by the Executive without use or disclosure restrictions prior to the
Executive's association with the Bank in any capacity, and any information that
is or is made publicly available by the Bank or that is rightfully obtained by
the Executive from persons other than the Bank or another officer or employee
thereof, where such persons neither are nor were under any obligation of
confidentiality to the Bank.
5(d) Non-solicitation. During the Employment Period and for a period of
one (1) year thereafter, the Executive shall not directly or indirectly solicit
or otherwise attempt to induce or encourage any employee of or consultant to the
Bank to terminate his employment or consulting relationship with the Bank.
5(e) Use and Return of Materials. At the termination of the Executive's
employment, the Executive shall return to the Bank the originals and all copies
of correspondence, memoranda, files, records and other materials that otherwise
may have come into the Executive's possession and contain or relate to anything
encompassed by subsection (1) or (2) of Section 5(c) hereof.
5(f) Other Offices. The Executive agrees to serve as an officer or
director of any one or more of the Bank's subsidiaries without additional
compensation, if requested by the Board and provided such additional service
does not unreasonably increase the demands upon Executive's time or energies and
is not inconsistent with or inappropriate to the Position.
Section 6. COMPENSATION AND RELATED MATTERS.
--------------------------------
The Executive and the Bank agree to the following compensation
arrangements:
6(a) Base Salary. For the services to be rendered by Executive and in
consideration of Executive's other undertakings in this Agreement, the Bank
shall pay to the Executive a minimum base salary of $229,000.00 per year ("Base
Salary"). The Base Salary shall be paid (less all applicable tax and other
authorized withholdings) in installments as nearly equal as practicable in
accordance with the Bank's then regular payroll schedule. The Base Salary may
be increased by the Board upon recommendation of the Board's Organization and
Compensation Committee (the "Compensation Committee") in the future as warranted
by business conditions and the Executive's performances, in which case such Base
Salary amount shall
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replace the amount set forth in the first sentence of this Section.
6(b) Performance Bonus. The Bank may also pay the Executive, in the
Board's discretion and in addition to the Base Salary, annual and/or long-term
incentive compensation, as additional compensation for the Executive's services
hereunder, in amounts, if any, to be determined by the Board.
6(c) Stock-Related Awards. During the Employment Period, the Executive
may be included in any stock incentive or stock compensation plan as the Board
may determine.
6(d) Expense Reimbursement. The Bank shall reimburse the Executive for
ordinary, necessary and reasonable expenses incurred in or in connection with
performing services described in Section 2 including expenses of travel, lodging
and sustenance while away from home on Bank business, provided that such
expenses are accounted for in accordance with the policies and procedures
established by the Bank.
6(e) Benefit Plans. During the Employment Period, the Executive shall be
entitled to participate in all employee pension and welfare benefit plans and
arrangements established by the Bank (presently or in future) and in which the
Executive is or may become eligible to participate (including without limitation
group life insurance, accidental death and dismemberment plans, and medical and
disability insurance plans). Such plans and arrangements may provide for
greater benefits to particular employees at the Bank, including the Executive.
Such plans, at the present time, include a Benefit Equalization Plan and
participation in a deferred compensation plan for senior officers.
6(f) Vacations. During the Employment Period, the Executive shall be
entitled to paid holidays and four (4) weeks paid vacation for each calendar
year in which any portion of the Employment Period shall fall, to be taken at a
time or times as shall be mutually agreed upon by the Bank and the Executive and
consistent with applicable regulatory requirements. If the Executive fails to
use all or any portion of his vacation time during a particular calendar year,
the unused portion shall not be carried over to the subsequent calendar year,
nor shall he be paid additionally for such unused time, all in accordance with
the Bank's established policies, as they may be amended from time to time.
6(g) Support Services and Facilities. The Bank shall furnish the
Executive with office space, secretarial assistance, and such other facilities
and services as shall be
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appropriate for performance of the duties of the Position.
Section 7. TERMINATION.
-----------
7(a) Permitted Termination. The Executive's employment hereunder shall
---------------------
continue until the end of the Employment Period specified in Section 1 hereof,
except that the employment of the Executive hereunder shall terminate prior to
the end of such Employment Period by reason of any one of the following:
(1) Death. Upon the death of the Executive during the Employment
-----
Period. In such event the Bank shall be obligated to pay to the
Executive's estate any unpaid Base Salary through the date of death and
incentive compensation, if any, as determined by the Board. Amounts
payable under this Section shall be payable at the times set forth in
Sections 6(a) and 6(b) hereof.
(2) Disability. The Bank shall have the right to terminate this
----------
Agreement during the continuance of any Disability of the Executive, as
hereinafter defined, upon fifteen (15) days' prior notice to the Executive
during the continuance of the Disability. "Disability" for purposes of
this Section 7(a)(2) shall mean an inability by the Executive to perform a
substantial portion of the Executive's duties hereunder by reason of
physical or mental incapacity or disability for a total of one hundred
eighty (180) days or more in any consecutive period of three hundred and
sixty-five (365) days, as determined by the Board in its good faith
judgment based upon a medical doctor's report. In the event of a
termination by reason of the Executive's Disability, the Bank shall be
obligated to pay the Executive any unpaid Base Salary through the date of
termination, and incentive compensation, if any, as determined by the
Board. Amounts payable under this Section 7(a)(2) shall be payable at the
times set forth in Sections 6(a) and 6(b) hereof.
(3) For Cause. For "Cause" immediately upon written notice by the
---------
Bank to the Executive. For purposes of this Agreement, the Board may
terminate for Cause only if the Board shall determine that any one or more
of the following has occurred:
(i) the filing of a petition under the federal bankruptcy laws or any
state insolvency law by or against the Executive;
(ii) the appointment by a court of competent
111.
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jurisdiction of a custodian, conservator, sequestrator, or like
official for the person or property (or both) of the Executive;
(iii) the Executive's conviction of a crime involving moral turpitude;
(iv) the Executive's violation of a federal or state banking or
securities law, with actual material, adverse consequences to the
Bank;
(v) the issuance of an order, judgment or decree (not reversed,
suspended or vacated) of any court of competent jurisdiction or
governmental agency having regulatory or supervisory jurisdiction of
the Bank or the Executive (or both), enjoining or otherwise
prohibiting the Executive from engaging in any conduct or activity
that forms a material part of the Position, or enjoining or
otherwise prohibiting the Bank's continued employment of the
Executive, or removing Executive as an officer of the Bank;
(vi) the Executive's material breach of his obligations under this
Agreement, and such breach shall not have been remedied within 30
days after receiving written notice from the Board specifying the
details thereof; or
(vii) the Executive's willful or reckless misstatement of a material fact
in, or failure to state a material fact necessary for the accuracy
of, any reports required to be filed by Executive with any
regulatory or supervisory agency in connection with the Executive's
Position.
Upon any termination of the Executive's employment hereunder pursuant to
this Section 7(a)(3), the Executive will have no right to any compensation
or benefits from the Bank pursuant to this Agreement for any period after
the effective date of such termination (which shall be no earlier than the
date of written notice to the Executive), but this provision shall not
affect other compensation and benefits as provided in any other plans,
policies or practices then applicable to the Executive in accordance with
the terms thereof.
7(b) Termination for Other Reason. If (1) the Executive's employment is
----------------------------
terminated other than by reason of death, Disability, Cause, the Executive's
65th birthday, or
112.
<PAGE>
the Executive's voluntary termination of employment other than as contemplated
by Section 7(b)(2) below, or (2) the Executive voluntarily terminates his
employment with the Bank based upon the Bank's material breach of any one or
more of the provisions of this Agreement, including but not limited to any such
breach that constitutes Good Reason (as hereinafter defined), and such breach
---
shall have continued in effect for a period of thirty (30) days after written
notice to the Bank specifying such breach in reasonable detail, then the Bank
shall pay the Executive an amount equal to one year's Base Salary, which amount
shall be payable in a lump sum within 90 days of such termination, and the Bank
shall continue to provide the Executive, for a period of one year after such
termination (the "Benefits Period"), with all employee welfare benefits to which
the Executive would have been entitled had he stayed employed for the Benefits
Period. All COBRA rights will begin at the end of the Benefits Period. In
addition, the Bank shall provide that the Executive's payment under the Benefit
Equalization Plan or any successor to such plan will be increased as if the
Executive continued to be employed for the Benefits Period at his W-2
compensation for the previous calendar year. For the purpose of pension or
other benefit calculations, the Executive shall be treated as if he had attained
the age he would have at the end of the Benefits Period. For purposes of this
Section 7(b), the term "Good Reason" shall mean any action by the Bank that (i)
significantly reduces the Executive's job responsibilities, (ii) significantly
worsens the Executive's work conditions, including but not limited to the
benefits and perquisites of the Position, or (iii) requires a relocation of the
Executive outside of Hartford County in the State of Connecticut.
7(c) Absence of Obligation to Mitigate. The Executive shall not be
required to take any action to mitigate the amount of any payment provided for
in Section 7(b) by seeking other employment or otherwise.
Section 8. NONCOMPETITION AND NONSOLICITATION.
----------------------------------
8(a) Noncompetition. Subject to the provisions hereof, the Executive
agrees that he shall not, during the Employment Period and for a period of one
(1) year thereafter, without the Bank's prior written consent, by himself or in
partnership or in conjunction with or as an employee, officer, director,
manager, or agent of any other person, firm or corporation, either directly or
indirectly, carry on or be engaged or have any financial or other interest in,
or in any other manner advise or assist any person, firm or corporation engaged
or interested in, any Business, as hereinafter defined, which competes with the
Bank or any of its subsidiaries and is carried on in the Restricted Area, as
hereinafter defined,
113.
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provided, however, that this Section 8(a) shall be of no force or effect if the
Bank terminates the Executive's employment prior to the expiration of the
applicable Employment Period without Cause, or if the Executive terminates his
employment based upon the Bank's material breach of any one or more of the
provisions of this Agreement, including but not limited to any such breach that
constitutes Good Reason (as defined in Section 7(b)), or if the Employment
Period expires due to the Bank's determination not to extend it in accordance
with Section 1 above.
8(b) Nonsolicitation. The Executive agrees that he shall not, during the
Employment Period and for a period of one (1) year thereafter, directly or
indirectly, solicit or otherwise attempt to induce or encourage any customer or
client of the Bank or any of its subsidiaries to terminate or restrict its
relationship with the Bank; provided, however, that this Section 8(b) shall be
of no force or effect at any time when Section 8(a) shall be of no force or
effect.
8(c) Definitions. As used in this Section 8: (1) the term "compete" shall
mean engaging, participating or being involved in any respect in the business of
banking, or furnishing any aid, assistance or service of any kind to any person
in connection with the business of banking, (2) the term "Restricted Area" shall
refer to an area within or without the State of Connecticut inclusive of the
municipalities in which the Bank maintains banking offices or branches at the
time of employment termination, and (3) the term "Business" shall mean a
financial institution or other company offering similar services which competes
with the Bank and has its home office in the Restricted Area, or which has a
branch or other place of business in the Restricted Area where the Executive is
based or in which he spends the majority of his office time.
8(d) Acknowledgement. The Executive acknowledges that in the event of his
violation of the covenants contained in this Section 8, the Bank's remedy at law
will be inadequate. Accordingly, the Executive agrees that, in addition to such
other remedies as the Bank may have at law, the Bank shall be entitled to
specific performance of such covenants and to an injunction to prevent any
continuing violation thereof. The Executive acknowledges and warrants that he
believes that he will be able to earn an adequate livelihood for the Executive
and his dependents if this Section 8 shall be enforced against the Executive.
The Executive further acknowledges and warrants that the covenants contained
herein are reasonable, that valid consideration has been and will be received
therefor and that such covenants are the result of arms' length negotiation
between the parties hereto.
114.
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Section 9. ARBITRATION.
Any disputes as to the meaning, interpretation, application or
enforceability of any provisions of this Agreement that cannot be resolved
within a reasonable time by the parties hereto shall be resolved by arbitration
in accordance with this Section 9. Either party challenging the meaning,
interpretation or application of any provision may initiate arbitration by
delivering written notice to the other party stating the notifying party's
election to resolve such dispute by arbitration. Within 15 days after delivery
of such notice, each party shall designate one disinterested person (defined
below) as an arbitrator, and both parties shall agree on the designation of
another disinterested person to be the third arbitrator within 30 days after
delivery of the notice of arbitration. Each arbitrator, regardless of how
selected, and all parties to the arbitration, shall keep all matters concerning
the arbitration confidential. The arbitrators shall conduct hearings on the
disputed matter in the City of Hartford, Connecticut and in accordance with the
Rules of the American Arbitration Association. The arbitrators shall render
their decision within 30 days after the conclusion of the hearings. The
decision of a majority of the arbitrators shall be final and binding upon all
parties without right of appeal. The Bank and the Executive shall each pay
their own legal fees associated with such arbitration proceedings hereunder, but
the fees of the arbitrators and any other reasonable costs associated with such
arbitration proceedings shall be paid by the Bank. For purposes of this Section
9, the term "disinterested person" means any person who has never been
associated or affiliated with either party to this Agreement.
Section 10. REGULATORY RESTRICTIONS.
Notwithstanding any provision to the contrary in this Agreement, the Bank
shall not be required under this Agreement to continue the Executive in his
position(s) at the Bank, or to make any payments to the Executive, if the
regulatory authorities having jurisdiction over the Bank order his removal from
the Bank, or if the Bank or the Federal Deposit Insurance Corporation determines
that any payment would constitute an illegal "excess parachute" payment under 12
U.S.C. Section 1828(k), or an "unsafe or unsound banking practice" pursuant to
12 U.S.C. Section 1818(b).
Section 11. CHANGE OF CONTROL INTEGRATION.
The Bank's obligations under this Agreement shall terminate automatically
and immediately in the event of and upon payment to the Executive of a full lump
sum cash payment
115.
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as contemplated in Section 1(a) of a Change in Control Agreement by and between
the Executive and the Bank dated June 28, 1996.
Section 12. MISCELLANEOUS.
12(a) Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the successors and assigns of the Bank and the
Executive's heirs and personal representatives. The rights, interest and
benefits of the Executive hereunder shall not, however, be subject to voluntary
or involuntary assignment, or other form of disposition, directly or indirectly,
without the written consent of the Bank in advance.
12(b) "Bank" Defined. As used herein, the term "Bank" means Mechanics
Savings Bank, provided, however, that for purposes of Sections 5 and 12 hereof
the term "Bank" shall also include any person that is a business organization,
is at any time controlling, controlled by, or under common control with
Mechanics Savings Bank, and for which the Executive provides services in any
form during his employment under this Agreement.
12(c) Modification and Waiver. No modification or waiver of any of the
provisions of this Agreement shall be binding upon either of the parties unless
made in writing and signed by the Executive and countersigned on behalf of the
Bank by senior officer thereof other than the Executive.
12(d) Notices. All notices, requests, demands, or other communications
required, permitted or contemplated by this Agreement (including a change of
address for purposes of this Section 12(d)) shall be deemed effectively
delivered or otherwise made (a) upon receipt if manually delivered, or (b) upon
the delivery date (or first date of attempted delivery, if delivery is refused)
shown on the returned receipt if mailed by U.S. registered or certified mail,
return receipt requested, addressed to the Executive at his most recent
residence address set forth in the employment records of Bank, or if intended
for the Bank, to its address as set forth in the first sentence of this
Agreement.
12(e) Integration. This Agreement contains the entire understanding
between the parties. Merged into the provisions of this Agreement are all
prior, contemporaneous and collateral negotiations, understandings, covenants,
representations, under-takings and conditions made in connection with the
subject matter hereof.
12(f) Invalidity or Regulatory Restriction. If any
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provision or part of this Agreement is held to be invalid or unenforceable by a
court of competent jurisdiction, by a governmental agency having regulatory or
supervisory authority over the Bank, or by an arbitration panel empowered under
Section 9, the remaining provisions or parts hereof shall nevertheless continue
to be valid and enforceable as though the invalid or unenforceable provision or
part had not been included in this Agreement. If any of the provisions or
covenants contained in Section 8 hereof are held to be unenforceable because of
the duration or geographical scope thereof, the parties agree that the court or
entity exercising jurisdiction shall have the power to reduce the duration or
geographical scope of such provisions or covenants and, in their reduced form,
said provisions or covenants shall be enforceable. Without limiting the
foregoing, if this Agreement shall be deemed unenforceable, or payments
prohibited, pursuant to law, regulation, order or similar action by a regulatory
authority with jurisdiction over the Bank, this Agreement will automatically be
amended, without further action by any of the parties, to be consistent with
such action.
12(g) Counterparts. This Agreement may be executed in two or more
identical counterparts, each of which shall be deemed an original instrument,
but all of such counterparts shall constitute but one and the same agreement.
12(h) Governing Law. This Agreement shall be construed pursuant to and in
accordance with the laws of the State of Connecticut.
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IN WITNESS WHEREOF, the Bank has caused this Agreement to be duly executed
by the Chairman of the Organization and Compensation Committee of the Board of
Directors, and the Executive has duly executed this Agreement, all on or as of
the date first set out in this Agreement.
MECHANICS SAVINGS BANK
Attest:
By: /s/ Donald K. Wilson
--------------------------------
Name: Name: Donald K. Wilson
Title: Title: Chairman, Organization and
Compensation Committee
Witness: EXECUTIVE:
/s/ Edgar C. Gerwig
- --------------------------- ------------------------------------
Edgar C. Gerwig
118.
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Exhibit 21
----------
SUBSIDIARIES OF MECH FINANCIAL, INC.
1. MECHANICS SAVINGS BANK
119.
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Exhibit 99.1
------------
Annual Report of Mechanics Savings Bank for the year ended December 31, 1996.
<PAGE>
To Our Shareholders:
For Mechanics Savings Bank, 1996 was one of the most significant years in our
135 year history. The successful conversion to a stock savings bank was a major
milestone. Our public offering in June was met with great enthusiasm, as
evidenced by its oversubscription. The resulting $52.9 million of new capital
will enable Mechanics Savings Bank to continue to grow and serve Central
Connecticut as a locally managed community bank.
As part of the conversion plan, the bank strengthened its position by completing
an accelerated disposition of $18.1 million of troubled loans and owned real
estate, as well as aggressively disposing of other problem loans. This effort
resulted in the decrease of non performing assets from $21.7 million to $8.5
million. The ratio of non performing assets to total assets was reduced from
3.28% at December 31, 1995 to 1.14% by year end 1996. Non performing assets
relating to commercial loans dropped from $19.0 million to $4.4 million, a 76.8%
reduction.
In the second half of 1996, after the conversion, Mechanics returned to strong
profitability. Net income for the fourth quarter was $2.9 million, or $0.56 per
share, which brought the net income for the second half of 1996 to $5.4 million
or $1.06 per share. Primarily because of the anticipated losses taken from the
disposition of problem assets earlier in the year, net income for all of 1996
was $1.1 million or $0.22 per share. Assets at year end reached $746.7 million,
up 12.8% over the December 31, 1995 total of $662.2 million. These 1996 results
all contributed to the dramatic improvement of Mechanics' year end capital ratio
to 10.20%, up 186% over the 3.57% level as of year end 1995. Mechanics now ranks
as one of the best capitalized banks in Connecticut.
Unlike thrifts in other states, for a number of years Connecticut savings banks
have had powers similar to those of commercial banks. Taking advantage of this
provision, we have developed a high level of business loans and checking
accounts along with traditional savings accounts and mortgages. We currently
have $550 million maintained in savings and time deposits, $105 million in
checking accounts, $360 million in loans to individuals, and $142 million in
loans to businesses.
Retail Banking
A key advantage of being a mid sized community bank like ours is the ability to
quickly respond to customer needs with top quality service and innovative
products. As an organization, we believe in First Class Personal Service as the
preferred bank delivery system. While we offer ATMs and other technology based
banking services, we have found that most customers still want a convenient
facility with an efficient, friendly staff to personally handle their banking
transactions. As evidence of this, over two million such banking transactions
took place in our 14 offices during 1996, reinforcing our commitment to person
to person banking.
First Class Personal Service demands that we listen and respond to our
customers. In addition to being one of the few banks that are open both Saturday
mornings and late Thursday and Friday evenings, at the request of many
customers, we began opening our offices at 8:30 a.m. in 1996. These early hours
were met with instant acceptance as thousands of busy customers began taking
advantage of this added convenience. Now over 10,000 banking transactions are
being conducted each month between 8:30 a.m. and 9:00 a.m. at our 14 offices.
Over the years Mechanics has developed a loyal base of retail customers in
Central Connecticut by offering product innovations and enhancements to meet
customer needs. Early in 1996 we introduced Blue Ribbon Banking, a specially
designed group of financial products and services for preferred customers.
Taking into account all deposit balances, this package includes no fee checking;
six free transactions per month at other banks' ATMs; free point-of-sale
transactions; free checks; free Travelers Cheques; special rates on CDs; and
discounts on loans and mortgages. By year end, we had over 1,000 Blue Ribbon
Checking Accounts with balances exceeding $4.6 million.
Mechanics' unique Penalty-Free CD continued to be popular as outstanding
balances more than doubled to $49 million during 1996. This three month CD
guarantees an interest rate for the full term, yet allows customers to withdraw
without penalty, a strong advantage over competitors' money market accounts. The
Penalty-Free CD received national attention, as an innovative product, with
articles in the Wall Street Journal's Smart Money Magazine, The Bank Rate
Monitor, and Kiplinger's Personal Finance Magazine.
Last summer we introduced the Forever Prime Equity Line. This line of credit,
secured by the equity in residential property, is priced at the prime rate for
the entire term of the line. Because home equity lending is very competitive, we
marketed the Forever Prime Equity Line with a 0% rate for the first two months
on amounts up to $50,000.
<PAGE>
Residential Mortgage Lending
In October we introduced our BumpDown Mortgage, a fixed rate mortgage that
eliminates refinancing hassles by allowing borrowers to reduce their rate once
within the first 36 months. At the customers' request, for a fee of $250, the
interest rate is reduced and can never go up again. Now customers have more
control and flexibility because they can borrow at Mechanics' current low rate
and gain the BumpDown Mortgage advantage. This loan is so new and different that
Mechanics has even applied for a patent on this innovative process.
Commercial Banking
Mechanics offers business customers what they want - a local expert who
understands their business and their particular banking requirements. In 1996
Mechanics' commercial lending efforts, geared to small and medium sized
companies, focused on enhancing current banking relationships and attracting new
customers with a consistent history of profitability. We have assembled a team
of seven seasoned lenders who promise and deliver competitive terms and a one to
one personal relationship with their customers. During 1996, we provided over
$30 million of financing for our business customers.
Recognizing that many smaller business loan requests need to be handled
expeditiously, we introduced the Priority Business Loan program last fall for
amounts under $100,000. This group of products has favorable terms for companies
which are able to demonstrate that both the business and the owner of the
business have sound credit. By combining these two repayment sources, we are
able to streamline the application process and make loan decisions quickly and
efficiently.
Our branch system serves several thousand businesses who utilize Mechanics as a
depository and to meet their cash, currency and other banking needs. During the
year over 700 businesses began banking with us. At year end 1996 the outstanding
balances in business checking accounts were over $50 million, more than half of
all checking balances.
Mechanics Investment Services
Mechanics Investment Services, our full service brokerage program is available
at all offices. Bank customers and the general public can purchase stocks,
bonds, mutual funds and money management products, including the increasingly
popular wrap fee accounts. Since its inception in 1986, Mechanics Investment
Services has invested over one half billion dollars on behalf of our customers
and produced revenues of over $13 million for the bank.
Mechanics Investment Services is now in the process of achieving broker/dealer
status. This will improve service to our customers, expand product offerings,
and increase profitability for the bank. In January of this year, Mechanics
Investment Services augmented its product mix by offering fixed and variable
annuities. In the past, due to legislative limitations on state chartered banks,
we were able to sell only Savings Bank Life Insurance annuity products.
Mechanics was consistently the second highest producer of SBLI annuities
throughout Connecticut. Now with the ability to offer customers the choice of
annuity products from many different companies, we anticipate a significant
additional income stream.
Future Plans
Mechanics Savings Bank's plans for the future are clear and unwavering: We will
continue to compete by providing high quality service, customer driven banking
products, and competitive rates on deposits and loans. This strategy works for
us and for thousands of other banks around the country because it is what
customers want. Our challenge is to execute this plan better than our
competitors.
Leveraging our new capital and providing excellent returns for our shareholders
requires significant but prudent growth. Deposits will remain the primary source
for funding this growth. Time accounts will still represent the bulk of
deposits, supplemented by a determined effort to acquire consumer and business
checking accounts as a low cost funding vehicle. On the loan side, residential
mortgages will continue to represent the lion's share of our outstandings, but
we will aggressively seek new commercial and consumer lending opportunities.
We believe Mechanics Savings Bank is well positioned for strong future growth
and profitability. The Connecticut economy is improving. Customers want the
quality of service that only a bank like ours can offer. Our directors,
officers, and employees are dedicated to providing high level performance for
both our customers and our shareholders.
<PAGE>
Thank you for your ongoing support of Mechanics Savings Bank.
Sincerely,
/s/ Edgar C. Gerwig
Edgar C. Gerwig
Chairman, President and Chief Executive Officer
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Page 1 Letter to Shareholder
Page 7 Selected Consolidated Financial Data
Page 10 Management's Discussion and Analysis
Page 30 Consolidated Financial Statements
Page 35 Notes to Consolidated Financial Statements
Page 53 Report of Independent Accounts
Page 54 Statement of Management's Responsibility
Page 55 Office Locations
Page 56 Directors & Officers
</TABLE>
<PAGE>
Selected Consolidated Financial Data
The following tables set forth certain selected consolidated financial and other
data of the Bank at or for the dates indicated. This information should be read
in conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere herein. The consolidated financial data as of and for the
years ended December 31, 1992 through 1996 have been derived from the audited
Consolidated Financial Statements of the Bank.
<TABLE>
<CAPTION>
As of or for the years ended December 31,
-----------------------------------------
(in thousands except per share data) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Interest and dividend income $ 49,577 $ 47,540 $ 45,371 $ 47,699 $ 52,019
Interest expense 23,526 21,942 18,424 21,812 28,531
------ ------ ------ ------ ------
Net interest income 26,051 25,598 26,947 25,887 23,488
Provision for possible loan losses 6,400 12,850 8,200 13,800 7,200
Other income:
Service fees and other 3,219 2,713 2,822 2,709 2,330
Investment brokerage services
commissions 1,136 1,455 1,802 2,301 2,463
Loan servicing and other fees 724 806 1,155 1,377 1,250
Net income from investment in
Real Estate Partnership 272 504 558 34 19
Net gains on sales of marketable
equity securities 61 140 17 820 1,514
Net gains (losses) on sales of
debt securities (139) 222 170 1,323 -
Net gains on sales of loans 43 69 2,830 2,366 1,209
Other expenses:
Operating expenses (a) 19,999 20,572 20,365 23,035 21,527
Operation of foreclosed
real estate owned 600 1,167 459 641 736
Write-down of investment in Real
Estate Partnership - 6,697 - - -
Write-downs and net losses on
sale of foreclosed real
estate owned 3,492 2,261 4,457 4,648 575
Write-down of real estate
agency subsidiary - 700 - 399 302
------ ------ ------ ------ ------
Income (loss) before income taxes 876 (12,740) 2,820 (5,706) 1,933
Income tax (benefit) expense (b) (266) 1,540 (1,224) (232) 410
------ ------ ------ ------ ------
Net income (loss) $ 1,142 $(14,280) $ 4,044 $ (5,474) $ 1,523
======== ======== ======== ======== ========
Earnings (loss) and pro forma
earnings (loss) per share
before income taxes (o) $ 0.17 $ (2.46) $ 0.55 $ (1.10) $ 0.37
Earnings (loss) and pro forma
earnings (loss) per share (o) $ 0.22 $ (2.76) $ 0.78 $ (1.06) $ 0.29
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
As of or for the years ended December 31,
-----------------------------------------
(dollars in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Financial Condition:
Total assets $ 746,685 $ 662,201 $ 684,219 $ 717,682 $ 739,401
Loans, net 494,291 517,789 536,868 574,712 564,762
Allowance for possible loan losses (7,983) (11,597) (7,108) (7,324) (6,342)
Securities (c) 194,863 39,315 51,049 47,280 46,043
Deposits 655,043 620,802 621,063 662,717 660,220
Borrowings 11,960 11,000 21,000 16,000 35,000
Capital $ 74,840 $ 23,726 $ 37,440 $ 34,277 $ 39,383
Non-performing loans (d) $ 7,856 $ 16,355 $ 12,099 $ 11,020 $ 17,087
Foreclosed real estate owned 679 5,393 7,845 13,798 20,241
Non-performing assets (e) $ 8,535 $ 21,748 $ 19,944 $ 24,818 $ 37,328
Performance Ratios:
Return (loss) on average
total assets (f) 0.16% (2.14)% 0.58% (0.76)% 0.21%
Return (loss) on average
capital (f) 2.34 (39.13) 11.73 (13.83) 4.00
Interest rate spread (g) 3.63 4.03 4.20 3.87 3.12
Net interest margin (h) 4.03 4.24 4.31 3.95 3.56
Efficiency ratio (i) 63.76 65.29 56.10 62.57 66.70
Efficiency ratio with
write-downs and OREO
expenses (j) 76.80% 99.65% 69.64% 78.02% 71.70%
Asset Quality Data:
Non-performing loans as a % of
gross loans (d) (k) 1.56% 3.09% 2.23% 1.89% 2.99%
Non-performing assets as a % of
gross loans and OREO (e) 1.70 4.07 3.62 4.17 6.31
Non-performing assets as a % of
total assets (e) 1.14 3.28 2.91 3.46 5.05
Allowance for possible loan losses
as % of gross loans (k) 1.59 2.19 1.31 1.26 1.11
Allowance for possible loan losses
as a % of non-performing
loans (d) 101.62 70.91 58.75 66.46 37.12
Net charge-offs as a % of
average gross loans (f) 1.99% 1.54% 1.48% 2.17% 1.43%
Capital Ratios:
Tier 1 leverage capital (l) 10.20% 3.57% 5.46% 4.64% 5.36%
Tier 1 risk-based capital (m) 18.28 5.65 8.06 6.81 7.33
Total risk-based capital (n) 19.54% 6.90% 9.31% 8.06% 8.53%
Other Selected Financial and
Statistical Data:
Loans originated during period $ 84,255 $ 109,396 $137,483 $ 233,987 $ 224,772
Number of:
Deposit accounts 68,212 67,125 66,975 70,669 71,258
Bank offices 14 14 14 14 14
Full-time staff 192 203 246 246 247
</TABLE>
<PAGE>
(a) Operating expenses exclude write-downs and operating expenses related to
OREO.
(b) In 1994, a tax benefit of $1.50 million was recognized as management
determined it was more likely than not that $1.50 million of deferred tax
assets would be realized in the future. In 1995, based on then-current
operating and asset quality trends, management recorded an additional
deferred tax valuation reserve of $1.50 million thereby determining that as
of December 31, 1995, it was more likely than not that the deferred tax
asset would not be realized. The total net deferred tax asset reserved
against was $9.7 million at December 31, 1996. Income tax expense (benefit)
for the years 1992-1996 reflect statutory and/or minimum tax rates, both
federal and state.
(c) Includes FHLB stock and excludes short-term investments classified as cash
equivalents.
(d) Non-performing loans are loans that are contractually past due in excess of
90 days or loans that are not 90 days past due but for which the Bank has
decided to stop the accrual of interest based on management's assessment
regarding the full collectibility of principal and interest. Troubled debt
restructured loans which are performing in accordance with their
restructured terms are not included in non-performing loans.
(e) Non-performing assets are the combination of non-performing loans and
foreclosed real estate owned.
(f) Averages based on daily average balances.
(g) Difference between the weighted average yield on loans, investment
securities and short-term investments and the weighted average cost of
funds.
(h) Represents net interest income divided by average total earning assets.
(i) Represents operating expenses divided by the sum of net interest income,
service fees and other, investment brokerage services commissions, loan
servicing and other fees, net income (loss) from investment in Real Estate
Partnership, net gains on sales of marketable equity securities, net gains
on sales of debt securities and net gains on sales of loans.
(j) Represents operating expenses, operation of foreclosed real estate owned,
write-down of investment in Real Estate Partnership, write-downs and net
losses on sale of foreclosed real estate owned and write-down of real
estate agency subsidiary divided by the sum of net interest income, service
fees and other, investment brokerage services commissions, loan servicing
and other fees, net income (loss) from investment in Real Estate
Partnership, net gains on sales of marketable equity securities, net gains
on sales of debt securities and net gains on sales of loans.
(k) Gross loans excludes loans held-for-sale.
(l) The Tier 1 leverage capital ratio established by the FDIC measures the
ratio of Tier 1 capital to average quarterly total assets. Tier 1 capital
is generally defined as common stock, additional paid in capital, surplus,
retained earnings, adjustments for unrealized gains (losses) on securities
classified as available-for-sale and unallocated ESOP shares. Tier 1
capital excludes goodwill and other intangibles.
(m) The Tier 1 risk-based capital ratio established by the FDIC measures the
ratio of Tier 1 leverage capital to total "risk-weighted" assets. The
Bank's assets and certain off-balance sheet items are assigned to broad
risk categories. Basically, the higher percentage of riskier assets an
institution has, the more capital it must have to satisfy the risk-based
guidelines; the lower the risk, the lower the required capital.
(n) The total risk-based capital ratio established by the FDIC is calculated as
described in (m) above but allows the Bank to include Tier II capital in
addition to Tier 1 capital. Tier II capital generally consists of the
general allowance for possible loan losses. The Bank recorded the full
amount of the general allowance for possible loan losses (1.25% of risk
based assets) in Tier II capital for the years presented, in accordance
with FDIC regulations. Not more than one-half of the capital used to
calculate the total risk-based capital ratio may come from Tier II capital.
<PAGE>
(o) Earnings (loss) per share is computed based upon the weighted average
number of shares of common stock and common stock equivalents (if dilutive)
outstanding during the periods presented. Common stock equivalents consist
of stock options granted upon the completion of the Conversion on June 25,
1996. For earnings (loss) per share purposes, the common stock and common
stock equivalents have been assumed to be outstanding for all periods
presented.
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
The following discussion and analysis of the Bank's financial condition and
results of operations should be read in conjunction with the Bank's Consolidated
Financial Statements and Notes thereto, which are included elsewhere herein.
The Bank is a state chartered capital stock savings bank which operates 14
banking offices in Hartford County and offers a full range of banking services
to individual and corporate customers primarily located in Greater Hartford. The
Bank was organized in 1861 and is the largest banking institution headquartered
in the City of Hartford. The Bank completed its subscription and community
offerings of common stock on June 25, 1996, thereby completing its conversion
from a Connecticut-chartered mutual savings bank to a Connecticut-chartered
capital stock savings bank. The Bank sold the maximum number of shares offered
in the conversion, as adjusted, issuing 5.29 million shares for total gross
proceeds of $52.90 million. The Bank's tier one leverage capital ratio increased
to 10.20% and its total risk-based capital ratio increased to 19.54% as of
December 31, 1996.
The Bank is a community bank with a broad range of products and services. The
Bank's lending focus is on making commercial loans to small and medium sized
businesses as well as originating residential mortgages and consumer loans. The
Bank's results of operations depend primarily on net interest income, which is
the difference between the income earned on its loan and securities portfolios,
and its cost of funds, consisting of interest paid on its deposits and
borrowings. The Bank, on a monthly basis, also sets aside a provision for
possible loan losses, which has had a significant impact on its results of
operations in recent years. The Bank's results of operations also depend upon
the commissions and fees earned from the Bank's investment brokerage program, as
well as other banking fees which contribute to non-interest income. The Bank's
operating expenses consist principally of employee compensation, occupancy
expenses, federal deposit insurance premiums and other general and
administrative expenses. The Bank's results of operations are also significantly
affected by general economic and competitive conditions, the real estate market,
changes in interest rates, government policies and actions of regulatory
authorities.
Overview
The Bank reported net income of $1.14 million for the year ended December 31,
1996 compared to a net loss of $14.28 million for the same period in 1995. As
stated above, the Bank successfully completed its subscription and community
offerings and became a Connecticut-chartered capital stock savings bank. In
addition, the Bank completed its previously announced Accelerated Asset
Disposition Plan ("ADP") on July 17, 1996 disposing of $18.13 million in problem
assets. As part of the ADP, the Bank added $3.60 million in additional loan loss
provisions and had additional write-downs of $2.65 million of foreclosed real
estate owned during the second quarter.
Non-performing assets decreased $13.21 million or 60.7% from $21.75 million at
December 31, 1995 to $8.54 million at December 31, 1996. Commercial non-
performing assets decreased $14.54 million or 76.6% from $18.97 million at
December 31, 1995 to $4.43 million at December 31, 1996. Non-performing assets
as a percentage of total assets were 1.14% at December 31, 1996 as compared to
3.28% at December 31, 1995. Non-performing assets as a percentage of loans and
foreclosed real estate owned were 1.70% at December 31, 1996 as compared to
4.07% at December 31, 1995. The allowance for possible loan losses to non-
performing loans was 101.62% at December 31, 1996 compared to 70.91% at December
31, 1995.
<PAGE>
Financial Condition
Total assets as of December 31, 1996 were $746.68 million representing an
increase of $84.48 million or 12.8% from $662.20 million at December 31, 1995.
Due mainly to the successful stock conversion, the Bank's capital increased from
$23.73 million at December 31, 1995 to $74.84 million at December 31, 1996.
Securities
The securities portfolio consists primarily of U.S. Treasury and Government
Agency securities, mortgage-backed securities, common stock and mutual funds.
There are no derivative instruments (other than collateralized mortgage
obligations guaranteed by the Federal National Mortgage Association and the
Federal Home Loan Mortgage Corporation), structured notes, inverse floating
notes or interest or principal only strips in the Bank's securities portfolio.
The following table sets forth the composition of the Bank's investment
securities portfolios at the dates indicated.
<TABLE>
<CAPTION>
At December 31,
------------------------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Securities held-to-maturity:
U.S. Treasury securities and other U.S. Government agencies $ 5,820 $ - $ 14,388
Debt securities issued by foreign governments - - 350
Corporate debt securities - - 1,991
Mortgage-backed securities 37,398 - -
-------- -------- --------
Total securities held-to-maturity $ 43,218 $ - $ 16,729
======== ======== ========
Securities available-for-sale:
U.S. Treasury securities and other U.S. Government agencies $14,487 $ 4,515 $ 13,516
Corporate debt securities - 2,470 -
Debt securities issued by foreign governments 350 350 -
Mortgage-backed securities 132,196 26,979 -
Marketable equity securities 15 429 4,543
Mutual funds 308 283 11,972
-------- -------- --------
Total securities available-for-sale $147,356 $ 35,026 $ 30,031
======== ======== ========
FHLB stock $ 4,289 $ 4,289 $ 4,289
======== ======== ========
</TABLE>
Investment securities increased $155.54 million from $35.03 million at December
31, 1995 to $190.57 million at December 31, 1996 due primarily to a $142.62
million increase in the mortgage-backed securities portfolio. Funds available
for investment increased mainly from the completion of the stock conversion, an
increase in deposits, a decrease in short-term investments and a decrease in the
loan portfolio due to payoffs and the ADP.
During 1995, management recognized that the appreciation in market values of
certain investment securities presented an economic opportunity to enhance
non-interest income and capital. Management took advantage of this opportunity
by selling $7.40 million of investment securities from the held-to-maturity
portfolio and recognized a gain on the sale of $125,000 on June 30, 1995. This
transaction, while not material to the Bank's financial condition or results of
operations in 1995, was outside the guidelines prescribed by Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). As such, the Bank was required to
reclassify $9.30 million of remaining held-to-maturity securities as available-
for-sale and was required to classify all investment purchases subsequent to
June 30, 1995 as either available-for-sale or trading, in accordance with
guidelines prescribed by SFAS 115. At June 30, 1996, the Bank demonstrated the
ability and the intent to hold certain securities to maturity and reclassified a
portion of its investment portfolio as held-to-maturity. At December 31, 1996,
the Bank held $43.22 million in securities classified as held-to-maturity.
<PAGE>
At December 31, 1996, the Bank had a net unrealized gain of $1.08 million
included in its $147.36 million available-for-sale securities portfolio and an
unrealized gain of $563,000 on its $43.22 million held-to-maturity securities
portfolio. Fluctuations in fair market value caused by movements in interest
rates and market conditions will not necessarily have a significant effect on
future earnings.
The following table sets forth the contractual maturities of investment
securities (excluding equity securities and mutual funds) at December 31, 1996,
and the weighted average yields of such securities. The weighted average yields
are calculated based on the cost and the effective yields to maturity of each
security.
<PAGE>
<TABLE>
<CAPTION>
Carrying Amount
---------------------------------------------------------------------------------------------------
Less than After One After Five After
One Year Through Five Years Through Ten Years Ten Years
-------- ------------------ ----------------- ---------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in thousands)
Securities held-to-maturity:
U.S. Treasury and other
U.S. Government agencies $ - - $ 5,820 6.82% $ - - $ - -
Mortgage-backed securities - - - - - - 37,398 6.32%
-------- -------- -------- --------
Total securities
held-to-maturity $ - - $ 5,820 6.82% $ - - $ 37,398 6.32%
Securities available-for-sale:
U.S. Treasury and other
U.S. Government agencies $ 11,504 5.47% $ 2,983 5.75% $ - - $ - -
Debt securities issued by
foreign governments - - 350 7.93 - - - -
Mortgage-backed securities - - 18,391 6.65 23,127 6.88% 90,678 6.58%
-------- -------- -------- --------
Total securities
available-for-sale $ 11,504 5.47% $ 21,724 6.55% $ 23,127 6.88% $ 90,678 6.58%
-------- -------- -------- --------
Total $ 11,504 5.47% $ 27,544 6.60% $ 23,127 6.88% $128,076 6.50%
======== ===== ======== ===== ======== ===== ======== =====
<CAPTION>
Totals
-------------------
Weighted
Average
Amount Yield
------ -----
<S> <C> <C>
(in thousands)
Securities held-to-maturity:
U.S. Treasury and other
U.S. Government agencies $ 5,820 6.82%
Mortgage-backed securities 37,398 6.32
--------
Total securities
held-to-maturity $ 43,218 6.39%
Securities available-for-sale:
U.S. Treasury and other
U.S. Government agencies $ 14,487 5.53%
Debt securities issued by
foreign governments 350 7.93
Mortgage-backed securities 132,196 6.64
--------
Total securities
available-for-sale $147,033 6.53%
--------
Total $190,251 6.50%
======== =====
</TABLE>
Loans
The following table details the composition of the loan portfolio as of the
periods presented.
<TABLE>
<CAPTION>
December 31, December 31, December 31,
(in thousands) 1996 % 1995 % 1994 %
---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages:
One- to four-family $341,371 68.02% $348,783 65.97% $355,510 65.40%
Multi-family 14,187 2.83 19,803 3.75 23,364 4.30
Commercial real estate 95,924 19.11 111,836 21.15 118,048 21.72
Construction and land development 6,173 1.23 4,485 0.85 5,976 1.10
Commercial and industrial 26,072 5.20 26,435 5.00 24,427 4.49
Home equity lines of credit 2,302 0.46 2,237 0.42 3,914 0.72
Other consumer loans 15,818 3.15 15,135 2.86 12,312 2.27
-------- ------ -------- ------ -------- ------
Total loans, gross 501,847 100.00% 528,714 100.00% 543,551 100.00%
Deferred loan origination costs, net 427 672 425
Allowance for possible loan losses (7,983) (11,597) (7,108)
-------- -------- --------
Total loans, net $494,291 $517,789 $536,868
======== ======== ========
</TABLE>
<PAGE>
Gross loans decreased $26.86 million or 5.1% from $528.71 million at December
31, 1995 to $501.85 million at December 31, 1996 due primarily to reductions of
$15.91 million of commercial real estate mortgages, $7.41 million of one- to
four-family mortgages and $5.62 million of multi-family real estate mortgages.
The reductions in commercial and multi-family real estate mortgages were due
largely to the ADP. The reductions in one- to four-family mortgages were mainly
attributed to amortization, prepayments and lower origination volume. Loans
held-for-sale decreased from $1.13 million at December 31, 1995 to $87,000 at
December 31, 1996 due primarily to lower volumes of 15 year fixed rate one- to
four-family real estate mortgages.
The following table sets forth certain information at December 31, 1996
regarding the dollar amount of loans maturing in the Bank's loan portfolio.
Demand loans and loans having no stated schedule of repayments and no stated
maturity are reported in the due within one year category.
<TABLE>
<CAPTION>
After After
One Year Five Years
Within Through Through After
Amount One Year Five Years Ten Years Ten Years
------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(in thousands)
Real estate mortgages:
One- to four-family $ 341,371 $ 2,540 $ 7,595 $ 22,922 $ 308,314
Multi-family 14,187 2,043 1,866 4,239 6,039
Commercial real estate 95,924 3,655 23,230 52,405 16,634
Construction and land development 6,173 1,576 446 2,608 1,543
Commercial and industrial 26,072 8,571 7,532 9,934 35
Home equity lines of credit 2,302 438 618 1,246 -
Other consumer loans 15,818 1,809 12,675 1,149 185
--------- -------- -------- -------- ---------
Total loans, gross $ 501,847 $ 20,632 $ 53,962 $ 94,503 $ 332,750
========= ======== ======== ======== =========
</TABLE>
At December 31, 1996, $139.82 million of the Bank's loans with contractual
maturities after December 31, 1997 were fixed rate loans and $341.39 million had
adjustable interest rates. The following table sets forth the dollar amount of
all loans maturing after December 31, 1997 by fixed or adjustable interest
rates.
<TABLE>
<CAPTION>
Fixed Adjustable
Rates Rates
----- -----
<S> <C> <C>
(in thousands)
Real estate mortgages:
One- to four-family $100,429 $238,402
Multi-family 5,656 6,488
Commercial real estate 12,556 79,713
Construction and land development 3,752 845
Commercial and industrial 3,514 13,987
Home equity lines of credit - 1,864
Other consumer loans 13,917 92
-------- --------
Total $139,824 $341,391
======== ========
</TABLE>
The allowance for possible loan losses totaled $7.98 million at December 31,
1996 compared to $11.60 million at December 31, 1995. Provisions for possible
loan losses during the year ended December 31, 1996 totaled $6.40 million and
net charge-offs totaled $10.01 million. Included in the $6.40 million provision
for possible loan losses was $3.60 million attributable to the ADP completed in
July 1996. The allowance for possible loan losses as a percentage of
non-performing loans increased from 70.91% at December 31, 1995 to 101.62% at
December 31, 1996.
<PAGE>
The following table sets forth an analysis of the activity in the allowance for
possible loan losses at and during the periods indicated.
<TABLE>
<CAPTION>
At or for the year ended December 31,
-------------------------------------
(in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period $11,597 $7,108 $7,324
Add:
Provision charged to operations 6,400 12,850 8,200
Recoveries 430 744 448
Less:
Charge-offs:
Real estate mortgages:
One- to four-family 2,966 1,829 620
Multi-family 1,677 2,083 629
Commercial real estate 4,878 4,549 6,751
Construction and land development 15 - 283
Consumer and commercial and industrial 908 644 581
--- --- ---
Total charge-offs 10,444 9,105 8,864
------ ----- -----
Balance at end of period $ 7,983 $ 11,597 $ 7,108
========= ========= =========
Net charge-offs $ 10,014 $ 8,361 $ 8,416
========= ========= =========
Total loans, gross $ 501,847 $ 528,714 $ 543,551
========= ========= =========
Net charge-offs to gross loans 2.00% 1.58% 1.55%
</TABLE>
The following table shows the allocation of the allowance for possible loan
losses to various types of loans at December 31,:
<TABLE>
<CAPTION>
% of Loan % of Loan % of Loan
Type to Type to Type to
(in thousands) 1996 Total Loans 1995 Total Loans 1994 Total Loans
---- ----------- ---- ----------- ---- -----------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages:
One- to four-family $1,724 68.02% $1,302 65.97% $1,166 65.40%
Multi-family 592 2.83 806 3.75 511 4.30
Commercial real estate 2,935 19.11 2,114 21.15 1,955 21.72
Construction and land development 239 1.23 90 0.85 134 1.10
Commercial and industrial 848 5.20 3,397 5.00 1,418 4.49
Home equity lines of credit and
consumer loans 395 3.61 366 3.28 288 2.99
Unallocated 1,250 n/a 3,522 n/a 1,636 n/a
------ --- ----- --- ----- ---
Total allowance for possible loan losses $7,983 100.00% $11,597 100.00% $7,108 100.00%
------ ------- ------- ------- ------ -------
</TABLE>
Management considers any allocation of the allowance to be subjective.
Therefore, the entire allowance is available to absorb loan losses for any
category of loans.
Depending upon the Bank's asset/liability position, the Bank may sell fixed rate
one- to four-family real estate mortgages on a servicing-retained basis. At
December 31, 1996 and 1995, loans serviced for others totaled $53.59 million and
$60.74 million, respectively. Currently, the Bank retains substantially all
originated loans for its own portfolio which was the main reason for the
decrease in the loans serviced for others.
<PAGE>
Adverse market interest rate changes, between the time the customer receives a
rate-lock commitment and the time the fully-funded mortgage loan is sold to an
investor, can erode the value of that mortgage. Therefore, the Bank enters into
forward sales contracts, generally for periods not exceeding ninety days, to
mitigate the interest rate risk associated with the origination and sale of
mortgage loans. The Bank accepts credit risk in forward sales contracts to the
extent of nonperformance by a counterparty, in which case the Bank would be
compelled to sell the mortgages to another party at the current market price.
The credit exposure of forward sales contracts represents the aggregate value of
contracts with a positive fair value. These credit exposures at both December
31, 1996 and December 31, 1995 were not significant. If the Bank did not have
sufficient loans to fulfill the contract, it would purchase mortgages from
others at the prevailing market rates to satisfy the contracts. The cost of
forward sales contracts, and any related gain or loss, are deferred and
recognized when the mortgages are sold and were not material in 1996, 1995 and
1994.
Non-Performing Assets
The following table summarizes changes in non-performing assets during the
periods presented.
<TABLE>
<CAPTION>
For the years ended December 31,
(in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $21,748 $19,944 $24,818
Loans placed on non-accrual status 20,663 23,578 18,488
Change in accruing loans past due 90
or more days, net - (144) 143
Payments on non-performing assets (6,594) (3,562) (4,024)
Loans returned to accrual status (3,887) (2,834) (1,799)
Loans charged-off (10,014) (9,105) (8,864)
Sales of loans and
foreclosed real estate owned (9,889) (3,868) (4,361)
Write-downs and net losses on sale
of foreclosed real estate owned (3,492) (2,261) (4,457)
-------- -------- --------
Total reductions (33,876) (21,774) (23,362)
-------- -------- --------
Balance, end of year $8,535 $21,748 $19,944
======== ======== ========
Percent of total assets 1.14% 3.28% 2.91%
</TABLE>
The following table details the composition of non-performing assets as of the
dates presented.
<PAGE>
<TABLE>
<CAPTION>
Accruing Loans Foreclosed Total Troubled
Non-accrual Past Due 90 Real Estate Non-Performing Debt
(in thousands) Loans or More Days Owned Assets Restructurings
<S> <C> <C> <C> <C> <C>
December 31, 1996
Real estate mortgages:
One- to four-family $ 3,636 - $ 653 $ 4,289 $ 178
Multi-family 187 - - 187 1,259
Commercial mortgages 2,103 - - 2,103 3,214
Construction and land development 895 - 26 921 -
Commercial and industrial 887 - - 887 -
Consumer loans 148 - - 148 -
------- ---------- -------- --------- --------
Total $ 7,856 $ - $ 679 $ 8,535 $ 4,651
======= ========== ======== ========= ========
December 31, 1995
Real estate mortgages:
One- to four-family $ 3,304 $ - $ 593 $ 3,897 $ 340
Multi-family - - - - 3,355
Commercial mortgages 11,964 - 1,748 13,712 8,981
Construction and land development 622 - 3,052 3,674 1,017
Commercial and industrial 431 - - 431 554
Consumer loans 34 - - 34 -
------- ---------- -------- --------- --------
Total $16,355 $ - $ 5,393 $ 21,748 $ 14,247
======= ========== ======== ========= ========
December 31, 1994
Real estate mortgages:
One- to four-family $ 4,194 $ 144 $ 1,995 $ 6,333 $ 326
Multi-family - - - - 6,065
Commercial mortgages 7,384 - 2,320 9,704 7,675
Construction and land development 252 - 3,530 3,782 1,022
Commercial and industrial 57 - - 57 800
Consumer loans 68 - - 68 -
------- ---------- -------- --------- --------
Total $11,955 $ 144 $ 7,845 $ 19,944 $ 15,888
======= ========== ======== ========= ========
</TABLE>
<PAGE>
The Bank places a loan into non-accrual status when it is 90 days or more past
due or based on management's assessment that the full collectibility of
principal and interest is uncertain. Non-performing assets as a percentage of
total assets decreased from 3.28% at December 31, 1995 to 1.14% at December 31,
1996. Non-performing assets as a percentage of total loans and foreclosed real
estate owned decreased from 4.07% at December 31, 1995 to 1.70% at December 31,
1996.
Changes in Connecticut's economy have affected many of the Bank's commercial
loan and residential customers. Management recognizes these trends may continue
as the Bank continues to be affected by underwriting decisions primarily made
prior to 1992. The Bank also maintains lists of adversely classified credits
(substandard, doubtful, or loss credits) as defined by the Federal Deposit
Insurance Corporation ("FDIC"). A significant portion of the Bank's classified
commercial loans and commercial loans which have been charged off were either
originated before 1992 or were the result of subsequent restructurings of such
loans. The Bank, through its workout department, pursues the resolution of all
classified and/or non-performing assets through restructurings, credit
modifications or collections. When these procedures do not bring a loan into
performing or restructured status, the Bank generally initiates action to
foreclose the collateral or to acquire it by deed in lieu of foreclosure.
As part of its loan workout efforts, the Bank periodically enters into troubled
debt restructurings. As of December 31, 1996, 1995, and 1994, the Bank had $4.65
million, $14.25 million and $15.89 million, respectively in troubled debt
restructurings. Interest rates on these restructurings range from 6.75% to
7.50%, and the terms of the restructurings usually encompass the splitting of
the loan note into two or more notes which contain varying interest rate and
repayment terms.
The foregoing tables do not include Special Mention List loans. Although not
impaired, Special Mention List loans, in the opinion of management, exhibit a
higher than normal degree of risk and warrant monitoring due to various
considerations, including (i) the degree of documentation supporting the
borrower's current financial position, (ii) potential weaknesses in the
borrowers' ability to service the loan, (iii) possible collateral value
deficiency, and (iv) other risk factors such as geographic location, industry
focus and negatively trending financial results. These Special Mention List
loans approximated $24.32 million at December 31, 1996. Properties
collateralizing these loans are located in Connecticut, primarily in Hartford
County, and consist primarily of commercial real estate mortgages. The above
mentioned deficiencies have created some uncertainty, but not serious doubt, as
to the borrowers' ability to comply with the loan repayment terms in the future.
Management believes the reserves for these loans are adequate.
Foreclosed real estate owned decreased from $5.39 million at December 31, 1995
to $679,000 at December 31, 1996. The Bank sold 36 properties totaling $5.57
million during the year ended December 31, 1996. Write-downs and net losses on
sale of foreclosed real estate owned for the year ended December 31,1996 totaled
$3.49 million, of which $2.65 million were associated with the ADP to reduce the
carrying values of foreclosed real estate owned properties in anticipation of
their sale in bulk.
Other Assets
Cash and cash equivalents decreased $38.31 million or 56.1% from $68.32 million
at December 31, 1995 to $30.01 million at December 31, 1996. Although the Bank
increased its available funds through the stock conversion, the Bank moved its
funds from short-term investments to other investment securities, primarily
mortgage-backed securities, as the treasury yield curve steepened, thereby
enhancing interest income.
Bank premises and equipment decreased $1.38 million from $6.89 million at
December 31, 1995 to $5.51 million at December 31, 1996 due mainly to the sale
in the first quarter of 1996 of the Bank's real estate agency subsidiary which
it had previously acquired through foreclosure.
Other assets totaled $1.58 million at December 31, 1996 compared to $3.44
million at December 31, 1995. At December 31, 1995, the Bank had $851,000 in tax
refunds due which were received in 1996. In addition, as described above, the
Bank sold its real estate agency subsidiary and its related receivables.
<PAGE>
Deposits and Borrowings
Deposits increased $34.24 million or 5.5% from $620.80 million at December 31,
1995 to $655.04 million at December 31, 1996. Certificates of deposit increased
$50.67 million from December 31, 1995 to December 31, 1996 due primarily to
increases in certificates of deposit with terms of three and six months.
Partially offsetting this increase, money market savings and regular savings
accounts decreased $11.18 million and $5.46 million, respectively.
The following table presents the amounts of certificates of deposit of the Bank
at December 31, 1996 maturing during the periods reflected below and the
weighted average interest rates of such accounts.
<TABLE>
<CAPTION>
Weighted Average
Amount Interest Rate
------ -------------
<S> <C> <C>
(in thousands)
Certificates of deposit maturing during the 12 months ending:
December 31, 1997 $287,211 5.21%
December 31, 1998 56,526 5.74
December 31, 1999 7,058 5.36
Thereafter 23,943 6.16
--------
Total $374,738 5.35%
======== ====
</TABLE>
The following table presents the maturities of the Bank's certificates of
deposit in amounts of $100,000 or more at December 31, 1996 by time remaining to
maturity.
<TABLE>
<CAPTION>
Maturing
<S> <C>
(in thousands)
Three months or less $23,105
Over three through six months 7,450
Over six through twelve months 4,312
Over twelve months 9,265
-------
Total $44,132
=======
</TABLE>
Borrowings increased $960,000 from December 31, 1995 to December 31, 1996 due to
the financing of the purchase of the Bank's common stock for the Employee Stock
Ownership Plan ("ESOP"). There were 96,000 unallocated ESOP shares at December
31, 1996. The following table sets forth, at the dates indicated, information
regarding the weighted average cost of funds and the highest and average
month-end balances of the Bank's total borrowings.
<TABLE>
<CAPTION>
Year ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Weighted average interest rate of total borrowings 5.00% 5.57% 5.09%
Highest outstanding balance of total borrowings $12,200 $21,000 $21,000
Average month end balance of total borrowings $11,680 $12,667 $17,667
</TABLE>
Other liabilities decreased from $5.37 million at December 31, 1995 to $2.43
million at December 31, 1996 due primarily to decreases in U.S. Government
treasury, tax and loan payments.
Liquidity
The Bank manages its liquidity position to ensure that there is sufficient
funding available at all times to meet both anticipated and unanticipated
deposit withdrawals, new loan originations, securities purchases and other
operating cash outflows. The primary sources of liquidity for the Bank are
principal payments and maturities of securities and loans, short-term borrowings
through repurchase agreements and Federal Home Loan Bank ("FHLB") advances, net
deposit growth and funds provided by operations. Liquidity can also be provided
through sales of loans and available-for-sale securities.
<PAGE>
The Bank's most liquid assets are cash and cash equivalents, which include
investments in liquid short-term instruments, such as federal funds sold. The
level of these liquid assets is dependent upon the Bank's operating, financing
and investing activities during any given period. At December 31, 1996, the
Bank's primary liquidity, consisting of cash and federal funds sold, was $30.01
million, or 4.00% of total assets, compared to $68.32 million, or 10.32% of
total assets, at December 31, 1995.
The Bank monitors its liquidity in accordance with guidelines established under
its asset/liability management policy and applicable regulatory requirements.
Management believes its current liquidity level, which is within policy
guidelines, is sufficient to meet normal operating needs. As part of its
asset/liability management strategy as well as to meet unexpected demands, the
Bank has available a line of credit with the FHLB. At December 31, 1996, the
Bank had no borrowings under its line of credit. The Bank may borrow
approximately $14 million under that line of credit. Additional borrowings may
be made upon the pledge of additional qualifying collateral.
Asset/Liability Management and Interest Rate Sensitivity
The Bank's objective in managing interest rate risk is to produce a high and
stable net interest margin in varying interest rate environments while
maintaining the flexibility to take advantage of opportunities that may arise
from the fluctuations of interest rates. The Bank's exposure to interest rate
risk is managed strategically through the use of balance sheet simulation.
The Bank models its forecasted balance sheet using interest rate ramps, shocks
and a most likely interest rate scenario over a 24 month time horizon. In
accordance with its funds management policy, the Bank measures its interest rate
sensitivity by ramping interest rates in one hundred basis point increments from
- -400 to +400 basis points from the current rate environment. From this 800 basis
point grid, the asset/liability committee selects the most likely 400 basis
point interest rate range based on the current interest rate environment, as
well as other economic factors. The Bank's policy is to achieve equal to or less
than a 5% change in net interest income over the next 12 months within the
selected 400 basis point band. At December 31, 1996, the Bank was within its
policy guideline, and the Bank believes its level of interest rate sensitivity
was appropriate.
The Bank analyzes its interest rate sensitivity position to manage the risk
associated with interest rate movements through the use of gap analysis and
income simulation. Interest rate risk arises from mismatches in the repricing of
assets and liabilities within a given time period. Gap analysis is an approach
used to quantify these differences.
With a positive gap, in which interest-earning assets maturing or repricing
exceed interest-bearing liabilities maturing or repricing within the same
period, earnings will generally increase in a rising interest rate environment
and decrease in a declining interest rate environment. Conversely, with a
negative gap, in which interest-bearing liabilities maturing or repricing exceed
interest-earning assets maturing or repricing within the same period, earnings
will generally decrease in a rising interest rate environment and increase in a
declining interest rate environment.
While gap analysis is a general indicator of the potential effect that changing
interest rates may have on net interest income, the gap itself does not present
a comprehensive view of interest rate sensitivity. First, changes in the general
level of interest rates do not affect all categories of assets and liabilities
equally or simultaneously. Second, assumptions must be made to construct a gap
table. Money market deposits, for example, which have no contractual maturity,
are assigned a repricing interval of within one year. Management can influence
the actual repricing of these deposits independent of the gap assumption. Third,
the gap table represents a one-day position and cannot incorporate a changing
mix of assets and liabilities over time as interest rates change. For those
reasons, the Bank primarily uses simulation techniques derived from interest
rate risk management computer models, to analyze and project future net interest
income streams, incorporating the current gap position, the forecasted balance
sheet mix, and the anticipated spread relationships between market rates and
bank products, under varying interest rate scenarios.
The following table sets forth the Bank's interest rate sensitivity position at
December 31, 1996, measured in terms of the volume of interest rate sensitive
assets and liabilities that are subject to repricing in future time periods. For
purposes of this analysis, money market deposits have been presented in the
within one year category and savings and other deposits have been presented in
the one to five year category, although the interest rate elasticity of money
market, savings and other deposits cannot be tied to any one time category.
Non-accrual loans have been presented in the repricing over five years category.
Significant variations may exist in the degree of interest rate sensitivity
between individual asset and liability types within the repricing periods
presented due to differences in the repricing elasticity relative to changes in
the general level of interest rates. No assurance can be made that these
assumptions will be indicative of future withdrawals of deposits or repayments.
<PAGE>
<TABLE>
<CAPTION>
Repricing Repricing Repricing
Total Percent of Within Within Over
(in thousands) Amount Total One Year 1-5 Years 5 Years
------ ------ --------- --------- -------
<S> <C> <C> <C> <C> <C>
Assets:
Securities $194,863 26.10% $117,017 $77,328 $518
Short-term investments 465 0.06 465 - -
Loans, gross 501,849 67.21 288,541 89,821 123,487
-------- ------ ------- ------ -------
Total rate sensitive assets 697,177 93.37 406,023 167,149 124,005
Other assets 49,508 6.63
-------- ------
Total assets $746,685 100.00%
======== ======
Liabilities and Capital:
Deposits:
Savings and other $115,359 15.45% - 115,359 -
Money market 96,823 12.97 96,823 - -
Certificates of deposit 374,738 50.19 287,210 87,528 -
Demand deposits 68,133 9.12 - - 68,133
Borrowings:
FHLB advances 11,000 1.47 11,000 - -
Other borrowings 960 0.13 960 - -
-------- ------ ------- ------- ------
Total rate sensitive liabilities 667,013 89.33 395,993 202,887 68,133
Other liabilities 4,832 0.65
Capital 74,840 10.02
-------- ------
Total liabilities and capital $746,685 100.00%
======== ======
Period repricing difference (gap) $10,030 $(35,738) $55,872
======= ======== =======
Cumulative repricing difference $10,030 $(25,708) $30,164
Cumulative repricing difference to total assets 1.34% (3.44)% 4.04%
</TABLE>
At December 31, 1996, the Bank was asset sensitive as measured by a positive
cumulative one year gap of $10.03 million, or 1.34% of total assets. As a
result, the Bank's net interest income could be adversely affected by a sudden
decline in interest rates. Based upon various earnings simulations, which
include 100 basis point to 200 basis point increases and decreases in interest
rates, management has projected the effect on 1997 net interest income as
follows:
<TABLE>
<CAPTION>
Effect on Net Interest Income
-----------------------------
Shock Ramp
Scenario (a) Scenario (b)
------------ ------------
<S> <C> <C>
(in thousands)
200 basis point increase in rates (c) $ (1,018) $ 23
100 basis point increase in rates (d) (387) 21
100 basis point decrease in rates (d) 110 (30)
200 basis point decrease in rates (c) 150 (59)
</TABLE>
(a) Represents the dollar amount of change in net interest income caused by an
instantaneous repricing of market interest rates.
(b) Represents the dollar amount of change in net interest income caused by a
gradual repricing of market interest rates in equal monthly increments
throughout 1997.
(c) No adjustments are made to the Bank's passbook rates. Money market rates
are shocked/ramped 50 basis points, rather than 200 basis points.
(d) No adjustments are made to the Bank's passbook rates. Money market rates
are shocked/ramped 25 basis points, rather than 100 basis points.
<PAGE>
Although interest rates have remained low, pressure continues to rise regarding
the Bank's need to increase cost of funds rates in line with the flattening
yield curve and market competition. Management believes it likely that interest
rate spreads will continue to compress in line with actual reductions in the
Bank's net interest income throughout 1997. During 1996, the increases in
deposits were primarily from increases in certificates of deposit which carry
higher rates than the Bank's other deposits. Net interest income increased 1.8%
in 1996, due mainly to larger increases in the average volume of
interest-earning assets than interest-bearing liabilities.
Management believes some of the potential effects of the Bank's interest rate
risk will be mitigated as cash flows from disposition of non-performing assets
are reinvested into higher yielding investments and loans. Furthermore,
essentially all of the Bank's deposit base is composed of local retail deposit
accounts which tend to be somewhat less sensitive to moderate interest
fluctuations than other funding sources and, therefore, provide a reasonably
stable and cost effective source of funds. Managing these core deposits is a
significant factor in determining the Bank's ability to maintain its net
interest margin in a changing interest rate environment. The recent entry of
additional competitors into the Bank's market area may create additional
competitive pressures on the Bank to raise rates on its deposit accounts, which
may negatively affect the Bank's net interest margin. The Bank structures its
loan and securities portfolio to provide for portfolio repricing consistent with
its interest rate risk objectives.
Capital Resources
At December 31, 1996, stockholders' equity totaled $74.84 million representing a
215.4% increase over the $23.73 million in capital at December 31, 1995.
Effective June 25, 1996, Mechanics Savings Bank completed its subscription and
community offerings of common stock and converted from a Connecticut-chartered
mutual to a Connecticut-chartered capital stock savings bank. Shares totaling
5.29 million were sold at $10.00 per share. As a result, at December 31, 1996,
the Bank's capital structure includes $52,900 in common stock (par value $.01)
and additional paid in capital of $50.61 million. Additional paid-in capital was
reduced by expenses associated with the initial public offering of $2.33
million. The Bank's ESOP currently contains 96,000 unallocated shares totaling
$960,000.
In order to address concerns arising out of an examination conducted by the FDIC
as of August 30, 1993, the Bank entered into a Cease and Desist Order (the
"Order") issued by the FDIC. The Order was issued on February 22, 1994 pursuant
to a Stipulation with the Bank in which the Connecticut State Banking Department
concurred. The FDIC, at the request of the Bank and with the concurrence of the
Connecticut State Banking Department, agreed to modify the Order during 1995 to
require the Bank to achieve a Tier 1 leverage capital ratio of 6.0% or greater
and a total risk-based capital ratio of 8.0% as of December 31, 1996 and
thereafter as long as the Order is in effect, while maintaining a minimum Tier 1
leverage capital ratio of 3.5% and total risk-based capital ratio of at least
6.5% in the interim.
The conversion of the Bank from a Connecticut-chartered mutual savings bank to a
Connecticut-chartered capital stock savings bank improved the Bank's capital
ratios to a Tier 1 leverage capital ratio of 10.20%, and a total risk-based
capital ratio of 19.54% at December 31, 1996. Both ratios have increased
significantly from their December 31, 1995 levels of 3.57% and 6.90%
respectively. On December 27, 1996, the FDIC removed the Order and the Bank is
currently operating under a Memorandum of Understanding ("MOU"). Under this
agreement, the Bank agreed to update its strategic plan and improve reporting
systems relative to interest rate risk and problem asset identification. The
Bank has completed these requirements. The MOU makes no mention of special
capital requirements that the Bank must maintain. The Bank is classified as
"adequately capitalized" by the FDIC. The Bank believes its current capital is
adequate to support operations and anticipated future growth.
Impact of Recent Accounting Pronouncements
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The Bank will be required to adopt SFAS 125 for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, on a prospective basis. The adoption of this
standard is not expected to have a material impact on the Bank's financial
condition or its results of operations.
<PAGE>
Impact of Inflation and Changing Prices
The Bank's consolidated financial statements and related notes thereto presented
elsewhere herein have been prepared in accordance with generally accepted
accounting principles which require the measurement of financial position and
operating results in terms of historical dollars, without considering changes in
the relative purchasing power of money over time due to inflation. Unlike most
industrial companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates have a more
significant impact 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.
Notwithstanding this, inflation can directly affect the value of loan
collateral, in particular, real estate. Sharp decreases in real estate prices,
as discussed previously, have resulted in significant loan losses and losses on
foreclosed real estate owned. Inflation, or disinflation, could continue to
affect significantly the Bank's earnings in future periods.
Other Risks and Uncertainties
The Bank's financial performance is influenced significantly by interest rate
movements. The Bank has benefited, in recent years, from a cost of funds lower
than that which was reported by most of its savings bank competitors. Although
1996 and 1995 results reflected a reduction in the Bank's net interest margin,
that margin continued to be higher than most of its savings bank competitors
reported. The Bank has traditionally been able to retain its core depositors
despite offering lower rates on deposits than some savings institutions in
surrounding markets. However, in recent years, the Bank has had to offer more
competitive rates to retain core deposits, some of which have moved into higher
cost time deposit accounts. In addition, the entry of additional competitors
into the Bank's market area may create additional competitive pressures on the
Bank to raise rates on its deposit accounts or accept lower yields on its loan
products, which may negatively affect the Bank's net interest margin in the
future. While interest rate spreads remain high by historical measures,
management believes it is likely that they will continue to narrow in the near
future. A significant increase in long-term interest rates could adversely
affect the ability of the Bank's borrowers to service real estate-related
indebtedness, which in turn could adversely affect the Bank's provision for
possible loan losses, carrying values of OREO and operating results. The Bank
attempts to manage this interest rate risk by monitoring interest rate
movements, making investments, and adjusting its deposit and asset pricings
accordingly. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Asset/Liability Management and Interest Rate
Sensitivity."
Intense competition exists in all major lines of business in which the Bank is
presently engaged. The City of Hartford and the surrounding communities in which
the Bank maintains branches constitutes the Bank's principal market area. This
market also includes numerous national, regional, and local financial
institutions of various types. Competition for the Bank, and the banking
industry in general, has also increased dramatically from non-bank competitors
such as mortgage and finance companies, insurance companies, mutual funds, and
securities firms. Recent bank consolidations affecting the Bank's market area
have brought to the area new institutions against whom the Bank has not
previously competed. This consolidation and expected future consolidation
activity has and is expected to continue to produce a dynamic and challenging
competitive environment for the Bank.
Economic conditions at the local and national levels, as well as government
policies and regulations concerning, among other things, monetary and fiscal
policies, significantly affect the operations of financial institutions such as
the Bank. In particular, local real estate values affect institutions like the
Bank, which have substantial amounts of loans collateralized by real estate.
Excess real estate inventory, coupled with a general economic decline, adversely
affected real estate markets in general and the Bank's market area in particular
in recent years and contributed to increases in the Bank's non-performing assets
during such years. Although Connecticut and Hartford County continue to reflect
personal wealth characteristics above national averages, the economies of both
continue to lag behind many areas of the country which have shown strong
recoveries in recent years.
Results of Operations
For the year ended December 31, 1996 compared to the year ended December 31,
1995
For the year ended December 31, 1996, the Bank reported net income of $1.14
million or $0.22 per share compared to a net loss of $14.28 million or $2.76 per
share for the same period in 1995. The results in 1995 included a $6.70 million
charge to address an other than temporary impairment in the underlying value of
the Bank's 50% interest in Pearl Street Associates Limited Partnership (the
"Real Estate Partnership"), a $1.50 million deferred tax provision to reserve
fully against the Bank's deferred tax assets and a $700,000 write-down of the
Bank's real estate agency subsidiary obtained through a 1991 foreclosure. In
addition, the provision for possible loan losses totaled $6.40 million for the
year ended December 31, 1996 which was $6.45 million lower than the provision of
$12.85 million for the year ended December 31, 1995. During 1996 in connection
with the ADP, the Bank recorded $3.60 million and $2.65 million in additional
loan loss provisions and additional write-downs of foreclosed real estate owned,
respectively.
<PAGE>
Net Interest Income
Net interest income totaled $26.05 million for the year ended December 31, 1996
compared to $25.60 million for the same period in 1995, representing a 1.8%
increase. The increase resulted from a significant shift in the composition of
assets and certain deposits as noted below and the growth in earning assets of
7.1%, which more than offset the impact of a lower net interest margin. Average
interest-earning assets increased $42.88 million while average interest-bearing
liabilities increased only $12.32 million. The difference in the increases of
average interest-earning assets and average interest-bearing liabilities was
primarily due to a $12.22 million increase in average stockholders' equity
caused by the stock conversion, a $12.19 million decrease in average other
assets due to the sale of foreclosed real estate owned and the write-down of the
Real Estate Partnership and a $5.72 million increase in average
non-interest-bearing demand deposits. Average investment securities increased
$78.50 million as the Bank invested funds primarily in mortgage-backed
securities. Average net loans decreased $39.47 million primarily due to the ADP
and payoffs. Upon completion of the stock conversion in June 1996 and the ADP in
July 1996, the Bank refocused its efforts by pursuing loan originations and
deposit growth. The Bank expects its net loans to increase in 1997, as loan
origination activity increased significantly in the fourth quarter of 1996. The
average balance of certificates of deposit increased $39.12 million or 12.8%
while the average rate on these deposits increased 5 basis points. The net
interest margin decreased from 4.24% for the year ended December 31, 1995 to
4.03% for the year ended December 31, 1996. The decrease in net interest margin
was primarily due to lower yields on investment securities and short-term
investments and higher rates on certificates of deposits from 1995 to 1996.
The following table sets forth certain information relating to the Bank's
average interest-earning assets and interest-bearing liabilities and net
interest income for the years ended December 31, 1996 and 1995. Non-accrual
loans have been included in the appropriate average balance loan category but
unpaid interest on non-accrual loans has not been included for purposes of
determining interest income.
<TABLE>
<CAPTION>
Average Balances Income/Expense Yields
------- -------- -------------- ------
(in thousands) 1996 1995 1996 1995 1996 1995
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Loans, net $494,820 $534,289 $40,730 $43,325 8.23% 8.11%
Investment securities 129,830 51,326 7,721 3,204 5.95 6.24
Short-term investments 21,394 17,553 1,126 1,011 5.26 5.76
-------- -------- ------- -------
Total interest-earning assets 646,044 603,168 49,577 47,540 7.67 7.88
------- -------
Other assets 50,433 62,626
-------- --------
Total assets $696,477 $665,794
======== ========
Money market checking $37,357 $36,367 488 446 1.31 1.23
Money market savings 65,453 82,803 1,528 1,937 2.34 2.34
Savings & other 123,543 133,533 2,469 2,684 2.00 2.01
Certificates of deposit 344,331 305,212 18,459 16,201 5.36 5.31
Borrowings 11,644 12,091 582 674 5.00 5.57
-------- -------- ------- -------
Total interest-bearing liabilities 582,328 570,006 23,526 21,942 4.04 3.85
-------- -------- ------- -------
Demand deposits 62,144 56,419
Other liabilities 3,299 2,875
Capital 48,706 36,494
-------- --------
Total liabilities and capital $696,477 $665,794
======== ========
Net interest income $26,051 $25,598
======= =======
Spread on interest-bearing liabilities 3.63% 4.03%
Net interest margin 4.03% 4.24%
</TABLE>
<PAGE>
The following table presents the changes in interest and dividend income and the
changes in interest expense, attributable to changes in Interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31, 1996 versus 1995
Change in interest due to
-------------------------
<S> <C> <C> <C> <C>
(in thousands) Volume Rate Vol/Rate Net
------ ---- -------- ---
Loans, net $ (3,201) $ 654 $ (48) $(2,595)
Investment securities 4,902 (152) (233) 4,517
Short-term investments 221 (87) (19) 115
-------- ----- --------- -------
Total 1,922 415 (300) 2,037
-------- ----- --------- -------
Money market checking 12 29 1 42
Money market savings (406) (3) - (409)
Savings & other (201) (15) 1 (215)
Certificates of deposit 2,077 160 21 2,258
Borrowings (25) (70) 3 (92)
-------- ----- --------- -------
Total 1,457 101 26 1,584
-------- ----- --------- -------
Net change to interest income $ 465 $ 314 $ (326) $ 453
======== ===== ========== =======
</TABLE>
Interest Income
Interest income increased $2.04 million or 4.3% due primarily to average
increased volume of investment securities of $78.50 million which was partially
offset by lower average volume of loans of $39.47 million. The Bank's efforts to
actively originate loans began after the successful stock conversion in June
1996 and the ADP in July 1996. Originations increased significantly for consumer
and residential loans during the last quarter of 1996 due to competitive pricing
and additional staffing. Increased funds, including those from the stock
conversion, were primarily invested in mortgage-backed securities during 1996.
Yields on loans increased 12 basis points while the yields on short-term
investment and investment securities decreased 50 basis points and 29 basis
points, respectively. Overall yields averaged 7.67% for the year ended December
31, 1996, representing a 21 basis point decrease from 7.88% for the year ended
December 31, 1995.
Interest Expense
Interest expense increased $1.58 million or 7.2% during the year ended December
31, 1996 as compared to the same period in 1995. The average volume for
certificates of deposit increased $39.12 million which was partially offset by
lower average volumes for money market savings and savings and other of $17.35
million and $9.99 million, respectively. Overall, the average cost of funds has
increased to 4.04% for the year ended December 31, 1996 from 3.85% for the year
ended December 31, 1995. This increase was mainly due to a 5 basis point
increase for certificates of deposit.
Provision and Allowance for Possible Loan Losses
The Bank determines its allowance and provisions for possible loan losses based
upon a detailed evaluation of the loan portfolio through a process which
considers numerous factors, including estimated credit losses based upon
internal and external portfolio reviews and credit risk ratings, delinquency
levels and trends, estimates of the current value of underlying collateral,
concentrations, portfolio volume and mix, changes in lending policy, historical
loan loss experience, current economic conditions and examinations performed by
regulatory authorities. Determining the level of the allowance at any given
period is difficult, particularly during deteriorating or uncertain economic
periods. Management must make estimates using assumptions and information which
is often subjective and rapidly changing. The review of the loan portfolio is a
continuing process in the light of a changing economy and the dynamics of the
banking and regulatory environment. In management's judgment, based upon an
analysis of the above factors and considering recent charge-offs and delinquency
activity, the allowance for possible loan losses at December 31, 1996 is
adequate. Should the economic climate deteriorate, borrowers could experience
difficulty in repaying their obligations, and the level of non-performing loans,
charge-offs and delinquencies could rise and require increased provisions. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for possible loan losses. Such
agencies could require the Bank to recognize additions to the allowance based on
their judgments of information available to them at the time of their
examination.
The provision for possible loan losses decreased from $12.85 million for the
year ended December 31, 1995 to $6.40 million for the same period in 1996.
Included in the $6.40 million, the Bank provided $3.60 million during the second
quarter of 1996 in anticipation of the ADP. The higher provision in 1995
reflected several factors, including (i) continued deterioration of economic
conditions in the Bank's
<PAGE>
market area; (ii) continued deterioration in loan quality primarily with respect
to loans originated prior to 1992, and (iii) the further strengthening of the
Bank's credit administration process.
The following table shows the activity in the Bank's allowance for possible loan
losses for the three years ended December 31,:
<TABLE>
<CAPTION>
(in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of year $ 11,597 $ 7,108 $ 7,324
Provision for possible losses 6,400 12,850 8,200
Charge-offs (10,444) (9,105) (8,864)
Recoveries 430 744 448
-------- -------- --------
Balance, end of year $ 7,983 $ 11,597 $ 7,108
======== ======== ========
Ratio of allowance for possible loan losses:
To non-performing loans 101.62% 70.91% 58.75%
To total gross loans 1.59% 2.19% 1.31%
</TABLE>
While all segments of the Bank's loan portfolio are subject to continuous
quality evaluation, a precise method for predicting loan losses does not exist.
Many of the components of the evaluation requires the exercise of management's
judgment. While management believes that actions taken with respect to the
provision and the allowance for possible loan losses have been adequate, there
are many factors which may influence future provisions.
Other Income
The Bank recorded $5.32 million in other income for the year ended December 31,
1996 compared to $5.91 million for the same period in 1995. The following table
shows the components of other income for the years ended December 31, 1996 and
1995:
<TABLE>
<CAPTION>
$ %
(in thousands) 1996 1995 Change Change
---- ---- ------ ------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 2,287 $ 2,258 $ 29 1.28%
Investment brokerage services commissions 1,136 1,455 (319) (21.92)
Loan servicing and other fees 724 806 (82) (10.17)
Rental income 307 275 32 11.64
Income from investment in Real Estate Partnership 272 504 (232) (46.03)
Net gain on sales of loans 43 69 (26) (37.68)
Net gain (loss) on sales of investment securities (78) 362 (440) (121.55)
Other 625 180 445 247.22
------- ------- ------ ------
Total other income $ 5,316 $ 5,909 $ (593) (10.04)%
======= ======= ====== =======
</TABLE>
Investment brokerage services commissions decreased $319,000 from 1995 to 1996
primarily due to a change in philosophy from traditional commission transactions
to asset gathering. The Bank adopted this change in philosophy with the goal of
enhancing future earnings from the investment brokerage department. The program,
which began in 1986, has evolved from its original emphasis on transactional
business to its current focus on relationship business, including asset
allocation programs with wrap fees. In addition, during 1996, the Bank hired
eight additional staff members to better meet customer demands. The Bank
recently formed a subsidiary, Mechanics Investments Services, Inc. to enable the
Bank to serve its customers by providing a broader range of competitive
investment products in a more timely manner as a wholly-owned, fully disclosed
broker/dealer.
Income from the investment in Real Estate Partnership decreased $232,000 from
$504,000 for the year ended December 31, 1995 to $272,000 for the year ended
December 31, 1996 due mainly to lower rental income. Loan servicing and other
fees decreased due to lower levels of loans serviced for others.
During 1996, the Bank incurred net losses on sales of debt securities of
$139,000 which were partially offset by net gains on sales of marketable equity
securities of $61,000. During 1995, the Bank reported net gains on sales of
marketable equity securities and debt securities of $140,000 and $222,000,
respectively. Other income increased by $445,000 due to the reduced losses
($271,000) from the
<PAGE>
real estate agency subsidiary which was sold during the first quarter of 1996
and improved results from the subsidiaries ($171,000) that facilitate the
ownership, management and disposition of foreclosed real estate owned.
Other Expenses
Other expenses totaled $24.09 million for the year ended December 31, 1996
compared to $31.40 million for the same period in 1995. The following table
shows the components of other expenses for the years ended December 31, 1996 and
1995:
<TABLE>
<CAPTION>
$ %
(in thousands) 1996 1995 Change Change
---- ---- ------ ------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 9,012 $ 10,001 $ (989) (9.89)%
Write-downs and net losses on sale of
foreclosed real estate owned 3,492 2,261 1,231 54.44
Occupancy 3,211 3,087 124 4.02
FDIC insurance 1,351 1,768 (417) (23.59)
Data processing 993 955 38 3.98
Furniture and equipment 942 1,064 (122) (11.47)
Legal and accounting 709 464 245 52.80
Operation of foreclosed real estate owned 600 1,167 (567) (48.59)
Communications 491 433 58 13.39
Advertising 463 193 270 139.90
Write-down of investment in
Real Estate Partnership - 6,697 (6,697) (100.00)
Write-down of real estate agency subsidiary - 700 (700) (100.00)
Other 2,827 2,607 220 8.44
-------- -------- ------- ------
Total other expenses $ 24,091 $ 31,397 $(7,306) (23.27)%
======== ======== ======= ======
</TABLE>
Salaries and benefits were $989,000 lower in 1996 due to a reduction in staff
during the fourth quarter of 1995 of 37 employees as well as lower health
insurance expenses. Write-downs of foreclosed real estate owned were $1.23
million higher for the year ended December 31, 1996 compared to the same period
in 1995. During the second quarter of 1996, the Bank recorded a $2.65 million
write-down on foreclosed real estate owned in connection with the ADP. Despite
higher deposits, FDIC insurance was lower by $417,000 due to lower premiums.
Legal and accounting expenses were higher in 1996 due primarily to $146,000 in
higher legal expenses relating to the workout of loans and higher accounting
fees due primarily to the outsourcing of the internal audit function during
1996. Operation of foreclosed real estate owned was $567,000 lower for the year
ended December 31, 1996 compared to the same period in 1995 primarily due to the
substantial reduction in foreclosed real estate owned through the ADP.
In 1995, the Bank recognized a $6.70 million write-down of its investment in the
Real Estate Partnership. This write-down was based upon a determination by the
Bank that the impairment of value to the Real Estate Partnership's assets was
other than temporary. This determination was made after a financial review of
the discounted cash flow estimates from the major underlying asset, the Bank's
headquarter's building, which in turn was based on certain assumptions regarding
future occupancy levels, inflation, capital improvements, tenant buildout, lease
rollover rates, and building operating costs. The assumptions included certain
estimated rent renewal rates, including those on the portion of the building
leased by the Bank and other significant tenants, which may or may not actually
be achieved at the time that certain leases are subject to renewal. The
estimates did not incorporate the effects of a significant rise in central
business district vacancy rates, further consolidation and/or downsizing of
Hartford-based companies, or the loss of any major tenant. As such, there can be
no assurance that the assumptions utilized in the cash flow estimates will
actually be realized or that events beyond the control of the Bank will not
occur which may adversely affect real estate values.
In 1995, the Bank also recorded a $700,000 charge in anticipation of the loss
incurred on the sale of its real estate agency subsidiary, which sale closed in
the first quarter of 1996. Other expenses were higher for the year ended
December 31, 1996 due primarily to the outsourcing of the purchasing function
and increased benefits plan administration expenses, office supplies, security
and business development expenses.
<PAGE>
Income Taxes
The income tax benefit was $266,000 for the year ended December 31, 1996
compared to income tax expense of $1.54 million for the year ended December 31,
1995. During the fourth quarter of 1996, the Bank received a tax refund from the
IRS relating to carrying back of 1995 deductions. During 1995, the provision
represented a $40,000 state tax provision, and an additional $1.50 million
deferred tax asset valuation allowance to fully reserve against the Bank's total
net deferred tax assets of $10.15 million at December 31, 1995. At December 31,
1996, the Bank had a fully reserved net deferred tax asset of $9.66 million. The
valuation allowance remains 100% of the net deferred tax asset. In making that
decision, management concluded that the amounts and recency of operating losses,
caused primarily by credit costs, more than offset the impact of improved
earnings and lower non-performing assets in the last six months of 1996. The
deferred tax asset and its valuation allowance are reviewed on a quarterly
basis.
Results of Operations
For the year ended December 31, 1995 compared to the year ended December 31,
1994
The Bank incurred a net loss of $14.28 million in 1995, compared with net income
of $4.04 million in 1994. The 1995 net loss included a provision for possible
loan losses of $12.85 million necessary to address an increase in non-performing
and classified loans, a $6.70 million charge to address an other than temporary
impairment in the underlying value of the Bank's investment in the Real Estate
Partnership, a $1.50 million deferred tax provision to reserve fully against the
Bank's net deferred tax assets, a $700,000 write-down in anticipation of the
sale of the Bank's real estate agency subsidiary obtained through a 1991
foreclosure (which sale closed in the first quarter of 1996), and a $470,000
charge incurred in connection with a reduction of 37 full-time staff, a 17.5%
reduction. These provisions, losses and charges were mitigated in part by income
generated from service charges, brokerage commissions and other sources.
Net Interest Income
Net interest income declined $1.35 million, or 5.01% to $25.60 million in 1995
from $26.95 million in 1994. This decline occurred due to a compression of the
Bank's interest rate spread caused by a shift in its cost of funds from lower
rate savings and money market accounts to higher rate certificates of deposit.
The Bank increased its cost of funds on certain accounts, driven by market
competition and depositor demand, as evidenced by the shift in deposit mix. Net
interest income was also adversely affected by the decline in loan balances in
the commercial mortgage and home equity lines of credit balances, and by the
increase in 1995 of non-performing loans. The following table sets forth certain
information relating to the Bank's average interest-earning assets and
interest-bearing liabilities and net interest income for the years ended
December 31, 1995 and 1994. Non-accrual loans have been included in the
appropriate average balance loan category, but unpaid interest on non-accrual
loans has not been included for the purposes of determining interest income.
<TABLE>
<CAPTION>
Average Balances Income/Expense Yields
(in thousands) 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Loans, net $534,289 $563,017 $43,325 $42,241 8.11% 7.50%
Investment securities 51,326 51,460 3,204 2,690 6.24 5.23
Short-term investments 17,553 10,678 1,011 440 5.76 4.12
-------- -------- ------- -------
Total interest-earning assets 603,168 625,155 47,540 45,371 7.88 7.26
------- -------
Other assets 62,626 69,238
-------- --------
Total assets $665,794 $694,393
======== ========
Money market checking $36,367 $41,151 446 507 1.23 1.23
Money market savings 82,803 106,269 1,937 2,203 2.34 2.07
Savings & other 133,533 149,508 2,684 3,011 2.01 2.01
Certificates of deposit 305,212 290,531 16,201 11,831 5.31 4.07
Borrowings 12,091 17,137 674 872 5.57 5.09
Total interest-bearing liabilities 570,006 604,596 21,942 18,424 3.85 3.05
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Demand deposits 56,419 54,029
Other liabilities 2,875 1,295
Capital 36,494 34,473
---------- ----------
Total liabilities and capital $ 665,794 $ 694,393
========== ==========
Net interest income $25,598 $26,947
======= =======
Spread on interest-bearing liabilities 4.03% 4.21%
Net interest margin 4.24% 4.31%
</TABLE>
The following table presents the changes in interest and dividend income and the
changes in interest expense, attributable to changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
Years ended December 31, 1995 versus 1994
Change in interest due to
-------------------------
(in thousands) Volume Rate Vol/Rate Net
------ ---- -------- ---
<S> <C> <C> <C> <C>
Loans, net $(2,155) $3,413 $(174) $ 1,084
Investment securities (7) 523 (2) 514
Short-term investments 283 175 113 571
------- ------ ----- -------
Total (1,879) 4,111 (63) 2,169
------- ------ ----- -------
Money market checking (59) (2) - (61)
Money market savings (486) 282 (62) (266)
Savings & other (322) (6) 1 (327)
Certificates of deposit 598 3,591 181 4,370
Borrowings (257) 83 (24) (198)
------- ------ ----- -------
Total (526) 3,948 96 3,518
------- ------ ----- -------
Net change to interest income $(1,353) $ 163 $(159) $(1,349)
======= ====== ===== =======
</TABLE>
Interest Income
Total interest income increased $2.17 million or 4.8% to $47.54 million in 1995
from $45.37 million in 1994. This increase was attributable to an upward
repricing of adjustable rate mortgages during the first half of the year and a
33 basis point increase in the Bank's yield on commercial loans. In addition,
the increase in average investment yield was driven by management's decision to
extend the average duration of the Bank's investment portfolio in 1995. The
increase in interest income caused by the rise in loan and investment yields was
offset, however, by a decline in average loans outstanding of $39.38 million
within the commercial lending and home equity lines of credit areas of the loan
portfolio, which resulted in shrinkage of average net loans to $534.29 million
in 1995 from $563.02 million in 1994. The decline in loan balances occurred as a
result of the Bank's increase in loan charge-offs, encouraging certain loan
customers which no longer met the Bank's current underwriting standards to
refinance elsewhere, and the sale of $17.37 million of home equity lines of
credit on December 31, 1994.
Interest Expense
Interest expense increased $3.52 million, or 19.1% to $21.94 million in 1995
from $18.42 million in 1994. This increase reflected an overall 80 basis point
increase in the Bank's cost of funds, primarily driven by a significant increase
in the Bank's money market account rates and its efforts to retain core
deposits. The Bank also increased rates on certain certificate of deposit
products in order to attract new deposits and retain existing deposits. Average
deposit balances were down $29.55 million, or 5.0%, to $557.91 million in 1995
from $587.46 million in 1994. The decrease was the result of a slight decline in
money market checking account balances, and 22.1% and 10.7% declines in money
market and savings accounts, respectively, as customers shifted funds from those
lower paying accounts to higher paying certificate of deposit accounts. Average
certificate of deposit account balances increased 5.1% in 1995, from $290.53
million in 1994. Average borrowings declined $5.05 million, from $17.14 million
in 1994, as the Bank prepaid certain advances in line with management's efforts
to reduce the size of the Bank's balance sheet. Average borrowing rates
increased slightly.
<PAGE>
Provision and Allowance for Possible Loan Losses
The Bank provided $12.85 million for possible loan losses in 1995, an increase
of $4.65 million, or 56.7%, from $8.20 million in 1994. The higher provision in
1995 reflected several factors, including (i) continued deterioration of
economic conditions in the Bank's market area; (ii) continued deterioration in
loan quality primarily with respect to loans originated prior to 1992, and (iii)
the implementation of the Bank's credit administration program.
Other Income
Other income decreased $3.45 million, or 36.8%, to $5.91 million in 1995 from
$9.36 million in 1994. The following table shows the components of other income
for the years ended December 31, 1995 and 1994:
<TABLE>
<CAPTION>
$ %
(in thousands) 1995 1994 Change Change
---- ---- ------ ------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $2,258 $2,168 $ 90 4.15%
Investment brokerage services commissions 1,455 1,802 (347) (19.26)
Loan servicing and other fees 806 1,155 (349) (30.22)
Income from investment in Real Estate Partnership 504 558 (54) (9.68)
Net gain on sales of investment securities 362 187 175 93.58
Rental income 275 275 - 0.00
Net gain on sales of loans 69 2,830 (2,761) (97.56)
Other 180 379 (199) (52.51)
------ ------ ------- ------
Total other income $5,909 $9,354 $(3,445) (36.83)%
====== ====== ======= ======
</TABLE>
Service charges on deposit accounts increased as a result of increased demand
deposit transaction volume and corresponding transaction fees, and a continued
increase in overdraft charges reflecting management's efforts to closely monitor
overdraft activity. Investment brokerage services commissions declined due to a
drop in the total number of trades made by the Bank's customers in 1995 and
changes in the type of the trades made. Loan servicing and other fees decreased
$349,000 due primarily to a decline in mortgage servicing fees in connection
with the sale of $88.17 million of servicing rights in 1994, a reduction in
mortgage conversion fees as fewer customers elected to convert adjustable rate
mortgages to fixed rate mortgages in 1995, and a decline in late fees. Gains on
sales of investment securities increased as management sold portions of its
investment portfolio in 1995 to take advantage of available gains and reduce
risk within the portfolio. Specifically, net gains of approximately $140,000 and
$222,000 were recognized on the sale of the equity and debt portions of the
portfolio, respectively. Gains on sales of loans decreased as the Bank sold
small amounts of performing loans and no servicing rights in 1995, compared to
large sales of both in 1994.
Other Expenses
The following table shows the components of other expenses for the years ended
December 31, 1995 and 1994:
<TABLE>
<CAPTION>
$ %
(in thousands) 1995 1994 Change Change
---- ---- ------ ------
<S> <C> <C> <C> <C>
Salaries and employee benefits $10,001 $ 9,738 $ 263 2.70%
Write-down of investment in Real Estate Partnership 6,697 - 6,697 n/a
Occupancy 3,087 3,196 (109) (3.41)
Write-downs and net losses on sale of foreclosed real estate owned 2,261 4,457 (2,196) (49.27)
FDIC insurance 1,768 1,924 (156) (8.11)
Operation of foreclosed real estate owned 1,167 458 709 154.80
Furniture and equipment 1,064 1,074 (10) (0.93)
Data processing 955 1,006 (51) (5.07)
Write-down of real estate agency subsidiary 700 - 700 n/a
Legal and accounting 464 592 (128) (21.62)
Communications 433 509 (76) (14.93)
Advertising 193 146 47 32.19
Other 2,607 2,181 426 19.53
------- ------- ------ ------
Total other expenses $31,397 $25,281 $6,116 24.19%
======= ======= ====== ======
</TABLE>
<PAGE>
The minor increase in salaries and employee benefits reflected a 3% overall pay
increase in 1995, an increase of approximately $100,000 in the Bank's pension
and 401(k) contributions from the prior year, and a $293,000 charge associated
with the Bank's reduction in full-time staff. Full-time staff was reduced by 37
employees in the fourth quarter of 1995.
Also in 1995, the Bank recognized a $6.70 million write-down of its investment
in the Real Estate Partnership. This write-down was based upon a determination
by the Bank that the impairment of value to the Real Estate Partnership's assets
was other than temporary. This determination was made after a financial review
of the discounted cash flow estimates from the major underlying asset, the
Bank's headquarter's building, which in turn was based on certain assumptions
regarding future occupancy levels, inflation, capital improvements, tenant
buildout, lease rollover rates, and building operating costs. The assumptions
included certain estimated rent renewal rates, including those on the portion of
the building leased by the Bank and other significant tenants, which may not
actually be achieved at the time that certain leases are subject to renewal. The
estimates do not incorporate the effects of a significant rise in central
business district vacancy rates, further consolidation and/or downsizing of
Hartford-based companies, or the loss of any major tenant. As such, there can be
no assurance that the assumptions utilized in the cash flow estimates will
actually be realized or that events beyond the control of the Bank will not
occur which may adversely affect real estate values.
The Bank's occupancy expense decreased in 1995 due to lower common area
maintenance and contractual service costs incurred. Foreclosed real estate owned
write-downs were reduced approximately 50% during 1995 due to a lower average
balance of foreclosed real estate owned at the Bank and the sale of certain
properties in 1995 at or near carrying value. FDIC insurance costs declined due
to a reduction in deposit balances and lower FDIC insurance premium rates. Costs
of operating foreclosed real estate owned increased significantly as a result of
large expenditures for property taxes, legal fees and workout costs incurred for
certain new properties which migrated into foreclosed real estate owned in 1995,
and the elimination of rental income generated from certain older properties
sold during the year.
Data processing fees declined due to a new contract effective January 1, 1995.
The Bank also recorded a $700,000 charge in anticipation of the loss incurred on
the sale of its real estate agency subsidiary, which sale closed in the first
quarter of 1996. Other operating expenses increased due to consulting costs
($177,000) incurred to address the restructuring of work flows and the reduction
in work force, and an increase in advanced escrow write-offs, returned item
losses and other transaction losses.
Income Taxes
The Bank recorded an income tax provision of $1.54 million in 1995. This
provision represents a $40,000 state tax provision, and an additional $1.50
million deferred tax asset valuation allowance to fully reserve against the
Bank's total net deferred tax assets of $10.15 million at December 31, 1995.
This additional valuation allowance was necessary because the then-current
operating and asset quality trends made it more likely than not, as of December
31, 1995 that the total net deferred tax asset will not be realized. This action
reversed 1994's tax benefit of the same amount.
<PAGE>
Consolidated Statements of Condition
December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
(dollars in thousands)
Assets
Cash and due from banks:
Non-interest-bearing deposits and cash $ 29,541 $ 29,219
Short-term investments 465 39,100
-------- --------
Cash and cash equivalents 30,006 68,319
Investments:
Available-for-sale, at market value 147,356 35,026
Held-to-maturity (market value at December 31, 1996: $43,781) 43,218 -
Federal Home Loan Bank stock, at cost 4,289 4,289
Loans, net 494,291 517,789
Loans held-for-sale 87 1,126
Bank premises and equipment 5,513 6,892
Investment in Real Estate Partnership 15,201 16,468
Accrued interest receivable 4,468 3,464
Foreclosed real estate owned 679 5,393
Other assets 1,577 3,435
-------- --------
$746,685 $662,201
======== ========
Liabilities and Stockholders' Equity
Liabilities:
Deposits $655,043 $620,802
Borrowings 11,960 11,000
Mortgage escrow 2,415 1,306
Other liabilities 2,427 5,367
-------- --------
Total liabilities 671,845 638,475
-------- --------
Commitments and contingencies (Note 14)
Stockholders' Equity:
Preferred stock - par value $.01; 1,000,000 shares - -
authorized, none issued
Common stock - par value $.01; 7,000,000 shares 53 -
authorized; 5,290,000 issued
at December 31, 1996
Additional paid in capital 50,611 -
Retained earnings 24,815 8,944
Net unrealized gains on securities 321 53
Less: Unallocated ESOP shares (96,000 shares) (960) -
Surplus - 14,729
-------- --------
Total stockholders' equity 74,840 23,726
-------- --------
$746,685 $662,201
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Consolidated Statements of Operations
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
(in thousands except for earnings per share)
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 40,730 $ 43,325 $ 42,241
------------ ------------ ------------
Interest on investment securities:
Interest on debt securities 6,852 2,479 1,735
Dividends on equity securities 276 377 614
Distribution from mutual funds 17 26 68
------------ ------------ ------------
7,145 2,882 2,417
Other interest income 1,702 1,333 713
------------ ------------ ------------
Total interest income 49,577 47,540 45,371
------------ ------------ ------------
Interest expense:
Interest on deposits:
Savings deposits 3,922 4,538 5,117
Time deposits 19,022 16,730 12,435
------------ ------------ ------------
Total interest on deposits 22,944 21,268 17,552
Interest on borrowings 582 674 872
------------ ------------ ------------
Total interest expense 23,526 21,942 18,424
------------ ------------ ------------
Net interest income 26,051 25,598 26,947
Provision for possible loan losses 6,400 12,850 8,200
------------ ------------ ------------
Net interest income after provision for possible loan losses 19,651 12,748 18,747
------------ ------------ ------------
Other income:
Service charges on deposit accounts 2,287 2,258 2,168
Investment brokerage services commissions 1,136 1,455 1,802
Loan servicing and other fees 724 806 1,155
Rental income 307 275 275
Income from investment in Real Estate Partnership 272 504 558
Net gain on sales of loans 43 69 2,830
Net gain (loss) on sales of investment securities (78) 362 187
Other 625 180 379
------------ ------------ ------------
Total other income 5,316 5,909 9,354
------------ ------------ ------------
Other expenses:
Salaries and employee benefits 9,012 10,001 9,738
Write-downs and net losses on sale of
foreclosed real estate owned 3,492 2,261 4,457
Occupancy 3,211 3,087 3,196
FDIC insurance 1,351 1,768 1,924
Data processing 993 955 1,006
Furniture and equipment 942 1,064 1,074
Legal and accounting 709 464 592
Operation of foreclosed real estate owned 600 1,167 458
Communications 491 433 509
Advertising 463 193 146
Write-down of investment in Real Estate Partnership - 6,697 -
Write-down of real estate agency subsidiary - 700 -
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Other 2,827 2,607 2,181
--------- --------- ---------
Total other expenses 24,091 31,397 25,281
--------- --------- ---------
Income (loss) before income taxes 876 (12,740) 2,820
--------- --------- ---------
Income tax expense (benefit):
Current (266) 40 276
Deferred - 1,500 (1,500)
--------- --------- ---------
(266) 1,540 (1,224)
--------- --------- ---------
Net income (loss) $ 1,142 $ (14,280) $ 4,044
========= ========= =========
Earnings per share and pro forma earnings per share:
Primary $0.22 $(2.76) $0.78
Fully diluted $0.22 $(2.76) $0.78
Weighted average and pro forma weighted
average shares outstanding:
Primary 5,170 5,170 5,170
Fully diluted 5,170 5,170 5,170
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity For the years ended
December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Additional Net Unrealized Unallocated
Common Paid in Retained Gains (Losses) ESOP
Stock Capital Earnings on Securities Shares Surplus
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Balance at December 31, 1993 $ - $ - $ 19,180 $ 368 $ - $ 14,729
1994 net income - - 4,044 - - -
Change in net unrealized gains
(losses) on securities - - - (881) - -
-------- -------- -------- -------- -------- --------
Balance at December 31, 1994 - - 23,224 (513) - 14,729
1995 net loss - - (14,280) - - -
Change in net unrealized gains
(losses) on securities - - - 566 - -
-------- -------- -------- -------- -------- --------
Balance at December 31, 1995 - - 8,944 53 - 14,729
1996 net income - - 1,142 - - -
Change in net unrealized gains
(losses) on securities - - - 268 - -
Issuance of common stock 53 50,514 - - - -
Unallocated ESOP sh_s - - - - (1,200) -
Reclass of surplus to retained earnings
upon issuance of common stock - - 14,729 - - (14,729)
Allocated ESOP shares - 97 - - 240 -
-------- -------- -------- -------- -------- --------
Balance at December 31, 1996 $ 53 $ 50,611 $ 24,815 $ 321 $ (960) $ -
======== ======== ======== ======== ======== ========
</TABLE>
<PAGE>
Consolidated Statements of Cash Flows
For the years ended December 31, 1996, 1995 & 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Cash flows from operating activities:
Net income (loss) $ 1,142 $ (14,280) $ 4,044
--------- --------- ---------
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Provision for possible loan losses 6,400 12,850 8,200
Depreciation and amortization 989 1,174 1,187
Amortization (accretion) of investment security
premiums/discounts, net 204 (1,364) (635)
Deferred loan costs, net of amortization (331) (635) (923)
Net gain on sales of loans (43) (69) (2,830)
Loss on retirement of bank premises and equipment 9 77 -
Decrease (increase) in deferred tax assets - 1,500 (1,500)
Realized losses on available-for-sale securities 230 381 260
Realized gains on available-for-sale securities (152) (618) (447)
Realized gains on held-to-maturity securities - (125) -
(Increase) decrease in interest and dividend receivables (1,004) 177 (533)
Income from investment in Real Estate Partnership (272) (504) (558)
Write-down of investment in Real Estate Partnership - 6,697 -
(Gain on sale) write-down of real estate agency subsidiary (7) 700 -
Write-downs and net losses on sale of foreclosed real estate owned 3,492 2,261 4,457
Decrease in other assets 1,071 756 25
(Decrease) increase in other liabilities (1,130) 1,256 (120)
Allocation of Employee Stock Ownership Plan shares 337 - -
--------- --------- ---------
Total adjustments 9,793 24,514 6,583
--------- --------- ---------
Net cash provided by operating activities 10,935 10,234 10,627
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 110,125 59,102 34,516
Proceeds from sale of held-to-maturity securities - 7,521 -
Proceeds from principal payments on available-for-sale securities 13,435 - -
Proceeds from principal payments on held-to-maturity securities 445 - -
Proceeds from maturities of available-for-sale securities 500 60,850 41,010
Proceeds from maturities of held-to-maturity securities 4,000 7,000 1,500
Purchases of available-for-sale securities (257,193) (120,428) (69,503)
Purchases of held-to-maturity securities (26,569) - (11,351)
Proceeds from loan sales 15,215 4,549 22,077
Net originations and purchases of loans (427) (412) 15,780
Decrease (increase) in investment in Real Estate Partnership 919 1,710 (920)
Proceeds from sale of real estate agency subsidiary 424 -
Proceeds from sale of foreclosed real estate owned 5,565 2,040 3,958
Purchases of bank premises and equipment (255) (946) (290)
--------- --------- ---------
Net cash (used in) provided by investing activities (133,816) 20,986 36,777
--------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C>
Cash flows from financing activities:
Net decrease in demand deposits, money market and savings accounts (15,592) (43,089) (15,495)
Net increase (decrease) in certificates of deposit 49,833 42,829 (26,160)
Net FHLB (repayments) borrowings - (10,000) 5,000
Financing of Employee Stock Ownership Plan 1,200 - -
Repayment of financing of Employee Stock Ownership Plan (240) - -
Net proceeds from stock conversion 49,367 - -
------- ------- -------
Net cash provided by (used in) financing activities 84,568 (10,260) (36,655)
------- ------- -------
Net (decrease) increase in cash and cash equivalents (38,313) 20,960 10,749
Cash and cash equivalents at beginning of year 68,319 47,359 36,610
------- ------- -------
Cash and cash equivalents at end of period $30,006 $68,319 $47,359
======= ======= =======
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
<PAGE>
Consolidated Statements of Cash Flows
For the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
(in thousands)
Non-cash investing and financing activities
Change in net unrealized gain (loss)
on securities available-for-sale $1,006 $566 $(881)
Change in net unrealized loss on securities held-to-maturity (432) - -
Transfer of loans to foreclosed real estate owned 3,723 1,849 2,461
Transfer of loans to held-for-sale 87 1,226 179
Transfer of held-to-maturity securities to available-for-sale - 9,301 -
Transfer of available-for-sale securities to held-to-maturity 21,076 - -
Supplemental disclosures of cash flow information
Income taxes paid 57 725 128
Income tax refunds received 1,330 88 452
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
1. Significant Accounting Policies:
Business
Mechanics Savings Bank provides a full range of banking and financial services
to individual and small-to-medium sized businesses located primarily in Central
Connecticut. The Bank competes with banks, brokerage firms, mortgage bankers and
other financial institutions. The Bank also is subject to the regulations of
certain state and federal agencies and receives periodic examinations by these
authorities.
The Bank completed its subscription and community offerings of common stock on
June 25, 1996, thereby completing its conversion from a Connecticut-chartered
mutual savings bank to a Connecticut-chartered capital stock savings bank (the
"Conversion"). The Bank sold the maximum number of shares offered in the
Conversion, as adjusted, issuing 5.29 million shares for total gross proceeds of
$52.90 million. The Bank's tier one leverage capital ratio increased to 10.20%
and its total risk-based capital ratio increased to 19.54% as of December 31,
1996.
Basis of Financial Statement Presentation
The preparation of the consolidated financial statements, in accordance with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for possible loan
losses and the valuation of foreclosed real estate owned. In connection with the
determination of the allowance for possible loan losses and valuation of
foreclosed real estate owned, management obtains independent appraisals for
significant relationships.
A substantial portion (88%) of the Bank's loans and commitments are
collateralized by real estate in Connecticut. In addition, all of the foreclosed
real estate owned is located in that same market. Accordingly, a substantial
portion of the Bank's loan portfolio and foreclosed real estate owned are
susceptible to changes in market conditions in Connecticut.
Management believes that the allowance for possible loan losses is adequate and
that foreclosed real estate owned is recorded at the lower of cost or estimated
fair value. While management uses available information to recognize losses on
loans and foreclosed real estate owned, future additions to the allowance for
possible loan losses or write-downs on foreclosed real estate owned may be
necessary based on changes in economic conditions, particularly in Connecticut.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for possible loan
losses and the valuation of foreclosed real estate owned. Such agencies may
require the Bank to recognize additions to the allowance for possible loan
losses or additional write-downs on foreclosed real estate owned based on their
judgments of information available to them at the time of their examination.
Principles of Consolidation
The consolidated financial statements include the accounts of Mechanics Savings
Bank (the Bank), and its wholly-owned subsidiaries, MECH Corporation, MECH TWO
Corporation, MECH THREE Corporation, Eighty Pearl Street Corp., Alliance Realty
and Mechanics Investment Services, Inc. Mechanics Investment Services, Inc. was
formed during 1996 to enable the Bank to serve its customers with a wholly-owned
fully disclosed broker/dealer. Intercompany accounts and transactions have been
eliminated in consolidation.
Investments
The Bank accounts for its securities in accordance with Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). Securities that the Bank has the ability and
positive intent to hold to maturity are classified as held-to-maturity and
carried at amortized cost. Securities that may be sold as part of the Bank's
asset/liability or liquidity management or in response to or in anticipation of
changes in interest rates and resulting prepayment risk, or for other similar
factors, are classified as available-for-sale and carried at fair market value.
Unrealized gains and losses on such securities are reported as a separate
component of stockholders' equity, net of taxes. From time to time, the Bank may
classify a security as a trading security when the intent is to sell the
security in the near future to generate profits or if a pool of loans is
securitized into a mortgage-backed security and the Bank's intent is not to hold
the security to maturity. Unrealized gains and losses on
<PAGE>
such securities are reported in earnings. Realized gains and losses on the sales
of all securities are reported in earnings and computed using the specific
identification cost basis.
Loans
Loans are generally recorded at the contractual amounts owed by borrowers, less
unearned discounts, deferred origination fees and costs, the undisbursed portion
of any loans in process, and the allowance for possible loan losses. Fixed rate
one- to four-family residential real estate loans that were originated with the
intent to sell in the secondary mortgage market or those loans which have been
identified as assets which may be sold prior to maturity or for which there is
not a positive intent to hold to maturity, based on foreseeable conditions, are
classified as held-for-sale and carried at the lower of cost or market value.
Allowance for Possible Loan Losses
The Bank adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), and Statement
of Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures" ("SFAS 118"),
effective January 1, 1995. Under these standards, a loan is considered impaired,
based on current information and events, if it is probable that the Bank will be
unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based on the present value of expected future cash
flows discounted at the loan's historical effective interest rate, except that
all collateral-dependent loans are measured for impairment based on the fair
value of the collateral. Smaller balance homogeneous loans, considered to be all
home equity and consumer loans, are excluded from the Bank's individual
impairment measurement assessment, as loans within this scope are collectively
evaluated for impairment. Such loans are collectively evaluated for impairment
using historical charge-off data, industry data and other trend analysis.
Factors which affect management's judgment in determining when a loan is
impaired include the length of the loan's current delinquency and the historical
number of times delinquent, the nature of the customer's industry focus, the
customer's financial stability as documented by its financial records, and
historical financial facts and estimates observed as part of the Bank's
relationship with the customer. However, another factor which may affect
management's judgment in determining impairment is a continuing insignificant
delay or shortfall in the amount of payments by the customer. Management
considers an insignificant delay in payment to be a delay of thirty days or
less, and considers an insignificant shortfall in payment amount of less than
10% of the required payment amount. However, an insignificant delay or shortfall
in the amount of payment is not an event that, when considered in isolation,
would automatically cause a loan to be considered impaired.
A loan continues to be classified as impaired until it is brought fully current
and the collection of scheduled interest and principal is considered probable.
Management reviews all loans classified as loss, doubtful, substandard and
special mention to determine impairment. Other risk categories used to identify
impaired loans include non-accrual loans and chronically delinquent loans. Loans
restructured prior to the Bank's adoption of SFAS 114 are not evaluated for
impairment, as allowed by that Statement.
The adoption of SFAS 114 and SFAS 118 resulted in no additional provision for
possible loan losses. Accordingly, there was no impact on the Bank's financial
condition or results of operations.
The adequacy of the allowance for possible loan losses is periodically evaluated
by the Bank in order to maintain the allowance at a level that is sufficient to
absorb probable credit losses. Management's evaluation of the adequacy of the
allowance is based on a review of the Bank's historical loss experience, known
and inherent risks in the loan portfolio, including adverse circumstances that
may affect the ability of the borrower to repay interest and/or principal, the
estimated value of collateral, and an analysis of the levels and trends of
delinquencies, charge-offs, and the risk ratings of the various loan categories.
Such factors as the level and trend of interest rates and the condition of the
national and local economies are also considered.
The allowance for possible loan losses is established through charges to
earnings in the form of a provision for possible loan losses. Increases and
decreases in the required allowance, based on management's periodic evaluation
of various risk factors and due to changes in the measurement of impaired loans,
are included in the provision for possible loan losses.
When a loan or portion of a loan, including impaired loans, is determined to be
uncollectible, the portion deemed uncollectible is charged against the allowance
and subsequent recoveries, if any, are credited to the allowance.
<PAGE>
Income Recognition on Accruing, Impaired and Non-accrual Loans
Interest on loans is credited to income as earned based on outstanding principal
balances. Nonrefundable loan origination fees and certain direct loan
origination costs are deferred and the net amounts are amortized over the
contractual life of the related loans using the level-yield method. Loans,
including impaired loans, are generally classified as non-accrual if they are
past due as to maturity or payment of principal or interest for a period of 90
days or more, unless such loans are well-collateralized and in the process of
collection. If a loan or a portion of a loan is classified as doubtful, the loan
is classified as non-accrual and is considered impaired. Loans that are current
or past due less than 90 days may also be classified as non-accrual and impaired
if repayment in full of principal and/or interest is in doubt. Management
generally considers non-accrual and impaired loans to be one and the same. Loans
which are determined to be impaired but which are not yet past due greater than
90 days, are placed on non-accrual at management's discretion.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) have been brought current, and there is
a sustained period of repayment performance (generally a minimum of six months)
by the borrower in accordance with the contractual terms of interest and
principal payment.
While a loan is classified as non-accrual and impaired and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal outstanding.
When the recorded loan balance is expected to be collected, interest income may
be recognized on a cash basis. In the case where a non-accrual or an impaired
loan had been partially charged off, recognition of interest on a cash basis is
limited to that which would have been recognized on the recorded loan balance at
the contractual interest rate. Cash interest receipts in excess of that amount
are recorded as recoveries to the allowance for possible loan losses until prior
charge-offs have been fully recovered.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation,
computed by the straight-line method over the estimated useful lives of the
assets. Accumulated depreciation is reduced upon the sale of Bank premises and
equipment and any resulting gain or loss is recorded as income or expense.
Effective January 1, 1996, the Bank implemented Statement of Financial
Accounting Standards No.121, "Accounting for the Impairment Of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of" ("SFAS 121"). SFAS 121 establishes
accounting standards for the impairment of long-lived assets and certain
identifiable intangibles to be held and used by an entity or disposed of. The
implementation of the statement did not have any impact on the Bank's financial
condition or results of operations.
Foreclosed Real Estate Owned
Foreclosed real estate owned consists principally of properties acquired through
mortgage loan foreclosure proceedings and properties acquired through a joint
venture. These properties are recorded at the lower of the carrying value of the
related loans, including costs of foreclosure, or the estimated fair value of
the real estate acquired.
Loan Sales
From time to time, the Bank sells residential mortgage loans in the secondary
market and retains the servicing rights. The Bank implemented Statement of
Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights" ("SFAS 122") effective January 1, 1996. Therefore, the Bank recognizes
an asset for rights to service mortgage loans for others, however those
servicing rights are acquired. The Bank also assesses its capitalized mortgage
servicing rights for impairment based on the fair value of those servicing
rights. The implementation of this new statement did not have a material effect
on the Bank's financial condition or results of operations.
Income Taxes
The Bank and its subsidiaries file consolidated federal and state income tax
returns. In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), the Bank uses the asset/liability
method of accounting for income taxes. Deferred income taxes and tax benefits
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The Bank provides deferred taxes for the estimated future tax effects
attributable to temporary differences and carryforwards when realization is more
likely than not.
<PAGE>
Earnings Per Share
Earnings (loss) per share is computed based upon the weighted average number of
shares of common stock and common stock equivalents (if dilutive) outstanding
during the periods presented. Common stock equivalents consist of stock options
granted upon the completion of the Conversion on June 25, 1996. For earnings
(loss) per share purposes, the common stock and common stock equivalents have
been assumed to be outstanding for all periods presented.
The option exercise price will be equal to the higher of the initial public
offering price of $10.00 or the fair market value of the stock on the date of
the first annual meeting of stockholders scheduled for April 23, 1997. For the
year ending December 31, 1996, the option exercise price used in the earnings
per share calculation was the closing price of $15.75 on December 31, 1996. For
the years ending December 1995 and 1994, the option exercise price used was
equal to the initial public offering price of $10.00.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation" ("SFAS 123"). SFAS 123
encourages, but does not require, the Bank to recognize compensation expense for
grants of stock, stock options and other equity instruments to employees based
on fair value accounting rules. That Statement also allows the Bank to account
for stock-based compensation under Accounting Principles Board Opinion No. 25
("APB 25"), under which no compensation expense is recognized in certain
circumstances. However, SFAS 123 requires the Bank to disclose pro forma net
income and earnings per share using the fair value based method. SFAS 123 was
required for years beginning after December 15, 1995. The Bank did not adopt the
expense recognition provisions of SFAS 123 but rather elected to follow APB 25
upon the implementation of stock-based compensation programs.
Since the grant price of the options issued will not be determined until the
scheduled April 23, 1997 stockholders' meeting, the Bank cannot determine the
fair value estimate of these shares and the subsequent pro forma effect on net
income. Therefore, the earnings per share for the year ended December 31, 1996
under SFAS 123 is the same as that disclosed in the consolidated financial
statements.
Cash Equivalents
Cash equivalents include non-interest bearing amounts due from banks, short-term
investments with original maturities of 90 days or less and certificates of
deposit with original maturities of 90 days or less.
Reclassifications
Certain amounts in the 1995 and 1994 financial statements have been reclassified
to conform with the current year's presentation. These reclassifications had no
effect on earnings in 1995 or 1994. Dollars are presented in thousands, except
for per share data, in the following footnotes.
2. Restrictions on Cash and Due from Banks:
The Bank is required to maintain reserves against its respective transaction
accounts and non-personal time deposits. At December 31, 1996, the Bank was
required to have cash and liquid assets of approximately $5,934 to meet these
requirements.
3. Short-Term Investments:
Short-term investments consisted of:
<TABLE>
<CAPTION>
December 31,
-------- --
1996 1995
---- ----
<S> <C> <C>
Federal funds sold $465 $39,100
==== =======
</TABLE>
<PAGE>
4. Investment Securities:
The amortized cost amounts and market values of investment securities as of
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Available-For-Sale
------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
United States Government
obligations (due in one year or less) $ 11,495 $ 9 $ - $ 11,504
United States Government
obligations (due after one year through five years) 2,985 - 2 2,983
Debt securities issued by foreign
governments (due after one year through five years) 350 - - 350
Mortgage-backed securities (due after one year
through five years) 18,402 37 48 18,391
Mortgage-backed securities (due after five years
through ten years) 22,936 191 - 23,127
Mortgage-backed securities (due after ten years) 89,778 904 4 90,678
Marketable equity securities 3 12 - 15
Mutual funds 329 - 21 308
-------- ------ --- --------
$146,278 $1,153 $75 $147,356
======== ====== === ========
</TABLE>
<TABLE>
<CAPTION>
Held-to-Maturity
----------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
United States Government
obligations (due after one year through five years) $ 5,820 $ 30 $ - $ 5,850
Mortgage-backed securities (due after ten years) 37,398 555 22 37,931
------- ---- --- -------
$43,218 $585 $22 $43,781
======= ==== === =======
</TABLE>
The amortized cost amounts and market values of investment securities as of
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
Available-For-Sale
------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---- ----- ------ -----
<S> <C> <C> <C> <C>
United States Government
obligations (due after one year through $ 4,471 $ 44 $ - $ 4,515
five years)
Corporate debt securities (due in one year or 501 - 1 500
less)
Corporate debt securities (due after one year
through five years) 1,993 - 23 1,970
Debt securities issued by foreign governments
(due after one year through five years) 250 - - 250
Debt securities issued by foreign governments
(due after five years through ten years) 100 - - 100
Mortgage-backed securities (due after ten years) 26,956 23 - 26,979
Marketable equity securities 371 61 3 429
Mutual funds 311 3 31 283
------- ---- --- -------
$34,953 $131 $58 $35,026
======= ==== === =======
</TABLE>
<PAGE>
During 1995, the Bank sold $7,396 of investment securities from the
held-to-maturity portfolio and recognized a gain on the sale of $125 during June
1995. This transaction, while not material to the Bank's financial condition or
results of operations in 1995, was outside the guidelines prescribed by SFAS
115. As such, the Bank was required to reclassify its remaining $9,301 of
held-to-maturity securities as available-for-sale and was required to classify
all investment purchases subsequent to June 30, 1995 as either
available-for-sale or trading, in accordance with guidelines prescribed by SFAS
115. At June 30, 1996, principally due to the Conversion from a mutual to a
capital stock institution which provided both capital and liquidity, the Bank
demonstrated the ability and the intent to hold certain securities to maturity
and reclassified a portion of its investment portfolio as held-to-maturity. At
December 31, 1996, the Bank had no investment securities classified as trading
securities.
Expected maturities of certain available-for-sale securities will differ from
contractual maturities because issuers may have the right to call or prepay
obligations with or without call or prepayment penalties.
There were no derivative instruments (other than collateralized mortgage
obligations guaranteed by Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation), structured notes, inverse floating rate notes or
interest or principal only strips in the Bank's investment securities portfolio
at December 31, 1996 or 1995.
Proceeds from sales of mortgage-backed securities classified as
available-for-sale in 1996 were $33,819, including gross realized gains of $91
and gross realized losses of $230. During 1995 there were no sales of
mortgage-backed securities. There were no other sales of debt securities in 1996
or 1995.
At December 31, 1996, investment securities with a carrying amount of $4,484
were pledged as collateral for Treasury Tax and Loan accounts and public
deposits and $32,550 were pledged as collateral for borrowings.
5. Loans:
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
December 31,
------------
1996 1995
---- ----
<S> <C> <C>
Real estate mortgages:
One- to four-family $341,372 $348,783
Multi-family 14,187 19,803
Commercial 95,923 111,836
Construction and land development 6,173 4,485
Commercial and industrial 26,072 26,435
Home equity lines of credit 2,302 2,237
Other consumer loans 15,818 15,135
-------- --------
Total loans, gross 501,847 528,714
Deferred loan origination costs, net 427 672
Allowance for possible loan losses (7,983) (11,597)
-------- --------
Total loans, net $494,291 $517,789
======== ========
</TABLE>
Changes in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of year $11,597 $7,108 $7,324
Provision for possible loan losses 6,400 12,850 8,200
Loan charge-offs (10,444) (9,105) (8,864)
Loan recoveries 430 744 448
------- ------- ------
Balance at end of year $7,983 $11,597 $7,108
======= ======= ======
</TABLE>
The Bank recognizes a loan as being impaired when, based upon current
information, the Bank may or may not be able to collect all amounts due
according to the contractual terms of the loan.
<PAGE>
The following table summarizes the Bank's impaired loans:
<TABLE>
<CAPTION>
Measured by Measured by
the Present Value the Fair Value
of Expected of the
Cash Flows Collateral Total
<S> <C> <C> <C>
At December 31, 1996:
Commercial loans and mortgages $1,111 $3,313 $4,424
Residential mortgages and other loans measured collectively - 3,432 3,432
----------- ------ ------
Total impaired loans $1,111 $6,745 $7,856
====== ====== ======
At December 31, 1995:
Commercial loans and mortgages $1,270 $16,841 $18,111
Residential mortgages and other loans measured collectively - 2,158 2,158
----------- ------- -------
Total impaired loans $1,270 $18,999 $20,269
====== ======= =======
</TABLE>
Impaired loans with no valuation allowance because the loans' fair value exceeds
their carrying value totaled $6,580 at December 31, 1996 and $15,199 at December
31, 1995. Impaired loans with a corresponding valuation allowance totaled $1,276
at December 31, 1996 and $5,070 at December 31, 1995. The valuation allowance
allocated to impaired loans was $360 at December 31, 1996 and $662 at December
31, 1995.
The average recorded investment in impaired loans was approximately $11,405 and
$17,516 for the years ended December 31, 1996 and 1995, respectively. During
1996, the Bank recognized $8 of interest on impaired loans (during the portion
of the year that they were impaired), all of which related to impaired loans for
which interest income is recognized on the cash basis. In 1995, the Bank
recognized $331 of interest on impaired loans (during the portion of the year
that they were impaired), of which $29 related to impaired loans for which
interest income was recognized on a cash basis.
As part of the Bank's loan workout efforts, troubled debt restructurings are
periodically entered into. These restructurings usually encompass the splitting
of the loan note into two or more notes which contain varying interest rate and
repayment terms. The Bank had troubled debt restructurings of $4,651, $14,247
and $15,888 at December 31, 1996, 1995 and 1994, respectively. As of December
31, 1996, 80% of loans reported as restructured possess interest rates equal to
or greater than the rates in place at the time of restructuring.
The reductions in interest income associated with restructured loans were as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income in accordance with original terms $373 $1,085 $1,337
Income recognized 370 1,059 1,254
----- -------- --------
Reduction in interest income $ 3 $ 26 $ 83
====== ======== ========
</TABLE>
There were no outstanding commitments to lend additional funds to any debtor who
is a party to a restructuring as of December 31, 1996.
6. Non-Performing Assets:
The components of non-performing assets were as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Non-accrual loans $7,856 $16,355
Accruing loans past due 90 days or more - -
Total non-performing loans 7,856 16,355
Foreclosed real estate owned 679 5,393
------ -------
Total non-performing assets $8,535 $21,748
====== =======
</TABLE>
Non-accrual loans are defined as loans past due ninety days or more, loans which
management believes will not be repaid in full, and loans which are ninety days
or more past contractual maturity.
<PAGE>
The Bank completed its previously announced Accelerated Asset Disposition Plan
("ADP") on July 17, 1996 disposing of $18.13 million in problem assets. As part
of the ADP, the Bank added $3.60 million in additional loan loss provisions and
had additional write-downs of $2.65 million on foreclosed real estate owned
during the second quarter.
The reductions in interest income associated with non-accrual loans were as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income in accordance with original terms $517 $1,229 $930
Income recognized 8 - -
---- ------ ----
Reduction in interest income $509 $1,229 $930
==== ====== ====
</TABLE>
The components of foreclosed real estate owned expenses (including subsidiaries
holding foreclosed properties) were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Expenses of holding and operating
foreclosed real estate owned $600 $1,167 $458
Net losses on sale of foreclosed real estate owned 48 238 322
Write-downs 3,444 2,023 4,135
------ ------ ------
Total foreclosed real estate owned expense $4,092 $3,428 $4,915
====== ====== ======
</TABLE>
Changes in the foreclosed real estate owned valuation reserve were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Valuation reserve at beginning of year $ - $ - $ -
Write-downs and net losses on sale 3,492 2,261 4,457
Provision 3,492 2,261 4,457
---------- ---------- ---------
Valuation reserve at end of year $ - $ - $ -
========== ========== =========
</TABLE>
7. Bank Premises and Equipment:
Cost and accumulated depreciation and amortization of the various categories of
Bank premises and equipment were as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
Accumulated Accumulated
Depreciation Depreciation
and and
Cost Amortization Cost Amortization
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
Bank premises and land $ 1,974 $1,101 $ 1,971 $1,017
Leasehold improvements 5,137 2,629 5,199 2,431
Furniture and equipment 5,827 3,695 6,963 3,793
------- ------ ------- ------
$12,938 $7,425 $14,133 $7,241
======= ====== ======= ======
</TABLE>
The Bank, through its wholly-owned subsidiary, Eighty Pearl Street Corp. (the
"Corporation") has a 50% interest in the Pearl Street Associates Limited
Partnership (the "Partnership") which owns the building that houses the Bank's
headquarters. The Bank's investment in the Partnership is accounted for under
the equity method of accounting.
In 1995, management recognized a $6,697 write-down of its equity interest in the
Partnership. This write-down was based upon a determination by the Bank that the
impairment of value to the Partnership's assets was other than temporary. This
determination was made after a financial review of the discounted cash flow
projections from the headquarters building, which in turn was based on certain
assumptions regarding future occupancy levels, inflation, capital improvements,
tenant buildout, lease rollover rates and building operating costs.
<PAGE>
8. Deposits:
<TABLE>
<CAPTION>
December 31,
1996 1995
---- ----
<S> <C> <C>
Savings:
Regular $115,208 $120,664
Other 141 132
Certificates of deposit 374,738 324,905
Money Market:
Checking 37,312 39,720
Passbook 59,511 70,690
-------- --------
Total savings and time deposits 586,910 556,111
Demand deposits 68,133 64,691
-------- --------
$655,043 $620,802
======== ========
</TABLE>
The Bank paid interest on deposits, escrow accounts and advances from the
Federal Home Loan Bank of Boston of $23,525, $21,986 and $18,417 for the years
ended December 31, 1996, 1995 and 1994, respectively.
9. Borrowings:
A description of the advances from the Federal Home Loan Bank of Boston and the
repayment schedule were as follows:
<TABLE>
<CAPTION>
Maturity Date Interest Rate December 31, 1996 December 31, 1995
------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
October 6, 1997 4.72% $11,000 $11,000
</TABLE>
During March 1995, the Bank prepaid advances of $3,908 and $6,092, both of which
were to mature on September 29, 1997. The Bank incurred prepayment penalties of
$10 and $32, respectively, on the two advances.
The Bank has access to a pre-approved line of credit up to approximately $14,000
and the capacity to borrow up to 30% of the Bank's total assets. In accordance
with an agreement with the Federal Home Loan Bank of Boston the Bank is required
to maintain qualified collateral, as defined in the FHLB Statement of Credit
Policy, free and clear of liens, pledges and encumbrances as collateral for the
advances.
In addition, the Employee Stock Ownership Plan ("ESOP") borrowed $1,200 to
purchase shares of the Bank's stock for the ESOP in conjunction with the
Conversion. At December 31, 1996, this borrowing had an outstanding balance of
$960. The loan's final principal payment is due on December 31, 2000. The loan
carries an interest rate equal to the prime rate. The Bank has fully guaranteed
this borrowing.
10. Investment Brokerage Services:
The Bank offers investment brokerage services by selling investment products to
customers through its branch network and the services of a broker/dealer, U.S.
Clearing Corporation. The program, which began in 1986, has evolved from its
original emphasis on transactional business to its current focus on relationship
business including asset allocation accounts with wrap fees. In 1996, the Bank
hired additional staff and formed a subsidiary, Mechanics Investment Services,
Inc. with the intent of becoming its own broker/dealer in 1997. The Bank employs
stockbrokers and support staff serving all of its branches. The stockbrokers'
objective is to provide investment advice based on a customer's individual
financial needs. The Bank earns its commissions by selling bonds, mutual funds
and stocks to its customers. Commissions, salaries and benefits expense related
to this service provided by the Bank approximated $1,113, $907 and $1,182 in
1996, 1995 and 1994, respectively.
<PAGE>
11. Employee Benefits:
On November 1, 1990, the Bank instituted a defined contribution pension plan
including all employees who have completed one year of service, have attained
age 21, and have worked a minimum of 1,000 hours during the plan year. The Bank
makes annual contributions based on a percentage of the total payroll for
eligible employees. Pension expense related to the plan for the years ended
December 31, 1996, 1995 and 1994 was $110, $396, and $350, respectively.
Effective January 1, 1987, the Bank adopted the Mechanics Savings Bank 401(k)
Plan. The Bank is also the trustee for the 401(k) Plan. Employees of the Bank
who have attained age 21, completed one year of service and worked a minimum of
1,000 hours during the plan year are eligible for the 401(k) Plan. Each employee
who elects to participate in the 401(k) Plan authorizes a payroll deduction of
an amount not less than 2% or greater than 15%, in increments of 1% of
compensation (as defined), for contribution to his or her account in the 401(k)
Plan. The employer's matching contribution of each participant's contribution up
to 5% of the participant's compensation was -0-% in 1996, 25% in 1995 and -0-%
in 1994.
The Bank's contribution to the 401(k) Plan was $-0-, $58 and $-0- for the years
ended December 31, 1996, 1995 and 1994, respectively. As directed by each
individual participant, the 401(k) Plan's investments are in a certificate of
deposit held at the Bank, Mechanics Savings Bank common stock and several mutual
funds. These investments were valued at $6,126 and $4,754 at December 31, 1996
and 1995, respectively.
As part of the Conversion from a mutual to a capital stock savings bank, the
Board of Directors adopted a leveraged ESOP. The ESOP purchased 120,000 shares
of stock issued as part of the Conversion. The ESOP is subject to the
eligibility, funding, participation, fiduciary, reporting and disclosure
requirements of ERISA. Under existing circumstances all Bank employees are
eligible to participate in the ESOP once they have attained age 21 and completed
one year of service (which requires employment for 1,000 or more hours in a
period of twelve consecutive months, including pre-Conversion service). The
stock will be allocated to the accounts of the Bank's employees participating in
the ESOP over five years. At December 31, 1996, 24,000 shares were allocated to
employees in connection with the ESOP. The Bank recognized an expense of $337
relating to the ESOP, which was calculated based on the average closing stock
price for the year ended December 31, 1996.
During 1996, the Board of Directors of the Bank adopted the 1996 Officer Stock
Option Plan (the "Officer Option Plan") and a separate 1996 Director Stock
Option Plan (the "Director Option Plan") which is similar in many respects to
the Officer Option Plan. Both plans are subject to the approval of the
stockholders of the Bank at the first annual meeting of stockholders which is
scheduled for April 23, 1997, and therefore no options were outstanding and no
options may be exercised prior to approval of the option plans by the
stockholders.
Because the Director Option Plan contains many of the same provisions as the
Officer Option Plan, the following description of the Officer Option Plan is
applicable to the Director Option Plan, except as otherwise indicated.
The number of shares of authorized but unissued Stock to be reserved under the
Officer Option Plan and the Director Option Plan is 423,200 and 105,800
respectively. The option exercise price will not be less than the greater of par
value or the "fair market value" of the Bank's Stock (as defined) on the date of
grant. The maximum option term will be 10 years from the date of grant. However,
upon the occurrence of various changes in capitalization, including a change in
control of the Bank, and unless otherwise provided for in such transaction, all
options outstanding shall fully vest.
Effective June 25, 1996, options to purchase 205,000 shares were granted to
certain officers and options to purchase 60,000 were granted to directors,
subject to the approval by the stockholders at the first annual meeting of
stockholders scheduled to be held on April 23, 1997. The options are exercisable
over a ten year period, and vest equally over five years. The exercise price for
this initial grant of options will be the greater of the market price of the
Bank's stock at the first stockholders' meeting or the initial price at which
the stock was sold in the Conversion ($10.00 per share).
<PAGE>
12. Leases:
Rental expense for operating leases amounted to $1,673, $1,647 and $1,662 in
1996, 1995 and 1994, respectively. Future minimum lease payments, by year and in
the aggregate, under noncancelable operating leases with initial or remaining
terms of one year or more consisted of the following at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
1997 $1,644
1998 1,397
1999 395
2000 406
2001 370
Thereafter 712
--------
$4,924
========
</TABLE>
Renewal options are available for periods ranging from one to twenty years.
13. Income Taxes:
The components of income tax expense (benefit) for the years ended December 31,
1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $(316) $ - $ 236
State 50 40 40
------ ------ -------
Total current (266) 40 276
------ ------ -------
Deferred:
Federal - - -
State - - -
Valuation allowance - 1,500 (1,500)
----- ------ --------
Total deferred - 1,500 (1,500)
----- ------ --------
$(266) $1,540 $(1,224)
====== ====== ========
</TABLE>
The income tax provision for 1996 includes a federal tax refund of $316. The
Bank recorded an income tax provision of $1,540 in 1995. This provision
represents a $40 minimum state tax provision and an additional $1,500 deferred
tax asset valuation allowance to fully reserve against the Bank's total net
deferred tax assets of $10,154 at December 31, 1995. This additional valuation
allowance was necessary because the then-current operating and asset quality
trends made it more likely than not, as of December 31, 1995 that the total net
deferred tax asset would not be realized. This action reversed 1994's tax
benefit of the same amount. At December 31, 1994, the Bank recognized $1,500 of
net deferred tax assets because management believed that, based upon evidence
available at that time, realization of such amount in the future was more likely
than not. The following is a reconciliation of the expected federal income tax
expense (benefit) to the actual income tax expense (benefit) for the years ended
December 31:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate of 34% $ 298 $(4,855) $ 959
Increase (decrease) resulting from:
Connecticut corporation tax, net of federal tax benefit 33 40 26
Dividends received deduction (4) (20) (65)
Change in deferred tax valuation allowance (492) 4,855 (651)
Valuation allowance against prior year
deferred tax assets - 1,500 (1,500)
Other items, net (101) 20 7
------ ------- --------
Income tax expense (benefit) $(266) $ 1,540 $(1,224)
====== ======= ========
</TABLE>
<PAGE>
The significant components of the Bank's net deferred tax assets (tax effected)
at December 31, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Federal State Federal State
------- ----- ------- -----
<S> <C> <C> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $2,714 $838 $3,943 $1,247
Net operating loss carryforwards 5,158 1,502 3,452 1,172
Alternative minimum tax credits 570 - 553 -
Deferred compensation 129 40 125 40
Charitable contributions 123 38 94 30
Investments in real estate 143 44 1,223 387
Securities mark to market 340 105 25 8
Accrued and other items 157 49 - -
------ ------ ------ ------
Total deferred tax assets 9,334 2,616 9,415 2,884
------ ------ ------ ------
Deferred tax liabilities:
State taxes 768 - 863 -
Depreciation 345 106 238 75
Bad debt recapture 532 164 633 200
Deferred mortgage fees 147 45 - -
Other 138 43 102 34
------ ------ ------ ------
Total deferred tax liabilities 1,930 358 1,836 309
------ ------ ------ ------
Net deferred tax assets before valuation
allowance 7,404 2,258 7,579 2,575
Valuation allowance 7,404 2,258 7,579 2,575
------ ------ ------ ------
Net deferred tax assets $ - $ - $ - $ -
====== ====== ====== ======
</TABLE>
At December 31, 1996 and 1995, the Bank had fully reserved net deferred tax
assets of $9,662 and $10,154, respectively. Management concluded a 100%
valuation against the net deferred tax asset was deemed necessary, as the
recency of operating losses, caused primarily by credit costs, more than offset
the impact of improved earnings and lower non-performing assets in the last six
months of 1996. The Bank reviews the net deferred tax asset and its valuation
allowance on a quarterly basis.
Pursuant to the Small Business Job Protection Act of 1996, the Bank is required
to change its method of accounting with respect to its tax bad debt reserves.
The change results in taxable income of approximately $1,880 which will be
recognized evenly over a six-year period. A deferred tax liability has been
established for this accounting method change.
The Bank has not provided deferred taxes for the tax reserve for bad debts of
approximately $9,050 that arose in tax years beginning before 1988 because it
expected that the requirements of Section 593, as amended by the Small Business
Protection Act of 1996, will be met in the foreseeable future.
The Bank has federal and state net operating loss carryforwards for tax return
purposes as follows:
<TABLE>
<CAPTION>
Year Year of Year Year of
Federal Generated Expiration State Generated Expiration
------- --------- ---------- ----- --------- ----------
<S> <C> <C> <C> <C> <C>
$ 1,083 1990 2005 $ 639 1992 1997
3,456 1991 2006 4,413 1993 1998
323 1992 2007 1,337 1995 2000
4,034 1993 2008 5,810 1996 2001
-------
1,000 1995 2010 $12,199
=======
5,274 1996 2011
-------
$15,170
=======
</TABLE>
<PAGE>
The Bank also has available alternative minimum tax loss carryforwards of
$8,391. In the event of an ownership change, as defined by the Internal Revenue
Code, the Bank's ability to utilize its net operating losses may be limited.
14. Commitments and Contingencies:
The Bank is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
instruments expose the Bank to credit risk in excess of the amount recognized in
the statement of condition.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. Total credit exposure related to these
items is summarized below:
<TABLE>
<CAPTION>
Contract Amount
1996 1995
---- ----
<S> <C> <C>
Loan commitments:
Mortgage and equity loan commitments $17,586 $ 2,486
Unadvanced portion of construction loans 546 1,428
Unadvanced portion of:
Commercial lines of credit 15,508 17,595
Home equity lines of credit 2,196 974
Overdraft protection 326 350
Standby letters of credit 665 1,117
------- -------
$36,827 $23,950
======= =======
</TABLE>
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 Bank evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management's credit evaluation
of the counterparty. Collateral held is primarily residential property. Interest
rates on home equity lines of credit are variable for a term of 10 years. All
other commitments are a combination of fixed and variable rates with maturities
of one year or more.
Commitments to sell to investors are contracts for delayed delivery of first
mortgage loans in which the Bank agrees to make delivery at a specified future
date at a specified price or yield. The Bank controls the risk of nonperformance
of investors by periodically monitoring the investors' financial condition. The
Bank controls the interest rate risk of commitments to extend credit to
mortgagors by receiving purchase commitments at yields which fluctuate with
interest rates. As of December 31, 1996 and 1995, the Bank had -$0- and $288 in
commitments to sell to investors, respectively.
The Bank and its subsidiaries are defendants in proceedings arising out of, and
incidental to, activities conducted in the normal course of business. In the
opinion of management, resolution of these matters will not have a material
effect on the Bank's financial condition or results of operations.
15. Recent Accounting Pronouncements:
In June 1996, the FASB issued Statement of Financial Accounting Standards No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" ("SFAS 125"). SFAS 125 provides accounting and
reporting standards for transfers and servicing of financial assets and
extinguishments of liabilities. The Bank will be required to adopt SFAS 125 for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996, on a prospective basis. The adoption of this
standard is not expected to have a material impact on the Bank's financial
condition or its results of operations.
<PAGE>
16. Regulatory Matters:
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 and discretionary actions by
the 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
guidelines that involve quantitative measures of the Bank's assets, liabilities,
and certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). As of December 31, 1996, the Bank meets all capital
adequacy requirements to which it is subject.
At December 31, 1996, the Bank was classified, as of its most recent
notification, as "adequately capitalized". Although the Bank's capital ratios
are substantial enough to qualify as "well capitalized", the FDIC, through
prompt corrective action provisions, has the ability to reduce a bank's capital
category by one level. Management believes that as credit quality continues to
improve, the Bank will become classified as "well capitalized". At December 31,
1995, the Bank was classified as "under capitalized".
The Bank's capital position is outlined below:
<TABLE>
<CAPTION>
Actual For Capital Adequacy Purposes
Amount Ratio Amount Ratio
<S> <C> <C> <C> <C>
As of December 31, 1996:
Tier one leverage $74,509 10.20% greater than or equal to $29,228 greater than or equal to 4.00%
Tier one risk-based $74,509 18.28% greater than or equal to $16,306 greater than or equal to 4.00%
Total risk-based $79,640 19.54% greater than or equal to $32,613 greater than or equal to 8.00%
As of December 31, 1995:
Tier one leverage $23,673 3.57% greater than or equal to $23,180 greater than or equal to 3.50%
Tier one risk-based $23,673 5.65% greater than or equal to $16,762 greater than or equal to 4.00%
Total risk-based $28,911 6.90% greater than or equal to $27,237 greater than or equal to 6.50%
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
Amount Ratio
<S> <C> <C>
As of December 31, 1996:
Tier one leverage greater than or equal to $36,535 greater than or equal to 5.00%
Tier one risk-based greater than or equal to $20,383 greater than or equal to 5.00%
Total risk-based greater than or equal to $40,766 greater than or equal to 10.00%
As of December 31, 1995:
Tier one leverage n/a n/a
Tier one risk-based n/a n/a
Total risk-based n/a n/a
</TABLE>
On a regular basis, the Bank is examined by both the Connecticut State Banking
Department and the FDIC. In order to address concerns arising out of an
examination conducted by the FDIC as of August 30, 1993, the Bank entered into a
Cease and Desist Order (the "Order") issued by the FDIC. The Order was issued on
February 22, 1994 pursuant to a Stipulation with the Bank in which the
Connecticut State Banking Department concurred.
Under the Order, the Bank's Board of Directors agreed to take certain actions
and achieve certain goals including, among others, capital ratios, retention of
qualified management, increase the allowance for possible loan losses, develop
written plans in a number of areas and revise its loan policy and maintain
capital at certain defined levels.
On December 27, 1996, the FDIC removed the Order and the Bank is currently
operating under a Memorandum of Understanding ("MOU"). Under this agreement, the
Bank has agreed to update its strategic plan and improve reporting systems
relative to interest rate risk and problem asset identification. The Bank has
completed these requirements. The MOU does not contain minimum capital
requirements other than those specified by FDIC regulation.
FDICIA was signed into law on December 19, 1991. Regulations implementing the
prompt corrective action provisions of FDICIA became effective on December 19,
1992. In addition to the prompt corrective action requirements, FDICIA includes
significant changes to the legal and regulatory environment for insured
depository institutions, including reductions in insurance coverage for certain
kinds of deposits, increased supervision by the federal regulatory agencies,
increased reporting requirements for insured institutions, and new regulations
concerning internal controls, accounting and operations.
<PAGE>
On June 25, 1996, the Bank converted from mutual to stock ownership. At the time
of the Conversion, the Bank established a liquidation account in an amount equal
to the Bank's capital accounts at May 31, 1996 ($25,476). The liquidation
account is being maintained for the benefit of those deposit account holders who
qualified as eligible account holders at the time of the Conversion and who have
continued to maintain their eligible deposit accounts with the Bank following
the Conversion. The liquidation account, which totaled $22,900 at December 31,
1996 is reduced annually by an amount proportionate to the decrease in eligible
deposit accounts. In the event of the complete liquidation of the Bank, each
eligible deposit account holder will be entitled to receive their proportionate
interest in the liquidation account, after the payment of all creditor's claims,
but before any distributions on the Bank's common stock.
Connecticut banking laws limit the amount of annual dividends that the Bank may
pay to an amount which approximates the Bank's net income for the then current
year, plus the Bank's net income for the prior two years. The Bank is also
prohibited from paying a cash dividend or repurchasing any of its common stock
if the effect thereof would reduce its capital accounts below minimum regulatory
requirements or below the amount required to be maintained in the liquidation
account.
17. Disclosures About Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments"("SFAS 107"), requires that the Bank disclose the
estimated fair values for certain of its financial instruments. Financial
instruments include items such as loans, deposits, securities, Federal Home Loan
Bank advances and other items as defined in SFAS 107.
Fair value estimates are intended to represent estimates of the amounts at which
a financial instrument could be exchanged between willing parties in a current
transaction other than in a forced liquidation. However, in many instances
current exchange prices are not available for certain of the Bank's financial
instruments. Accordingly, the Bank uses other valuation techniques to estimate
the fair values of its financial instruments such as discounted cash flow
methodologies and other methods allowable under SFAS 107.
Fair value estimates are subjective in nature and are dependent on a number of
significant assumptions based on management's judgment regarding future expected
loss experience, current economic conditions, risk characteristics of various
financial instruments and other factors. In addition, because SFAS 107 allows a
wide range of valuation techniques, it may be difficult to compare the Bank's
fair value information to independent markets or to other financial
institutions' fair value information.
The Bank generally holds its earning assets to maturity and settles its
liabilities at maturity. However, fair value estimates are made at a specific
point in time and are based on relevant market information and information about
the financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Bank's entire holdings
of a particular instrument. Accordingly, as assumptions change, such as interest
rates, fair value estimates change and these amounts could not necessarily be
realized in an immediate sale. In addition, differences between carrying values
under historical cost accounting and fair value estimates can be significant
and, in particular, such differences arise in the loan portfolio, where the net
carrying value represents management's estimate of ultimate recoverable amounts
versus fair value estimates that represent a theoretical exchange value based on
current market conditions.
SFAS 107 does not require disclosures about fair value information for items
that do not meet the definition of a financial instrument or certain other
financial instruments specifically excluded from its requirements. These items
include core deposit intangibles and other customer relationships, premises and
equipment, leases, income taxes, foreclosed properties, investments accounted
for under the equity method of accounting and capital accounts. Furthermore,
SFAS 107 does not attempt to value future income or business. These items are
material and, accordingly, the fair value information presented does not purport
to represent, nor should it be construed to represent the underlying "market" or
franchise value of the Bank.
The methods and assumptions used to estimate the fair values of each class of
financial instruments are as follows:
Cash and Due from Banks, Accrued Interest Receivable, Short-Term Investments and
Federal Home Loan Bank Stock These items are generally short-term in nature and,
accordingly, the carrying amounts are reasonable approximations of their fair
values.
Available-For-Sale Securities
Available-for-sale securities are carried at market value. Such values are
generally based on quoted market prices.
<PAGE>
Held-To-Maturity Securities
Fair values for held-to-maturity securities are based upon quoted market prices.
For items in which no quoted market price exists, the carrying amount is a
reasonable estimate of fair value.
Loans
For commercial loans whose interest rates adjust at time intervals greater than
one year or are fixed, fair value is estimated by discounting the expected
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and remaining maturities. For
commercial loans whose interest rates adjust at time intervals of less than one
year, the carrying amounts are a reasonable estimate of fair value.
For residential real estate mortgages and loans held-for-sale, the fair values
are based upon quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics.
For unearned points, the carrying amounts are a reasonable estimate of fair
value. For installment loans, fair value is estimated by discounting the
expected future cash flows using the current rates at which similar loans would
be made to borrowers with similar credit ratings and remaining maturities.
For non-accrual loans which are not collateral dependent, fair value is
estimated by discounting the expected future cash flows using the interest rate
at the time the loan went into non-accrual status. For non-accrual loans which
are collateral dependent, the fair value of the collateral is obtained from
independent appraisals.
Deposits
The fair value of demand deposits, savings accounts and money market deposits is
the amount payable on demand on the balance sheet date. The fair value of
fixed-maturity certificates of deposit and individual retirement accounts is
estimated by discounting the expected future cash flows using the rates
currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank Borrowings
The fair value of these advances is estimated by discounting the expected future
cash flows using the rates currently offered for advances with similar remaining
maturities.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counterparties or on the
estimated cost to terminate them or to otherwise settle with the counterparties.
The estimated fair values of the Bank's financial instruments at December 31,
were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial Assets
Cash and due from banks $ 29,541 $ 29,541 $ 29,219 $ 29,219
Short-term investments 465 465 39,100 39,100
Available-for-sale securities 147,356 147,356 35,026 35,026
Held-to-maturity securities 43,218 43,781 - -
Federal Home Loan Bank stock 4,289 4,289 4,289 4,289
Loans, net 494,291 501,040 517,789 519,000
Loans held-for-sale 87 87 1,126 1,126
Accrued interest receivable 4,468 4,468 3,464 3,464
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Financial Liabilities
Deposits 655,043 642,800 620,802 609,000
Borrowings 11,960 11,476 11,000 10,900
Accrued interest payable 92 92 90 90
Other Unrecognized Financial Instruments
Commitments to extend credit and
standby letters of credit - (175) - (25)
</TABLE>
18. Selected Quarterly Consolidated Financial Information (unaudited):
The following table presents quarterly financial information of the Bank for
1996 and 1995.
<TABLE>
<CAPTION>
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
1996 1996 1996 1996 1995 1995 1995 1995
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $13,158 $12,557 $12,036 $11,826 $11,885 $11,781 $12,009 $11,865
Interest expense 6,081 5,779 5,845 5,821 5,771 5,660 5,493 5,018
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 7,077 6,778 6,191 6,005 6,114 6,121 6,516 6,847
Provision for possible loan losses 645 655 4,925 175 6,650 4,100 1,150 950
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after provision
for possible loan losses 6,432 6,123 1,266 5,830 (536) 2,021 5,366 5,897
Other income 1,344 1,358 1,122 1,492 1,417 1,406 1,851 1,234
Write-down of investment in
Real Estate Partnership - - - - 6,697 - - -
Write-down of real estate
agency subsidiary - - - - 700 - - -
Write-downs and net losses on sale
of foreclosed real estate owned (3) 95 2,825 575 11 1,350 350 550
Other expenses 5,211 4,826 5,175 5,387 5,216 5,617 5,473 5,432
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes 2,568 2,560 (5,612) 1,360 (11,743) (3,540) 1,394 1,149
Income tax expense (benefit) (316) - - 50 1,140 (279) 390 289
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss) $ 2,884 $ 2,560 $(5,612) $ 1,310 $(12,883) $(3,261) $ 1,004 $ 860
======= ======= ======= ======= ======== ======= ======= =======
Earnings per share and pro forma
earnings per share:
Primary $0.56 $0.50 $(1.09) $0.25 $(2.49) $(0.63) $0.19 $0.17
Fully diluted $0.56 $0.50 $(1.09) $0.25 $(2.49) $(0.63) $0.19 $0.17
Weighted average outstanding
shares and pro forma weighted
average outstanding shares:
Primary 5,170 5,170 5,170 5,170 5,170 5,170 5,170 5,170
Fully diluted 5,170 5,170 5,170 5,170 5,170 5,170 5,170 5,170
</TABLE>
<PAGE>
To the Board of Directors and Stockholders of
Mechanics Savings Bank:
We have audited the accompanying consolidated statements of condition of
Mechanics Savings Bank and subsidiaries as of December 31, 1996 and 1995, and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1996. These financial statements are the responsibility of the Bank's
management. Our responsibility is to express an opinion on these 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
misstatements. 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 consolidated financial position of
Mechanics Savings Bank and subsidiaries as of December 31, 1996 and 1995, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, in 1995 the
Bank adopted the provisions of Statement of Financial Accounting Standards No.
114, "Accounting by Creditors for Impairment of a Loan" and Statement of
Financial Accounting Standards No. 118, "Accounting by Creditors for Impairment
of a Loan - Income Recognition and Disclosures".
/s/ Coopers & Lybrand LLP
Hartford, Connecticut
January 24, 1997
<PAGE>
To our Stockholders:
The accompanying consolidated financial statements of Mechanics Savings Bank and
subsidiaries have been prepared by management, which is responsible for the
accuracy and reliability of the financial statements and other information in
this Annual Report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and, of necessity, include certain amounts that are based on
management's best judgments and estimates.
Management is responsible for maintaining a system of internal control and has
established a system of internal accounting control designed to provide
reasonable assurance that transactions are recorded properly to permit
preparation of financial statements, that transactions are executed in
accordance with management's authorizations, and that assets are safeguarded
from significant loss or unauthorized use. Management believes that during 1996,
the system of internal control was adequate to accomplish these objectives.
The Audit Committee of the Board of Directors, composed of non-management
directors, meets periodically with the independent external auditors, the
internal auditors and management to discuss auditing, internal accounting
control and financial reporting matters and to insure that each is properly
discharging its responsibilities. In addition, the Audit Committee annually
recommends to the Board of Directors the selection of independent accountants.
/s/ Edgar C. Gerwig /s/ Thomas M. Wood
Edgar C. Gerwig Thomas M. Wood
Chairman, President and Executive Vice President
Chief Executive Officer and Treasurer
<PAGE>
Directors
- ---------
David Freeman
Chairman and Chief Executive Officer
Loctite Corporation
Edgar C. Gerwig
Chairman, President and CEO
John J. Meehan
President and Chief Executive Officer
The Hartford Hospital
Kevin A. North
President,
Talcott Corporation
Robert G. Rayve
Chairman, President and CEO
The Spencer Turbine Company
Alfred R. Rogers
President and Chief Executive Officer
Urban League of Greater Hartford
Samuel H. Title
Insurance Broker
John L. Way, 2nd
Manufacturing Consultant
Donald K. Wilson, Jr.
Consultant
American Phoenix Corp. of Connecticut
Barbara Brown Zikmund
President
Hartford Seminary
Officers
- --------
Edgar C. Gerwig
Chairman, President and CEO
Thomas M. Wood
Executive Vice President & Treasurer
Richard W. Stout, Jr.
Executive Vice President
Reid W. Fraser
Senior Vice President
Eugene B. Marinelli
Senior Vice President
Mary D. Negro
Senior Vice President
<PAGE>
Brian A. Orenstein
Senior Vice President & Controller
Gary J. Roman
Senior Vice President
Lael K. Noel
Corporate Secretary
Vice Presidents
- ---------------
Donald L. Clark Mary-Lynn Kinney Kathleen P. Sullivan
Gerald M. Delmato Teresa E. Knox Padma Vatti
Luis M. Ferreira Mark A. Kucia William J. Wallace
Charles R. Glendon Mary G. Murphy Gregory A. White
Janice H. Kelley Judith I. Nokes N. Robert Young
Marsha L. Keppler Ralph K. Ovalle Steven J. Zarrella
Stephen T. Richards
Assistant Vice Presidents
- -------------------------
Martha R. Beach David B. Gregoire Jeffrey O. Plitt
Perry F. DePaolo Edward J. Hazuka Frank W. Salamon
Carolyn Lee Forst Lauren D. Kilpatrick Diane M. Sementilli
Barbara C. Giggie Mark P. Labbe Patricia R. Taylor
Brent B. Gottier Jeffry K. Pierce Frank J. Tycz
Assistant Treasurers
- --------------------
Mary A. Ames Harold L. Harper Sandy T. Pace
Dani S. Ayotte Peter K. Heger, Jr Ricardo F. Punzalan
Alan G. Baker Daniel M. Lacy Janina Mroz Rocheleau
John W. Baker Carl A. Lauretti Susan C. Rusk
Wayne I. Benjamin Daniel D. Lauretti Nicholas F. Russillo
J. Richard Bradshaw William M. Leonard Anthony G. Russo
Phyllis Buccheri Maria J. Laureano Mary M. Shackelford
David C. Donaldson, Jr. Luis J. Marrero Scott A. Silvay
Robert J. Halldin Dennis B. Mulry Laurie Szepanski
<PAGE>
Exhibit 99.2
------------
Quarterly Report of Mechanics Savings Bank on Form F-4 for the quarter ended
September 30, 1997.
<PAGE>
FORM F-4
Quarterly Report Under Section 13
of the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1997
FDIC Insurance Certificate Number: 17941
Mechanics Savings Bank
Connecticut
I. R. S. Employer Identification Number: 06-0448670
100 Pearl Street
Hartford, Connecticut 06103
(860) 293-4000
Indicate by check mark whether the bank (1) has filed all reports required 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
-------- ------
Common Stock Par Value $.01 Per Share
5,293,266 Outstanding (as of September 30, 1997)
<PAGE>
Table Of Contents
-----------------
<TABLE>
<C> <S> <C>
I. Condensed Consolidated Financial Statements Page
A. Statements of Condition as of September 30, 1997 and 1
December 31, 1996
B. Statements of Operations for the Three and Nine Month Periods 2
Ended September 30, 1997 and September 30, 1996
C. Statements of Changes in Stockholders' Equity for the Nine 3
Month Periods Ended September 30, 1997 and September 30, 1996
D. Statements of Cash Flows for the Nine Month Periods Ended 4
September 30, 1997 and September 30, 1996
E. Notes to Financial Statements 6
II. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
III. Signatures 23
</TABLE>
<PAGE>
Mechanics Savings Bank and Subsidiaries
Consolidated Statements of Condition
<TABLE>
<CAPTION>
(dollars in thousands) September 30, 1997 December 31, 1996
----------------------- ----------------------
(Unaudited)
ASSETS
<S> <C> <C>
Cash and due from banks:
Non-interest-bearing deposits and cash $ 19,572 $ 29,541
Short-term investments 7,270 465
----------------------- ----------------------
Cash and cash equivalents 26,842 30,006
Investments:
Available-for-sale, at market value 162,916 147,356
Held-to-maturity (market value at September 30, 1997 - $36,172; 35,289 43,218
at December 31, 1996 - $43,781)
Federal Home Loan Bank stock, at cost 4,864 4,289
Loans, net 546,383 494,291
Loans held-for-sale 1,558 87
Bank premises and equipment 5,001 5,513
Investment in Real Estate Partnership 14,704 15,201
Accrued interest receivable 4,401 4,468
Foreclosed real estate owned 1,562 679
Other assets 27,221 1,577
----------------------- ----------------------
$ 830,741 $ 746,685
======================= ======================
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Deposits $ 650,993 $ 655,043
Borrowings 85,960 11,960
Mortgage escrow 2,586 2,415
Other liabilities 4,757 2,427
----------------------- ----------------------
Total liabilities 744,296 671,845
----------------------- ----------------------
Stockholders' Equity:
Preferred stock - par value $.01; 1,000,000 shares - -
authorized, none issued
Common stock - par value $.01; 7,000,000 shares 53 53
authorized; 5,293,266 issued at September 30, 1997 and
5,290,000 issued at December 31, 1996
Additional paid in capital 50,668 50,611
Retained earnings 35,889 24,815
Net unrealized gains on securities 795 321
Less: Unallocated ESOP shares (96,000 shares) (960) (960)
----------------------- ----------------------
Total stockholders' equity 86,445 74,840
----------------------- ----------------------
$ 830,741 $ 746,685
======================= ======================
</TABLE>
The accompanying notes are an integral part of these financial statements
1
<PAGE>
Mechanics Savings Bank and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(in thousands except for earnings per share) For the three months ended
September 30, 1997 September 30, 1996
----------------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Interest income:
Interest and fees on loans $ 11,211 $ 9,820
Interest and dividends on investment securities:
Interest on debt securities 3,117 2,184
Dividends on equity securities 80 68
----------------------- -----------------------
3,197 2,252
Other interest income 99 485
----------------------- -----------------------
Total interest income 14,507 12,557
----------------------- -----------------------
Interest expense:
Interest on deposits:
Savings deposits 896 971
Time deposits 5,115 4,650
----------------------- -----------------------
Total interest on deposits 6,011 5,621
Interest on securities sold under agreements to repurchase - -
Interest on other borrowings 1,183 158
----------------------- -----------------------
Total interest expense 7,194 5,779
----------------------- -----------------------
Net interest income 7,313 6,778
Provision for possible loan losses 600 655
----------------------- -----------------------
Net interest income after provision for possible loan losses 6,713 6,123
----------------------- -----------------------
Other income:
Investment brokerage services commissions 648 282
Service charges on deposit accounts 569 572
Loan servicing and other fees 192 173
Income from investment in Real Estate Partnership 136 47
Net gain on sales of loans 19 4
Net gain (loss) on sales of investment securities - 2
Other 389 278
----------------------- -----------------------
Total other income 1,953 1,358
----------------------- -----------------------
Other expenses:
Salaries, commissions and employee benefits 2,994 2,119
Occupancy 801 785
Data processing 259 260
Furniture and equipment 238 234
Legal and accounting 212 142
Advertising 157 112
Communications 125 122
Operation of foreclosed real estate owned 60 11
FDIC insurance 67 416
Write-downs and net losses on sale
of foreclosed real estate owned - 95
Other 652 624
----------------------- -----------------------
Total other expenses 5,565 4,920
----------------------- -----------------------
Income (loss) before income taxes 3,101 2,561
----------------------- -----------------------
Income tax expense (benefit):
Current 195 -
Deferred 996 -
----------------------- -----------------------
Total income tax expense (benefit) 1,191 -
----------------------- -----------------------
Net income (loss) $ 1,910 $ 2,561
======================= =======================
Earnings (loss) per share:
Primary $ 0.36 $ 0.50
Fully diluted $ 0.36 $ 0.50
Weighted average shares outstanding:
Primary 5,263 5,170
Fully diluted 5,306 5,170
<CAPTION>
(in thousands except for earnings per share) For the nine months ended
September 30, 1997 September 30, 1996
---------------------- -----------------------
(Unaudited) (Unaudited)
<S> <C> <C>
Interest income:
Interest and fees on loans $ 32,301 $ 30,690
Interest and dividends on investment securities:
Interest on debt securities 9,498 3,963
Dividends on equity securities 227 205
---------------------- -----------------------
9,725 4,168
Other interest income 225 1,561
---------------------- -----------------------
Total interest income 42,251 36,419
---------------------- -----------------------
Interest expense:
Interest on deposits:
Savings deposits 2,723 2,973
Time deposits 14,999 14,049
---------------------- -----------------------
Total interest on deposits 17,722 17,022
Interest on securities sold under agreements to repurchase 243 -
Interest on other borrowings 2,291 424
---------------------- -----------------------
Total interest expense 20,256 17,446
---------------------- -----------------------
Net interest income 21,995 18,973
Provision for possible loan losses 8,800 5,755
---------------------- -----------------------
Net interest income after provision for possible loan losses 13,195 13,218
---------------------- -----------------------
Other income:
Investment brokerage services commissions 2,542 812
Service charges on deposit accounts 1,701 1,713
Loan servicing and other fees 594 519
Income from investment in Real Estate Partnership 442 237
Net gain on sales of loans 26 40
Net gain (loss) on sales of investment securities 2 (78)
Other 1,061 729
---------------------- -----------------------
Total other income 6,368 3,972
---------------------- -----------------------
Other expenses:
Salaries, commissions and employee benefits 9,254 6,741
Occupancy 2,398 2,420
Data processing 789 736
Furniture and equipment 715 706
Legal and accounting 696 502
Advertising 622 386
Communications 377 371
Operation of foreclosed real estate owned 317 420
FDIC insurance 201 929
Write-downs and net losses on sale
of foreclosed real estate owned 120 3,495
Other 2,014 2,176
---------------------- -----------------------
Total other expenses 17,503 18,882
---------------------- -----------------------
Income (loss) before income taxes 2,060 (1,692)
---------------------- -----------------------
Income tax expense (benefit):
Current 1,627 50
Deferred (10,641) -
---------------------- -----------------------
Total income tax expense (benefit) (9,014) 50
---------------------- -----------------------
Net income (loss) $ 11,074 $ (1,742)
====================== =======================
Earnings (loss) per share:
Primary $ 2.12 $ (0.34)
Fully diluted $ 2.09 $ (0.34)
Weighted average shares outstanding:
Primary 5,219 5,170
Fully diluted 5,301 5,170
</TABLE>
The accompanying notes are an integral part of these financial statements
2
<PAGE>
Mechanics Savings Bank and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity (unaudited)
<TABLE>
<CAPTION>
Additional
Common Paid in Retained
(in thousands) Stock Capital Earnings
------------ -------------- --------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ - $ - $ 8,944
Net loss - - (1,742)
Change in net unrealized gains (losses) on securities - - -
Issuance of common stock 53 50,514 -
Reclass of surplus to retained earnings
upon issuance of common stock - - 14,729
Unallocated ESOP shares - - -
------------ -------------- --------------
Balance at September 30, 1996 $ 53 $ 50,514 $ 21,931
============ ============== ==============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Balance at December 31, 1996 $ 53 $ 50,611 $ 24,815
Net income - - 11,074
Change in net unrealized gains (losses) on securities - - -
Exercised stock options - 57 -
------------ -------------- --------------
Balance at September 30, 1997 $ 53 $ 50,668 $ 35,889
============ ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Net Unrealized Unallocated
Gains (Losses) ESOP
(in thousands) on Securities Shares Surplus
---------------- -------------- ----------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 53 $ - $ 14,729
Net loss - - -
Change in net unrealized gains (losses) on securities (65) - -
Issuance of common stock - - -
Reclass of surplus to retained earnings
upon issuance of common stock - - (14,729)
Unallocated ESOP shares - (1,200) -
------------ -------------- --------------
Balance at September 30, 1996 $ (12) $ (1,200) $ -
============ ============== ==============
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Balance at December 31, 1996 $ 321 $ (960) $ -
Net income - - -
Change in net unrealized gains (losses) on securities 474 - -
Exercised stock options - - -
------------ -------------- --------------
Balance at September 30, 1997 $ 795 $ (960) $ -
============ ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements
3
<PAGE>
Mechanics Savings Bank and Subsidiaries
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the nine months ended
(in thousands) September 30, 1997 September 30, 1996
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 11,074 $ (1,742)
------------------ ------------------
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for possible loan losses 8,800 5,755
Depreciation and amortization 709 748
Amortization of investment security premiums/discounts, net 119 184
Deferred loan costs, net of amortization (479) (186)
Net gain on sale of loans (26) (40)
Increase in deferred tax assets (10,666) -
Realized losses on available-for-sale securities 92 230
Realized gains on available-for-sale securities (94) (152)
Decrease (increase) in interest and dividend receivables 67 (962)
Income from investment in Real Estate Partnership (442) (290)
Write-down of investment in Real Estate Partnership - 355
Write-downs and net losses on sale of foreclosed real estate owned 120 3,140
(Increase) decrease in other assets (15,228) 202
Increase (decrease) in other liabilities 2,501 (1,158)
------------------ ------------------
Total adjustments (14,527) 7,826
------------------ ------------------
Net cash (used in) provided by operating activities (3,453) 6,084
------------------ ------------------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities 22,823 74,183
Proceeds from principal payments on available-for-sale securities 26,572 10,049
Proceeds from principal payments on held-to-maturity securities 2,132 254
Proceeds from maturities of available-for-sale securities 11,500 500
Purchases of available-for-sale securities (70,051) (211,688)
Purchases of held-to-maturity securities - (19,537)
Purchases of Federal Home Loan Bank stock (575) -
Proceeds from loan sales 2,791 15,066
Net originations and purchases of loans (66,854) 17,898
Decrease in investment in Real Estate Partnership 940 757
Proceeds from sale of real estate agency subsidiary - 417
Proceeds from sale of foreclosed real estate owned 1,201 5,159
Purchases of bank premises and equipment (197) (223)
------------------ ------------------
Net cash used in investing activities (69,718) (107,165)
------------------ ------------------
Cash flows from financing activities:
Net decrease in demand deposits, money market and savings accounts (15,264) (20,985)
Net increase in certificates of deposit 11,214 21,901
Net increase in FHLB borrowings 74,000 -
Financing of Employee Stock Ownership Plan - 1,200
Issuance of common stock 57 49,366
------------------ ------------------
Net cash provided by financing activities 70,007 51,482
------------------ ------------------
Net decrease in cash and cash equivalents (3,164) (49,599)
Cash and cash equivalents at beginning of period 30,006 68,319
------------------ ------------------
Cash and cash equivalents at end of period $ 26,842 $ 18,720
================== ==================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements
4
<PAGE>
Mechanics Savings Bank and Subsidiaries
Consolidated Statements of Cash Flows (continued)
<TABLE>
<CAPTION>
For the nine months ended
September 30, 1997 September 30, 1996
------------------ ------------------
(unaudited) (unaudited)
<S> <C> <C>
Non-cash investing and financing activities
Change in net unrealized gain (loss) on securities available-for-sale $ 679 $ 350
Change in net unrealized gain (loss) on securities held-to-maturity 44 (440)
Transfer of loans to foreclosed real estate owned 2,311 3,322
Transfer of loans to held-for-sale 1,558 85
Transfer of available-for-sale securities to held-to-maturity - 21,076
Supplemental disclosures of cash flow information
Income taxes paid 641 57
Income tax refunds received - 988
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements
5
<PAGE>
Mechanics Savings Bank
Notes to Consolidated Financial Statements
Note 1 - Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements include the
accounts of Mechanics Savings Bank and its wholly-owned subsidiaries, Mech
Corporation, Mech Two Corporation, Mech Three Corporation, Eighty Pearl Street
Corporation, Mechanics Investment Services, Inc. (newly incorporated in July,
1996) and Alliance Realty (through February 7, 1996) ("the Bank"). Mechanics
Investment Services, Inc. ("MIS") was formed to enable the Bank to serve its
customers with a wholly-owned fully disclosed broker / dealer. Intercompany
accounts and transactions have been eliminated in consolidation.
The condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and with the instructions to Form
F-4. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Bank's 1996 annual report and
Form F-2.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Dollars are presented in thousands, except for per share data, in the following
footnotes.
Note 2 - Investments
The amortized cost and market values as of September 30, 1997 of
available-for-sale securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
U. S. Government and agency securities $ 2,993 $ 3 $ - $ 2,996
Mortgage-backed securities 152,465 1,695 1 154,159
Debt securities issued by foreign governments 350 - - 350
Marketable equity securities 5,350 61 - 5,411
-------------- -------------- -------------- -------------
$ 161,158 $ 1,759 $ 1 $ 162,916
============== ============== ============== =============
</TABLE>
The amortized cost and market values as of December 31, 1996 of
available-for-sale securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
U. S. Government and agency securities $ 14,480 $ 9 $ 2 $ 14,487
Mortgage-backed securities 131,116 1,132 52 132,196
Debt securities issued by foreign governments 350 - - 350
Marketable equity securities 332 12 21 323
-------------- -------------- -------------- -------------
$ 146,278 $ 1,153 $ 75 $ 147,356
============== ============== ============== =============
</TABLE>
6
<PAGE>
The amortized cost and market values as of September 30, 1997 of
held-to-maturity securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Mortgage-backed securities $ 35,289 $ 883 $ - $ 36,172
============= ============= ============== ==============
</TABLE>
The amortized cost and market values as of December 31, 1996 of held-to-maturity
securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
U. S. Government and agency securities $ 5,820 $ 30 $ - $ 5,850
Mortgage-backed securities 37,398 555 22 37,931
============= ============= ============== ==============
$ 43,218 $ 585 $ 22 $ 43,781
============= ============= ============== ==============
</TABLE>
Note 3 - Allowance for Possible Loan Losses
Changes in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
For the nine months ending
September 30, September 30,
1997 1996
----------------- ------------------
<S> <C> <C>
Balance at beginning of year $ 7,983 $ 11,597
Provision for possible loan losses 8,800 5,755
Loan charge-offs (3,272) (9,369)
Loan recoveries 692 319
----------------- ------------------
Balance $ 14,203 $ 8,302
================= ==================
</TABLE>
7
<PAGE>
Note 4 - Non-Performing Assets
The components of non-performing assets were as follows:
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------- ---------------------
<S> <C> <C>
Non-accrual loans $ 4,814 $ 7,856
Accruing loans past due greater
than 90 days - -
------------------- ---------------------
Total non-performing loans 4,814 7,856
Foreclosed real estate owned 1,562 679
------------------- ---------------------
Total non-performing assets $ 6,376 $ 8,535
=================== =====================
Non-performing assets as a
percentage of total assets 0.77% 1.14%
=================== =====================
Non-performing assets as a
percentage of gross loans and
foreclosed real estate owned 1.13% 1.70%
=================== =====================
Allowance for possible loan
losses as a percentage of
non-performing loans 295.04% 101.62%
=================== =====================
</TABLE>
Note 5 - Borrowings
Advances from the Federal Home Loan Bank of Boston ("FHLB") and the repayment
schedule were as follows:
<TABLE>
<CAPTION>
Interest
Maturity Date Rate September 30, 1997 December 31, 1996
- ----------------------- ----------- ------------------- -----------------
<S> <C> <C> <C>
October 6, 1997 5.62 % $ 5,000 $ -
October 6, 1997 4.72 11,000 11,000
October 17, 1997 5.53 18,000 -
November 25, 1997 5.62 18,000 -
March 1, 1999 6.35 5,000 -
July 1, 1999 6.15 13,000 -
August 25, 1999 6.00 7,000 -
November 30, 2000 6.61% 8,000 -
------------------- -----------------
$ 85,000 $ 11,000
=================== =================
</TABLE>
The Bank has access to a pre-approved line of credit up to approximately $15,000
and the capacity to borrow in excess of 40% of the Bank's total assets. In
accordance with an agreement with the FHLB, the Bank is required to maintain
qualified collateral, as defined in the FHLB Statement of Credit Policy, free
and clear of liens, pledges and encumbrances as collateral for the advances.
In addition, the Employee Stock Ownership Plan ("ESOP") borrowed $1,200 to
purchase shares of the Bank's stock for the ESOP in conjunction with the Bank's
conversion from a Connecticut-chartered mutual savings bank to a
Connecticut-chartered capital stock savings bank, completed on June 25, 1996
(the "Conversion"). At September 30, 1997 and December 31, 1996, this borrowing
had an outstanding balance of $960. The loan's final principal payment is due on
December 31, 2000. The loan carries an interest rate equal to the prime rate.
The Bank has fully guaranteed this borrowing.
8
<PAGE>
Note 6 - Earnings Per Share
Earnings per share is computed based upon the weighted average number of shares
of common stock and common stock equivalents (if dilutive) outstanding during
the periods presented. Common stock equivalents consist of stock options granted
on June 25, 1996, February 18, 1997 and August 19, 1997. For earnings per share
purposes, the common stock and common stock equivalents issued with the
Conversion on June 25, 1996 have been assumed to be outstanding for all periods
presented.
In the earnings per share calculation, the option exercise price for the options
granted with the Conversion was the actual $17.50 for the three months and the
nine months ending September 30, 1997. For the three months and nine months
ending September 30, 1996, the option exercise price used was equal to the
initial public offering price of $10.00. If the option exercise price of $17.50
had been used to calculate previously reported earnings per share amounts, there
would have been no effect on the previously reported amounts.
Note 7 - Income Tax Expense (Benefit)
During the second quarter of 1997, the Bank recorded a tax benefit of $10.33
million and fully reversed its valuation allowance on its net deferred tax
assets. Based on three consecutive prior quarters of income and projections for
the second half of 1997 and for 1998 that indicated continued profitability, the
Bank determined that it was more likely than not that it would realize its net
deferred tax assets. There have been no significant changes in the composition
of the net deferred tax items since December 31, 1996.
Note 8 - Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share". This
pronouncement establishes standards for computing and presenting earnings per
share ("EPS"). It replaces the presentation of primary EPS with a presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures.
This statement is effective for financial statements issued for periods ending
after December 15, 1997. The Bank does not expect the impact of this
pronouncement will be material to its reported EPS.
In February 1997, the FASB also issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure". This
pronouncement establishes standards for the disclosure of information about an
entity's capital structure and is effective for financial statements issued for
periods ending after December 15, 1997. The adoption of this pronouncement is
expected to have no impact on the financial statements of the Bank.
In June 1997, the FASB issued two pronouncements, Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", ("SFAS No. 130")
and No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 130 establishes standards for reporting
and display of comprehensive income, which is defined as the change in net
equity of a business enterprise during a period from nonowner sources. SFAS No.
130 is effective for years beginning after December 15, 1997 and requires
reclassification of financial statements for all prior years presented. The
adoption of SFAS No. 130 is expected to impact the presentation of financial
information only. SFAS No. 131 requires public companies to report financial and
descriptive information about operating segments in annual financial statements
and requires selected information about operating segments to be reported in
interim financial reports issued to shareholders. Operating segment financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and allocation of resources. SFAS No. 131 is
effective for financial statements for periods beginning after December 15, 1997
and requires presentation of comparative information for prior periods
presented. The adoption of SFAS No. 131 is expected to impact the way the Bank
reports information about its operating segments.
9
<PAGE>
Note 9 - Subsequent Event
On October 8, 1997, the Bank announced that the Board of Directors is proposing
the formation of a bank holding company to be called MECH Financial, Inc. The
formation of a bank holding company will provide additional corporate
structuring opportunities and powers to respond to changing needs of the Bank's
customers. Shareholders of the Bank have been asked to approve the new holding
company structure. If approved, shares of common stock of Mechanics Savings Bank
will be automatically converted into shares of MECH Financial, Inc. on a
one-for-one, tax-free exchange basis. The Bank expects that the new holding
company structure will be approved by the end of this year.
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Bank reported net income of $1.91 million for the third quarter ended
September 30, 1997 compared to $2.56 million for the same period in 1996. Income
before income taxes was $3.10 million for the third quarter of 1997 representing
a 21.1% increase over the $2.56 million of pretax income for the third quarter
of 1996. As the Bank steadily increased its asset base and expanded its business
activities, overall revenues have increased faster than expenses. The Bank's
results reflect increased activities in its residential and consumer lending
activities, in its brokerage subsidiary, in its investment portfolio and in its
borrowing activity.
Net income for the nine months ending September 30, 1997 totaled $11.07 million
compared to a net loss of $1.74 million for the same period in 1996. As
reflected in its 1997 year-to-date results, the Bank recognized a tax benefit of
$10.33 million in the second quarter primarily due to the full reversal of its
deferred tax asset valuation allowance. Based on three consecutive prior
quarters of income and projections for the second half of 1997 and for 1998 that
indicated continued profitability, the Bank determined that it was more likely
than not that it would realize its net deferred tax assets. Also, during the
second quarter of 1997, the Bank recorded $6.50 million in provisions for
possible loan losses which increased its allowance for possible loan losses to
$14.20 million at September 30, 1997. This action further strengthens the
allowance for possible loan losses which now represents 237.55% of
non-performing and restructured loans, up significantly from 63.83% at December
31, 1996. With intense competition in a continued sluggish Central Connecticut
economy, management believed increasing the allowance for possible loan losses
and the reserve coverage ratios while maintaining high credit quality were
prudent strategies to implement.
The results for the nine months ended September 30, 1996 reflect the $3.60
million in additional provisions for possible loan losses and $2.65 million in
additional write-downs and net losses on sale of foreclosed real estate owned in
connection with the Accelerated Disposition Plan ("ADP") completed July 17,
1996.
Financial Condition
Total assets as of September 30, 1997 were $830.74 million representing an
increase of $84.06 million or 11.3% from $746.68 million at December 31, 1996.
The Bank's Tier 1 leverage ratio was 9.82% at September 30, 1997 compared to
10.20% at December 31, 1996. The Bank's total risk-based capital ratio was
18.71% at September 30, 1997 compared to 19.54% at December 31, 1996. Although
the Bank's total capital increased by $11.61 million from December 31, 1996 to
September 30, 1997, the capital ratios decreased due to larger asset size and a
deduction from Tier 1 capital of $5.05 million due to regulatory limitations on
deferred tax assets. The amount of regulatory deduction will be reduced on a
quarterly basis as taxable income is recognized.
Cash and cash equivalents decreased $3.16 million or 10.5% from $30.00 million
at December 31, 1996 to $26.84 million at September 30, 1997. The Bank continues
to efficiently manage cash and cash equivalents to balance the need for
liquidity with the need for increased yields.
Investment securities increased $7.63 million or 4.0% from $190.57 million at
December 31, 1996 to $198.20 million at September 30, 1997. The mortgage-backed
securities portfolio increased $19.85 million while the U.S. government and
agency obligations decreased $17.34 million. The vast majority of
mortgage-backed security purchases were one year adjustable rate instruments,
thereby improving the Bank's interest rate sensitivity. In addition during the
third quarter of 1997, there was an increase in marketable equity securities.
Funds available for investment increased mainly due to increased
11
<PAGE>
borrowings. At September 30, 1997, the Bank held $35.29 million in securities
classified as held-to-maturity in accordance with Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities".
Due to an increase in assets collateralized by residential properties, the Bank
had the opportunity to purchase additional shares of stock totaling $575,000
from the Federal Home Loan Bank of Boston ("FHLB"). Such shares provide above
average dividend yields and are considered to be low risk equity investments.
Net loans increased $52.09 million or 10.5% from $494.29 million at December 31,
1996 to $546.38 million at September 30, 1997. Increases in one- to four-family
residential mortgages and consumer loans were partially offset by decreases in
commercial mortgages and commercial and industrial loans. The allowance for
possible loan losses totaled $14.20 million at September 30, 1997 compared to
$7.98 million at December 31, 1996, an increase of $6.22 million or 77.9%.
Provisions for possible loan losses during the nine months ended September 30,
1997 totaled $8.80 million and net charge-offs totaled $2.58 million. The
allowance for possible loan losses as a percentage of non-performing loans
increased from 101.62% at December 31, 1996 to 295.04% at September 30, 1997.
Foreclosed real estate owned increased from $679,000 at December 31, 1996 to
$1.56 million at September 30, 1997 due primarily to an increase in one- to
four-family properties. The Bank sold twenty-nine properties totaling $1.20
million during the nine months ended September 30, 1997. Write-downs and net
losses on sale of foreclosed real estate owned for the first nine months of 1997
totaled $120,000 compared to $3.50 million for the same period in 1996. During
the second quarter of 1996, the Bank incurred $2.65 million in write-downs
primarily due to the ADP.
Non-performing assets totaled $6.38 million at September 30, 1997 compared to
$8.54 million at December 31, 1996, representing a 25.3% decrease. Payoffs of
non-accrual loans reduced the balances by $6.11 million. Charge-offs on
non-performing loans and write-downs and net losses on sale of foreclosed real
estate owned reduced non-performing assets by $3.23 million and $120,000,
respectively. Sales of foreclosed real estate owned accounted for an additional
$1.20 million of the reductions. In addition, there were other reductions of
non-performing assets of $2.27 million due to payments and loans returning to
accrual status. Loans totaling $1.17 million were restructured during the nine
months ended September 30, 1997. These reductions were offset by $11.94 million
in additions to non-performing assets since December 31, 1996. Non-performing
assets as a percentage of total assets was 1.14% at December 31, 1996 and 0.77%
at September 30, 1997. Non-performing assets as a percentage of total loans and
foreclosed real estate owned decreased from 1.70% at December 31, 1996 to 1.13%
at September 30, 1997.
Other assets increased from $1.58 million at December 31, 1996 to $27.22 million
at September 30, 1997. The Bank invested in $14.72 million of cash surrender
value life insurance on its executive officers and directors during the nine
months ended September 30, 1997. This investment currently has tax equivalent
yields above 9%. In addition, the Bank had a deferred tax asset of $10.09
million at September 30, 1997 due primarily to the second quarter 1997 full
reversal of its deferred tax asset valuation allowance. The deferred tax asset
had a 100% valuation allowance against it on December 31, 1996.
Deposits remained relatively unchanged from $655.04 million at December 31, 1996
to $650.99 million at September 30, 1997. The decreases in the money market
savings of $6.66 million and regular savings accounts of $5.64 million were
partially offset by a $11.21 million increase in certificates of deposit.
Borrowings increased $74.00 million from December 31, 1996 to September 30, 1997
due to increased borrowings from the FHLB. These borrowings were mainly used to
fund one- to four-family real estate mortgages. The Bank's $85.00 million of
FHLB advances carry a weighted average rate of 5.73% and have a weighted average
maturity of 0.85 years.
12
<PAGE>
Liquidity
The Bank manages its liquidity position to ensure that there is sufficient
funding available at all times to meet both anticipated and unanticipated
deposit withdrawals, new loan originations, securities purchases and other
operating cash outflows. The Bank monitors its liquidity in accordance with
guidelines established under its asset/liability management policy and
applicable regulatory requirements. On a monthly basis, management monitors the
Bank's liquidity position by analyzing the amount of securities available for
repurchase agreements, the Bank's borrowing capacity at the FHLB, the expected
level of cash flows from loans and mortgage-backed securities, the expected
prepayments from loans and mortgage-backed securities, and the Bank's levels of
cash and short-term investments. At September 30, 1997, management believes its
current liquidity level is sufficient to meet normal operating needs.
Asset/Liability Management
The Bank's objective in managing interest rate risk is to produce a high and
stable net interest margin in varying interest rate environments while
maintaining the flexibility to take advantage of opportunities that may arise
from the fluctuations of interest rates. The Bank's exposure to interest rate
risk is managed strategically through the use of balance sheet simulation. At
September 30, 1997, the Bank was slightly liability sensitive.
The Bank models its forecasted balance sheet using interest rate ramps, shocks
and a most likely interest rate scenario over a 24 month time horizon. In
accordance with its funds management policy, the Bank measures its interest rate
sensitivity by ramping interest rates in one hundred basis point increments from
- -400 to +400 basis points from the current rate environment. From this 800 basis
point grid, the asset/liability committee selects the most likely 400 basis
point interest rate range based on the current interest rate environment, as
well as other economic factors. The Bank will accept equal to or less than a 5%
change in net interest income over the next 12 months within the selected 400
basis point band. At September 30, 1997, the Bank was within its policy
guideline, and the Bank believes its level of interest rate sensitivity was
appropriate.
Capital Resources
At September 30, 1997, the Bank's stockholders' equity totaled $86.45 million
representing a 15.5% increase over the $74.84 million in capital at December 31,
1996. At September 30, 1997, the Bank had a Tier 1 leverage capital ratio of
9.82% and a total risk-based capital ratio of 18.71%. The Bank's Tier 1 leverage
capital ratio was 10.20% and its total risk-based capital ratio was 19.54% at
December 31, 1996. Although the Bank's total capital increased by $11.61 million
from December 31, 1996 to September 30, 1997, the capital ratios decreased due
to larger asset size and a deduction from Tier 1 capital of $5.05 million due to
regulatory limitations on deferred tax assets. The amount of regulatory
deduction will be reduced on a quarterly basis as taxable income is recognized.
As of September 30, 1997, the Bank meets all capital adequacy requirements to
which it is subject and was classified, as of its most recent notification, as
"well capitalized". At December 31, 1996, the Bank was classified as "adequately
capitalized". Although the Bank's capital ratios were substantial enough to
qualify as "well capitalized", the FDIC, through prompt corrective action
provisions, has the ability to reduce a bank's capital category by one level.
The Bank believes its current capital is adequate to support operations and
anticipated future growth. In October 1997, the FDIC and the State Department of
Banking terminated the December 17, 1996 memorandum of understanding and
classified the Bank as "well capitalized".
13
<PAGE>
Results of Operations
For the quarter ended September 30, 1996 and 1997
For the quarter ended September 30, 1997, the Bank reported net income of $1.91
million or $0.36 per share compared to $2.56 million or $0.50 per share for the
same period in 1996. Income before income taxes was $3.10 million for the third
quarter of 1997 representing a 21.1% increase over the $2.56 million of pretax
income for the third quarter of 1996. Net interest income increased $535,000 or
7.9% due mainly to increased average volumes of net loans and investment
securities. The increase in the average volume of net loans was mainly due to
increased originations of one- to four-family and consumer loans. In addition,
investment brokerage services commissions were $366,000 higher for the third
quarter of 1997 compared to the same period in 1996. These increases were
partially offset by higher salary, commission and benefit expenses due in part
to the increased activity.
Net Interest Income
Net interest income totaled $7.31 million for the three months ended September
30, 1997 compared to $6.78 million for the same period in 1996, representing a
$535,000 or 7.9% increase. Net interest margin decreased from 4.04% for the
quarter ended September 30, 1996 to 3.86% for the same period in 1997. Average
interest-bearing liabilities increased $90.18 million while average
interest-earning assets increased $83.76 million. Average FHLB borrowing and
certificates of deposit increased $67.69 million and $36.73 million,
respectively, from quarter to quarter. Average net loans and investment
securities increased $59.85 million and $31.67 million, respectively. Average
balance increases of one- to four-family and consumer loans were partially
offset by lower average volume of commercial loans. Mortgage-backed securities
were the main reason for the increase in average investment securities for the
quarter. In addition, average other assets were $25.94 million higher due mainly
to the deferred tax asset and the cash surrender value life insurance.
The following table sets forth certain information relating to the Bank's
average interest-earning assets and interest-bearing liabilities and net
interest income for the quarters ended September 30, 1996 and 1997:
14
<PAGE>
<TABLE>
<CAPTION>
Average Balances Income / Expense Yields
------------------------------ ----------------------------- ---------------------------
Quarters ended September 30, Quarters ended September 30, Quarters ended September 30,
(in thousands) 1997 1996 1997 1996 1997 1996
-------------- ------------ ------------ ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 539,889 $ 480,040 $ 11,211 $ 9,820 8.24 % 8.14 %
Investment securities 204,894 173,226 3,212 2,555 6.22 5.87
Short-term investments 6,118 13,879 84 182 5.45 5.23
-------------- ------------ ------------ ------------- ----------- ----------
Total interest-earning assets 750,901 667,145 14,507 12,557 7.66 7.49
Other assets 70,876 44,939
-------------- ------------
Total assets $ 821,777 $ 712,084
============== ============
Money market checking $ 34,222 $ 35,061 100 109 1.16 1.24
Money market savings 55,929 63,352 330 373 2.34 2.34
Savings & other 116,178 122,148 583 614 1.99 2.00
Certificates of deposit 379,989 343,264 4,998 4,525 5.22 5.24
Borrowings 79,887 12,200 1,183 158 5.88 5.14
-------------- ------------ ------------ ------------- ----------- ----------
Total interest-bearing funds 666,205 576,025 7,194 5,779 4.28 3.99
Demand deposits 65,506 63,010
Other liabilities 4,659 3,626
Capital 85,407 69,423
-------------- ------------
Total liabilities and capital $ 821,777 $ 712,084
============== ============
Net interest income $ 7,313 $ 6,778
============ =============
Spread on interest-bearing funds 3.38 % 3.50 %
Net interest margin 3.86 % 4.04 %
</TABLE>
15
<PAGE>
The following table presents the changes in interest and dividend income and the
changes in interest expense, attributable to changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
Quarters ended September 30, 1996 versus 1997
Change in interest due to
---------------------------------------------------------------------------
(in thousands) Volume Rate Vol/Rate Net
------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Loans, net $ 1,224 $ 148 $ 19 $ 1,391
Investment securities 467 161 29 657
Short-term investments (102) 9 (5) (98)
------------- --------------- --------------- ---------------
Total 1,589 318 43 1,950
------------- --------------- --------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Money market checking (3) (7) 1 (9)
Money market savings (44) 1 - (43)
Savings & other (30) (1) - (31)
Certificates of deposit 484 (10) (1) 473
Borrowings 877 23 125 1,025
------------- --------------- --------------- ---------------
Total 1,284 6 125 1,415
------------- --------------- --------------- ---------------
Net change to interest income $ 305 $ 312 $ (82) $ 535
============= =============== =============== ===============
</TABLE>
Interest Income
Interest income increased $1.95 million or 15.5% due primarily to average
increased volumes of net loans and investment securities of $59.85 million and
$31.67 million, respectively, which were partially offset by lower average
volume of short-term investments of $7.76 million. Overall average yields
increased from 7.49% for the third quarter of 1996 to 7.66% for the same period
in 1997.
Interest Expense
Interest expense increased $1.42 million or 24.5% from the third quarter of 1996
to the same period in 1997. The increase was mainly due to higher average
balances of borrowings and certificates of deposit. These increases were
partially offset by lower average volumes of the other interest-bearing
deposits. Overall average rates increased from 3.99% for the third quarter of
1996 to 4.28% for the same period in 1997. The increase in average rates was
mainly due to higher rates on borrowings.
Provision for Possible Loan Losses
The provision for possible loan losses totaled $600,000 for the three months
ended September 30, 1997 which is slightly less than the $655,000 recorded for
the same period in 1996. However, the Bank's percentage of allowance for
possible loan losses to non-performing loans increased significantly from
101.62% at December 31, 1996 to 295.04% at September 30, 1997. The Bank
strengthened its allowance during the second quarter of 1997 by adding $6.50
million in provisions for possible loan losses. Despite a significant increase
in the Bank's loan portfolio, the allowance for possible loan losses to gross
loans increased from 1.59% at December 31, 1996 to 2.53% at September 30, 1997.
16
<PAGE>
Other Income
The Bank recorded $1.95 million in other income for the three months ended
September 30, 1997 compared to $1.36 million for the same period in 1996,
representing an increase of $595,000 or 43.8%. The following table shows the
components of other income for the quarters ended September 30, 1996 and 1997:
<TABLE>
<CAPTION>
(in thousands) Quarters ended September 30, $ %
1997 1996 Change Change
------------------ ----------------- ---------- -----------
<S> <C> <C> <C> <C>
Investment brokerage services commissions $ 648 $ 282 $ 366 129.79 %
Service charges on deposit accounts 569 572 (3) (0.52)
Loan servicing and other fees 192 173 19 10.98
Income from investment in Real Estate Partnership 136 47 89 189.36
Net gain on sales of loans 19 4 15 375.00
Net gain on sales of investment securities - 2 (2) (100.00)
Other 389 278 111 39.93
------------------ ----------------- ----------
$ 1,953 $ 1,358 $ 595 43.81 %
================== ================= ========== ===========
</TABLE>
Investment brokerage services commissions increased $366,000 from third quarter
1996 to the same period in 1997 primarily due to the Bank's new ability to sell
annuities and to earn investment advisory fees in 1997. Investment advisory fees
and commissions from annuity sales totaled $193,000 and $150,000, respectively
during the third quarter of 1997. Loan servicing and other fees increased mainly
due to higher late charges. Income from the investment in Real Estate
Partnership increased primarily due higher rental income and to the December 31,
1996 expiration of a lease incentive for an existing tenant which decreased the
Real Estate Partnership's expenses during the third quarter of 1997. Other
income increased due mainly to the appreciation of the cash surrender value life
insurance.
Other Expenses
Other expenses totaled $5.57 million for the three months ended September 30,
1997 compared to $4.92 million for the same period in 1996. The following table
details the significant components of other expenses for the periods presented:
<TABLE>
<CAPTION>
(in thousands) Quarters ended September 30, $ %
1997 1996 Change Change
------------ ------------- ------------ -----------
<S> <C> <C> <C> <C>
Salaries, commissions and employee benefits $ 2,994 $ 2,119 $ 875 41.29 %
Occupancy 801 785 16 2.04
Data processing 259 260 (1) (0.38)
Furniture and equipment 238 234 4 1.71
Legal and accounting 212 142 70 49.30
Advertising 157 112 45 40.18
Communications 125 122 3 2.46
Operation of foreclosed real estate owned 60 11 49 445.45
FDIC insurance 67 416 (349) (83.89)
Write-downs and net losses on sale
of foreclosed real estate owned - 95 (95) (100.00)
Other 652 624 28 4.49
------------ ------------- ------------ -----------
Total other expenses $ 5,565 $ 4,920 $ 645 13.11 %
============ ============= ============ ===========
</TABLE>
17
<PAGE>
Salaries, commissions and employee benefits increased $875,000 or 41.3% due
mainly to a $511,000 increase in commission expense primarily as a result of
increased investment brokerage services sales and higher executive deferred
compensation expense. In addition, overall salaries were higher by $157,000 and
the restoration to pre-1995 benefit levels for the Bank's pension and 401K plans
added $122,000 to the third quarter of 1997. Legal and accounting fees increased
primarily due to legal costs for commercial loan issues and lending related
activities. Operation of foreclosed real estate expenses increased due to
expenses relating to one- to four-family properties. FDIC insurance decreased
$349,000 or 83.9% caused primarily by lower premiums due to the Bank's improved
capital position.
Income Taxes
During the third quarter of 1997, the Bank recorded tax expense of $1.19
million. Income tax expense of $996,000 was deferred and therefore, reduced the
Bank's deferred tax asset. There was no tax provision recorded for the third
quarter of 1996.
For the nine months ended September 30, 1996 and 1997
For the nine months ended September 30, 1997, the Bank reported net income of
$11.07 million or $2.12 per share compared to a net loss of $1.74 million or
$0.34 per share for the same period in 1996. The Bank recognized a tax benefit
of $9.01 million for the nine months ended September 30, 1997 primarily due to
the second quarter of 1997 full reversal of its deferred tax asset valuation
allowance. Also, during the nine months of 1997, the Bank recorded $8.80 million
in provisions for possible loan losses compared to $5.76 million for the same
period in 1996. This action strengthened the Bank's allowance for possible loan
losses to $14.20 million at September 30, 1997. At September 30, 1997, the
Bank's allowance for possible loan losses was 237.55% of non-performing and
restructured loans, significantly up from 63.83% at December 31, 1996. With
intense competition in a continued sluggish Central Connecticut economy,
management believed increasing the allowance for possible loan losses and the
reserve coverage ratios while maintaining high credit quality were prudent
strategies to implement. In addition, the Bank incurred fewer write-downs and
net losses on sale of foreclosed real estate during the nine months of 1997
compared to the same period in 1996 due primarily to the $2.65 million recorded
in 1996 related to the ADP.
Net Interest Income
Net interest income totaled $21.99 million for the nine months ended September
30, 1997 compared to $18.97 million for the same period in 1996, representing
$3.02 million or a 15.9% increase. The net interest margin remained the same at
3.99% for the nine months ended September 30, 1996 and 1997. Average
interest-earning assets increased $101.62 million while average interest-bearing
liabilities increased only $64.79 million. Also funding the increase in
interest-earning assets, the Bank's average stockholders' equity increased
$39.36 million. For the nine months ended September 30, 1997 compared to the
same period in 1996, average investment securities increased $100.13 million.
Average net loans were $24.26 higher for the nine months ended September 30,
1997 compared to the same period in 1996 which was partially offset by a $22.77
million decrease in average short-term investments.
Average borrowings increased $41.42 million due to an increase in borrowings
from the FHLB. The average balance of certificates of deposit increased $35.84
million while the average rate on these deposits fell 15 basis points. Partially
offsetting this increase, there were decreases in the average volumes of the
remaining interest-bearing deposit categories. In addition during 1997, the Bank
utilized securities sold under agreements to repurchase to raise average funds
of $5.97 million for the nine months. These securities sold under agreements to
repurchase matured on April 15, 1997.
18
<PAGE>
The following table sets forth certain information relating to the Bank's
average interest-earning assets and interest-bearing liabilities and net
interest income for the nine months ended September 30, 1996 and 1997:
<TABLE>
<CAPTION>
Average Balances Income / Expense Yields
----------------------------- ------------------------------ ---------------------------
Nine months ended Sept. 30, Nine months ended Sept. 30, Nine months ended Sept. 30,
1997 1996 1997 1996 1997 1996
------------- ------------ ------------- ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 523,669 $ 499,407 $ 32,301 $ 30,690 8.25 % 8.21 %
Investment securities 208,084 107,952 9,752 4,637 6.27 5.75
Short-term investments 4,919 27,692 198 1,092 5.38 5.27
------------- ------------ ------------- ------------- ---------- -----------
Total interest-earning assets 736,672 635,051 42,251 36,419 7.67 7.66
Other assets 55,248 49,769
------------- ------------
Total assets $ 791,920 $ 684,820
============= ============
Money market checking $ 34,526 $ 38,159 $ 307 $ 378 1.19 1.32
Money market savings 58,018 66,739 1,013 1,166 2.33 2.33
Savings & other 118,500 124,595 1,765 1,863 1.99 2.00
Certificates of deposit 374,143 338,302 14,637 13,615 5.23 5.38
Securities sold under
agreements to repurchase 5,974 - 243 - 5.44 n/a
Other borrowings 52,883 11,460 2,291 424 5.79 4.94
------------- ------------ ------------- ------------- ---------- -----------
Total interest-bearing funds 644,044 579,255 20,256 17,446 4.21 4.02
Demand deposits 64,335 61,735
Other liabilities 3,644 3,290
Capital 79,897 40,540
------------- ------------
Total liabilities and capital $ 791,920 $ 684,820
============= ============
Net interest income $ 21,995 $ 18,973
============= =============
Spread on interest-bearing funds 3.46 % 3.64 %
Net interest margin 3.99 % 3.99 %
</TABLE>
19
<PAGE>
The following table presents the changes in interest and dividend income and the
changes in interest expense, attributable to changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
Nine months ended September 30, 1996 versus 1997
Change in interest due to
--------------------------------------------------------
(in thousands) Volume Rate Vol/Rate Net
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Loans, net $ 1,491 $ 114 $ 6 $ 1,611
Investment securities 4,301 422 392 5,115
Short-term investments (898) 23 (19) (894)
----------- ----------- ----------- -----------
Total 4,894 559 379 5,832
----------- ----------- ----------- -----------
Money market checking (36) (39) 4 (71)
Money market savings (152) (1) - (153)
Savings & other (91) (7) - (98)
Certificates of deposit 1,442 (380) (40) 1,022
Securities sold under
agreements to repurchase 243 - - 243
Other borrowings 1,533 72 262 1,867
----------- ----------- ----------- -----------
Total 2,939 (355) 226 2,810
----------- ----------- ----------- -----------
Net change to interest income $ 1,955 $ 914 $ 153 $ 3,022
=========== =========== =========== ===========
</TABLE>
Interest Income
Interest income increased $5.83 million or 16.0% due primarily to average
increased volumes of investment securities and loans of $100.13 million and
$24.26 million, respectively, which were partially offset by lower average
volume of short-term investments of $22.77 million. Overall average yields
increased slightly from 7.66% for the nine months ended September 30, 1996 to
7.67% for the same period in 1997.
Interest Expense
Interest expense increased $2.81 million or 16.1% from the nine months of 1996
to the same period in 1997. The increase was mainly due to higher average
balances of other borrowings, certificates of deposit and securities sold under
agreements to repurchase. These increases were partially offset by lower average
volumes of the other interest-bearing deposits and lower rates on certificates
of deposit. Overall rates increased from 4.02% for the nine months ended
September 30, 1996 to 4.21% for the same period in 1997. The increase in average
rates was mainly due to higher rates on borrowings and the use of securities
sold under agreements to repurchase.
Provision for Possible Loan Losses
The provision for possible loan losses increased from $5.76 million for the nine
months ended September 30, 1996 to $8.80 million for the same period in 1997.
Although previously considered adequate, the Bank further strengthened the
allowance for possible loan losses during the second quarter of 1997 by adding
$6.50 million in provisions for possible loan losses. During the second quarter
of 1996, the Bank
20
<PAGE>
added $3.60 million in anticipation of the ADP. The Bank's percentage of
allowance for possible loan losses to non-performing loans was 295.04% at
September 30, 1997 up from to 101.62% at December 31, 1996. The allowance for
possible loan losses as a percentage of gross loans increased from 1.59% at
December 31, 1996 to 2.53% at September 30, 1997.
Other Income
The Bank recorded $6.37 million in other income for the nine months ended
September 30, 1997 compared to $3.97 million for the same period in 1996,
representing an increase of $2.40 million or 60.3%. The following table shows
the components of other income for the nine months ended September 30, 1996 and
1997:
<TABLE>
<CAPTION>
(in thousands) Nine months ended September 30, $ %
1997 1996 Change Change
------------------ ----------------- ---------- -----------
<S> <C> <C> <C> <C>
Investment brokerage services commissions $ 2,542 $ 812 $ 1,730 213.05 %
Service charges on deposit accounts 1,701 1,713 (12) (0.70)
Loan servicing and other fees 594 519 75 14.45
Income from investment in Real Estate Partnership 442 237 205 86.50
Net gain on sales of loans 26 40 (14) (35.00)
Net gain (loss) on sales of investment securities 2 (78) 80 (102.56)
Other 1,061 729 332 45.54
------------------ ----------------- ----------
$ 6,368 $ 3,972 $ 2,396 60.32 %
================== ================= ========== ==========
</TABLE>
Investment brokerage services commissions increased $1.73 million from the nine
months ended September 30, 1996 to the same period in 1997 primarily due to the
Bank's new ability to sell annuities and to earn investment advisory fees in
1997. Commissions from annuity sales and investment advisory fees totaled
$957,000 and $477,000, respectively during the nine months of 1997. In addition,
there was $296,000 in increased commissions on other investment brokerage
service products. Loan servicing and other fees increased due mainly to higher
late charges and prepayment fees which were partially offset by lower loan
servicing income. Income from the investment in Real Estate Partnership
increased primarily due to the December 31, 1996 expiration of a lease incentive
for an existing tenant which decreased the Real Estate Partnership's expenses
during the nine months of 1997. Other income increased due mainly to
appreciation from the cash surrender value life insurance, lower expenses from
the subsidiaries that facilitate the ownership, management and disposition of
foreclosed real estate owned and the absence of the real estate agency
subsidiary which was sold during the first quarter of 1996.
Other Expenses
Other expenses totaled $17.50 million for the nine months ended September 30,
1997 compared to $18.88 million for the same period in 1996. The following table
details the significant components of other expenses for the periods presented:
21
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Nine months ended September 30, $ %
1997 1996 Change Change
------------ ------------- ------------ ----------
<S> <C> <C> <C> <C>
Salaries, commissions and employee benefits $ 9,254 $ 6,741 $ 2,513 37.28 %
Occupancy 2,398 2,420 (22) (0.91)
Data processing 789 736 53 7.20
Furniture and equipment 715 706 9 1.27
Legal and accounting 696 502 194 38.65
Advertising 622 386 236 61.14
Communications 377 371 6 1.62
Operation of foreclosed real estate owned 317 420 (103) (24.52)
FDIC insurance 201 929 (728) (78.36)
Write-downs and net losses on sale
of foreclosed real estate owned 120 3,495 (3,375) (96.57)
Other 2,014 2,176 (162) (7.44)
------------ ------------- ------------
Total other expenses $ 17,503 $ 18,882 $ (1,379) (7.30) %
============ ============= ============ ===========
</TABLE>
Salaries, commissions and employee benefits increased $2.51 million or 37.3% due
mainly to a $1.74 million increase in commission expense primarily as a result
of increased investment brokerage services sales. In addition, overall salary
expenses were higher by $458,000 and the restoration to pre-1995 benefit levels
for the Bank's pension and 401K plans added $353,000 to the nine months ended
September 30, 1997. Legal and accounting increased due to increased legal fees
due in part to the formation of the MIS broker / dealer and the proposed
formation of a bank holding company. Advertising increased $236,000 partially
due to production costs for the annual report. Operation of foreclosed real
estate owned decreased $103,000 due primarily to reduced expenses on commercial
properties which was partially offset by higher expenses on one- to four-family
properties. FDIC insurance decreased $728,000 or 78.4% caused primarily by lower
premiums due to the Bank's improved capital position. Write-downs and net losses
on sale of foreclosed real estate owned decreased due primarily to the
write-downs of $2.65 million recorded in the second quarter of 1996 in
anticipation of the ADP. Other expenses decreased $162,000 primarily due to
lower consulting expenses.
Income Taxes
During the nine months ended September 30, 1997, the Bank recorded a tax benefit
of $9.01 million primarily due to the second quarter 1997 full reversal of its
valuation allowance on its net deferred tax assets. Based on three consecutive
prior quarters of income and projections for the second half of 1997 and for
1998 that indicate continued profitability, the Bank determined that it was more
likely than not that it would realize its net deferred tax assets. There was
$50,000 of income tax expense recorded for the nine months of 1996.
22
<PAGE>
Signatures
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Bank has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
Mechanics Savings Bank
Date: 11/4/97 /S/ THOMAS M. WOOD
---------------- ------------------
Executive Vice President and Treasurer
Date: 11/4/97 /S/ BRIAN A. ORENSTEIN
---------------- ----------------------
Senior Vice President and Controller
23
