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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
COMMISSION FILE NUMBER 000-23557
MECHANICS SAVINGS BANK
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(EXACT NAME OF BANK AS SPECIFIED IN CHARTER)
STATE OF CONNECTICUT 06-1500984
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
100 PEARL STREET, HARTFORD, CT 06103
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(ADDRESS OF PRINCIPAL OFFICE) (ZIP CODE)
REGISTRANT'S TELEPHONE INCLUDING AREA CODE: (860) 293-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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Title of Class
Indicate by check mark whether the bank (1) has filed all reports to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the bank was required to file such
reports), and (2) has been subject to such filing requirement for the past 90
days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
Form 10-K. [_]
As of February 28, 1998, the aggregate market value of the 5,221,933 shares of
common stock of the registrant issued and outstanding on such date was $139
million . As of that same date, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $134 million.
The following documents and information are incorporated by reference herein to
the extent indicated under the appropriate item:
1. The annual report to shareholders of Mechanics Savings Bank for the fiscal
year ended December 31, 1997 (hereinafter referred to as the "Bank's 1997
Annual Report"); and
2. Management's definitive Proxy Statement for the 1998 Annual Meeting of
Shareholders (hereinafter referred to as the "Bank's 1998 Proxy Statement")
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TABLE OF CONTENTS:
<TABLE>
<S> <C> <C>
Item 1. Business of the Bank............................................ 2
Item 2. Properties...................................................... 7
Item 3. Legal Proceedings............................................... 7
Item 4. Submission of Matters to a Vote of Security Holders............. 7
Item 5. Market for Common Equity and Related Shareholder Matters........ 8
Item 6. Selected Financial Data......................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 8
Item 8. Financial Statements and Supplementary Data..................... 8
Item 9. Changes and Disagreements with Accountants on Accounting
and Financial Disclosure........................................ 8
Item 10. Directors and Principal Officers of the Registrant.............. 8
Item 11. Executive Compensation.......................................... 8
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 8
Item 13. Certain Relationships and Related Transactions.................. 8
Item 14. Exhibits........................................................ 9
Signatures...................................................... 11
</TABLE>
1
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PART I
ITEM 1 BUSINESS
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GENERAL
MECH Financial, Inc., (the "Company"), a Connecticut corporation, is the
registered bank holding company for Mechanics Savings Bank (the "Bank"), a
wholly-owned subsidiary. The Bank's shareholders approved the formation of the
Company at a special meeting held on November 25, 1997. The Company was formed
on January 1, 1998 and will provide additional corporate structuring
opportunities and powers to respond to the expanding needs of the Bank's
customers and to the competitive conditions in the financial services industry.
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 individuals and corporate customers primarily located in Central Connecticut.
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 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.
MARKET AREA AND COMPETITION
The Bank has 14 retail banking offices, located in Hartford (3), and the
Greater Hartford communities of West Hartford (3), Avon, Bloomfield, Windsor,
Manchester, East Hartford, Glastonbury, Wethersfield and New Britain. All of the
Bank's office facilities and its primary market area are located in Hartford
County, Connecticut. According to the 1990 U.S. Census, the City of Hartford and
Hartford County had populations of 139,739 and 851,738 respectively.
Hartford County is located half-way, approximately two hours driving time,
between Boston and New York City. The region serves as the governmental and
financial center of the state. Hartford County has a diversified mix of industry
groups, including insurance and financial services, manufacturing, service,
government and corporate offices, and retail. The City of Hartford is the hub of
the region and is a major employment center. Hartford is best noted as the home
office of several international and national insurance companies and
manufacturing companies. Other major employers include Fortune 500 companies,
regional banks and the State of Connecticut.
Intense competition exists in all major lines of business in which the Bank
is presently engaged. The Bank's market area contains a significant number of
financial institutions, including commercial banks, thrift institutions, credit
unions, insurance companies, mortgage brokers and brokerage firms. The Bank
competes with a variety of other community banking institutions as well as
regional, super-regional and also several money center institutions which have
located branch offices in the Hartford County market. Many of the larger
institutions offer a full array of consumer and business products which compete
directly with those products and services offered by the Bank. In addition, the
community banks compete directly with the Bank by attempting to differentiate
themselves from larger rivals in the same manner that the Bank does, namely
through providing first class, personalized service.
2
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LENDING ACTIVITIES
GENERAL. The Bank concentrates primarily upon its traditional residential
mortgage, home equity and other consumer loan products, in addition to
commercial loans that meet the needs of small to medium sized businesses.
Commercial real estate lending is restricted to owner occupied business realty
and non-speculative, already improved investor properties owned by creditworthy,
substantive borrowers.
ONE- TO FOUR-FAMILY RESIDENTIAL LENDING. The Bank continues to focus on the
origination of loans collateralized primarily by first mortgages on existing
one-to four-family residences, offering a variety of fixed and adjustable rate
mortgage loan products. At December 31, 1997, $396.39 million, or 67.9%, of the
Bank's total loan portfolio consisted of one- to four- family mortgage loans,
substantially all of which are conventional loans (i.e., loans that are neither
insured by the Federal Housing Administration nor partially guaranteed by the
Veterans Administration).
The Bank actively solicits one- to four-family residential mortgage loan
applications primarily through its branches, loan originators and
correspondents. In addition, the Bank periodically conducts first-time home
buyer seminars in an effort to develop residential loan applications. The Bank
periodically purchases residential mortgage loans from correspondents.
The Bank originates residential mortgage loans which qualify for sale to
the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). The Bank originates both fixed rate and
adjustable rate mortgage loans with loan terms of between 10 and 30 years. One
year adjustable rate mortgage loans have interest rates that adjust annually
based upon an index tied to the weekly average yield on U. S. Treasury
securities, adjusted to a constant maturity of one year. These loans typically
provide that the amount of any increase or decrease in the interest rate is
limited to two percentage points per adjustment period and is limited to an
aggregate of six percentage points by which the rate can increase or decrease
over the life of the loan. In addition, the Bank offers a variety of other
adjustable rate mortgage programs.
Borrower demand for adjustable rate versus fixed rate mortgage loans is
a function of the level of interest rates, expectations as to future changes in
interest rates and pricing differences between fixed rate mortgage loans and
adjustable rate mortgage loans. The relative amount of fixed rate and adjustable
rate residential loans that are originated at any time is therefore largely
determined by market and financial conditions.
At December 31, 1997, $130.39 million, or 32.9%, of the Bank's one- to
four-family residential mortgage loan portfolio carried fixed interest rates.
Although these loans generally provide for repayment of principal over a fixed
period of 10 to 30 years, the Bank's experience, because of prepayments and due-
on-sale clauses, is that such loans generally remain outstanding for a
substantially shorter period of time. At December 31, 1997, $266.00 million or
67.1% of Bank's residential mortgage portfolio carried variable interest rates.
Adjustable rate loans tend to decrease the risks to the Bank's net interest
income associated with changes in interest rates, but involve credit risk,
primarily because as interest rates rise, the payment by the borrower rises to
the extent permitted by the terms of the loan, thereby increasing the potential
for default. At the same time, the market value of the underlying property may
be adversely affected by higher interest rates. The Bank offers introductory
rates on its one year adjustable rate residential mortgage loans, which are
lower than the fully indexed rate on adjustable rate loans but which are
competitive with other lenders in the Bank's market. The Bank underwrites the
ability of borrowers to service adjustable rate mortgage loans at interest rates
higher than the introductory rates.
The Bank's general practice is to lend up to 80% of the appraised value of
the property collateralizing a one- to four-family residential loan. Under
certain circumstances, the Bank will lend up to 97% of the appraised value. To
the extent that a loan exceeds 80% of the appraised value of the property, the
borrower generally must obtain private mortgage insurance, which effectively
reduces the loss exposure to a 75% loan-to-value ratio or less. Appraisals on
property collateralizing the Bank's one- to four-family residential loans are
made by independent licensed appraisers or the Bank's licensed, in-house
appraisal staff.
The Bank's policy also requires that appraisals be performed in accordance
with applicable federal and state laws and regulations. Borrowers also must
obtain hazard insurance and flood insurance, when required, prior to closing.
The Bank generally has required borrowers to pay funds, with each monthly
payment of principal and interest, to a loan escrow account from which the Bank
makes disbursements for items such as real estate taxes, hazard and flood
insurance premiums and mortgage insurance premiums as they become due.
3
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MULTI-FAMILY, COMMERCIAL REAL ESTATE, LAND AND CONSTRUCTION LENDING.
Multi-family, commercial real estate and construction lending to builders
involves a higher degree of risk than one- to four-family residential lending.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, owner-occupied real estate.
Commercial construction loans are made only if the borrower also seeks and
qualifies for a permanent loan from the Bank. The Bank's lending policy allows
for permanent commercial real estate loans collateralized by multi-family
properties and commercial real estate with a maximum loan-to-value ratio of 80%.
The Bank typically offers maturities of 10 to 20 years and loan terms which
provide for interest rates that adjust at regular intervals of one, three or
five years, based upon an index tied to the corresponding treasury constant. The
Bank generally obtains personal guarantees from the principals of the borrowing
entities. Appraisals of the property collateralizing such loans are made by
independent licensed appraisers.
At December 31, 1997, $13.50 million, or 2.3%, of the Bank's total loan
portfolio consisted of loans collateralized by multi-family properties. Multi-
family loans are comprised primarily of loans collateralized by income producing
properties with five or greater residential units.
At December 31, 1997, $99.25 million, or 17.0%, of the Bank's total loan
portfolio consisted of loans collateralized by commercial real estate, of which
$47.29 million was for professional office buildings, $28.12 million for retail
stores, and $12.55 million for industrial/warehouse properties. The remaining
balance consisted of loans collateralized by various commercial properties. Also
at December 31, 1997, $3.60 million, or 0.6% of the Bank's total loan portfolio,
were construction and land loans, $2.18 million which were for construction of
one- to four-family residential units and $1.42 million which were for
construction of commercial properties.
As of December 31, 1997, the Bank's largest single loan was a line of
credit to a mortgage lending company. The largest loan outstanding was $3.59
million, which was classified as a performing commercial mortgage. The largest
lending relationship aggregated $4.0 million, which was also classified as
performing.
COMMERCIAL AND INDUSTRIAL LENDING. The Bank has focused a major portion of
its business development on small to medium sized businesses within the central
Connecticut market. Such loans diversify the Bank's portfolio and reduce the
Bank's interest rate risk by originating loans that adjust with changes in the
prime rate. These loans typically generate fee income and often have
compensating depository balances.
The Bank seeks to expand its current relationships with existing borrowers
that have a superior reputation and a consistent history of profitability. The
Bank also seeks to develop new relationships with creditworthy small to midsize
business customers in towns in which the Bank has branches and within certain
contiguous communities.
The Bank also cross sells depository, cash management and investment
products. Present loan policy generally discourages transactional lending.
Potential customers include those customers that meet the Bank's risk tolerance
levels by industry, collateral type and debt service capacity.
At December 31, 1997, $33.70 million or 5.8% of the Bank's total loan
portfolio consisted of commercial and industrial loans. At that date the Bank
had outstanding commitments on commercial lines of credit of $17.48 million.
HOME EQUITY LENDING. Originations of home equity lines of credit increased
during 1997, mainly due to aggressive marketing during the year. Gross new loan
production increased from $2.71 million in 1996 to $3.13 million in 1997. At
December 31, 1997, the Bank had $6.75 million in approved home equity lines of
credit with $3.00 million outstanding.
The Bank currently offers amortizing second mortgage loans to enable home
owners to access equity in their home. The Bank offers repayment schedules of up
to 20 years. The Bank's current loan policy permits home equity and second
mortgage loans up to 80% of the appraised value of the property collateralizing
the loan, less any existing encumbrances. Appraisals on the property
collateralizing the Bank's home equity and second mortgage loan products and
lines are made by independent licensed appraisers or the Bank's licensed, in-
house appraisal staff.
CONSUMER LENDING. The Bank offers an expanding variety of consumer loan
products ranging from secured to unsecured assets. Interest rates are generally
competitive to those in the Bank's market. At December 31, 1997, the Bank's
consumer loans totaled $34.62 million or 5.9% of its loan portfolio. The Bank
has pursued consumer lending more actively in 1997 through various loan
programs, and will continue to emphasize this expansion in 1998. New loan volume
grew 287% from $7.7 million in 1996 to $29.8 million in 1997 and has accounted
for 119% increase in outstanding loans in 1997. Management believes that prudent
underwriting, higher interest rates and shorter maturities associated with this
type of lending will complement both earnings and asset/liability management
objectives.
4
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RESIDENTIAL MORTGAGE LOAN SERVICING. The Bank has historically serviced
loans sold to other institutions as a means of maintaining customer
relationships and generating fee income. These loans were originated by the Bank
and sold to private banking institutions or FNMA or FHLMC. Currently the Bank's
intention is not to make bulk sales of residential mortgage servicing rights in
the future.
ASSET QUALITY. Asset quality is of significant importance to the Bank. All
commercial loans are risk-rated at least annually by each loan officer and
reviewed by either internal or external loan review personnel. A loan committee
meets regularly to adopt action plans for all adversely graded loans and reviews
monthly compliance with previously agreed upon remediation programs.
NON-PERFORMING, DELINQUENT AND CLASSIFIED ASSETS
GENERAL. Non-performing assets totaled $4.03 million, or 0.45% of total
assets, at December 31, 1997 compared to $8.54 million, or 1.14% of total
assets, at December 31, 1996. At December 31, 1997, non-performing assets were
comprised of $2.83 million of non-performing loans and $1.20 million of other
real estate owned ("OREO").
The Bank identifies certain Other Assets Especially Mentioned ("OAEM") that
include performing loans which management believes exhibit a higher than normal
degree of risk due to a variety of factors, such as geographic and industry
related weaknesses, a downturn in operations in recent years, bankruptcy of a
related company, or other loans from the same borrower that are classified as
non-performing. The OAEM list included loans totaling $17.41 million at December
31, 1997, a decrease of $6.91 million or 28.4% from $24.32 million at December
31, 1996. Although the Bank has reduced the level of these loans, there can be
no assurance that the decline will continue or that these loans will not be
classified as non-performing at a future date.
The Bank also maintains lists of adversely classified credits (substandard,
doubtful or loss credits, referred to as the "Classified Asset Lists"). The
Classified Asset Lists included loans totaling $10.19 million at December 31,
1997, a decrease of $7.04 million or 40.9% from $17.23 million at December 31,
1996. Of the loans on the Classified Asset Lists, non-performing loans totaled
$2.83 million, at December 31, 1997, a decrease of $5.03 million or 64.0% from
$7.86 million at December 31, 1996. No assurance can be given that the decrease
in the amounts of non-performing loans and other loans on the Classified Asset
Lists will continue in the future.
NON-PERFORMING ASSETS. Management of the Bank regularly reviews
delinquent loans, which are placed on non-accrual status when, in its judgment,
the probability of collection is uncertain. All loans 90 days or more past due
as to interest or principal are placed on non-accrual status unless, in
exceptional circumstances, the loan is both well collateralized and in the
process of collection. At December 31, 1997, the Bank had no loans accruing
interest which were 90 days or more past due.
Because of certain provisions of Connecticut foreclosure law, the Bank may
encounter delays in its attempt to foreclose on property for which it is
mortgagee. Connecticut foreclosure law requires a lawsuit by the foreclosing
party against the borrower (owner) of real estate. The lawsuit must name as
defendants all junior lien holders. In addition, Connecticut law protects
consumers who are unemployed or under-employed, as defined by statute, by
permitting them to obtain a six-month stay of a mortgage foreclosure action and
to restructure their mortgage debt. In general borrowers can and sometimes do
raise defenses which, even if not meritorious, can delay the foreclosure process
for months or even years.
ALLOWANCE FOR POSSIBLE LOAN LOSSES. The Bank uses various guidelines for
determining the allowance for possible loan losses. The Bank primarily relies
on its internal risk rating system as a means to derive loan reserves through
the application of loss experience ratios to individual risk rating categories.
Management also analyzes peer industry data, historical charge-off information
and market data to assess reserve adequacy. Management believes that the Bank's
allowance for possible loan losses is appropriately set reflecting the inherent
uncertainty in estimating loan losses.
The Bank regards its allowance for possible loan losses as a general
reserve which is available to absorb losses from all types of loans. Various
factors included in the Bank's determination of appropriate levels of the
allowance for possible loan losses include the size and nature of troubled
loans, collateral values, trends and credit concentrations within the portfolio,
general delinquency levels, regional and national economic trends and regulatory
policy.
5
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INVESTMENT ACTIVITIES
GENERAL. Under Connecticut law, the Bank has authority to purchase a wide
range of investment securities. In accordance with federal banking laws,
however, financial institutions such as the Bank may not engage in any
activities that are not permissible for a national bank, unless the FDIC has
determined that the activity would pose no significant risk to the Bank
Insurance Fund and the bank is in compliance with applicable capital standards.
The Bank is actively engaged in the purchase and sale of mortgage-backed
securities, U.S. Treasury securities and obligations of other U.S. government
agencies. The Bank has not invested in derivative investments other than
collateralized mortgage obligations which are either guaranteed by FNMA or FHLMC
or are rated AAA by at least one nationally recognized rating agency. The
Bank's current investment policy contemplates investments by the Bank in U.S.
Treasury securities, mortgage-backed securities, federal agency securities,
corporate debt securities, stock in the Federal Home Loan Bank of Boston
("FHLB"), federal funds, common or preferred stock listed on a national
securities exchange and shares of investment companies registered under the
Investment Company Act of 1940
MORTGAGE-BACKED SECURITIES AND SECONDARY MARKET ACTIVITIES. Mortgage-
backed securities increase the Bank's asset quality, are more liquid than
individual mortgage loans, and may be more readily available to collateralize
borrowings or other obligations of the Bank. All mortgage-backed securities
owned by the Bank at December 31, 1997 had maturities of 1 to 30 years, although
the Bank expects the average lives will be significantly shorter due to
principal amortization and prepayments.
SOURCES OF FUNDS
GENERAL. The principal sources of funds for the Bank's activities are
deposit accounts, amortization and prepayment of loans and mortgage-backed
securities, borrowings from the FHLB, funds provided from operations, and
shareholders' equity. Loan repayments and funds provided from operations are
relatively stable sources of funds, while deposit inflows and outflows are
significantly influenced by prevailing interest rates, competition and general
economic conditions.
The Bank offers a variety of deposit accounts having a wide range of
interest rates and terms. The Bank attempts to control the flow of funds in its
deposit accounts according to its need for funds and the cost of alternative
sources of funds primarily through the pricing of deposits and, to a lesser
extent, by promotional activities. The Bank's deposit accounts consist of
demand and money market accounts, statement and passbook savings, and time
accounts.
BORROWINGS. Although deposits are the Bank's primary source of funds, the
Bank also utilizes borrowings from the FHLB. The Federal Home Loan Bank System
functions in a reserve credit capacity for savings institutions and certain
other home financing institutions. The Bank is required to own capital stock in
the FHLB in order to access the System and is authorized to apply for advances
collateralized by residential mortgages and other qualified collateral. The Bank
has access to a pre-approved line of credit up to approximately $15 million 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.
RETAIL, NON-DEPOSITORY PRODUCTS
MECHANICS INVESTMENT SERVICES ("MIS"). The Bank offers investment products
and services to its customers through its wholly-owned subsidiary, MIS. 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 the subsidiary, MIS, with the intent on becoming its own
broker/dealer in 1997. On July 2, 1997, MIS became licensed as a broker/dealer
and registered investment advisor. MIS is regulated by the National Association
of Security Dealers ("NASD") and is a member of the Security Investors
Protection Corporation ("SIPC"). MIS offers a wide variety of investment
products, including mutual funds, stocks and bonds as well as investment
advisory services. MIS also offers fixed and variable annuity products and is
licensed as an insurance agency in the State of Connecticut. MIS earns its
commissions by selling investment products and by providing investment advisory
services to its customers. Commissions, salaries and benefits expense related
to this service approximated $1.99 million, $1.11 million, and $0.907 million in
1997, 1996 and 1995, respectively.
SAVINGS BANK LIFE INSURANCE. The Bank offers Savings Bank Life Insurance
("SBLI") to customers which includes insurance and annuity products. The Bank
also offers mortgage life, disability and credit life insurance relating to
loans as part of its SBLI business. During 1997 the Bank had pre-tax income of
$317,000, from all sales of SBLI insurance and SBLI annuities.
6
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SUBSIDIARIES
The Bank has five wholly-owned subsidiaries, three of which facilitate the
ownership, management and disposition of OREO (at December 31, 1997 these three
subsidiaries owned no properties), one which owns a 50% interest in the Real
Estate Partnership which owns the building that houses the Bank's headquarters
and one formed in 1996 to enable the Bank to serve its customers with a wholly-
owned broker/dealer.
EMPLOYEES
The Bank had 202 full-time employees and 59 part-time employees as of
December 31, 1997.
ITEM 2. PROPERTIES
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At December 31, 1997, the Bank had 14 banking offices, each of which is a
full-service office. The following table lists information at December 31, 1997
for the properties of the Bank.
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Office Area Amount of Owned or Lease
Location Opened by Square Feet Deposits Leased Expiration
- -------- ------ -------------- -------- ------ ----------
<S> <C> <C> <C> <C> <C>
100 Pearl Street, Hartford, CT/(a)/................ 1861 6,156 $88,398 Lease 2003
202 Farmington Ave., Hartford, CT.................. 1951 5,200 17,147 Own N/A
680 Park Street, Hartford, CT...................... 1957 5,400 23,639 Own N/A
1126 New Britain Ave., West Hartford, CT........... 1961 4,300 94,463 Lease 2003
124 LaSalle Road, West Hartford, CT................ 1963 4,268 75,716 Own N/A
722 North Main Street, West Hartford, CT........... 1976 2,662 64,689 Lease 2005
321 West Main Street, Avon, CT..................... 1978 2,639 22,712 Lease 2003
275 Cottage Grove Road, Bloomfield, CT............. 1962 4,000 32,080 Lease 2002
1491 Silver Lane, East Hartford, CT................ 1975 2,288 38,069 Lease 2005
156 Broad Street, Windsor, CT...................... 1961 3,000 57,832 Lease 2001
1063 Silas Deane Highway, Wethersfield, CT......... 1980 3,500 67,492 Lease 2004
341 Broad Street, Manchester, CT................... 1989 2,760 33,759 Lease 2003
446 South Main Street, New Britain, CT............. 1989 2,964 27,916 Lease 1999
2450 Main Street, Glastonbury, CT.................. 1991 2,594 23,652 Lease 2003
</TABLE>
/(a)/ In addition to the banking office at 100 Pearl Street, the Bank also
maintains its headquarters and executive offices at that location,
consisting of 46,449 square feet of office space on six floors leased
from the Real Estate Partnership.
ITEM 3. LEGAL PROCEEDINGS
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The Bank from time to time becomes involved in or is threatened with legal
proceedings occurring in the ordinary course of business. In the opinion of
management, final disposition of matters pending or threatened will not
individually or in the aggregate have a material adverse effect on the financial
condition or results of operations of the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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During the fourth quarter of 1997, the shareholders approved the formation
of MECH Financial, Inc., a bank holding company. The Special Meeting was held
November 25, 1997. The voting results were 3,818,606 FOR, 24,545 AGAINST and
66,455 ABSTAINED.
7
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
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The information is contained in the section captioned Common Stock
Information located on page 56 of the Bank's 1997 Annual Report and is
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
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The selected financial data required are contained in the Bank's 1997
Annual Report on pages 1 through 3, and are incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
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RESULTS OF OPERATIONS
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The information contained in the section captioned "Management's
Discussion and Analysis" on pages 4 through 30 of the Bank's 1997 Annual Report
is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The financial statements and supplementary data required are contained in
the Bank's 1997 Annual Report on pages 31 through 51 and are incorporated herein
by reference.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
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DISCLOSURE
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KPMG Peat Marwick, L.L.P. is succeeding Coopers & Lybrand L.L.P. as
independent accountants. The report on the financial statements for the two most
recent fiscal years by Coopers & Lybrand L.L.P. contained no adverse opinion or
disclaimer of opinion. There were no disagreements between Coopers & Lybrand
L.L.P. and the management of MECH Financial, Inc. or its subsidiaries including
Mechanics Savings Bank on accounting policies or procedures, financial statement
disclosure or auditing scope or procedure.
Certain other required information under this item is included in the
Bank's 1998 Proxy Statement on pages 14 and 15 and is incorporated herein by
reference.
PART III
ITEM 10. DIRECTORS AND PRINCIPAL OFFICERS OF THE REGISTRANT
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Director and Principal Officer information is incorporated by reference
beginning on page 3 in the Bank's 1998 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
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Management Compensation and Transactions are incorporated by reference
from pages 7 through 12 of the Bank's 1998 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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As of February 28, 1998, there were no persons or groups (as that term is
used in Section 13(d) (3) of the Exchange Act) known to the Company who may be
deemed to own beneficially more than 5% of the Common Stock.
Certain other required information under this item is included in the
Bank's 1998 Proxy Statement on pages 3, 6 and 13 and is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The required information is included in the Bank's 1998 Proxy Statement on
page 13 and is incorporated herein by reference.
8
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM F-3
- ------------------------------------------------------------------------
(A) FINANCIAL STATEMENTS
The following documents filed as part of this report are incorporated
herein by reference from the indicated pages of the 1997 Annual Report.
(1) Financial Statements Page(s)
Report of Independent Accountants 52
Consolidated Statements of Condition 26
Consolidated Statements of Operations 27
Consolidated Statements of Stockholders' Equity 28
Consolidated Statements of Cash Flows 29-30
Notes to Consolidated Financial Statements 31-51
(2) Financial Statement Schedules
All Schedules are included in the 1997 Annual Report or are not
required or inapplicable and have been omitted.
(3) Exhibits
EXHIBIT DESCRIPTION
- ------- -----------
2 Agreement and Plan of Reorganization dated November 25, 1997 between
Mechanics Savings Bank and the Registrant (incorporated by reference
from Exhibit 2 to Form 8-A filed by the Registrant on December 29,
1997).
3.1(i) Certificate of Incorporation of MECH Financial, Inc. (incorporated by
reference from Exhibit 3(i) to Form 8-A filed by the Registrant on
December 29, 1997).
3.1(ii) Bylaws of MECH Financial, Inc. (incorporated by reference from Exhibit
3(ii) to Form 8-A filed by the Registrant on December 29, 1997).
10.1 1996 Mechanics Savings Bank Officer Stock Option Plan.
10.2 1996 Mechanics Savings Bank Director Stock Option Plan.
10.3 Change of Control Agreement between Mechanics Savings Bank and Edgar
C. Gerwig (incorporated by reference from Exhibit 10.1 to Form 8-A
filed by the Registrant on December 29, 1997).
10.4 Change of Control Agreement between Mechanics Savings Bank and Thomas
M. Wood (incorporated by reference from Exhibit 10.2 to Form 8-A filed
by the Registrant on December 29, 1997).
10.5 Change in Control Agreement between Mechanics Savings Bank and Richard
W. Stout (incorporated by reference from Exhibit 10.3 to Form 8-A
filed by the Registrant on December 29, 1997).
10.6 Change in Control Agreement between Mechanics Savings Bank and Eugene
B. Marinelli (incorporated by reference from Exhibit 10.4 to Form 8-A
filed by the Registrant on December 29, 1997).
10.7 Change in Control Agreement between Mechanics Savings Bank and Marci
D. Negro (incorporated by reference form Exhibit 10.5 to Form 8-A
filed by the Registrant on December 29, 1997).
10.8 Change in Control Agreement between Mechanics Savings Bank and Brian
A. Orenstein (incorporated by reference from Exhibit 10.6 to Form 8-A
filed by the Registrant on December 29, 1997).
9
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10.9 Change in Control Agreement between Mechanics Savings Bank and Gary
J.Roman (incorporated by reference from Exhibit 10.7 to Form 8-A filed
by the Registrant on December 29, 1997).
10.10 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Edgar C. Gerwig.
10.11 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Thomas M. Wood.
10.12 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Richard W. Stout.
10.13 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Eugene B. Marinelli.
10.14 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Marci D. Negro.
10.15 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Brian A. Orenstein.
10.16 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Gary J. Roman.
10.17 Employment Agreement between Mechanics Savings Bank and Edgar C.
Gerwig (incorporated by reference from Exhibit 10.8 to Form 8-A filed
by the Registrant on December 29, 1997).
11 Statement regarding computation of earnings per share is hereby
incorporated by reference from pages 33-34 of the 1997 Annual Report
of the Registrant and Mechanics Savings Bank (see Exhibit 13).
13 1997 Annual Report of the Registrant and Mechanics Savings Bank.
16 Letter from Coopers & Lybrand L.L.P. regarding declination to stand
for re-election (incorporated by reference from Item #4 of Form 8-K
filed by the Registrant on January 26, 1998).
21 Information regarding subsidiaries of Mechanics Savings Bank is hereby
incorporated by reference from "Item 1 Business-Subsidiaries" of this
Form 10-K.
27 Financial Data Schedule.
(b) The Company did not file any Report on Form 8-K during the fourth quarter
of 1997.
(c) The exhibits required by Item 601 of Regulation S-K are filed as a separate
part of this report.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
MECH FINANCIAL, INC. AND MECHANICS SAVINGS BANK
- -----------------------------------------------
REGISTRANT
By /s/ Edgar C. Gerwig By: /s/ Thomas M. Wood
- ---------------------- ----------------------
Edgar C. Gerwig Thomas M. Wood
Chairman, President and Executive Vice President and
Chief Executive Officer Treasurer
By: /s/ Brian A. Orenstein
- --------------------------
Brian A. Orenstein
Senior Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
SIGNATURES/TITLE DATE
/s/ Edgar C. Gerwig 3/17/98
- ------------------- -------
Edgar C. Gerwig / Chairman
President and Chief Executive Officer
/s/ Richard H. Booth 3/17/98
- -------------------- -------
Richard H. Booth / Director
/s/ David Freeman 3/17/98
- ----------------- -------
David Freeman / Director
/s/ John J. Meehan 3/17/98
- ------------------ -------
John J. Meehan / Director
/s/ Kevin A. North 3/17/98
- ------------------ -------
Kevin A. North / Director
/s/ Robert G. Rayve 3/17/98
- ------------------- -------
Robert G. Rayve / Director
/s/ Alfred R. Rogers 3/17/98
- -------------------- -------
Alfred R. Rogers / Director
/s/ Donald K. Wilson, Jr. 3/17/98
- ------------------------- -------
Donald K. Wilson, Jr. / Director
_____________________ _______
Barbara Brown Zikmund / Director
MECHANICS SAVINGS BANK
11
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MECHANICS SAVINGS BANK
EXHIBIT 10.1
MECHANICS SAVINGS BANK
1996 OFFICER STOCK OPTION PLAN
1. PURPOSE
The 1996 Officer Stock Option Plan is designed to enable selected employees
of Mechanics Savings Bank and its Subsidiaries to acquire or increase a
proprietary interest in the Bank, and thus to share in the future success of the
Bank's business. Accordingly, the Plan is intended as a further means, not only
of attracting and retaining outstanding personnel who are in a position to make
important and direct contributions to the success of the Bank, but also of
promoting a closer identity of interests between the Bank's employees and its
shareholders.
2. DEFINITIONS
Whenever used herein, the following terms shall have the meanings set forth
below:
"Bank" means Mechanics Savings Bank.
"Board" means the Board of Directors of Mechanics Savings Bank.
"Code" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Committee" means the Board's Organization and Compensation Committee or
any successor thereto.
"Common Stock" means the Bank's Common Stock, par value $.01 per share.
"Conversion Offering" means the offering for sale of up to 5,290,000 shares
of the Bank's Common Stock upon its conversion from a Connecticut-chartered
mutual to a Connecticut-chartered capital stock savings bank.
"Disability," as applied to a Grantee, shall have the meaning set forth in
Section 22(e)(3) of the Code.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" on any particular date means the last sales price of a
share of Common Stock on the NASDAQ National Market (or any exchange on
which the Common Stock is then traded) as reported for that date by NASDAQ
or, if no sales price is reported on that date, the mean between the bid
and asked quotations for the Common Stock on that date as reported by
NASDAQ; provided that (i) if no such sales or quotations are reported by
NASDAQ for such date, or (ii) if in the opinion of the Committee sales of
Common Stock on such date were insufficient to constitute a representative
market, the Fair Market Value of a share of Common Stock on such date shall
be the last sales price or, if not available, the mean between the bid and
asked quotations as reported by NASDAQ for the first preceding date to
which clause (ii) does not apply. In the case of Initial Officer Options,
"Fair Market Value" for purposes of determining the Option Price shall be
the Fair Market Value (as first defined herein) on the date the Plan is
approved by the Bank's Shareholders, which shall be the Grant Date for
Initial Officer Options. The newness of the market for the Bank's common
stock, and the uncertainty over whether there will be an established market
at that time for such stock, makes this a reasonable and good faith method
to determine Fair Market Value on the grant date for these Initial Officer
Options.
"Grantee" means an employee of the Bank or one of its Subsidiaries to whom
an Option is granted.
"Grant Date," as used with respect to a particular Option, means the date
on which such Option is granted by the Committee pursuant to the Plan as
set forth in Section 5(b), except as specifically provided for Initial
Officer Options.
"Incentive Stock Option" means an Option described in Code Section 422(b).
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<PAGE>
"Initial Officer Options" means Incentive Stock Options granted to officers
of the Bank in connection with the Conversion Offering.
"NASDAQ" means National Association of Securities Dealers Automated
Quotation System.
"Nonstatutory Stock Option" means an Option that is not an Incentive Stock
Option.
"Option" means the right to purchase, at a price and for the Term fixed by
the Committee in accordance with the Plan and subject to such other
limitations and restrictions as this Plan and the Committee impose, the
number of shares of Common Stock specified by the Committee and shall
include Incentive Stock Options, Nonstatutory Stock Options and Initial
Officer Options.
"Option Agreement" means a written agreement in a form approved by the
Committee to be entered into by the Bank and the Grantee of an Option, as
provided in Section 9 hereof.
"Option Price" means the purchase price of each share of Common Stock
subject to an Option set by the Committee in accordance with Section 10
hereof.
"Plan" means the Bank's 1996 Officer Stock Option Plan, as amended from
time to time.
"Retirement," as applied to an employee, shall mean when the employee's
employment with the Bank or any present or future parent or Subsidiary of
the Bank terminates upon reaching the normal age of retirement as
established by the Board's policies from time to time.
"Stock Appreciation Right" means a right to surrender to the Bank all or a
portion of an Option and to be paid therefor an amount as determined by the
Committee, no greater than the excess of (i) the Fair Market Value, as of
the date such right is exercised, of the shares of Common Stock associated
with the Option, or portion thereof, which is surrendered, over (ii) the
aggregate Option Price of such shares.
"Subsidiary" means an entity of which, at the time such subsidiary status
is to be determined, at least 50% of the total combined voting power of all
classes of stock of such entity is held by the Bank and its Subsidiaries
(exclusive of ownership by the entity whose subsidiary status is being
determined).
"Successor" means the legal representative of the estate of a deceased
Grantee or the person or persons who shall acquire the right to exercise an
Option or a Stock Appreciation Right by bequest or inheritance or by reason
of the death of the Grantee.
"Term" means the period during which a particular Option may be exercised.
3. EFFECTIVE DATE AND DURATION OF PLAN
The Plan shall become effective on the day of the consummation of the
conversion of the Bank from a mutual to a stock form of organization (the
"Conversion Date") subject to approval of the Plan within one year of such
effective date by the holders of a majority of the outstanding shares of Common
Stock present or represented and entitled to vote at a duly held meeting of the
Bank's shareholders; provided, however, that upon approval of the Plan by the
-------- -------
shareholders of the Bank as set forth above, all Options granted under the Plan
on or after the effective date shall be fully effective as if the shareholders
of the Bank had approved the Plan on the effective date. If the shareholders
fail to approve the Plan within one year of such effective date, any options
granted hereunder shall be null and void and of no effect.
Unless previously terminated by the Board of Directors or except as
otherwise provided for herein, the Plan shall terminate, as to any shares as to
which Options have not theretofore been granted, on the tenth anniversary of its
adoption by the Board of Directors.
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<PAGE>
4. ADMINISTRATION OF THE PLAN
(a) The Plan shall be administered by the Committee. No member of the
Committee shall be employed by the Bank or any of its Subsidiaries and
each shall qualify in all respects as a "disinterested person" as
defined in Rule 16b-3 under the Exchange Act. The Committee shall
have the responsibility of construing and interpreting the Plan and of
establishing and amending such rules and regulations as it deems
necessary or desirable for the proper administration of the Plan. Any
decision or action taken or to be taken by the Committee, arising out
of or in connection with the construction, administration,
interpretation and effect of the Plan and of its rules and
regulations, shall, to the extent permitted by law, be within its
absolute discretion (except as otherwise specifically provided herein)
and shall be conclusive and binding upon all Grantees and any person
claiming under or through any Grantee.
(b) The Committee shall have plenary authority, subject to the provisions
of the Plan, to grant Incentive Stock Options, Nonstatutory Stock
Options and Stock Appreciation Rights and to determine to whom Options
and Stock Appreciation Rights shall be granted and the number of
shares subject thereto, the Term of each Option, and the terms of such
awards, and the waiver or acceleration thereof, including to
accelerate the exercisability or vesting of all or any portion of any
Option or to extend the period during which an Option is exercisable,
provided that no Incentive Stock Option shall be granted which is
exercisable after the expiration of ten (10) years from the date it is
granted.
(c) Any member of the Board who is an employee of the Bank or any of its
Subsidiaries shall be without vote on (i) any proposed amendment to
the Plan, or (ii) any other matter which might affect such member's
individual interest under the Plan; nor shall such member's presence
be counted in determining whether a quorum is present at any meeting
at which a vote involving the Plan or individual rights thereunder is
taken.
5. GRANT OF OPTIONS: NUMBER AND SOURCE OF SHARES SUBJECT TO THE PLAN
(a) (i) The Initial Officer Options shall be granted to those officers,
in the amounts set forth opposite such officers' names, as set
forth in Exhibit A attached hereto and made a part hereof, on the
condition subsequent that the Plan is approved by the Bank's
shareholders. The aggregate number of shares subject to Initial
Officer Options shall equal 205,000 shares of Common Stock. The
Initial Officer Options shall become exercisable ratably over
five (5) years beginning on December 31, 1996 (subject to the
condition subsequent that shareholders of the Bank approve the
Plan).
(ii) The Committee may from time to time grant additional Options
under the Plan, provided, however, that the aggregate number of
Options granted pursuant to this Plan (including Initial Officer
Options) shall not exceed 423,200 shares of Common Stock, subject
to adjustment in accordance with Section 16. Any shares of
Common Stock to be delivered by the Bank upon the exercise of
Options shall, at the discretion of the Board, be provided from
Common Stock held in the Bank's treasury which is not reserved
for some other purpose or from authorized and unissued Common
Stock which is not reserved for some other purpose.
(b) The date of grant of an Option shall be the date on which the
Committee's action is final or such later date as specified by the
Committee.
(c) In the event that any Option expires, lapses or otherwise terminates
prior to being fully exercised, any share of Common Stock allocable to
the unexercised portion of such Option may again be made subject to an
Option.
(d) Shares as to which there is a surrender in whole or in part of an
Option upon the exercise of a Stock Appreciation Right shall not again
be available for grant of Options.
(e) Shares of Common Stock delivered upon the exercise of a Stock
Appreciation Right shall be provided from Common Stock held in the
Bank's treasury which is not reserved for some other purpose or from
authorized and unissued Common Stock which is not reserved for some
other purpose.
3
<PAGE>
(f) Shares subject to Initial Officer Options granted under the Plan shall
be considered as shares purchased in the Conversion Offering for the
purpose of the insider limitation on conversion share purchases
provided in Section 36-142m-12(g) of the Code of Connecticut
Regulations (the "Limitation"). The Limitation limits Conversion
Offering stock purchases by officers, directors and their associates
in the Conversion to not more than 30% of the total number of shares
offered in the Conversion Offering. Any and all Initial Officer
Options which may be granted to persons, purposefully or
inadvertently, in excess of the limitation shall automatically be null
and void, and not exercisable at any time.
6. STOCK APPRECIATION RIGHTS
(a) The Committee may grant a Stock Appreciation Right to the Grantee of
an Option, either at the time the Option is granted or by amending the
Option Agreement at any time thereafter prior to the end of the Term
of the associated Option. A Stock Appreciation Right shall be
exercisable only during the Term of the associated Option, and only
when the Fair Market Value of the shares of Common Stock subject to
the Option exceeds the Option Price of such shares.
(b) The Committee may, at the time of granting a Stock Appreciation Right,
add such conditions and limitations to the Stock Appreciation Right as
it shall deem advisable.
(c) A Stock Appreciation Right may be exercised in whole or in part in
accordance with the terms set forth in the Grantee's Option Agreement.
The date of exercise shall be the date upon which notice thereof is
received by the Bank's corporate Secretary.
(d) Upon the exercise of a Stock Appreciation Right, the payment to be
made to the Grantee may be in cash, or in shares of Common Stock
valued at their Fair Market Value on the date of exercise, or partly
in cash and partly in shares of Common Stock, as determined by the
Committee.
(e) If the Committee, in its discretion, decides to permit a Grantee who
is an officer or director of the Bank to elect to receive cash in full
or partial settlement of the exercise of a Stock Appreciation Right,
then the following conditions must be met: (i) such election shall be
made during the period beginning on the third business day following
the date of release for publication of quarterly and annual summary
statements of sales and earnings of the Bank and ending on the twelfth
business day following such date, unless a different period is
specified in Rule 16b-3 under the Exchange Act, as in effect at the
time of such exercise, or any law, rule, regulation or other provision
that may hereafter replace such rule, and (ii) the Bank has been
subject to the reporting requirements of Section 13 of the Exchange
Act for at least one year prior to the date of said exercise and has
filed all reports and statements required to be filed pursuant to that
section during that period.
7. EMPLOYEES ELIGIBLE TO RECEIVE OPTIONS AND STOCK APPRECIATION RIGHTS
(a) Options may be granted under the Plan to employees of the Bank or its
Subsidiaries as designated from time to time by the Committee. Stock
Appreciation Rights may be granted only to Grantees of Options.
(b) Directors who are not salaried employees of the Bank or its
Subsidiaries shall not be eligible to receive Options and Stock
Appreciation Rights.
8. LIMITATION ON ANNUAL AWARDS
The aggregate Fair Market Value (determined at the date an Incentive Stock
Option is granted) of the shares with respect to which Incentive Stock Options
are exercisable for the first time by a Grantee during any calendar year (under
the Plan or any other plan maintained by the Bank or its subsidiaries) shall not
exceed $100,000.
4
<PAGE>
9. OPTION AGREEMENT
(a) The prospective Grantee of an Option may execute an Option Agreement
with the Bank memorializing such terms and conditions, not
inconsistent with the Plan, as may be approved by the Committee. The
terms and conditions of Option Agreements may vary from Grantee to
Grantee.
(b) The Committee may amend an Option Agreement from time to time.
(c) Appropriate officers of the Bank are hereby authorized to execute (by
facsimile or manually affixed signature) and deliver Option
Agreements, and amendments thereto, in the name of the Bank as
directed from time to time by the Committee.
10. OPTION PRICE
The Option Price shall be fixed by the Committee and stated in each Option
Agreement and, except as set forth hereafter, shall be not less than the greater
of par value or 100% of the Fair Market Value of a share of the Common Stock on
the Grant Date of the Option (as determined in good faith by the Committee).
The Option Price for Initial Officer Options shall be not less than the greater
of par value, $10 or 100% of the Fair Market Value (as defined for this purpose)
of a share of Common Stock on the date such Initial Officer Options are granted.
Notwithstanding the foregoing, in the event the Grantee would otherwise be
ineligible to receive an Incentive Stock Option by reason of the provisions of
Sections 422(b)(6) and 424(d) of the Code (relating to stock ownership of more
than 10%), the Option Price of an Option that is intended to be an Incentive
Stock Option shall be not less than the greater of par value or 110% of the Fair
Market Value of a share of Common Stock on the Grant Date of such Option.
Payment of the Option Price shall be made in cash or in such other form as the
Committee may approve, including shares of Common Stock of the Bank valued at
the Fair Market Value on the date of exercise of the Option, or a combination of
cash and/or such other form of property, or, if authorized by the Committee's
regulations and accomplished in accordance therewith, by delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to
deliver promptly to the Bank sale or loan proceeds sufficient to pay the Option
Price.
11. TERMS AND EXERCISE OF OPTIONS; LIMITATIONS ON EXERCISE AND TRANSFERABILITY
OF OPTIONS
(a) Each Option granted under the Plan shall be exercisable only during a
Term commencing on the date of the grant, unless otherwise specified
in the Option Agreement, and ending (unless the Option shall have
terminated earlier under other provisions of the Plan) on a date to be
fixed by the Committee but in no event later than the tenth
anniversary of its date of grant; provided, however, that in the event
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the Grantee would otherwise be ineligible to receive an Incentive
Stock Option by reason of the provisions of Sections 422(b)(6) and
424(d) of the Code (relating to stock ownership of more than 10%), an
Option granted to such Grantee that is intended to be an Incentive
Stock Option shall in no event be exercisable after the expiration of
five years from the date it is granted.
(b) The Committee shall have authority to grant Options exercisable in
full at any time during their Term, or exercisable in cumulative or
non-cumulative installments.
(c) Options shall be exercised in whole or in part in accordance with the
terms set forth in the Grantee's Option Agreement.
(d) Subject to the provisions of subsection (e) hereof, upon compliance by
the Grantee with such terms of exercise, the Bank shall promptly
deliver to the Grantee a certificate or certificates for the shares
purchased, without charge to the Grantee for any issue or transfer
tax.
(e) The Committee may postpone any exercise of an Option or a Stock
Appreciation Right for such time as the Committee in its discretion
may deem necessary, in order to permit the Bank with reasonable
diligence to determine that the shares are qualified for delivery
under such securities laws and regulations as the Committee may deem
to be applicable thereto; and the Bank shall not be obligated by
virtue of any Option Agreement or any provision of the Plan to
recognize the exercise of an Option or the exercise of a Stock
Appreciation Right to sell or issue shares in violation of any
applicable law. Any such postponement shall not extend the Term of an
Option; and neither the Bank nor its directors or officers shall have
any obligation
5
<PAGE>
or liability to the Grantee of an Option or Stock Appreciation Right,
or to the Grantee's Successor, with respect to any shares as to which
the Option or Stock Appreciation Right shall lapse because of such
postponement.
(f) All Options and Stock Appreciation Rights granted under the Plan shall
not be transferable other than by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of ERISA, or the rules thereunder, and
may be exercised during the lifetime of the Grantee only by the
Grantee, except that the Committee may permit:
(i) exercise, during the Grantee's lifetime, by the Grantee's
guardian or legal representative; and
(ii) transfer, upon the Grantee's death, to beneficiaries
designated by Grantee in a manner authorized by the
Committee, provided that the Committee determines that such
exercise and such transfer are, with respect to an Incentive
Stock Option, consonant with the requirements of Section
422(b)(5) of the Code.
(g) Upon the exercise of a Nonstatutory Stock Option or Stock Appreciation
Right by the Grantee, the stock certificate or certificates may, at
the request of the Grantee, be issued in the Grantee's name and the
name of another person as joint tenants with right of survivorship.
(h) The Committee may provide, in the Option Agreement, for the lapse of
the Option, prior to the expiration of its term, upon the occurrence
of any event specified by the Committee.
(i) A person electing to exercise an Option shall give written notice, in
such form as the Committee may require, of such election to the Bank
and shall tender to the Bank the full Option Price of the shares of
Common Stock for which the election is made.
12. SEQUENTIAL EXERCISE OF INCENTIVE STOCK OPTIONS
With the exception of an Option that is, by its terms, exercisable in
installments, an Incentive Stock Option shall be exercisable in any order or
sequence, irrespective of whether there is outstanding any other Incentive Stock
Option previously granted to the Grantee.
13. EXERCISE OF OPTIONS OR STOCK APPRECIATION RIGHTS BY
GRANTEE ON CESSATION OF EMPLOYMENT
Except as otherwise specifically provided for herein, employment for the
purposes of this section shall mean continuous full-time salaried employment
with the Bank or a Subsidiary, except that vacations, sick leaves and other
approved absences and severance pay periods shall be disregarded. Employment
for the purposes of this section may, at the discretion of the Committee, also
include continuous full-time salaried employment with a former Subsidiary under
circumstances as determined by the Committee, which determination can be made
either at the time of granting an Option or afterward. The following
limitations shall apply to any provisions the Committee shall make in an Option
Agreement for exercises of Options and Stock Appreciation Rights following
cessation of employment.
(a) Except as provided in Section 13(b), (c) and (e) below, in the event
Grantee ceases to be an employee of the Bank through involuntary
termination with or without cause by the Bank or any voluntary
termination, all Options and associated Stock Appreciation Rights held
by such Grantee shall be exercisable only to the extent that such
Options and associated Stock Appreciation Rights were exercisable at
the time such Grantee ceases to be an employee of the Bank, and such
Options and associated Stock Option Rights shall lapse on the date
that is the earlier of (i) three months following such termination,
or (ii) the expiration date set forth in such Option.
(b) If such termination is due to Retirement, all Options held by such
Grantee shall be exercisable only to the extent that such Options were
exercisable at the time of such Retirement, and such Options shall
lapse on the date that is the earlier of (i) three (3) months after
such termination in the case of the exercise of an Incentive
6
<PAGE>
Stock Option, and such period of time as determined by the Committee
and set forth in the Agreement evidencing such Option in the case of
the exercise of a Nonstatutory Stock Option, or (ii) the expiration
date set forth in such Option.
(c) If such termination is due to Disability, all Options held by such
Grantee shall be exercisable only to the extent that such Options were
exercisable at the time of such Disability, and such Options shall
lapse on the date that is the earlier of (i) one (1) year after such
termination in the case of the exercise of an Incentive Stock Option
and such period of time as determined by the Committee and set forth
in the Agreement evidencing such Option in the case of the exercise of
a Nonstatutory Stock Option, or (ii) the expiration date set forth in
such Option.;
(d) An Incentive Stock Option not exercised within three months (twelve
months in the case of Disability or death) after the date of
termination due to Disability, Retirement or death may be exercised
within such period of time as determined by the Committee and set
forth in the Agreement evidencing such Option (as the permitted period
of exercise in such circumstances of a Nonstatutory Stock Option)
after the date of such termination but no longer will be eligible for
the treatment afforded Incentive Stock Options under Section 422 of
the Code.
(e) If a Grantee should die while employed by the Company or any
subsidiary of the Company or after Disability or Retirement, any
Option previously granted to the Grantee under this Plan may be
exercised by the person designated in such Grantee's last will and
testament or, in the absence of such designation, by the Grantee's
estate, to the full extent that such Option could have been exercised
by such Grantee immediately prior to the Grantee's death, but not
later than the first anniversary of the Grantee's death in the case of
the exercise of an Incentive Stock Option and such period of time as
determined by the Committee and set forth in the Agreement evidencing
such Option in the case of the exercise of a Nonstatutory Stock
Option.
(f) No exercises may occur after expiration of the Term of the Option.
14. SHAREHOLDERS' RIGHTS
No Grantee, and no beneficiary or other person claiming through a Grantee,
shall have any interest in any shares of Common Stock allocated for the purposes
of the Plan or subject to any Option until such shares of Common Stock shall
have been transferred to the Grantee or such person. Furthermore, the existence
of the Options shall not affect: the right or power of the Bank or its
stockholders to make adjustments, recapitalization, reorganizations or other
changes in the Bank's capital structure; the dissolution or liquidation of the
Bank, or sale or transfer of any party of its assets or business; or any other
corporate act, whether of a similar character or otherwise.
15. NO RIGHT TO EMPLOYMENT
Nothing in the Plan or any instrument executed pursuant hereto shall confer
upon any employee any right to continue in the employ of the Bank nor shall
anything in the Plan affect the right of the Bank to terminate the employment of
any employee, with or without cause.
7
<PAGE>
16. EFFECT OF CHANGES IN CAPITALIZATION
(a) Changes in Common Stock. If the outstanding shares of Common Stock
------------------------
are increased or decreased or changed into or exchanged for a
different number or kind of shares or other securities of the Bank by
reason of any recapitalization, reclassification, stock split-up,
combination of shares, exchange of shares, stock dividend or other
distribution payable in capital stock, or other increase or decrease
in such shares effected without receipt of consideration by the Bank,
occurring after the effective date of the Plan, the number and kind of
shares for the purchase of which Options may be granted under Section
5(a) of the Plan shall be adjusted proportionately and accordingly by
the Committee. In addition, the number and kind of shares for which
Options are outstanding shall be adjusted proportionately and
accordingly so that the proportionate interest of the holder of the
Option immediately following such event shall, to the extent
practicable, be the same as immediately prior to such event. Any such
adjustment in outstanding Options shall not change the aggregate
Option Price payable with respect to shares subject to the unexercised
portion of the Option outstanding but shall include a corresponding
proportionate adjustment in the Option Price per share.
(b) Reorganization in Which the Bank is the Surviving Bank. Subject to
------------------------------------------------------
Subsection (c) hereof, if the Bank shall be the surviving bank in any
reorganization, merger, or consolidation of the Bank with one or more
other banks, any Option theretofore granted pursuant to the Plan shall
pertain to and apply to the securities to which a holder of the number
of shares of Common Stock subject to such Option would have been
entitled immediately following such reorganization, merger, or
consolidation, with a corresponding proportionate adjustment of the
Option Price per share so that the aggregate Option Price thereafter
shall be the same as the aggregate Option Price of the shares
remaining subject to the Option immediately prior to such
reorganization, merger, or consolidation.
(c) Reorganization in Which the Bank is Not the Surviving Bank or Sale of
---------------------------------------------------------------------
Assets or Stock. Upon the dissolution or liquidation of the Bank, or
---------------
upon a merger, consolidation or reorganization of the Bank with one or
more other banks in which the Bank is not the surviving bank, or upon
a sale of all or substantially all of the assets of the Bank to
another bank, or upon any transaction approved by the Board which
results in any person or entity owning 80% or more of the combined
voting power of all classes of stock of the Bank, the Plan and all
Options outstanding hereunder shall terminate, except to the extent
provision is made in writing in connection with such transaction for
the continuation of the Plan and/or the assumption of the Options
theretofore granted, or for the substitution for such Options of new
options or stock appreciation rights covering the stock of a successor
bank, or a parent or subsidiary thereof, with appropriate adjustments
as to the number and kinds of shares and exercise prices, in which
event the Plan and Options theretofore granted shall continue in the
manner and under the terms so provided. In the event of any such
termination of the Plan, each individual holding an Option shall have
the right (subject to the general limitations on exercise set forth in
Section 11 above and except as otherwise specifically provided in the
Option Agreement relating to such Option), immediately prior to the
occurrence of such termination and during such period occurring prior
to such termination as the Committee in its sole discretion shall
determine and designate, to exercise such Option in whole or in part,
whether or not such Option was otherwise exercisable at the time such
termination occurs and without regard to any installment limitation on
exercise imposed pursuant to Section 11 above. The Committee shall
send written notice of an event that will result in such a termination
to all individuals who hold Options not later than the time at which
the Bank gives notice thereof to its shareholders.
(d) Adjustments. Adjustments under this Section 16 related to stock or
-----------
securities of the Bank shall be made by the Committee whose
determination in that respect shall be final, binding, and conclusive.
No fractional shares of Common Stock or units of other securities
shall be issued pursuant to any such adjustment, and any fractions
resulting from any such adjustment shall be eliminated in each case by
rounding downward to the nearest whole share or unit.
(e) No Limitations on Bank. The grant of an Option pursuant to the Plan
----------------------
shall not affect or limit in any way the right or power of the Bank to
make adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge, consolidate, dissolve or
liquidate, or to sell or transfer all or any part of its business or
assets.
(f) Except as provided in this Section 16, the issuance by the Bank of
shares of stock of any class or securities convertible into shares of
stock of any class, shall not affect the outstanding Options.
8
<PAGE>
17. CHANGE IN CONTROL
(a) Upon the occurrence of a Change in Control (as hereinafter defined):
(1) All Options shall become immediately exercisable in full for the
remainder of their terms.
(2) All Stock Appreciation Rights shall become immediately
exercisable in full for the remainder of their terms.
(b) A "Change in Control" is the occurrence of any one of the following
events:
(i) any Person (other than a Grantee, the Bank or any trustee
or other fiduciary holding securities under an employee
benefit plan of the Bank (or of any subsidiary of the
Bank)) is or becomes an "Acquiring Person";
(ii) less than eighty percent (80%) of the total membership of
the Board shall be Continuing Directors; or
(iii) the shareholders of the Bank shall approve a merger or
consolidation of the Bank or a plan of complete liquidation
of the Bank or an agreement for the sale or disposition by
the Bank of all or substantially all of the Bank's assets
to another Person, except in any such case in a transaction
in which immediately after such merger, consolidation or
sale, exchange 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
Person pursuant to any such merger (or of its parent), the
consolidated corporation or business entity in any such
consolidation, or of the other Person to which such sale,
exchange or transfer of assets is made.
(c) A "Change in 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 the Bank will
receive, pro rata, all of the Common Stock of such bank holding company; unless,
in such transaction, a Person satisfies subsection (b)(i), (ii) or (iii) above.
(d) For purposes of this Section 17:
(1) "Acquiring Person" shall mean any Person who is or becomes a
"beneficial owner" (as defined in Rule 13d-3 of the Exchange Act)
of securities of the Bank representing twenty-five percent (25%)
or more of the combined voting power of the Bank's then
outstanding voting securities, unless such Person has filed Form
F-11A and all required amendments thereto with respect to its
holdings and continues to hold such securities for investment in
a manner qualifying such Person to utilize Form F-11A for
reporting of ownership.
(2) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act as in effect on the date
hereof.
(3) "Continuing Directors" shall mean any member of the Board who was
a member of the Board prior to the date hereof, and any successor
of a Continuing Director while such successor is a member of the
Board who is not an Acquiring Person or an Affiliate or Associate
of an Acquiring Person or of any such Affiliate or Associate and
is recommended or elected to succeed the Continuing Director by a
majority of the Continuing Directors.
(4) "Person" shall mean any individual, corporation, partnership,
group, association or other "person", as such term is used in
Section 13(d) and 14(d) of the Exchange Act.
9
<PAGE>
18. TERMINATION, SUSPENSION OR MODIFICATION OF PLAN
The Board may at any time terminate, suspend or modify the Plan, except
that the Board shall not, without the authorization of the holders of a majority
of the outstanding shares entitled to vote, effect any change (other than
through adjustment for changes in capitalization as hereinabove provided) which
(a) increases the aggregate number of shares for which Options may be granted;
(b) changes the class of employees eligible to be granted Options; (c) lowers
the minimum Option Price or otherwise materially increases the benefits accruing
to Grantees through awards under the Plan; (d) lengthens the period during which
a Stock Appreciation Right may be exercised; (e) increases the maximum amount a
Grantee may be paid upon the exercise of a Stock Appreciation Right; (f) renders
any member of the Committee eligible to receive an Option or Stock Appreciation
Right while serving thereon; (g) extends the effective period of the Plan; or
(h) removes the restrictions set forth in Section 4(c). No termination,
suspension or modification of the Plan shall adversely affect any right acquired
by any Grantee or any Successor under the terms of an Option or Stock
Appreciation Right granted before the date of such termination, suspension or
modification, unless such Grantee or Successor shall consent; but it shall be
conclusively presumed that any adjustment for changes in capitalization as
provided in Section 16 does not adversely affect any such right.
Upon the dissolution or liquidation of the Bank, the Plan shall terminate,
and all Options previously granted shall lapse on the date of such dissolution
or liquidation.
19. APPLICATION OF PROCEEDS
The proceeds received by the Bank from the sale of its shares under the
Plan will be used for general corporate purposes.
20. LEGAL RESTRICTIONS
The Bank will not be obligated to issue shares of Common Stock or make any
payment if counsel to the Bank determines that such issuance or payment would
violate any law or regulation of any governmental authority or any agreement
between the Bank and any national securities exchange or quotations system upon
which the Common Stock is listed. In connection with any stock issuance or
transfer, the person acquiring the shares shall, if requested by the Bank, give
assurances satisfactory to counsel to the Bank regarding such matters as the
Bank may deem desirable to assure compliance with all legal requirements. The
Bank shall in no event be obliged to take any action in order to cause the
exercise of any Option.
21. WITHHOLDING TAXES
Each Grantee exercising an Option or Stock Appreciation Right as a
condition to such exercise shall pay to the Bank the amount, if any, required to
be withheld from distributions resulting from such exercise under applicable
Federal and State income tax laws and any portion of FICA that is due from
Grantee ("Withholding Taxes"). Such Withholding Taxes shall be payable as of the
date the payment is required from the Bank to the taxing authority. The
Committee may establish such procedures as it deems appropriate for the settling
of withholding obligations with shares of Common Stock, including, without
limitation, the establishment of such procedures as may be necessary to comply
with Rule 16b-3.
22. GOVERNING LAWS
This Plan and all rights thereunder shall be construed in accordance with
and governed by the laws of the State of Connecticut. The intent of this Plan
is to qualify for the exemption provided by Rule 16b-3 under the Exchange Act.
To the extent any provision of the Plan does not comply with the requirements of
Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and
deemed advisable by the Committee and shall not affect the validity of the Plan.
In the event Rule 16b-3 is revised or replaced, the Committee may exercise
discretion to modify this Plan in any respect necessary to satisfy the
requirements of the revised exemption or its replacement.
10
<PAGE>
23. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to the
shareholders of the Bank for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options or stock
appreciation rights otherwise than under the Plan.
* * *
This Plan was duly adopted and approved by the Board of Directors of the
Bank by resolution at a meeting held on the 7th day of February, 1996.
/s/ Lael Noel
-------------
Corporate Secretary of the Bank
This Plan was duly approved by the shareholders of the Bank at a meeting of
the shareholders held on the 23rd day of April, 1997.
/s/ Lael Noel
-------------
Corporate Secretary of the Bank
11
<PAGE>
MECHANICS SAVINGS BANK
1996 OFFICER STOCK OPTION PLAN
EXHIBIT A
---------
<TABLE>
<CAPTION>
Initial Officer
Officer Title Options
- ------- ----- -------
<S> <C> <C>
Edgar C. Gerwig Chairman, President and 60,000
Chief Executive Officer
Thomas M. Wood Executive Vice President 45,000
and Treasurer
Richard W. Stout, Jr. Executive Vice President 40,000
Eugene B. Marinelli Senior Vice President 20,000
Marci D. Negro Senior Vice President 20,000
Brian A. Orenstein Senior Vice President 20,000
Gary J. Roman Senior Vice President 20,000
-------
TOTAL 225,000
=======
</TABLE>
12
<PAGE>
MECHANICS SAVINGS BANK
EXHIBIT 10.2
MECHANICS SAVINGS BANK
1996 DIRECTOR STOCK OPTION PLAN
1. PURPOSE
The 1996 Director Stock Option Plan is designed to enable Non-Employee
Directors of Mechanics Savings Bank to acquire or increase a proprietary
interest in the Bank, and thus to share in the future success of the Bank's
business. Accordingly, the Plan is intended as a further means, not only of
attracting and retaining outstanding Non-Employee Directors who are in a
position to make important and direct contributions to the success of the Bank,
but also of promoting a closer identity of interests between the Bank's Non-
Employee Directors and its shareholders.
2. DEFINITIONS
Whenever used herein, the following terms shall have the meanings set forth
below:
"Annual Options" shall have the meaning set forth in Section 5(a)(iii)
hereof.
"Bank" means Mechanics Savings Bank.
"Board" means the Board of Directors of Mechanics Savings Bank.
"Code" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Committee" means the entire Board with the exception of those directors
who are also officers and employees of the Bank or, if so delegated by the
Board, the Organization and Compensation Committee of the Board, provided
no Committee member is an officer or employee of the Bank.
"Common Stock" means the Bank's Common Stock, par value $.01 per share.
"Conversion Offering" means the offering for sale of up to 5,290,000 shares
of the Bank's Common Stock upon its conversion from a Connecticut-chartered
mutual to a Connecticut-chartered capital stock savings bank.
"Current Non-Employee Directors" means a Non-Employee Director who was a
member of the Board at the time of adoption of the Plan by the Board and
whose name is set forth on Schedule A attached hereto and made a part
hereof.
"Disability," as applied to a Grantee, shall have the meaning set forth in
Section 22(e)(3) of the Code.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" on any particular date means the last sales price of a
share of Common Stock on the NASDAQ National Market (or any exchange on
which the Common Stock is then traded) as reported for that date by NASDAQ
or, if no sales price is reported on that date, the mean between the bid
and asked quotations for the Common Stock on that date as reported by
NASDAQ; provided that if no such sales or quotations are reported by NASDAQ
for such date, the Fair Market Value of a share of Common Stock on such
date shall be the last sales price or, if not available, the mean between
the bid and asked quotations as reported by NASDAQ for the first preceding
date. In the case of Initial Options (as defined below) granted on the
effective date of the Plan, "Fair Market Value" for purposes of determining
the Option Price shall be the Fair Market Value of the Common Stock on the
date the Plan is approved by the Bank's Shareholders.
"Future Non-Employee Directors" means a Non-Employee Director who was not a
member of the Board at the time of adoption of the Plan by the Board, as
shown by his or her absence from Schedule A attached hereto and made a part
hereof.
"Future Options" shall have the meaning set forth in Section 5(a)(ii)
hereof.
1
<PAGE>
"Grantee" means a Non-Employee Director of the Bank to whom an Option is
granted.
"Grant Date" as used with respect to a particular Option, means the date on
which such Option is granted pursuant to Section 5 of the Plan.
"Initial Options" shall have the meaning set forth in Section 5(a)(i)
hereof.
"NASDAQ" means National Association of Securities Dealers Automated
Quotation System.
"Non-Employee Director" means a member of the Board who is not an employee
of the Bank or any Subsidiary.
"Option" means an option granted pursuant to the Plan, including Initial
Options, Future Options, and Annual Options, to purchase the number of
shares of Common Stock specified by this Plan which shall be a non-
qualified stock option not intended to qualify as incentive stock options
under Section 422 of the Code.
"Option Agreement" means a written agreement in a form substantially as
attached hereto as Appendix A to be entered into by the Bank and the
Grantee of an Option, as provided in Section 8 hereof.
"Option Price" means the purchase price of each share of Common Stock
subject to an Option as set forth in Section 9.
"Plan" means the Bank's 1996 Director Stock Option Plan, as amended from
time to time.
"Retirement," as applied to a Non-Employee Director, shall mean when the
Non-Employee Director's term on the Board terminates upon the natural
expiration of the Non-Employee Director's then-current term during which he
attains the age of seventy years.
"Subsidiary" means an entity of which, at the time such subsidiary status
is to be determined, at least 50% of the total combined voting power of all
classes of stock of such entity is held by the Bank and its Subsidiaries
(exclusive of ownership by the entity whose subsidiary status is being
determined).
"Successor" means the legal representative of the estate of a deceased
Grantee or the person or persons who shall acquire the right to exercise an
Option by bequest or inheritance or by reason of the death of the Grantee.
"Term" means the period during which an Option may be exercised as set
forth in the Option Agreement.
3. EFFECTIVE DATE AND DURATION OF PLAN
The Plan shall become effective on the day of the consummation of the
conversion of the Bank from a mutual to a stock form of organization (the
"Conversion Date") subject to approval of the Plan within one year of the
Conversion Date by the holders of a majority of the outstanding shares of Common
Stock present or represented and entitled to vote at a duly held meeting of the
Bank's shareholders; provided, however, that upon approval of the Plan by the
-------- -------
shareholders of the Bank as set forth above, all Options granted under the Plan
on or after the effective date shall be fully effective as if the shareholders
of the Bank had approved the Plan on the effective date. If the shareholders
fail to approve the Plan within one year of such effective date, any options
granted hereunder shall be null and void and of no effect.
Unless previously terminated by the Board of Directors or except as
otherwise provided for herein, the Plan shall terminate, as to any shares as to
which Options have not theretofore been granted, on the tenth anniversary of its
adoption by the Board of Directors.
4. ADMINISTRATION OF THE PLAN
(a) General. The Plan shall be administered by the Committee, which shall
-------
have full power and authority, subject to the provisions of the Plan,
to supervise administration of the Plan and interpret the provisions
of the Plan and any Options granted hereunder. Any decision by the
Committee shall be final and binding on all parties. No member of the
Committee shall be liable for any determination, decision or action
made in
2
<PAGE>
good faith with respect to the Plan or any Options under the Plan. The
Committee may delegate any of such responsibilities to one or more
agents and may retain advisors to advise it. No Grantee shall
participate in the decision of any question relating exclusively to an
Option granted to that Grantee.
(b) Rules and Interpretation. The Committee shall be vested with full
------------------------
authority to make such rules and regulations as it deems necessary to
administer the Plan and to interpret and administer the provisions of
the Plan in a uniform manner. Any determination, decision or action
of the Committee in connection with the construction, interpretation,
administration or application of the Plan shall be final, conclusive
and binding on all parties. The Committee's administrative functions
shall be ministerial in nature in view of the Plan's explicit
provisions, including those related to eligibility for, timing, price
and amount of Option grants.
5. GRANT OF OPTIONS: NUMBER AND SOURCE OF SHARES SUBJECT TO THE PLAN
(a) (i) The initial grant of Options ("Initial Options") under the Plan
shall be made to Current Non-Employee Directors on the condition
subsequent that the Plan is approved by the Bank's shareholders.
The number of shares subject to Initial Options granted to each
Non-Employee Director shall equal 6,000 shares of Common Stock.
The Initial Options shall become exercisable ratably over five
(5) years beginning on December 31, 1996 (subject to the
condition subsequent that shareholders of the Bank approve the
Plan).
(ii) Subsequent grants of Options will be made to Future Non-Employee
Directors upon their appointment or election as Non-Employee
Directors ("Future Options"). Each such Future Non-Employee
Director shall receive a Future Option to purchase 6,000 shares
of Common Stock. Future Options shall be awarded at the Option
Price on the Grant Date. Future Options shall also be
exercisable ratably over five (5) years beginning on the first
December 31 following their Grant Date.
(iii) Each Current Non-Employee Director who is a Non-Employee
Director on the day following the Annual Meeting of Shareholders
in 2001, and who is a Non-Employee Director on the day following
each Annual Meeting of Shareholders thereafter, and each Future
Non-Employee Director who is a Non-Employee Director on the day
following the Annual Meeting of Shareholders immediately
following the fifth anniversary of the appointment or election
of such person as a Non-Employee Director, and who is a Non-
Employee Director on the day following each Annual Meeting of
Shareholders thereafter, shall be granted on each such date an
Option to purchase 1,000 shares of Common Stock ("Annual
Options"). Such Annual Options shall be awarded at the Option
Price on the Grant Date and shall be fully vested on the Grant
Date and exercisable in full at the later of the expiration of
six months following the Grant Date or the first December 31
following the Grant Date.
(iv) If, on any Grant Date, the aggregate number of shares of Common
Stock subject to Option grants on that date exceeds the
remaining number of shares reserved for issuance under the Plan,
the number of Option shares awarded to each Non-Employee
Director to whom Options shall be granted on such date shall be
reduced pro rata so that the aggregate number of Option shares
awarded to such Non-Employee Directors equals the number of
reserved shares of Common Stock remaining under the Plan. All
Options awarded shall be subject to adjustment in accordance
with Section 14. Any shares of Common Stock to be delivered by
the Bank upon the exercise of Options shall, as determined by
the Board of Directors, be provided from Common Stock held in
the Bank's treasury which is not reserved for some other purpose
or from authorized and unissued Common Stock which is not
reserved for some other purpose.
(b) The Grant Date of an Option shall be, with respect to the Initial
Options, the Conversion Date, and with respect to Future Options
shall be the date of the appointment or election of Future Non-
Employee Directors, and with respect to Annual Options shall be the
day following the Annual Meeting of Shareholders in the year at issue,
without further action by the Committee.
3
<PAGE>
(c) In the event that any Option expires, lapses or otherwise terminates
prior to being fully exercised, any share of Common Stock allocable to
the unexercised portion of such Option may again be made subject to an
Option.
(d) Subject to adjustment as provided in Section 14 hereof, the aggregate
number of shares to be delivered under the Plan shall not exceed
105,800 shares of Common Stock. Shares subject to Initial Options
granted under the Plan shall be considered as shares purchased in the
Conversion Offering for the purpose of the insider limitation on
conversion share purchases provided in Section 36-142m-12(g) of the
Code of Connecticut Regulations (the "Limitation"). The Limitation
limits Conversion Offering stock purchases by officers, directors and
their associates in the Conversion to not more than 30% of the total
number of shares offered in the Conversion Offering. Any and all
Initial Options which may be granted to persons, purposefully or
inadvertently, in excess of the limitation shall automatically be null
and void, and not exercisable at any time.
6. PERSONS ELIGIBLE TO RECEIVE OPTIONS
Options may be granted under the Plan to Non-Employee Directors only.
7. LIMITATION ON ANNUAL AWARDS
The amount of Options which may be granted to any Grantee in any calendar
year is established pursuant to Section 5 above.
8. OPTION AGREEMENT
(a) The Grantee of an Option may execute an Option Agreement with the Bank
substantially in the form attached hereto as Appendix A.
(b) Appropriate officers of the Bank are hereby authorized to execute (by
facsimile or manually affixed signature) and deliver Option Agreements
in the name of the Bank as directed from time to time by the
Committee.
9. OPTION PRICE
For the Initial Options, the Option Price shall be the greater of par
value, $10 or 100% of the Fair Market Value of a share of Common Stock on
the date the Plan is approved by the Bank's shareholders. Subsequent
grants shall be the greater of par value or 100% of the Fair Market Value
of a share of the Common Stock on the Grant Date of the Option. Payment of
the Option Price shall be made in cash or in shares of Common Stock of the
Bank valued at the Fair Market Value on the date of exercise of the Option,
or a combination of cash and/or such other form of property.
10. TERMS AND EXERCISE OF OPTIONS; LIMITATIONS ON EXERCISE AND TRANSFERABILITY
OF OPTIONS
(a) Each Option granted under the Plan shall be exercisable only during a
Term commencing on its Grant Date and ending (unless the Option shall
have terminated earlier under other provisions of the Plan) on the
tenth anniversary of its Grant Date.
(b) Initial Options shall be fully vested on the Conversion Date (subject
to shareholder approval) and shall become exercisable ratably on
December 31, 1996, 1997, 1998, 1999 and 2000. Future Options shall be
fully vested on the Grant Date and shall become exercisable ratably on
the later of six months following the Grant Date and December 31 of
the year of the grant, and the next four annual anniversaries of that
date. Annual Options shall fully vested on the Grant Date and shall
be exercisable in full at the later of expiration of six months
following the Grant Date or December 31 of the year of the grant.
4
<PAGE>
(c) Subject to subparagraph (d) hereof, upon compliance by the Grantee
with such terms of exercise, the Bank shall promptly deliver to the
Grantee a certificate or certificates for the shares purchased,
without charge to the Grantee for any issue or transfer tax.
(d) The Committee may postpone any exercise of an Option for such time as
the Committee may deem necessary, in order to permit the Bank with
reasonable diligence to determine that the shares are qualified for
delivery under such securities laws and regulations as the Committee
may deem to be applicable thereto; and the Bank shall not be obligated
by virtue of any Option Agreement or any provision of the Plan to
recognize the exercise of an Option to sell or issue shares in
violation of any applicable law. Any such postponement shall not
extend the Term of an Option; and neither the Bank nor its directors
or officers shall have any obligation or liability to the Grantee of
an Option, or to the Grantee's Successor, with respect to any shares
as to which the Option shall lapse because of such postponement.
(e) All Options granted under the Plan shall not be transferable other
than by will or by the laws of descent and distribution or pursuant to
a qualified domestic relations order as defined by the Code or Title I
of ERISA, or the rules thereunder, and may be exercised during the
lifetime of the Grantee only by the Grantee or by the Grantee's
guardian or legal representative.
(f) Upon the exercise of an Option by the Grantee, the stock certificate
or certificates may, at the request of the Grantee, be issued in the
Grantee's name and the name of another person as joint tenants with
right of survivorship.
(g) A person electing to exercise an Option shall give written notice, in
such form as the Committee may require, of such election to the Bank
and shall tender to the Bank the full Option Price of the shares of
Common Stock for which the election is made.
11. EXERCISE OF OPTIONS BY GRANTEE ON CESSATION OF SERVING AS A DIRECTOR
(a) Except as provided in Section 11(b) below, in the event Grantee ceases
to be a Non-Employee Director of the Bank through voluntary
resignation by the Grantee, or involuntary removal with or without
cause by the Bank, all Options held by such Grantee shall be
exercisable only to the extent that such Options were exercisable at
the time of such resignation or removal, and such Options shall lapse
on the date that is the earlier of (i) three months following such
resignation or removal, or (ii) the expiration date set forth in such
Options.
(b) In the event Grantee ceases to be a Non-Employee Director of the Bank
due to death or Disability, all Options held by such Grantee shall be
exercisable only to the extent that such Options were exercisable at
the time of such death or Disability, and such Options shall lapse on
the date that is the earlier of (i) one year after termination due to
such causes or (ii) on the expiration date set forth in such Options.
(c) In the event Grantee ceases to be a Non-Employee Director of the Bank
due to Retirement, all Options held and exercisable by such Grantee at
the date of his Retirement shall continue to be exercisable and shall
lapse on the expiration of the Term of the Option. All Options which
are not exercisable as of the Retirement Date shall lapse and again
become available for grant to other Non-Employee Directors in
accordance with this Plan.
(d) No exercises may occur after expiration of the Term of the Option.
12. SHAREHOLDERS' RIGHTS
No Grantee, and no beneficiary or other person claiming through a Grantee,
shall have any interest in any shares of Common Stock allocated for the purposes
of the Plan or subject to any Option until such shares of Common Stock shall
have been transferred to the Grantee or such person. Furthermore, the existence
of the Options shall not affect: the right or power of the Bank or its
stockholders to make adjustments, recapitalization, reorganizations or other
changes in the Bank's capital
5
<PAGE>
structure; the dissolution or liquidation of the Bank, or sale or transfer of
any party of its assets or business; or any other corporate act, whether of a
similar character or otherwise.
13. NO RIGHT TO SERVE AS A DIRECTOR
Nothing in the Plan or any instrument executed pursuant hereto shall confer
upon any Non-Employee Director any right to continue to serve as a Non-Employee
Director of the Bank nor shall anything in the Plan affect the right of the
Board to remove a Non-Employee Director from the Board, with or without cause,
in accordance with the Bank's Amended and Restated Certificate of Incorporation
and By-laws.
14. EFFECT OF CHANGES IN CAPITALIZATION
(a) Changes in Common Stock. If the outstanding shares of Common Stock
------------------------
are increased or decreased or changed into or exchanged for a
different number or kind of shares or other securities of the Bank by
reason of any recapitalization, reclassification, stock split-up,
combination of shares, exchange of shares, stock dividend or other
distribution payable in capital stock, or other increase or decrease
in such shares effected without receipt of consideration by the Bank,
occurring after the effective date of the Plan, the number and kind of
shares for the purchase of which Options may be granted under Section
5(d) of the Plan shall be adjusted proportionately and accordingly by
the Committee. In addition, the number and kind of shares for which
Options are outstanding shall be adjusted proportionately and
accordingly so that the proportionate interest of the holder of the
Option immediately following such event shall, to the extent
practicable, be the same as immediately prior to such event. Any such
adjustment in outstanding Options shall not change the aggregate
Option Price payable with respect to shares subject to the unexercised
portion of the Option outstanding but shall include a corresponding
proportionate adjustment in the Option Price per share.
(b) Reorganization in Which the Bank is the Surviving Bank. Subject to
------------------------------------------------------
Subsection (c) hereof, if the Bank shall be the surviving bank in any
reorganization, merger, or consolidation of the Bank with one or more
other banks, any Option theretofore granted pursuant to the Plan shall
pertain to and apply to the securities to which a holder of the number
of shares of Common Stock subject to such Option would have been
entitled immediately following such reorganization, merger, or
consolidation, with a corresponding proportionate adjustment of the
Option Price per share so that the aggregate Option Price thereafter
shall be the same as the aggregate Option Price of the shares
remaining subject to the Option immediately prior to such
reorganization, merger, or consolidation.
(c) Reorganization in Which the Bank is Not the Surviving Bank or Sale of
---------------------------------------------------------------------
Assets or Stock. Upon the dissolution or liquidation of the Bank, or
---------------
upon a merger, consolidation or reorganization of the Bank with one or
more other banks in which the Bank is not the surviving bank, or upon
a sale of all or substantially all of the assets of the Bank to
another bank, or upon any transaction approved by the Board which
results in any person or entity owning 80% or more of the combined
voting power of all classes of stock of the Bank, the Plan and all
Options outstanding hereunder shall terminate, except to the extent
provision is made in writing in connection with such transaction for
the continuation of the Plan and/or the assumption of the Options
theretofore granted, or for the substitution for such Options of new
options or stock appreciation rights covering the stock of a successor
bank, or a parent or subsidiary thereof, with appropriate adjustments
as to the number and kinds of shares and exercise prices, in which
event the Plan and Options theretofore granted shall continue in the
manner and under the terms so provided. In the event of any such
termination of the Plan, each individual holding an Option shall have
the right (subject to the general limitations on exercise set forth in
Section 10 above and except as otherwise specifically provided in the
Option Agreement relating to such Option), immediately prior to the
occurrence of such termination and during the period following the
notice of termination described below to exercise such Option in whole
or in part, whether or not such Option was otherwise vested or
exercisable at the time such notice of termination is given and
without regard to any installment limitation on exercise imposed
pursuant to Section 10 above. The Committee shall send written notice
of an event that will result in such a termination to all individuals
who hold Options not later than the time at which the Bank gives
notice thereof to its shareholders.
(d) Adjustments. Adjustments under this Section 14 related to stock or
-----------
securities of the Bank shall be made by the Committee whose
determination in that respect shall be final, binding, and conclusive.
No fractional shares of Common Stock or units of other securities
shall be issued pursuant to any such adjustment, and any
6
<PAGE>
fractions resulting from any such adjustment shall be eliminated in
each case by rounding downward to the nearest whole share or unit.
(e) No Limitations on Bank. The grant of an Option pursuant to the Plan
----------------------
shall not affect or limit in any way the right or power of the Bank to
make adjustments, reclassifications, reorganizations or changes of its
capital or business structure or to merge, consolidate, dissolve or
liquidate, or to sell or transfer all or any part of its business or
assets.
(f) Except as provided in this Section 14, the issuance by the Bank of
shares of stock of any class or securities convertible into shares of
stock of any class, shall not affect the outstanding Options.
15. TERMINATION, SUSPENSION OR MODIFICATION OF PLAN
Subject to the limitation that the provisions of the Plan shall not be
amended more than once every six months other than to comport with changes in
the Code or regulations thereunder, the Board may at any time terminate, suspend
or modify the Plan, except that the Board shall not, without the authorization
of the holders of a majority of the outstanding shares entitled to vote, effect
any change (other than through adjustment for changes in capitalization as
hereinabove provided) which (a) increases the aggregate number of shares for
which Options may be granted; (b) changes the criteria for determining directors
eligible to participate in the Plan; (c) lowers the minimum Option Price or
otherwise materially increases the benefits accruing to Grantees through awards
under the Plan; or (d) extends the term of the Plan. No termination, suspension
or modification of the Plan shall adversely affect any right acquired by any
Grantee or any Successor under the terms of an Option granted before the date of
such termination, suspension or modification, unless such Grantee or Successor
shall consent; but it shall be conclusively presumed that any adjustment for
changes in capitalization as provided in Section 14 does not adversely affect
any such right.
Upon the dissolution or liquidation of the Bank, the Plan shall terminate,
and all Options previously granted shall lapse on the date of such dissolution
or liquidation.
16. APPLICATION OF PROCEEDS
The proceeds received by the Bank from the sale of its shares under the
Plan will be used for general corporate purposes.
17. LEGAL RESTRICTIONS
The Bank will not be obligated to issue shares of Common Stock or make any
payment if counsel to the Bank determines that such issuance or payment would
violate any law or regulation of any governmental authority or any agreement
between the Bank and any national securities exchange or quotations system upon
which the Common Stock is listed. In connection with any stock issuance or
transfer, the person acquiring the shares shall, if requested by the Bank, give
assurances satisfactory to counsel to the Bank regarding such matters as the
Bank may deem desirable to assure compliance with all legal requirements. The
Bank shall in no event be obliged to take any action in order to cause the
exercise of any Option.
18. WITHHOLDING TAXES
The Bank may require any Grantee, as a condition of exercise of an Option,
to pay or reimburse any taxes which the Bank determines it is required to
withhold in connection with the grant or exercise of the Option.
19. GOVERNING LAWS
This Plan and all rights thereunder shall be construed in accordance with
and governed by the laws of the State of Connecticut.
7
<PAGE>
20. NONEXCLUSIVITY OF THE PLAN
Neither the adoption of the Plan nor the submission of the Plan to the
shareholders of the Bank for approval shall be construed as creating any
limitations upon the right and authority of the Board to adopt such other
incentive compensation arrangements (which arrangements may be applicable either
generally to a class or classes of individuals or specifically to a particular
individual or individuals) as the Board in its discretion determines desirable,
including, without limitation, the granting of stock options or stock
appreciation rights otherwise than under the Plan.
* * *
This Plan was duly adopted and approved by the Board of Directors of the
Bank by resolution at a meeting held on the 7th day of February, 1996.
/s/ Lael Noel
-------------
Corporate Secretary of the Bank
This Plan was duly approved by the shareholders of the Bank at a meeting of
the shareholders held on the 23rd day of April, 1997.
/s/ Lael Noel
-------------
Corporate Secretary of the Bank
8
<PAGE>
MECHANICS SAVINGS BANK
EXHIBIT 10.10
AGREEMENT
THIS AGREEMENT is dated as of January 1, 1998, between and among MECHANICS
SAVINGS BANK, a capital stock savings bank organized and existing under the laws
of the State of Connecticut with headquarters located in Hartford, Connecticut
(the "Bank"), MECH FINANCIAL, INC, a Connecticut stock corporation with
headquarters located in Hartford, Connecticut (the "Company"), and EDGAR C.
GERWIG ("Executive").
RECITALS
--------
WHEREAS, the Bank and the Executive have entered into that certain change
in control agreement dated as of June 28, 1996 pursuant to which the Bank
provided various incentives to the Executive to remain an employee and officer
of the Bank during an actual or possible change in control of the Bank (the
"Bank Change in Control Agreement");
WHEREAS, on January 1, 1998, the Company and the Bank consummated that
certain Agreement and Plan of Reorganization pursuant to which the Company
acquired all of the issued and outstanding shares of common stock of the Bank,
par value $0.01 per share, in a one-for-one share exchange for common stock of
the Company, par value $0.01 per share (the "Reorganization");
WHEREAS, an actual or prospective change of control of the Company would
elicit the same kinds of concerns for the Executive, the Bank and the Company
after the Reorganization as was the case for Executive and Bank before the
Reorganization.
WHEREAS, the Company and the Bank have determined that it is in their best
interests to provide certain incentive to the Executive to remain an employee
and officer of the Company and the Bank at any period prior to or during a
possible or an actual change of control of the Company or the Bank; and
WHEREAS, the Company, the Bank, and the Executive desire to enter into this
Agreement to reflect the terms and conditions set forth herein.
NOW THEREFORE, to further the above recited corporate objective and in
consideration of the mutual promises and covenants hereinafter described and
other good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. The Bank Change in Control Agreement is hereby amended to additionally
provide that all of its provisions shall also apply in the event of a
Change of Control of the Company, that the Bank Change in Control Agreement
shall be effective so long as the Executive is employed by either the Bank
or the Company, and that any Compensation shall include compensation paid
to the Executive by both the Company and the Bank.
2. Without otherwise limiting the foregoing, the Reorganization shall not have
caused a Change of Control of the Bank as defined in the Bank Change in
Control Agreement.
3. Defined terms not otherwise defined herein shall have the meanings ascribed
to them in the Bank Change in Control Agreement, provided that the word
"Company" shall be used in addition to "Bank" when determining a "Change of
Control" event.
4. Each of the parties agrees to execute all further instruments and documents
and to take all further action as any other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
5. Any and all obligations of the Bank under the Bank Change in Control
Agreement shall also be deemed to be obligations of the Company, for which
obligations the Bank and the Company shall be jointly and severally liable.
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. Except to the extent amended herein, the Bank Change in Control Agreement
shall continue to remain in full force and effect, without interruption.
1
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECH FINANCIAL, INC.
By: /s/ Donald K. Wilson, Jr.
---------------------------
Donald K. Wilson, Jr.
Member of Executive Committee
MECHANICS SAVINGS BANK
By: /s/ Donald K. Wilson, Jr.
---------------------------
Donald K. Wilson, Jr.
Chairman of the Organization
and Compensation Committee
EXECUTIVE
By: /s/ Edgar C. Gerwig
---------------------
EDGAR C. GERWIG
2
<PAGE>
MECHANICS SAVINGS BANK
EXHIBIT 10.11
AGREEMENT
THIS AGREEMENT is dated as of January 1, 1998, between and among MECHANICS
SAVINGS BANK, a capital stock savings bank organized and existing under the laws
of the State of Connecticut with headquarters located in Hartford, Connecticut
(the "Bank"), MECH FINANCIAL, INC, a Connecticut stock corporation with
headquarters located in Hartford, Connecticut (the "Company"), and THOMAS M.
WOOD ("Executive").
RECITALS
--------
WHEREAS, the Bank and the Executive have entered into that certain change
in control agreement dated as of June 28, 1996 pursuant to which the Bank
provided various incentives to the Executive to remain an employee and officer
of the Bank during an actual or possible change in control of the Bank (the
"Bank Change in Control Agreement");
WHEREAS, on January 1, 1998, the Company and the Bank consummated that
certain Agreement and Plan of Reorganization pursuant to which the Company
acquired all of the issued and outstanding shares of common stock of the Bank,
par value $0.01 per share, in a one-for-one share exchange for common stock of
the Company, par value $0.01 per share (the "Reorganization");
WHEREAS, an actual or prospective change of control of the Company would
elicit the same kinds of concerns for the Executive, the Bank and the Company
after the Reorganization as was the case for Executive and Bank before the
Reorganization.
WHEREAS, the Company and the Bank have determined that it is in their best
interests to provide certain incentive to the Executive to remain an employee
and officer of the Company and the Bank at any period prior to or during a
possible or an actual change of control of the Company or the Bank; and
WHEREAS, the Company, the Bank, and the Executive desire to enter into this
Agreement to reflect the terms and conditions set forth herein.
NOW THEREFORE, to further the above recited corporate objective and in
consideration of the mutual promises and covenants hereinafter described and
other good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. The Bank Change in Control Agreement is hereby amended to additionally
provide that all of its provisions shall also apply in the event of a
Change of Control of the Company, that the Bank Change in Control Agreement
shall be effective so long as the Executive is employed by either the Bank
or the Company, and that any Compensation shall include compensation paid
to the Executive by both the Company and the Bank.
2. Without otherwise limiting the foregoing, the Reorganization shall not have
caused a Change of Control of the Bank as defined in the Bank Change in
Control Agreement.
3. Defined terms not otherwise defined herein shall have the meanings ascribed
to them in the Bank Change in Control Agreement, provided that the word
"Company" shall be used in addition to "Bank" when determining a "Change of
Control" event.
4. Each of the parties agrees to execute all further instruments and documents
and to take all further action as any other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
5. Any and all obligations of the Bank under the Bank Change in Control
Agreement shall also be deemed to be obligations of the Company, for which
obligations the Bank and the Company shall be jointly and severally liable.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
1
<PAGE>
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. Except to the extent amended herein, the Bank Change in Control Agreement
shall continue to remain in full force and effect, without interruption.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECH FINANCIAL, INC.
By: /s/ Edgar C. Gerwig
-----------------------
Edgar C. Gerwig
Its President
MECHANICS SAVINGS BANK
By: /s/ Donald K. Wilson, Jr.
-----------------------------
Donald K. Wilson, Jr.
Chairman of the Organization
and Compensation Committee
EXECUTIVE
By: /s/ Thomas M. Wood
----------------------
THOMAS M. WOOD
2
<PAGE>
MECHANICS SAVINGS BANK
EXHIBIT 10.12
AGREEMENT
THIS AGREEMENT is dated as of January 1, 1998, between and among MECHANICS
SAVINGS BANK, a capital stock savings bank organized and existing under the laws
of the State of Connecticut with headquarters located in Hartford, Connecticut
(the "Bank"), MECH FINANCIAL, INC, a Connecticut stock corporation with
headquarters located in Hartford, Connecticut (the "Company"), and RICHARD W.
STOUT, JR. ("Executive").
RECITALS
--------
WHEREAS, the Bank and the Executive have entered into that certain change
in control agreement dated as of June 28, 1996 pursuant to which the Bank
provided various incentives to the Executive to remain an employee and officer
of the Bank during an actual or possible change in control of the Bank (the
"Bank Change in Control Agreement");
WHEREAS, on January 1, 1998, the Company and the Bank consummated that
certain Agreement and Plan of Reorganization pursuant to which the Company
acquired all of the issued and outstanding shares of common stock of the Bank,
par value $0.01 per share, in a one-for-one share exchange for common stock of
the Company, par value $0.01 per share (the "Reorganization");
WHEREAS, an actual or prospective change of control of the Company would
elicit the same kinds of concerns for the Executive, the Bank and the Company
after the Reorganization as was the case for Executive and Bank before the
Reorganization.
WHEREAS, the Company and the Bank have determined that it is in their best
interests to provide certain incentive to the Executive to remain an employee
and officer of the Company and the Bank at any period prior to or during a
possible or an actual change of control of the Company or the Bank; and
WHEREAS, the Company, the Bank, and the Executive desire to enter into this
Agreement to reflect the terms and conditions set forth herein.
NOW THEREFORE, to further the above recited corporate objective and in
consideration of the mutual promises and covenants hereinafter described and
other good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. The Bank Change in Control Agreement is hereby amended to additionally
provide that all of its provisions shall also apply in the event of a
Change of Control of the Company, that the Bank Change in Control Agreement
shall be effective so long as the Executive is employed by either the Bank
or the Company, and that any Compensation shall include compensation paid
to the Executive by both the Company and the Bank.
2. Without otherwise limiting the foregoing, the Reorganization shall not have
caused a Change of Control of the Bank as defined in the Bank Change in
Control Agreement.
3. Defined terms not otherwise defined herein shall have the meanings ascribed
to them in the Bank Change in Control Agreement, provided that the word
"Company" shall be used in addition to "Bank" when determining a "Change of
Control" event.
4. Each of the parties agrees to execute all further instruments and documents
and to take all further action as any other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
5. Any and all obligations of the Bank under the Bank Change in Control
Agreement shall also be deemed to be obligations of the Company, for which
obligations the Bank and the Company shall be jointly and severally liable.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
1
<PAGE>
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. Except to the extent amended herein, the Bank Change in Control Agreement
shall continue to remain in full force and effect, without interruption.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECH FINANCIAL, INC.
By: /s/ Edgar C. Gerwig
---------------------
Edgar C. Gerwig
Its President
MECHANICS SAVINGS BANK
By: /s/ Donald K. Wilson, Jr.
---------------------------
Donald K. Wilson, Jr.
Chairman of the Organization
and Compensation Committee
EXECUTIVE
By: /s/ Richard W. Stout, Jr.
---------------------------
RICHARD W. STOUT, JR.
2
<PAGE>
MECHANICS SAVINGS BANK
EXHIBIT 10.13
AGREEMENT
THIS AGREEMENT is dated as of January 1, 1998, between and among MECHANICS
SAVINGS BANK, a capital stock savings bank organized and existing under the laws
of the State of Connecticut with headquarters located in Hartford, Connecticut
(the "Bank"), MECH FINANCIAL, INC, a Connecticut stock corporation with
headquarters located in Hartford, Connecticut (the "Company"), and EUGENE B.
MARINELLI ("Executive").
RECITALS
--------
WHEREAS, the Bank and the Executive have entered into that certain change
in control agreement dated as of June 28, 1996 pursuant to which the Bank
provided various incentives to the Executive to remain an employee and officer
of the Bank during an actual or possible change in control of the Bank (the
"Bank Change in Control Agreement");
WHEREAS, on January 1, 1998, the Company and the Bank consummated that
certain Agreement and Plan of Reorganization pursuant to which the Company
acquired all of the issued and outstanding shares of common stock of the Bank,
par value $0.01 per share, in a one-for-one share exchange for common stock of
the Company, par value $0.01 per share (the "Reorganization");
WHEREAS, an actual or prospective change of control of the Company would
elicit the same kinds of concerns for the Executive, the Bank and the Company
after the Reorganization as was the case for Executive and Bank before the
Reorganization.
WHEREAS, the Company and the Bank have determined that it is in their best
interests to provide certain incentive to the Executive to remain an employee
and officer of the Company and the Bank at any period prior to or during a
possible or an actual change of control of the Company or the Bank; and
WHEREAS, the Company, the Bank, and the Executive desire to enter into this
Agreement to reflect the terms and conditions set forth herein.
NOW THEREFORE, to further the above recited corporate objective and in
consideration of the mutual promises and covenants hereinafter described and
other good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. The Bank Change in Control Agreement is hereby amended to additionally
provide that all of its provisions shall also apply in the event of a
Change of Control of the Company, that the Bank Change in Control Agreement
shall be effective so long as the Executive is employed by either the Bank
or the Company, and that any Compensation shall include compensation paid
to the Executive by both the Company and the Bank.
2. Without otherwise limiting the foregoing, the Reorganization shall not have
caused a Change of Control of the Bank as defined in the Bank Change in
Control Agreement.
3. Defined terms not otherwise defined herein shall have the meanings ascribed
to them in the Bank Change in Control Agreement, provided that the word
"Company" shall be used in addition to "Bank" when determining a "Change of
Control" event.
4. Each of the parties agrees to execute all further instruments and documents
and to take all further action as any other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
5. Any and all obligations of the Bank under the Bank Change in Control
Agreement shall also be deemed to be obligations of the Company, for which
obligations the Bank and the Company shall be jointly and severally liable.
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. Except to the extent amended herein, the Bank Change in Control Agreement
shall continue to remain in full force and effect, without interruption.
1
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECH FINANCIAL, INC.
By: /s/ Edgar C. Gerwig
---------------------
Edgar C. Gerwig
Its President
MECHANICS SAVINGS BANK
By: /s/ Donald K. Wilson, Jr.
---------------------------
Donald K. Wilson, Jr.
Chairman of the Organization
and Compensation Committee
EXECUTIVE
By: /s/ Eugene B. Marinelli
--------------------------
EUGENE B. MARINELLI
2
<PAGE>
MECHANICS SAVINGS BANK
EXHIBIT 10.14
AGREEMENT
THIS AGREEMENT is dated as of January 1, 1998, between and among MECHANICS
SAVINGS BANK, a capital stock savings bank organized and existing under the laws
of the State of Connecticut with headquarters located in Hartford, Connecticut
(the "Bank"), MECH FINANCIAL, INC, a Connecticut stock corporation with
headquarters located in Hartford, Connecticut (the "Company"), and MARCI D.
NEGRO ("Executive").
RECITALS
--------
WHEREAS, the Bank and the Executive have entered into that certain change
in control agreement dated as of December 30, 1996 pursuant to which the Bank
provided various incentives to the Executive to remain an employee and officer
of the Bank during an actual or possible change in control of the Bank (the
"Bank Change in Control Agreement");
WHEREAS, on January 1, 1998, the Company and the Bank consummated that
certain Agreement and Plan of Reorganization pursuant to which the Company
acquired all of the issued and outstanding shares of common stock of the Bank,
par value $0.01 per share, in a one-for-one share exchange for common stock of
the Company, par value $0.01 per share (the "Reorganization");
WHEREAS, an actual or prospective change of control of the Company would
elicit the same kinds of concerns for the Executive, the Bank and the Company
after the Reorganization as was the case for Executive and Bank before the
Reorganization.
WHEREAS, the Company and the Bank have determined that it is in their best
interests to provide certain incentive to the Executive to remain an employee
and officer of the Company and the Bank at any period prior to or during a
possible or an actual change of control of the Company or the Bank; and
WHEREAS, the Company, the Bank, and the Executive desire to enter into this
Agreement to reflect the terms and conditions set forth herein.
NOW THEREFORE, to further the above recited corporate objective and in
consideration of the mutual promises and covenants hereinafter described and
other good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. The Bank Change in Control Agreement is hereby amended to additionally
provide that all of its provisions shall also apply in the event of a
Change of Control of the Company, that the Bank Change in Control Agreement
shall be effective so long as the Executive is employed by either the Bank
or the Company, and that any Compensation shall include compensation paid
to the Executive by both the Company and the Bank.
2. Without otherwise limiting the foregoing, the Reorganization shall not have
caused a Change of Control of the Bank as defined in the Bank Change in
Control Agreement.
3. Defined terms not otherwise defined herein shall have the meanings ascribed
to them in the Bank Change in Control Agreement, provided that the word
"Company" shall be used in addition to "Bank" when determining a "Change of
Control" event.
4. Each of the parties agrees to execute all further instruments and documents
and to take all further action as any other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
5. Any and all obligations of the Bank under the Bank Change in Control
Agreement shall also be deemed to be obligations of the Company, for which
obligations the Bank and the Company shall be jointly and severally liable.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
1
<PAGE>
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. Except to the extent amended herein, the Bank Change in Control Agreement
shall continue to remain in full force and effect, without interruption.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECH FINANCIAL, INC.
By: /s/ Edgar C. Gerwig
---------------------
Edgar C. Gerwig
Its President
MECHANICS SAVINGS BANK
By: /s/ Donald K. Wilson, Jr.
---------------------------
Donald K. Wilson, Jr.
Chairman of the Organization
and Compensation Committee
EXECUTIVE
By: /s/ Marci D. Negro
--------------------
MARCI D. NEGRO
2
<PAGE>
MECHANICS SAVINGS BANK
EXHIBIT 10.15
AGREEMENT
THIS AGREEMENT is dated as of January 1, 1998, between and among MECHANICS
SAVINGS BANK, a capital stock savings bank organized and existing under the laws
of the State of Connecticut with headquarters located in Hartford, Connecticut
(the "Bank"), MECH FINANCIAL, INC, a Connecticut stock corporation with
headquarters located in Hartford, Connecticut (the "Company"), and BRIAN A.
ORENSTEIN ("Executive").
RECITALS
--------
WHEREAS, the Bank and the Executive have entered into that certain change
in control agreement dated as of June 28, 1996 pursuant to which the Bank
provided various incentives to the Executive to remain an employee and officer
of the Bank during an actual or possible change in control of the Bank (the
"Bank Change in Control Agreement");
WHEREAS, on January 1, 1998, the Company and the Bank consummated that
certain Agreement and Plan of Reorganization pursuant to which the Company
acquired all of the issued and outstanding shares of common stock of the Bank,
par value $0.01 per share, in a one-for-one share exchange for common stock of
the Company, par value $0.01 per share (the "Reorganization");
WHEREAS, an actual or prospective change of control of the Company would
elicit the same kinds of concerns for the Executive, the Bank and the Company
after the Reorganization as was the case for Executive and Bank before the
Reorganization.
WHEREAS, the Company and the Bank have determined that it is in their best
interests to provide certain incentive to the Executive to remain an employee
and officer of the Company and the Bank at any period prior to or during a
possible or an actual change of control of the Company or the Bank; and
WHEREAS, the Company, the Bank, and the Executive desire to enter into this
Agreement to reflect the terms and conditions set forth herein.
NOW THEREFORE, to further the above recited corporate objective and in
consideration of the mutual promises and covenants hereinafter described and
other good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. The Bank Change in Control Agreement is hereby amended to additionally
provide that all of its provisions shall also apply in the event of a
Change of Control of the Company, that the Bank Change in Control Agreement
shall be effective so long as the Executive is employed by either the Bank
or the Company, and that any Compensation shall include compensation paid
to the Executive by both the Company and the Bank.
2. Without otherwise limiting the foregoing, the Reorganization shall not have
caused a Change of Control of the Bank as defined in the Bank Change in
Control Agreement.
3. Defined terms not otherwise defined herein shall have the meanings ascribed
to them in the Bank Change in Control Agreement, provided that the word
"Company" shall be used in addition to "Bank" when determining a "Change of
Control" event.
4. Each of the parties agrees to execute all further instruments and documents
and to take all further action as any other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
5. Any and all obligations of the Bank under the Bank Change in Control
Agreement shall also be deemed to be obligations of the Company, for which
obligations the Bank and the Company shall be jointly and severally liable.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
1
<PAGE>
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. Except to the extent amended herein, the Bank Change in Control Agreement
shall continue to remain in full force and effect, without interruption.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECH FINANCIAL, INC.
By: /s/ Edgar C. Gerwig
---------------------
Edgar C. Gerwig
Its President
MECHANICS SAVINGS BANK
By: /s/ Donald K. Wilson, Jr.
---------------------------
Donald K. Wilson, Jr.
Chairman of the Organization
and Compensation Committee
EXECUTIVE
By: /s/ Brian A. Orenstein
------------------------
BRIAN A. ORENSTEIN
2
<PAGE>
MECHANICS SAVINGS BANK
EXHIBIT 10.16
AGREEMENT
THIS AGREEMENT is dated as of January 1, 1998, between and among MECHANICS
SAVINGS BANK, a capital stock savings bank organized and existing under the laws
of the State of Connecticut with headquarters located in Hartford, Connecticut
(the "Bank"), MECH FINANCIAL, INC, a Connecticut stock corporation with
headquarters located in Hartford, Connecticut (the "Company"), and GARY J. ROMAN
("Executive").
RECITALS
--------
WHEREAS, the Bank and the Executive have entered into that certain change
in control agreement dated as of June 28, 1996 pursuant to which the Bank
provided various incentives to the Executive to remain an employee and officer
of the Bank during an actual or possible change in control of the Bank (the
"Bank Change in Control Agreement");
WHEREAS, on January 1, 1998, the Company and the Bank consummated that
certain Agreement and Plan of Reorganization pursuant to which the Company
acquired all of the issued and outstanding shares of common stock of the Bank,
par value $0.01 per share, in a one-for-one share exchange for common stock of
the Company, par value $0.01 per share (the "Reorganization");
WHEREAS, an actual or prospective change of control of the Company would
elicit the same kinds of concerns for the Executive, the Bank and the Company
after the Reorganization as was the case for Executive and Bank before the
Reorganization.
WHEREAS, the Company and the Bank have determined that it is in their best
interests to provide certain incentive to the Executive to remain an employee
and officer of the Company and the Bank at any period prior to or during a
possible or an actual change of control of the Company or the Bank; and
WHEREAS, the Company, the Bank, and the Executive desire to enter into this
Agreement to reflect the terms and conditions set forth herein.
NOW THEREFORE, to further the above recited corporate objective and in
consideration of the mutual promises and covenants hereinafter described and
other good and valuable consideration the receipt and sufficiency of which is
hereby acknowledged, the parties hereto agree as follows:
1. The Bank Change in Control Agreement is hereby amended to additionally
provide that all of its provisions shall also apply in the event of a
Change of Control of the Company, that the Bank Change in Control Agreement
shall be effective so long as the Executive is employed by either the Bank
or the Company, and that any Compensation shall include compensation paid
to the Executive by both the Company and the Bank.
2. Without otherwise limiting the foregoing, the Reorganization shall not have
caused a Change of Control of the Bank as defined in the Bank Change in
Control Agreement.
3. Defined terms not otherwise defined herein shall have the meanings ascribed
to them in the Bank Change in Control Agreement, provided that the word
"Company" shall be used in addition to "Bank" when determining a "Change of
Control" event.
4. Each of the parties agrees to execute all further instruments and documents
and to take all further action as any other party may reasonably request in
order to effectuate the terms and purposes of this Agreement.
5. Any and all obligations of the Bank under the Bank Change in Control
Agreement shall also be deemed to be obligations of the Company, for which
obligations the Bank and the Company shall be jointly and severally liable.
6. This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
1
<PAGE>
7. This Agreement shall be construed pursuant to and in accordance with the
laws of the State of Connecticut.
8. Except to the extent amended herein, the Bank Change in Control Agreement
shall continue to remain in full force and effect, without interruption.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
MECH FINANCIAL, INC
By: /s/ Edgar C. Gerwig
---------------------
Edgar C. Gerwig
Its President
MECHANICS SAVINGS BANK
By: /s/ Donald K. Wilson, Jr.
---------------------------
Donald K. Wilson, Jr.
Chairman of the Organization
and Compensation Committee
EXECUTIVE
By: /s/ Gary J. Roman
-------------------
GARY J. ROMAN
2
<PAGE>
EXHIBIT 13
MECH Financial, Inc.
Mechanics Savings Bank
1997 Annual Report
<PAGE>
ABOUT MECHANICS
Mechanics Savings Bank, founded in 1861, has become an integral part of the
retail and small business community of Central Connecticut. The Bank's roots
trace back to the time of the Civil War; since then much has changed but our
commitment remains the same - to provide top quality service which exceeds the
needs of our customers. Small businesses and families have come to rely upon our
staff, our 14 offices, and our willingness to serve their financial needs.
[LOGO OF MECHANICS SAVINGS BANK APPEARS HERE]
This is a time of great opportunity for Mechanics. The recent formation of
our bank holding company, MECH Financial, Inc., empowers us to grow and respond
to a number of financial opportunities that will benefit our customers,
shareholders and employees.
<PAGE>
1997 HIGHLIGHTS
. Net income rose to $13.1 million from $1.1 million in 1996.
. Total assets increased by $146 million to $892 million or 19.5%
. New loans totaled $196 million, compared to $90 million in 1996.
. Non-performing assets decreased $4.5 million or 53% to 0.45% of total assets.
. Mechanics Investment Services, Inc. became a subsidiary of the Bank, achieved
broker dealer status, and generated increased revenues totaling $2.9 million.
. Shareholders approved formation of MECH Financial, Inc., a bank holding
company.
<PAGE>
TO OUR SHAREHOLDERS:
Mechanics Savings Bank completed 1997 with impressive results in all areas. A
rebounding local economy with lower out-migration and increased employment,
coupled with aggressive sales efforts, yielded increases in loan volumes, net
income, deposit growth, and total assets.
Net income was $13.08 million, or $2.49 per share. Assets reached $892 million,
an increase of 19.51% over the December 31, 1996 total of $746 million. Return
on assets was 1.61% and return on equity was 15.99%.
$196 million in new loans were made during the year, well over double 1996
despite heavy price compensation. Mechanics continued to strengthen its position
as a small business lender, and also increased residential mortgage originations
over 1996. Non-performing assets as a percentage of total assets as a percentage
of total assets decreased to 0.45% at December 31, 1997 as compared to 1.14% at
December 31, 1996.
COMMERCIAL BANKING
Over the years, Mechanics has developed a strong presence in small business
banking, building rapport with business owners and their employees. As a result,
in 1997 our lending and commercial services team showed significant success with
quality business prospects in our markets. $37 million in new loans to
businesses were made by Mechanics. As the local economy emerged from a period of
slow growth, Mechanics' efforts to retain existing relationships and obtain new
business were successful.
The key to small business banking is our 14 offices that serve customers each
day. Our full line of depository services, coin and currency, convenient hours,
and willingness to assist small business owners all contribute to the growth of
our portfolio, which now numbers over 3,000 business clients.
The Bank introduced our new computer-based money management product called Money
Manager for small businesses. Electronic communications and commerce for
business customers is now an integral part of the way they do business with us.
Priority Business Loan volumes continued to increase as nearly $4 million in
commitments were made to small business borrowers in 1997. Businesses are now
able to borrow up to $150,000 and get loan requests approved in just three
business days. Priority Business Loans add another dimension to our service for
small businesses.
"Mechanics has developed a strong presence in small business banking."
<PAGE>
RETAIL LENDING
The mortgage business was key to loan growth in 1997, with new loans of $120
million, over double the 1996 volume. More than half of these loans were made at
adjustable rates. The Bank increased the sales potential and market
effectiveness of our nine Mortgage Specialists by promoting their ability to
find clients the right mortgage for their circumstances.
Growth in the consumer loan area was outstanding, totaling $30 million in new
installment loans to over 2,500 new customers. The Bank continued pursuit of
lending opportunities with expansion of our auto dealer network and significant
improvements in direct lending. Promotion of loan services to our customers
contributed to increased application and loan volumes.
RETAIL BANKING AND TECHNOLOGY
Mechanics continues to deliver quality service to our customers. While other
banks merge and shuffle customers among branches and eliminate services,
Mechanics holds to the tradition of quality over quantity. While sales of
checking accounts, CDs and other deposit services were up in 1997, customers
continue to comment on how personal and attentive our staff is, whether it's
explaining new products, finding the best person to answer their question, or
simply saying "thank you."
We are proud of our record of community service. In 1997 we received our fifth
straight outstanding Community Reinvestment Act rating from our regulators, one
of only a few banks in Connecticut to receive that distinction.
Mechanics opened our "15th office" in 1997 located at W.W.W.MECHANICSBANK.COM.
Our new web site is designed to attract and serve the computing public. Bank
product, location and contact information is available to retail and small
business prospects at no charge. Shareholder news and other topics of interest
are also distributed via our site.
The introduction of Mechanics' new Check Card, a banking card that offers ATM
access worldwide and the convenience of using the card wherever Visa(R) is
accepted, met with strong response. Over 1,500 checking account customers
accepted the Check Card in December alone, translating into greater convenience
for them and guaranteeing a future revenue stream for the Bank.
MECHANICS INVESTMENT SERVICES, INC.
On July 1, Mechanics Investment Services was converted into a subsidiary of the
Bank, and also formed its own broker dealer. Mechanics Investment Services
became a registered investment advisor, and began the sale of fixed and variable
annuities with great success. Mechanics Investment Services has grown as a key
conduit for revenue, recognizing $2.9 million in income, a 158% increase over
1996. Continued emphasis on relationship pricing and wrap fees propelled asset
sales to our customers to $104 million in 1997.
"We are proud of our record of community service;"
<PAGE>
Mechanics Investment Services consistently ranks in the top 10 in investment fee
income from the sales and servicing of mutual funds and annuities of 493 banks
nationwide with assets between $500 million and $1 billion.
We were pleased to welcome Richard H. Booth, Executive Vice President of Phoenix
Home Life Mutual Insurance Company, to the Board in September. In April, Samuel
H. Title retired from the Board after 29 years of service. We appreciate and
acknowledge all of his contributions to the Bank.
We were saddened by the deaths of retired Director Sister Francis Marie Garvey
and Director John L. Way, 2nd. Sister Francis was a Director for 20 years until
retiring in 1995. John Way had been an active Board member for 22 years when he
died January 1, 1998. Their major contributions to our Bank and the Hartford
community will be deeply missed by all of us.
Looking to the future, Mechanics Savings Bank and MECH Financial, Inc. are
moving forward. Our new holding company will enable us to increase the size of
our franchise and expand into new businesses. We are focused on improving
shareholder value and plan our first dividend payout for the first quarter. We
continue to seek further office locations through acquisitions.
Prudent growth of our loan portfolio is a priority. Residential and commercial
mortgages and other business credits will provide us the opportunity to offer
these customers further services. Consumer loan growth is expected to be strong.
New products and technology may be the norm these days but the constant we rely
upon at Mechanics Savings Bank is our commitment to exceed consumers'
expectations. Our directors, officers, and employees will provide a quality
banking experience for all of our customers.
Thank you for your support.
Sincerely,
/s/ Edgar C. Gerwig
Edgar C. Gerwig
Chairman, President and Chief Executive Officer
"We are focused on improving shareholder value."
<PAGE>
[PHOTO OF MECHANICS SAVINGS BANK]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
FINANCIAL DATA
Selected Consolidated Financial Data Page 1
ManagementOs Discussion and Analysis Page 4
Consolidated Financial Statements Page 26
Notes to Consolidated Financial Statements Page 31
Report of Independent Accountants Page 52
Statement of ManagementOs Responsibility Page 53
BANK INFORMATION
Office Locations Page 54
Directors and Officers Page 55
Shareholder Information Page 56
</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, 1993 through 1997 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) 1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Interest and dividend income $ 57,315 $ 49,577 $ 47,540 $ 45,371 $ 47,699
Interest expense 28,053 23,526 21,942 18,424 21,812
-------- -------- -------- -------- --------
Net interest income 29,262 26,051 25,598 26,947 25,887
Provision for possible loan losses 9,100 6,400 12,850 8,200 13,800
Other income:
Service charges on deposit
accounts and other 3,737 3,219 2,713 2,822 2,709
Investment brokerage services
commissions 2,927 1,136 1,455 1,802 2,301
Loan servicing and other fees 790 724 806 1,155 1,377
Income from investment in
Real Estate Partnership 579 272 504 558 34
Net gains on sales of marketable
equity securities - 61 140 17 820
Net gains (losses) on sales of debt
securities 209 (139) 222 170 1,323
Net gains on sales of loans 52 43 69 2,830 2,366
Other expenses:
Operating expenses (a) 22,642 19,999 20,572 20,365 23,035
Operation of foreclosed
real estate owned 425 600 1,167 459 641
Write-down of investment in Real
Estate Partnership - - 6,697 - -
Write-downs and net losses on sale
of foreclosed real estate owned 121 3,492 2,261 4,457 4,648
Write-down of real estate agency
subsidiary - - 700 - 399
-------- -------- -------- -------- --------
Income (loss) before income taxes 5,268 876 (12,740) 2,820 (5,706)
Income tax (benefit) expense (b) (7,808) (266) 1,540 (1,224) (232)
-------- -------- -------- -------- --------
Net income (loss) $ 13,076 $ 1,142 $(14,280) $ 4,044 $ (5,474)
======== ======== ======== ======== ========
Diluted earnings and pro forma diluted earnings
(loss) per share before income taxes (o) $ 1.00 $ 0.17 $ (2.46) $ 0.55 $ (1.10)
Diluted earnings and pro forma diluted earnings
(loss) per share (o) $ 2.49 $ 0.22 $ (2.76) $ 0.78 $ (1.06)
========================================================================================================
</TABLE>
Mechanics Savings bank 1 1997 Annual Report
<PAGE>
<TABLE>
<CAPTION>
============================================================================================================================
As of or for the years ended December 31,
---------------------------------------------------------------
(dollars in thousands) 1997 1996 1995 1994 1993
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
FINANCIAL CONDITION:
Total assets $892,371 $746,685 $662,201 $684,219 $717,682
Loans, net 571,112 494,291 517,789 536,868 574,712
Allowance for possible loan losses (14,031) (7,983) (11,597) (7,108) (7,324)
Securities (c) 233,849 194,863 39,315 51,049 47,280
Deposits 667,564 655,043 620,802 621,063 662,717
Borrowings 129,720 11,960 11,000 21,000 16,000
Capital $ 88,549 $ 74,840 $ 23,726 $ 37,440 $ 34,277
Non-performing loans (d) $ 2,830 $ 7,856 $ 16,355 $ 12,099 $ 11,020
Foreclosed real estate owned 1,204 679 5,393 7,845 13,798
Non-performing assets (e) $ 4,034 $ 8,535 $ 21,748 $ 19,944 $ 24,818
PERFORMANCE RATIOS:
Return (loss) on average total assets (f) 1.61% 0.16% (2.14)% 0.58% (0.76)%
Return (loss) on average capital (f) 15.99 2.34 (39.13) 11.73 (13.83)
Interest rate spread (g) 3.38 3.63 4.03 4.20 3.87
Net interest margin (h) 3.90 4.03 4.24 4.31 3.95
Efficiency ratio (i) 60.29 63.76 65.29 56.10 62.57
Efficiency ratio with write-downs and
OREO expenses (j) 61.74% 76.80% 99.65% 69.64% 78.02%
ASSET QUALITY DATA:
Non-performing loans as a % of gross loans (d) (k) 0.48% 1.56% 3.09% 2.23% 1.89%
Non-performing assets as a % of
gross loans and OREO (e) 0.69 1.70 4.07 3.62 4.17
Non-performing assets as a % of total assets (e) 0.45 1.14 3.28 2.91 3.46
Allowance for possible loan losses
as a % of gross loans (k) 2.40 1.59 2.19 1.31 1.26
Allowance for possible loan losses as
a % of non-performing loans (d) 495.80 101.62 70.91 58.75 66.46
Net charge-offs as a % of average gross loans (f) 0.56% 1.99% 1.54% 1.48% 2.17%
CAPITAL RATIOS:
Tier 1 leverage capital (l) 9.74% 10.20% 3.57% 5.46% 4.64%
Tier 1 risk-based capital (m) 16.49 18.28 5.65 8.06 6.81
Total risk-based capital (n) 17.76% 19.54% 6.90% 9.31% 8.06%
OTHER SELECTED STATISTICAL DATA:
Number of:
Deposit accounts 67,751 68,212 67,125 66,975 70,669
Bank offices 14 14 14 14 14
Full-time staff 202 192 203 246 246
============================================================================================================================
</TABLE>
Mechanics Savings bank 1997 Annual Report
2
<PAGE>
a) Operating expenses exclude write-downs and operating expenses related to
foreclosed real estate owned.
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 additonal
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. In the second quarter of 1997, the Bank
recognized a tax benefit of $10.33 million 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 1998 that indicated continued profitability, the Bank determined
that it was more likely than not that it would realize its net deferred tax
assets. Therefore, at December 31, 1997, the Bank had not valuation
allowance regarding its $9.12 million net deferred tax asset.
c) Includes Federal Home Loan Bank ("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 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 restructed
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, and the 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 and
total other income.
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 and
total other income.
k) Gross loans excludes loans held-for-sale.
l) The Tier 1 leverage capital ratio established by the Federal Deposit
Insurance Corporation ("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.
o) Diluted earnings and proforma diluted 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 on June 25, 1996,
February 18, 1997 and August 19, 1997. For earnings (loss) per share
purposes, the common stock has been assumed to be outstanding for all
periods presented.
Mechanics Savings Bank 3 1997 Annual Report
<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 individuals and corporate customers primarily located in Central Connecticut.
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 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 $13.08 million for the year ended December 31,
1997 compared to $1.14 million for the year ended December 31, 1996. In the
second quarter of 1997, the Bank recognized a tax benefit of $10.33 million
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 contributing to the 1997 results was a 12.3%
increase in net interest income, a 56.0% increase in other income and a 3.7%
decrease in other expenses for the year ended December 31, 1997 compared to the
same period in 1996.
During 1997, the Bank increased its assets to $892.37 million or 19.5% over the
$746.68 million at December 31, 1996. The 1997 results also reflect increased
activity in lending and investing. These increases were funded primarily with
increased borrowings from the FHLB.
During 1997, the Bank recorded $9.10 million in provisions for possible loan
losses which increased its allowance for possible loan losses to $14.03 million
at December 31, 1997. The Bank's allowance for possible loan losses represented
495.8% of non-performing loans at December 31, 1997, up from 101.6% at December
31, 1996. With intense competition in a continued sluggish Central Connecticut
economy, management believes increasing the allowance for possible loan losses
and the reserve coverage ratios while maintaining high credit quality are
prudent strategies to implement. Non-performing assets as a percentage of total
assets decreased to 0.45% at December 31, 1997 as compared to 1.14% at December
31, 1996.
During 1997, the Bank's Mechanics Investment Services, Inc. ("MIS") subsidiary
became a licensed broker/dealer and insurance agency in the State of Connecticut
as well as a registered investment advisor. Also during 1997, the Bank gained
approval for the formation of a holding company effective January 1, 1998. The
formation of MECH Financial, Inc. will provide additional corporate structuring
opportunities and powers to respond to the changing and expanding needs of the
Bank's customers and to the competitive conditions in the financial services
industry. The Board of Directors believes the formation of MECH Financial, Inc.
will enhance the Bank's competitive position and result in greater long-term
shareholder value.
FINANCIAL CONDITION
Total assets as of December 31, 1997 were $892.37 million, representing an
increase of $145.69 million or 19.5% from $746.68 million at December 31, 1996.
During the year, the Bank emphasized increased lending and investing activities
which resulted in increases in one- to four-family and commercial real estate
mortgages, commercial and industrial and consumer loans, mortgage-backed
securities and mutual funds. The major source of funding these increases was the
expanded use of FHLB borrowings.
Mechanics Savings Bank 4 1997 Annual Report
<PAGE>
SECURITIES
The securities portfolio consists primarily of U.S. Treasury and Government
agency securities, mortgage-backed securities and mutual funds. There are no
derivative instruments (other than collateralized mortgage obligations, the
majority of which are 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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
AT DECEMBER 31,
---------------------------------------
(in thousands) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Securities held-to-maturity:
U.S. Treasury securities and other U.S. Government agencies $ 5,000 $ 5,820 $ -
Mortgage-backed securities 70,199 37,398 -
--------- --------- --------
Total securities held-to-maturity $ 75,199 $ 43,218 $ -
========= ========= ========
Securities available-for-sale:
U.S. Treasury securities and other U.S. Government agencies $ 2,997 $ 14,487 $ 4,515
Corporate debt securities 1,002 - 2,470
Debt securities issued by foreign governments 350 350 350
Mortgage-backed securities 127,185 132,196 26,979
Marketable equity securities 23 15 429
Mutual funds 20,643 308 283
--------- --------- --------
Total securities available-for-sale $ 152,200 $ 147,356 $ 35,026
========= ========= ========
FHLB stock $ 6,450 $ 4,289 $ 4,289
========= ========= ========
- -------------------------------------------------------------------------------------------------------------
</TABLE>
Investment securities increased $36.83 million or 19.3% from $190.57 million at
December 31, 1996 to $227.40 million at December 31, 1997 due primarily to a
$27.79 million increase in the mortgage-backed securities portfolio and a $20.34
million increase in mutual funds, which were partially offset by a $12.31
million decrease in U.S. Treasury securities and other U.S. Government agency
securities. Funds available for investment increased mainly from additional FHLB
borrowings.
Due to increased FHLB borrowings, the Bank was required to purchase additional
shares of stock totaling $2.16 million from the FHLB. Such shares provide above
average dividend yields and are considered to be low risk equity investments.
At December 31, 1997, the Bank had a net unrealized gain of $1.04 million
included in its $152.20 million available-for-sale securities portfolio and a
net unrealized gain of $987,000 on its $75.20 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.
Mechanics Savings Bank 5 1997 Annual Report
<PAGE>
The following table sets forth the contractual maturities of investment
securities (excluding equity securities and mutual funds) at December 31, 1997,
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.
<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 $ - - $ 3,000 6.61% $ 2,000 7.00% $ - -
Mortgage-backed securities - - - - - - 70,199 6.90%
------ -------- ------- -------- ------- --------- --------- ---------
Total Securities held-to-maturity $ - - $ 3,000 6.61% $ 2,000 7.00% $ 70,199 6.90%
------ -------- ------- -------- ------- --------- --------- ---------
Securities available-for-sale:
U.S. Treasury and other U.S.
Government agencies $2,997 5.71% $ - - $ - - $ - -
Debt securities issued by
foreign governments - - 350 8.11% - - - -
Corporate debt securities - - 1,002 7.44 - - - -
Mortgage-backed securities 1,802 6.24 8,296 6.46 21,601 6.86% 95,486 6.32%
------ -------- ------- -------- ------- --------- --------- ---------
Total securities available-for-sale $4,799 5.91% $ 9,648 6.62% $21,601 6.86% $ 95,486 6.32%
------ -------- ------- -------- ------- --------- --------- ---------
Total $4,799 5.91% $12,648 6.62% $23,601 6.87% $ 165,685 6.57%
====== ======== ======= ======== ======= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
CARRYING AMOUNT
- -----------------------------------------------------------------
TOTALS
--------------------
WEIGHTED
AVERAGE
AMOUNT YIELD
-------- --------
<S> <C> <C>
(in thousands)
Securities held-to-maturity:
U.S. Treasury and other U.S.
Government agencies $ 5,000 6.77%
Mortgage-backed securities 70,199 6.90
-------- --------
$ 75,199 6.89%
Total Securities held-to-maturity -------- --------
Securities available-for-sale:
U.S. Treasury and other U.S.
Government agencies $ 2,997 5.71%
Debt securities issued by
foreign governments 350 8.11
Corporate debt securities 1,002 7.44
Mortgage-backed securities 127,185 6.42
-------- --------
Total securities available-for-sale $131,534 6.42%
-------- --------
Total $206,733 6.59%
- -----------------------------------------------------------------
</TABLE>
Refer to Note 4 of the consolidated financial statements for information related
to unrealized gains and losses on the available-for-sale investment securities.
LOANS
The following table details the composition of the loan portfolio as of the
periods presented.
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995
AMOUNT % AMOUNT % AMOUNT %
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Real estate mortgages:
One- to four-family $ 396,390 67.87% $341,371 68.02% $ 348,783 65.97%
Multi-family 13,497 2.31 14,187 2.83 19,803 3.75
Commercial real estate 99,252 16.99 95,924 19.11 111,836 21.15
Construction and land development 3,602 0.62 6,173 1.23 4,485 0.85
Commercial and industrial 33,699 5.77 26,072 5.20 26,435 5.00
Home equity lines of credit 3,003 0.51 2,302 0.46 2,237 0.42
Other consumer loans 34,620 5.93 15,818 3.15 15,135 2.86
---------- --------- --------- --------- ---------- ---------
Total loans, gross 584,063 100.00% 501,847 100.00% 528,714 100.00%
========= ========= =========
Deferred loan origination costs, net 1,080 427 672
Allowance for possible loan losses (14,031) (7,983) (11,597)
---------- --------- ----------
Total loans, net $ 571,112 $ 494,291 $517,789
========== ========= ==========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross loans increased $82.21 million or 16.4% from $501.85 million at December
31, 1996 to $584.06 million at December 31, 1997. The increase was due primarily
to increases of $55.02 million of one- to four-family mortgages and $18.80
million of consumer loans due to increased origination activity which was
partially offset by amortization and prepayments. The increased origination
activity during 1997 was due mainly to additional staff, increased marketing
campaigns and the expansion of the network of automotive dealers offering the
Bank's lending programs. Loans held-for-sale increased from $87,000 at December
31, 1996 to $1.92 million at December 31, 1997 due primarily to higher volumes
of 15 year fixed rate, one- to four-family mortgages.
Mechanics Savings Bank 6 1997 Annual Report
<PAGE>
The following table sets forth certain information at December 31, 1997
regarding the dollar amount of loans maturing in the BankOs loan portfolio.
Demand loans and loans having no stated schedule of repayments and no stated
maturity are reported in the maturing within one year category.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AFTER ONE AFTER FIVE
WITHIN THROUGH THROUGH AFTER
(in thousands) AMOUNT ONE YEAR FIVE YEARS TEN YEARS TEN YEARS
----------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Real estate mortgages:
One- to four-family $ 396,390 $ 729 $ 7,950 $ 23,138 $ 364,573
Multi-family 13,497 243 2,004 4,452 6,798
Commercial real estate 99,252 2,969 21,302 47,991 26,990
Construction and land development 3,602 477 478 - 2,647
Commercial and industrial 33,699 12,638 12,338 8,690 33
Home equity lines of credit 3,003 337 320 2,346 -
Other consumer loans 34,620 2,460 29,772 2,215 173
----------- -------- -------- -------- ---------
Total loans, gross $ 584,063 $ 19,853 $ 74,164 $ 88,832 $ 401,214
=========== ======== ======== ======== =========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, $193.24 million of the BankOs loans with contractual
maturities after December 31, 1998 were fixed rate loans and $370.97 million had
adjustable interest rates. The following table sets forth the dollar amount of
all loans maturing after December 31, 1998 by fixed or adjustable interest
rates.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FIXED ADJUSTABLE
(in thousands) RATES RATES
----------- --------------
<S> <C> <C>
Real estate mortgages:
One- to four-family $ 120,224 $ 275,437
Multi-family 5,214 8,040
Commercial real estate 25,184 71,099
Construction and land development 478 2,647
Commercial and industrial 10,051 11,010
Home equity lines of credit - 2,666
Other consumer loans 32,093 67
--------- ---------
Total loans, gross $ 193,244 $ 370,966
========= =========
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The allowance for possible loan losses totaled $14.03 million at December 31,
1997 compared to $7.98 million at December 31, 1996. Provisions for possible
loan losses during 1997 totaled $9.10 million and net charge-offs totaled $3.05
million. 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 in 1996 was $3.60
million attributable to the Accelerated Disposition Plan (OADPO) completed in
July 1996. The allowance for possible loan losses as a percentage of non-
performing loans increased from 101.6% at December 31, 1996 to 495.8% at
December 31, 1997.
Mechanics Savings Bank 7 1997 Annual Report
<PAGE>
The following table sets forth an analysis of activity in the allowance for
possible loan losses at and during the periods indicated.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
AT OR FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------------------------
(in thousands) 1997 1996 1995
--------------- -------------- ---------------
<S> <C> <C> <C>
Balance at beginning of period $ 7,983 $ 11,597 $ 7,108
Add:
Provision charged to operations 9,100 6,400 12,850
Recoveries 960 430 744
Less:
Charge-offs:
Real estate mortgages:
One- to four-family 1,840 2,966 1,829
Multi-family 694 1,677 2,083
Commercial real estate 987 4,878 4,549
Construction and land development - 15 -
Consumer and commercial and industrial 491 908 644
--------------- -------------- ---------------
Total charge-offs 4,012 10,444 9,105
--------------- -------------- ---------------
Balance at end of period $ 14,031 $ 7,983 $ 11,597
=============== ============== ===============
Net charge-offs $ 3,052 $ 10,014 $ 8,361
=============== ============== ===============
Total loans, gross $584,063 $501,847 $528,714
=============== ============== ===============
Net charge-offs to gross loans 0.52% 2.00% 1.58%
=============== ============== ===============
- -------------------------------------------------------------------------------------------------------------------
</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) 1997 TOTAL LOANS 1996 TOTAL LOANS 1995 TOTAL LOANS
--------- ----------- --------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages:
One- to four-family $ 2,549 67.87% $ 1,724 68.02% $ 1,302 65.97%
Multi-family 399 2.31 592 2.83 806 3.75
Commercial real estate 2,397 16.99 2,935 19.11 2,114 21.15
Construction and land development 36 0.62 239 1.23 90 0.85
Commercial and industrial 1,085 5.77 848 5.20 3,397 5.00
Home equity lines of credit and consumer loans 423 6.44 395 3.61 366 3.28
Unallocated 7,142 N/A 1,250 N/A 3,522 N/A
--------- ----------- --------- ----------- -------- -----------
Total allowance for possible loan losses $ 14,031 100.00% $ 7,983 100.00% $11,597 100.00%
========= =========== ========= =========== ======== ===========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank allocates the allowance for possible loan losses based on historic loss
ratios for its one- to four-family mortgages, home equity lines of credit and
consumer loans. The allocation for the remaining loans is done on a loan-by-loan
basis. With intense competition in a continued sluggish Central Connecticut
economy, management believes that increasing the allowance for possible loan
losses and the reserve coverage ratios while maintaining high credit quality are
prudent strategies to implement. Although improving, the Central Connecticut
economy continues to lag both the New England and National economies. In
addition, 85% of the Bank's loans and commitments are collateralized by real
estate in Connecticut. 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, 1997 and 1996, loans serviced for others totaled $53.39 million and
$53.59 million, respectively.
Mechanics Savings Bank 8 1997 Annual Report
<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, 1997 and December 31, 1996 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 1997, 1996 and
1995.
NON-PERFORMING ASSETS
The following table summarizes changes in non-performing assets during the
periods presented.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(in thousands) For the years ended December 31,
--------------------------------------------
1997 1996 1995
------------ ------------- ------------
<S> <C> <C> <C>
Balance, beginning of year $ 8,535 $ 21,748 $ 19,944
Loans placed on non-accrual status 12,194 20,663 23,578
Change in accruing loans past due 90 or more days, net - - (144)
Payments on non-performing assets (8,308) (6,594) (3,562)
Loans returned to accrual status (2,988) (3,887) (2,834)
Loans charged-off (3,052) (10,014) (9,105)
Sales of loans and foreclosed real estate owned (2,226) (9,889) (3,868)
Write-downs and net losses on sale of foreclosed real estate owned (121) (3,492) (2,261)
-------------- -------------- ------------
Total reductions (16,695) (33,876) (21,774)
-------------- -------------- ------------
Balance, end of year $ 4,034 $ 8,535 $ 21,748
============== ============== ============
Percent of total assets 0.45% 1.14% 3.28%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Mechanics Savings Bank 9 1997 Annual Report
<PAGE>
The following table details the composition of non-performing assets and
troubled debt restructurings as of the dates presented.
<TABLE>
<CAPTION>
============================================================================================================================
FORECLOSED TOTAL TROUBLED
NON-ACCRUAL REAL ESTATE NON-PERFORMING DEBT
(in thousands) LOANS OWNED ASSETS RESTRUCTURINGS
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1997
Real estate mortgages:
One- to four-family $ 1,713 $ 828 $ 2,541 $ -
Multi-family 78 - 78 1,160
Commercial real estate 681 164 845 -
Construction and land development 2 212 214 -
Commercial and industrial 286 - 286 -
Home equity lines of credit and consumer loans 70 - 70 -
----------- -------- ----------- -----------
Total $ 2,830 $1,204 $ 4,034 $ 1,160
=========== ======== =========== ===========
DECEMBER 31, 1996
Real estate mortgages:
One- to four-family $ 3,636 $ 653 $ 4,289 $ 178
Multi-family 187 - 187 1,259
Commercial real estate 2,103 - 2,103 3,214
Construction and land development 895 26 921 -
Commercial and industrial 887 - 887 -
Home equity lines of credit and 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 real estate 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
Home equity lines of credit and consumer loans 34 - 34 -
----------- -------- ----------- -----------
TOTAL $16,355 $5,393 $21,748 $14,247
=========== ======== =========== ===========
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
There were no accruing loans past due 90 days or more at December 31, 1997, 1996
and 1995.
The Bank places a loan on 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 1.14% at December 31, 1996 to 0.45% at December 31, 1997. Non-
performing assets as a percentage of total loans and foreclosed real estate
owned decreased from 1.70% at December 31, 1996 to 0.69% at December 31, 1997.
Changes in Connecticut's economy have affected many of the Bank's commercial
loan and residential customers. The Bank also maintains lists of adversely
classified credits (substandard, doubtful, or loss credits) as defined by the
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 restructuring of such loans. The Bank, through
its workout department, pursues the resolution of all classified and/or non-
performing assets through restructuring, 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, 1997, 1996 and 1995, the Bank had $1.16
million, $4.65 million and $14.25 million, respectively, in troubled debt
restructurings. At December 31, 1997, interest rates on these restructurings
were at 9.25%.
Mechanics Savings Bank 10 1997 Annual Report
<PAGE>
The foregoing tables do not include Other Assets Especially Mentioned ("OAEM")
loans. Although not impaired, OAEM 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 OAEM loans approximated
$17.41 million at December 31, 1997 and $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 increased from $679,000 at December 31, 1996 to
$1.20 million at December 31, 1997. The Bank foreclosed upon 45 properties
totaling $3.04 million during 1997. The Bank sold 47 properties totaling $2.25
million during the year ended December 31, 1997. Write-downs and net losses on
sale of foreclosed real estate owned for the year ended December 31,1997 totaled
$121,000.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased $3.01 million or 10.0% from $30.01 million
at December 31, 1996 to $33.02 million at December 31, 1997. An increase in
short-term investments of $9.67 million was partially offset by a decrease in
non-interest-bearing deposits and cash of $6.66 million from December 31, 1996
to December 31, 1997.
CASH SURRENDER VALUE LIFE INSURANCE AND OTHER ASSETS
Cash surrender value life insurance and other assets totaled $27.61 million at
December 31, 1997 compared to $1.58 million at December 31, 1996, representing a
$26.03 million increase. At December 31,1997, the Bank had $16.05 million in
universal cash surrender value life insurance. Twenty policies were acquired on
the lives of seven executive officers and six directors and are designed to
recover the costs of the Bank's Long Term Deferred Incentive Plan ("LTDIP") and
Outside Director Deferred Compensation Plan ("DDCP"). The policy death benefit
also indemnifies the Bank against the death benefit provision of these benefit
plans. The policies were paid with a single premium and have a combined death
benefit of $41.3 million. Policy cash values earn interest at a current tax-free
rate of 6% and policy mortality costs are charged against the cash value
monthly. There are no loads or surrender charges associated with the policies.
In the second quarter of 1997, the Bank recognized a tax benefit of $10.33
million 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. At December 31, 1997, the Bank had a net deferred tax
asset of $9.12 million with no valuation allowance.
DEPOSITS AND BORROWINGS
Deposits increased $12.52 million or 1.9% from $655.04 million at December 31,
1996 to $667.56 million at December 31, 1997. Certificates of deposit increased
$23.70 million from December 31, 1996 to December 31, 1997 due primarily to
increases in certificates of deposit with terms of twelve and fifteen months.
Partially offsetting this increase, savings and money market savings accounts
decreased $8.06 million and $5.90 million, respectively.
The following table presents the amounts of certificates of deposit of the Bank
at December 31, 1997 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, 1998 $ 310,033 5.11 %
December 31, 1999 50,512 5.64
December 31, 2000 14,895 6.37
Thereafter 22,993 5.86
--------- ---------
Total $ 398,433 5.27 %
========= =========
=================================================================================
</TABLE>
Mechanics Savings Bank 11 1997 Annual Report
<PAGE>
The following table presents the maturities of the Bank's certificates of
deposit in amounts of $100,000 or more at December 31, 1997 by time remaining to
maturity.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(in thousands) MATURING
--------
<S> <C>
Three months or less $ 23,758
Over three through six months 7,813
Over six through twelve months 15,718
Over twelve months 7,332
--------
Total $ 54,621
========
- -------------------------------------------------------------------------------
</TABLE>
Borrowings increased $117.76 million from December 31, 1996 to December 31, 1997
due to additional FHLB borrowings primarily to fund the increases in the loan
and investment portfolios. At December 31, 1997, the FHLB borrowings had a
weighted average rate of 5.98% and a weighted average remaining term of 3.1
years. During 1996, the Bank financed the purchase of the Bank's common stock
for the Employee Stock Ownership Plan (OESOPO). There were 72,000 and 96,000
unallocated ESOP shares at December 31, 1997 and December 31, 1996,
respectively.
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>
- ------------------------------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
------------ ---------- ---------
<S> <C> <C> <C>
(in thousands)
Weighted average interest rate of total borrowings 6.00 % 5.00 % 5.57 %
Highest month end outstanding balance of total borrowings $129,960 $12,200 $21,000
Average month end balance of total borrowings $ 76,865 $11,680 $12,667
- -------------------------------------------------------------------------------------------------------
</TABLE>
Other liabilities increased from $2.43 million at December 31, 1996 to $5.15
million at December 31, 1997 due primarily to increases in income taxes payable
and FHLB advances accrued interest payable.
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 FHLB advances, net deposit growth and funds
provided by operations. Liquidity can also be provided through sales of loans
and available-for-sale securities.
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, 1997, the
Bank's primary liquidity, consisting of cash and federal funds sold, was $33.02
million, or 3.7% of total assets, compared to $30.01 million, or 4.0% of total
assets, at December 31, 1997.
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, 1997, the
Bank had no borrowings under its line of credit. The Bank may borrow
approximately $15 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 several interest rate scenarios over a 24-month time horizon. In accordance
with its asset/liability policy,
Mechanics Savings Bank 12 1997 Annual Report
<PAGE>
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 10% change in net interest income over the
next 12 months within the selected 400 basis point band. At December 31, 1997,
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
balance sheet 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, 1997, 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.
Mechanics Savings Bank 13 1997 Annual Report
<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 $ 233,849 26.20 % $ 152,242 $ 64,756 $ 16,851
Short-term investments 10,140 1.14 10,140 - -
Loans, gross 584,063 65.45 302,059 133,364 148,640
--------- ---------- --------- --------- ---------
Total rate sensitive assets 828,052 92.79 464,441 198,120 165,491
Other assets 64,319 7.21
--------- ----------
Total assets $ 892,371 100.00 %
========= ==========
LIABILITIES AND CAPITAL:
Deposits:
Savings and other $ 107,307 12.03 % - 107,307 -
Money market 89,970 10.08 89,970 - -
Certificates of deposit 398,433 44.65 310,034 88,399 -
Demand deposits 71,854 8.05 - - 71,854
Borrowings:
FHLB advances 129,000 14.46 16,000 113,000 -
Other borrowings 720 0.08 720 - -
--------- ---------- --------- --------- ---------
Total rate sensitive liabilities 797,284 89.35 416,724 308,706 71,854
Other liabilities 6,538 0.73
Capital 88,549 9.92
--------- ----------
Total liabilities and capital $ 892,371 100.00 %
========= ==========
Period repricing difference (gap) $ 47,717 $(110,586) $ 93,637
========= ========= =========
Cumulative repricing difference $ 47,717 $ (62,869) $ 30,768
Cumulative repricing difference to total assets 5.35 % (7.05) % 3.45 %
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, the Bank was asset sensitive as measured by a positive
cumulative one year gap of $47.72 million, or 5.4% 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 1998 net interest income as follows:
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
EFFECT ON NET INTEREST INCOME
-----------------------------
SHOCK RAMP
(in thousands) SCENARIO (A) SCENARIO (B)
------------ ------------
<S> <C> <C>
200 basis point increase in rates (c) $ (324) $ (99)
100 basis point increase in rates (d) 42 (36)
100 basis point decrease in rates (d) (256) 32
200 basis point decrease in rates (c) (478) 58
- -------------------------------------------------------------------------------
</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 1998.
(c) No adjustments are made to the BankOs 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.
Mechanics Savings Bank 14 1997 Annual Report
<PAGE>
Management believes it likely that interest rate spreads will continue to
compress during 1998, mainly due to the flattening yield curve. Net interest
margin decreased from 4.03% in 1996 to 3.90% in 1997. Overall average yields
decreased 3 basis points due to an increased percentage of securities in average
earning assets. During 1997, average securities represented 27.9% of earning
assets compared to 20.1% during 1996. In addition, the Bank's overall cost of
funds increased 22 basis points due mainly to increased borrowings from the
FHLB.
Management believes some of the potential effects of the Bank's interest rate
risk will be mitigated as 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
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, 1997, stockholders' equity totaled $88.55 million, representing
a 18.3% increase over the $74.84 million in capital at December 31, 1996. At
December 31, 1997, the Bank's Tier 1 leverage capital ratio was 9.74% and its
total risk-based capital ratio was 17.76%. The Bank was classified as "well
capitalized" at December 31, 1997. At December 31, 1996, the Bank's Tier 1
leverage capital ratio was 10.20% and its total risk-based capital ratio was
19.54%. The Bank was classified as "adequately capitalized" at December 31,
1996. Although the Bank's capital ratios were substantial enough to qualify as
"well capitalized" at December 31, 1996, the FDIC, through prompt corrective
action provisions, had the ability to, and did reduce the Bank's capital
category by one level. No such action was taken by the FDIC in 1997.
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. 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,
the Bank significantly increased its capital levels. On December 27, 1996, the
FDIC removed the Order and the Bank was 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. On September 30, 1997, the FDIC and the State
Department of Banking terminated the MOU. Therefore at December 31, 1997, the
Bank is not operating under any regulatory enforcement action. The Bank believes
its current capital is adequate to support operations and anticipated future
growth.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued two pronouncements, Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income", ("SFAS No.
130O") and No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (OSFAS No. 131O). 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 but specific determination has
not yet been made as to how this will be implemented.
Mechanics Savings Bank 15 1997 Annual Report
<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 in the past. Inflation, or disinflation, could
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
1997 and 1996 results reflected a reduction in the Bank's net interest margin,
that margin continued to be higher than most of its savings bank competitors.
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. The Bank
attempts to manage this interest rate risk by monitoring interest rate
movements, making investments, and adjusting its deposit and asset pricing
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 previous 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.
YEAR 2000
During 1997, the Bank developed its plan to address the Year 2000 issue. The
Bank utilizes software and related technologies that will be affected by the
date change in the year 2000. An internal study is currently under way to
determine the full scope and related costs to ensure that the Bank's systems
continue to meet its customers' and internal needs. The Bank has received
notification from its data processing service bureau that it will be Year 2000
compliant within regulatory timeframes. The Bank will continue to monitor and
test all of its systems (both internal and outsourced) to ensure Year 2000
compliance. In addition, the Bank has incorporated Year 2000 issues into its
credit analysis of its borrowers. Based on the above analysis, the Bank does not
expect to incur significant costs associated with this effort.
Mechanics Savings Bank 16 1997 Annual Report
<PAGE>
RESULTS OF OPERATIONS
For the year ended December 31, 1997 compared to the year ended December 31,
1996
For the year ended December 31, 1997, the Bank reported net income of $13.08
million or $2.49 per diluted share compared to $1.14 million or $0.22 per
diluted share for the same period in 1996. In the second quarter of 1997, the
Bank recognized a tax benefit of $10.33 million 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. The
Bank recorded $9.10 million in provisions for possible loan losses during 1997
compared to $6.40 million during 1996. Also contributing to the 1997 results,
was a 12.3% increase in net interest income, a 56.0% increase in other income
and a 3.7% decrease in other expenses as compared to the year ended December 31,
1996.
NET INTEREST INCOME
Net interest income totaled a record $29.26 million for the year ended December
31, 1997 compared to $26.05 million for the same period in 1996, representing a
$3.21 million or 12.3% increase. The increase was primarily a result of a
$104.02 million or 16.1% increase in average interest-earning assets. Average
investment securities increased $79.25 million primarily due to increased
investments in mortgage-backed securities and mutual funds. Average net loans
increased $37.91 million due mainly to increased one-to four-family mortgages
and consumer loans as a result of increased origination activity in excess of
prepayments and amortization during 1997. Funding the increases in interest-
earning assets, average balances of borrowings and certificates of deposit
increased $55.53 million and $34.68 million, respectively. The net interest
margin decreased from 4.03% for the year ended December 31, 1996 to 3.90% for
the same period in 1997. The decrease was mainly due to the changed composition
of interest-bearing liabilities which resulted in a higher overall average cost
of funds by 22 basis points. During the year, increases in FHLB borrowings and
certificates of deposit were combined with a decrease in the lower cost deposits
of money market accounts and savings accounts.
17
<PAGE>
The following table sets forth certain information relating to the BankOs
average interest-earning assets, interest-bearing liabilities and net interest
income for the years ended December 31, 1997 and 1996. 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. For investment securities, the yield calculations are based on
the average amortized cost.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
AVERAGE BALANCE INCOME/EXPENSE YIELD
---------------------- -------------------- -------------------
(in thousands) 1997 1996 1997 1996 1997 1996
----------- --------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 532,726 $ 494,820 $ 43,799 $ 40,730 8.22% 8.23%
Investment securities 209,044 129,791 13,067 7,721 6.25 5.95
Short-term investments 8,261 21,394 449 1,126 5.44 5.26
---------- --------- -------- ---------
Total interest-earning assets 750,031 646,005 57,315 49,577 7.64 7.67
-------- ---------
Other assets 59,978 50,472
---------- ---------
Total assets $ 810,009 $ 696,477
========== =========
Money market checking $ 34,306 $ 37,357 408 488 1.19 1.31
Money market savings 57,066 65,453 1,334 1,528 2.34 2.34
Savings & other 117,242 123,543 2,247 2,469 1.92 2.00
Certificates of deposit 379,006 344,331 19,854 18,459 5.24 5.36
Securities sold under
agreements to repurchase 4,468 - 243 - 5.44 -
Other borrowings 67,177 11,644 3,967 582 5.91 5.00
---------- --------- -------- ---------
Total interest-bearing liabilities 659,265 582,328 28,053 23,526 4.26 4.04
---------- --------- -------- ---------
Demand deposits 64,921 62,144
Other liabilities 4,039 3,299
Capital 81,784 48,706
---------- ---------
Total liabilities and capital $ 810,009 $ 696,477
========== =========
Net interest income $ 29,262 $ 26,051
======== =========
Spread on interest-bearing liabilities 3.38% 3.63%
Net interest margin 3.90% 4.03%
- --------------------------------------------------------------------------------------------------------------------
</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, 1997 VERSUS 1996
(in thousands) CHANGE IN INTEREST DUE TO
--------------------------------------------
Volume Rate Vol/Rate Net
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Loans, net $ 3,120 $ (48) $ (3) $ 3,069
Investment securities 4,715 392 239 5,346
Short-term investments (691) 37 (23) (677)
--------- -------- ------- --------
Total 7,144 381 213 7,738
--------- -------- ------- --------
Money market checking (40) (44) 4 (80)
Money market savings (196) 2 - (194)
Savings & other (126) (101) 5 (222)
Certificates of deposit 1,859 (421) (43) 1,395
Securities sold under
agreements to repurchase 243 - - 243
Other borrowings 2,776 106 503 3,385
--------- -------- ------- --------
Total 4,516 (458) 469 4,527
--------- -------- ------- --------
Net change to interest income $ 2,628 $ 839 $ (256) $ 3,211
========= ======== ======= ========
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
Mechanics Savings Bank 18 1997 Annual Report
<PAGE>
INTEREST INCOME
Interest income increased $7.74 million or 15.6% due primarily to average
increased volume of investment securities and net loans of $79.25 million and
$37.91 million, respectively, for the year ended December 31, 1997. Partially
offsetting these increases, the average balance of short-term investments
decreased $13.13 million. Overall average yields decreased 3 basis points from
7.67% for the year ended December 31, 1996 to 7.64% for the year ended December
31, 1997. The decrease was mainly a result of the increased ratio of investment
securities to total interest-earning assets from 20.1% for the year ended
December 31, 1996 to 27.9% for the same period in 1997.
INTEREST EXPENSE
Interest expense increased $4.53 million or 19.3% for the year ended December
31, 1997 as compared to the same period in 1996. The increase was primarily due
to an increase in average volume of borrowings and certificates of deposit of
$55.53 million and $34.68 million, respectively. Overall, the average cost of
funds increased to 4.26% for the year ended December 31, 1997 from 4.04% for the
year ended December 31, 1996. This increase was mainly due to the shift in the
composition of interest-bearing liabilities to higher cost FHLB borrowings and
certificates of deposit from savings and money market accounts.
PROVISION AND ALLOWANCE FOR POSSIBLE LOAN LOSSES
The Bank determines its allowance and provision 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 managementOs 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, 1997 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 BankOs 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 increased from $6.40 million for the year
ended December 31, 1996 to $9.10 million for the same period in 1997. The 1997
increase further strengthens the allowance for possible loan losses which now
represents 351.7% of non-performing and restructured loans, up from 63.8% at
December 31, 1996 and 495.8% of only non-performing loans, up from 101.6% at
December 31, 1996. With intense competition in a continued sluggish Central
Connecticut economy, management believes increasing the allowance for possible
loan losses and the reserve coverage ratios while maintaining high credit
quality are prudent strategies to implement.
The following table shows the activity in the BankOs allowance for possible loan
losses for the three years ended December 31.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
(in thousands) 1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
Balance, beginning of year $ 7,983 $ 11,597 $ 7,108
Provision for possible loan losses 9,100 6,400 12,850
Charge-offs (4,012) (10,444) (9,105)
Recoveries 960 430 744
--------- ========= =========
Balance, end of year $ 14,031 $ 7,983 $ 11,597
========= ========= =========
Ratio of allowance for possible loan losses:
To non-performing loans 495.80% 101.62% 70.91%
To total gross loans 2.40% 1.59% 2.19%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Merchanics Savings Bank, 19 1997 Annual Report
<PAGE>
While all segments of the Banks 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 require 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 $8.29 million in other income for the year ended December 31,
1997 compared to $5.32 million for the same period in 1996, representing a 56.0%
increase. The following table shows the components of other income for the years
ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
$ %
(in thousands) 1997 1996 Change Change
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Investment brokerage services commissions $ 2,927 $ 1,136 $ 1,791 157.66 %
Service charges on deposit accounts 2,246 2,287 (41) (1.79)
Loan servicing and other fees 790 724 66 9.12
Income from investment in Real Estate Partnership 579 272 307 112.87
Appreciation of cash surrender value life insurance 421 - 421 -
Net gain (loss) on sales of investment securities 209 (78) 287 (367.95)
Other 1,122 975 147 15.08
-------- ------- -------
Total other income $ 8,294 $ 5,316 $ 2,978 56.02 %
======== ======= ======= =======
- -------------------------------------------------------------------------------------------------
</TABLE>
Investment brokerage services commissions increased $1.79 million from 1996 to
1997 primarily due to MISO new ability to sell annuities and earn investment
advisory fees during 1997. MIS, 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 late 1996, the Bank hired eight additional staff members to better meet
customer demands. During 1996, the Bank formed a subsidiary, Mechanics
Investments Services, Inc., to enable the Bank to better 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. In July 1997, MIS
became a licensed broker/dealer and a registered investment advisor. MIS also
offers fixed and variable annuity products and is licensed as an insurance
agency in the State of Connecticut. Commissions from annuity sales and
investment advisory fees totaled $1.04 million and $517,000, respectively, for
the year ended December 31, 1997.
Income from investment in Real Estate Partnership increased $307,000 due to
higher rental income and to the December 31, 1996 expiration of a lease
incentive for an existing tenant which decreased the Real Estate PartnershipOs
expenses during 1997. During 1997, the Bank invested in universal cash surrender
value life insurance to recover costs of the Banks LTDIP and DDCP. These cash
surrender value policies appreciated $421,000 during 1997, representing a tax-
free 6% gross yield before mortality charges. During 1997, the Bank reported
gross gains and gross losses on the sale of mortgage-backed securities of
$301,000 and $92,000, respectively. Other income increased $147,000 due mainly
to reduced expenses in the subsidiaries that facilitate the ownership,
management and disposition of foreclosed real estate owned and from reduced
losses from the real estate agency subsidiary which was sold during the first
quarter of 1996.
Mechanics Savings Bank 20 1997 Annual Report
<PAGE>
OTHER EXPENSES
Other expenses totaled $23.19 million for the year ended December 31, 1997,
compared to $24.09 million for the same period in 1996, representing a 3.7%
decrease. The following table shows the components of other expenses for the
years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
$ %
(in thousands) 1997 1996 Change Change
------- ------- ------ ------
<S> <C> <C> <C> <C>
Salaries, commissions and employee benefits $12,172 $ 9,012 $ 3,160 35.06 %
Occupancy 3,196 3,211 (15) (0.47)
Data processing 1,083 993 90 9.06
Furniture and equipment 953 942 11 1.17
Legal and accounting 880 709 171 24.12
Advertising 835 463 372 80.35
Communications 502 491 11 2.24
Operation of foreclosed real estate owned 425 600 (175) (29.17)
FDIC insurance 270 1,351 (1,081) (80.01)
Write-downs and net losses on sale of foreclosed real estate owned 121 3,492 (3,371) (96.53)
Other 2,751 2,827 (76) (2.69)
------- ------- -------
Total other expenses $23,188 $24,091 $ (903) (3.75)%
======= ======= ======= ======
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Salaries, commissions and benefits were $3.16 million higher in 1997 primarily
due to $2.09 million in increased commissions due to the performance of MIS and
excellent overall Bank results. Benefit plan expenses increased $605,000 as
pension and ESOP expenses increased. Advertising increased $372,000 during the
year due to a renewal and expansion of marketing efforts to support the MIS,
lending and deposit activities of the Bank. Due to the Bank's improved capital
position and classification, FDIC insurance premiums were lower, resulting in a
80.0% decrease in FDIC insurance expense. Due to decreased levels of non-
performing assets, operation of foreclosed real estate and write-downs and net
losses on sale of foreclosed real estate owned combined to lower expenses by
$3.55 million. During 1996, the Bank recorded a $2.65 million write-down on
foreclosed real estate owned in anticipation of the ADP.
INCOME TAXES
The Bank recognized an income tax benefit of $7.81 million for the year ended
December 31, 1997 as compared to a benefit of $266,000 for the same period in
1996. 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. During the fourth quarter of 1996, the Bank received a
tax refund from the IRS relating to the carrying back of 1995 deductions.
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 diluted share compared to a net loss of $14.28 million or
$2.76 per diluted 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.
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 average
Mechanics Savings Bank 21 1997 Annual Report
<PAGE>
earning assets of 7.1%, which more than offset the impact of a lower net
interest margin. Average interest-earning assets increased $42.77 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 $12.09 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 $78.40 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 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, 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. For investment securities, the yield calculations are based on
the average amortized cost.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Average Balance Income/Expense Yield
-------------------- --------------------- --------------
(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 129,791 51,391 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 646,005 603,233 49,577 47,540 7.67 7.88
---------- ----------
Other assets 50,472 62,561
---------- ----------
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>
Mechanics Savings Bank 22 1997 Annual Report
<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
(in thousands) CHANGE IN INTEREST DUE TO
---------------------------------------------
VOLUME RATE VOL/RATE NET
-------- ------ ---------- -------
<S> <C> <C> <C> <C>
Loans, net $(3,201) $ 654 $ (48) $ (2,595)
Investment securities 4,889 (147) (225) 4,517
Short-term investments 221 (87) (19) 115
------- ----- ------ --------
Total 1,909 420 (292) 2,037
------- ----- ------ --------
Money market checking 12 29 1 42
Money market savings (406) (2) - (408)
Savings & other (201) (15) 1 (215)
Certificates of deposit 2,077 160 21 2,258
Borrowings (25) (70) 2 (93)
------- ----- ------ --------
Total 1,457 102 25 1,584
------- ----- ------ --------
Net change to interest income $ 452 $ 318 $ (317) $ 453
======= ===== ====== =======
- --------------------------------------------------------------------------------
</TABLE>
INTEREST INCOME
Interest income increased $2.04 million or 4.3% due primarily to average
increased volume of investment securities of $78.40 million which was partially
offset by lower average volume of loans of $39.47 million. The Bank's efforts to
actively originate loans resumed 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
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 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 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.
Mechanics Savings Bank 23 1997 Annual Report
<PAGE>
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)
Income from investment in Real Estate Partnership 272 504 (232) (46.03)
Net gain (loss) on sales of investment securities (78) 362 (440) (121.55)
Other 975 524 451 86.07
------- ------- ------
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. 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 $451,000 due mainly to the reduced
losses ($271,000) from the 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, commissions 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>
Mechanics Savings Bank 24 1997 Annual Report
<PAGE>
Salaries, commissions and employee 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
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. 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.
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 the 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.
Mechanics Savings Bank 25 1997 Annual Report
<PAGE>
CONSOLIDATED STATEMENTS OF CONDITION
December 31, 1997 and 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
1997 1996
---------- ----------
<S> <C> <C>
(dollars in thousands)
ASSETS
Cash and due from banks:
Non-interest-bearing deposits and cash $ 22,884 $ 29,541
Short-term investments 10,140 465
---------- ----------
Cash and cash equivalents 33,024 30,006
Investments:
Available-for-sale, at market value 152,200 147,356
Held-to-maturity (market value at December 31, 1997: $76,186; 75,199 43,218
at December 31, 1996: $43,781)
Federal Home Loan Bank stock, at cost 6,450 4,289
Loans, net 571,112 494,291
Loans held-for-sale 1,922 87
Bank premises and equipment 4,823 5,513
Investment in Real Estate Partnership 14,485 15,201
Accrued interest receivable 4,347 4,468
Foreclosed real estate owned 1,204 679
Cash surrender value life insurance 16,053 -
Other assets 11,552 1,577
---------- ----------
$ 892,371 $ 746,685
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $667,564 $ 655,043
Borrowings 129,720 11,960
Mortgage escrow 1,388 2,415
Other liabilities 5,150 2,427
Total liabilities 803,822 671,845
Commitments and contingencies (Note 15)
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 December 31, 1997 and
5,290,000 issued at December 31, 1996
Additional paid in capital 50,927 50,611
Retained earnings 37,891 24,815
Net unrealized gains on securities 398 321
Less: Unallocated ESOP shares (72,000 shares at December 31, 1997
and 96,000 shares at December 31, 1996) (720) (960)
Total stockholders' equity 88,549 74,840
---------- ----------
$ 892,371 $ 746,685
========== ==========
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
Mechanics Savings Bank 26 1997 Annual Report
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATION
For the Year ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
(in thousands except for earnings per share) 1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
INTEREST INCOME:
Interest and fees on loans $43,799 $40,730 $ 43,325
-------- -------- ---------
Interest and dividends on investment securities:
Interest on debt securities 12,403 6,852 2,479
Dividends on equity securities 320 276 377
-------- -------- ---------
12,723 7,128 2,856
Other interest and dividend income 793 1,719 1,359
-------- -------- ---------
Total interest income 57,315 49,577 47,540
-------- -------- ---------
INTEREST EXPENSE:
Interest on deposits:
Savings deposits 3,503 3,922 4,538
Time deposits 20,340 19,022 16,730
-------- -------- ---------
Total interest on deposits 23,843 22,944 21,268
Interest on securities sold under agreements to repurchase 243 - -
Interest on other borrowings 3,967 582 674
-------- -------- ---------
Total interest expense 28,053 23,526 21,942
-------- -------- ---------
Net interest income 29,262 26,051 25,598
Provision for possible loan losses 9,100 6,400 12,850
-------- -------- ---------
Net interest income after provision for possible loan losses 20,162 19,651 12,748
-------- -------- ---------
OTHER INCOME:
Investment brokerage services commissions 2,927 1,136 1,455
Service charges on deposit accounts 2,246 2,287 2,258
Loan servicing and other fees 790 724 806
Income from investment in Real Estate Partnership 579 272 504
Appreciation of cash surrender value life insurance 421 - -
Net gain (loss) on sales of investment securities 209 (78) 362
Other 1,122 975 524
-------- -------- ---------
Total other income 8,294 5,316 5,909
-------- -------- ---------
OTHER EXPENSES:
Salaries, commissions and employee benefits 12,172 9,012 10,001
Occupancy 3,196 3,211 3,087
Data processing 1,083 993 955
Furniture and equipment 953 942 1,064
Legal and accounting 880 709 464
Advertising 835 463 193
Communications 502 491 433
Operation of foreclosed real estate owned 425 600 1,167
FDIC insurance 270 1,351 1,768
Write-downs and net losses on sale
of foreclosed real estate owned 121 3,492 2,261
Write-down of investment in Real Estate Partnership - - 6,697
Write-down of real estate agency subsidiary - - 700
Other 2,751 2,827 2,607
-------- -------- ---------
Total other expenses 23,188 24,091 31,397
-------- -------- ---------
Income (loss) before income taxes 5,268 876 (12,740)
-------- -------- ---------
Income tax expense (benefit):
Current 1,602 (266) 40
Deferred (9,410) - 1,500
-------- -------- ---------
Total income tax expense (benefit) (7,808) (266) 1,540
-------- -------- ---------
Net income (loss) $13,076 $ 1,142 $(14,280)
======== ======== =========
Earnings per share and pro forma earnings (loss) per share:
Basic $2.52 $0.22 $(2.76)
Diluted $2.49 $0.22 $(2.76)
Weighted average and pro forma weighted average shares outstanding:
Basic 5,195 5,170 5,170
Diluted 5,242 5,170 5,170
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
Mechanics Savings Bank 27 1997 Annual Report
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended December 31, 1997, 1996 and 1995
<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, 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 shares - - - - (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) -
1997 net income - - 13,076 - - -
Change in net unrealized
gains (losses) on securities - - - 77 - -
Exercise of stock options - 58 - - - -
Allocated ESOP shares - 258 - - 240 -
--------- ----------- ---------- ---------------- ------------- -----------
Balance at December 31, 1997 $53 $50,927 $ 37,891 $ 398 $ (720) $ -
========= =========== ========== ================ ============= ===========
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements
Mechanics Savings Bank 28 1997 Annual Report
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 13,076 $ 1,142 $ (14,280)
------------ ------------ ------------
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Provision for possible loan losses 9,100 6,400 12,850
Depreciation and amortization 944 989 1,174
Amortization (accretion) of investment security premiums/discounts, net 186 204 (1,364)
Deferred loan costs, net of amortization (681) (331) (635)
Net gain on sale of loans (52) (43) (69)
Loss on retirement of bank premises and equipment - 9 77
(Decrease) increase in deferred tax assets (9,410) - 1,500
Realized losses on available-for-sale securities 92 230 381
Realized gains on available-for-sale securities (301) (152) (618)
Realized gains on held-to-maturity securities - - (125)
Decrease (increase) in interest and dividend receivables 121 (1,004) 177
Income from investment in Real Estate Partnership (579) (272) (504)
Write-down of investment in Real Estate Partnership - - 6,697
(Gain on sale) writedown of real estate agency subsidiary - (7) 700
Write-downs and net losses on sale of foreclosed real estate owned 121 3,492 2,261
Increase in cash surrender value life insurance (16,053) - -
(Increase) decrease in other assets (527) 1,071 756
Increase (decrease) in other liabilities 1,696 (1,130) 1,256
Allocation of Employee Stock Ownership Plan shares 498 337 -
------------ ------------ ------------
Total adjustments (14,845) 9,793 24,514
------------ ------------ ------------
Net cash (used in) provided by operating activities (1,769) 10,935 10,234
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities 41,675 110,125 59,102
Proceeds from sale of held-to-maturity securities - - 7,521
Proceeds from principal payments on available-for-sale securities 37,445 13,435 -
Proceeds from principal payments on held-to-maturity securities 3,982 445 -
Proceeds from maturities of available-for-sale securities 19,513 500 60,850
Proceeds from maturities of held-to-maturity securities 5,820 4,000 7,000
Purchases of available-for-sale securities (103,458) (257,193) (120,428)
Purchases of held-to-maturity securities (41,741) (26,569) -
Purchases of Federal Home Loan Bank stock (2,161) - -
Proceeds from loan sales 7,987 15,215 4,549
Net originations and purchases of loans (97,903) (427) (412)
Decrease in investment in Real Estate Partnership 1,295 919 1,710
Proceeds from sale of real estate agency subsidiary - 424 -
Proceeds from sale of foreclosed real estate owned 2,248 5,565 2,040
Purchases of bank premises and equipment (254) (255) (946)
------------ ------------ ------------
Net cash (used in) provided by investing activities (125,552) (133,816) 20,986
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, money market and savings accounts (11,174) (15,592) (43,089)
Net increase in certificates of deposit 23,695 49,833 42,829
Increase in FHLB borrowings 368,188 - -
Repayments of FHLB borrowings (250,188) - (10,000)
Financing of Employee Stock Ownership Plan - 1,200 -
Repayment of financing of Employee Stock Ownership Plan (240) (240) -
Issuance of common stock 58 49,367 -
------------ ------------ ------------
Net cash provided by (used in) financing activities 130,339 84,568 (10,260)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 3,018 (38,313) 20,960
------------ ------------ ------------
Cash and cash equivalents at beginning of period 30,006 68,319 47,359
------------ ------------ ------------
Cash and cash equivalents at end of period 33,024 $ 30,006 $ 68,319
============ ============ ============
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Mechanics Savings Bank 29 1997 Annual Report
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the years ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------ -------------- --------------
<S> <C> <C> <C>
(in thousands)
Non-cash investing and financing activities
Change in net unrealized gain (loss) on securities available-for-sale $ (36) $ 1,006 $ 566
Change in net unrealized gain (loss) on securities held-to-maturity 74 (432) -
Transfer of loans to foreclosed real estate owned 3,042 3,723 1,849
Transfer of loans to held-for-sale 1,922 87 1,226
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 641 57 725
Income tax refunds received 54 1,330 88
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
Mechanics Savings Bank 30 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES:
Business
Mechanics Savings Bank provides a full range of banking and financial services
to individuals 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 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.
On November 25, 1997, the shareholders of the Bank approved the formation of a
holding company, MECH Financial, Inc. MECH Financial, Inc. will provide
additional corporate structuring opportunities and powers to respond to changing
and expanding needs of the Bank's customers and to the competitive conditions in
the financial services industry. The Board of Directors believes the formation
of MECH Financial, Inc. will enhance the Bank's competitive position and result
in greater long-term shareholder value. The new structure became effective
January 1, 1998, as approved by the appropriate regulatory agencies. Shares of
common stock of Mechanics Savings Bank were automatically converted into shares
of MECH Financial, Inc. on a one-for-one, tax-free exchange basis on that date.
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 (85%) 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, and its wholly-owned subsidiaries; (the "Bank"), MECH Corporation, MECH
TWO Corporation, MECH THREE Corporation, Eighty Pearl Street Corp., Alliance
Realty, and Mechanics Investment Services, Inc. ("MIS"). MIS was formed during
1996 to enable the Bank to serve its customers with a wholly-owned fully
disclosed broker/dealer. On July 2, 1997, MIS became a licensed broker/dealer
and registered investment advisor. 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" (OSFAS 115O). 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 stockholdersO 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 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. Premiums are amortized and discounts are accreted into interest income
using the level yield method.
Mechanics Savings Bank 31 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 mortgages 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 on an aggregate
basis.
Allowance for Possible Loan Losses
The Bank adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" (OSFAS 114O), and Statement
of Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclousres" (OSFAS 118O),
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
other 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 other
assets especially mentioned ("OAEM") 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.
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
Mechanics Savings Bank 32 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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 statement did not have a material effect on the Bank's
financial condition or results of operations.
Effective January 1, 1997, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Serving of
Financial Assets and Extinguishment of Liabiliites" (SFAS 125). SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishing of liabilities occurring after December 31,
1996, on a prospective basis. The adoption of this standard did not have a
material effect on the Bank's financial condition or its 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.
Earnings Per Share
Effective December 31, 1997, the Bank adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" (SFAS 128). SFAS
128 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 was effective for financial statements issued for periods ending
after December 15, 1997 and has been applied for all periods presented.
Mechanics Savings Bank 33 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Diluted 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 on June 25, 1996 (the completion of the Conversion),
February 18, 1997 and August 19, 1997. For EPS purposes, the common stock has
been assumed to be outstanding for all periods presented. Unallocated shares
held for the Employee Stock Option Plan ("ESOP") are not considered outstanding
until such shares are committed to be allocated to the ESOP.
For the year ended December 31, 1997, the actual stock option exercise prices
were used in the earnings per share calculation. 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 year ending
December 1995, 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" (OSFAS 123O). 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
(OAPB 25O), 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 on June 25, 1996 was not determined
until the April 23, 1997 stockholders' meeting, the Bank could not determine the
fair value estimate of these shares and the subsequent pro forma effect on net
income at December 31, 1996. Therefore, the earnings per share for the year
ended December 31, 1996 under SFAS 123 was the same as that disclosed in the
consolidated financial statements. The fair value estimate of these shares and
the subsequent pro forma effect on net income and EPS for the year ended
December 31, 1997 are contained herein.
Cash Equivalents
Cash equivalents include non-interest bearing amounts due from banks and short-
term investments with original maturities of 90 days or less.
Reclassifications
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform with the current year's presentation. These reclassifications had no
effect on earnings in 1996 or 1995. 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 by the Federal Reserve Bank to maintain reserves against
its respective transaction accounts and non-personal time deposits. At December
31, 1997, the Bank was required to have cash and liquid assets of approximately
$6,304 to meet these requirements.
As a broker/dealer, MIS is required to maintain a minimum amount of net capital
as defined by the National Association of Securities Dealers ("NASD"). MIS can
maintain its capital requirements in the form of cash or marketable securities.
At December 31,1997, MIS held $126 at a non-affiliated financial institution to
meet this requirement.
3. SHORT-TERM INVESTMENTS:
Short-term investments consisted of:
<TABLE>
<CAPTION>
- ------------------------------------------------
December 31,
------------------
1997 1996
------- --------
<S> <C> <C>
Federal funds sold $10,140 $ 465
======= ========
- ------------------------------------------------
</TABLE>
Mechanics Savings Bank 34 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. INVESTMENT SECURITIES:
The amortized cost amounts and market values of investment securities as of
December 31, 1997 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) $ 2,996 $ 1 $ - $ 2,997
Debt securities issued by foreign governments
(due after one through five years) 350 - - 350
Corporate debt securities
(due in one year through five years) 999 3 - 1,002
Mortgage-backed securities (due in one year or less) 1,788 14 - 1,802
Mortgage-backed securities (due after one year through
five years) 8,267 29 - 8,296
Mortgage-backed securities (due after five years through
ten years) 21,304 297 - 21,601
Mortgage-backed securities (due after ten years) 94,788 705 7 95,486
Marketable equity securities 3 20 - 23
Mutual funds 20,662 20 39 20,643
--------- -------- -------- ---------
$ 151,157 $ 1,089 $ 46 $ 152,200
========= ======== ======== =========
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) $ 3,000 $ 3 $ - $ 3,003
United States Government
obligations (due after five years through ten years) 2,000 4 - 2,004
Mortgage-backed securities (due after ten years) 70,199 989 9 71,179
--------- --------- --------- ---------
$ 75,199 $ 996 $ 9 $ 76,186
========= ========= ========= =========
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
Mechanics Savings Bank 35 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
========= ======== ======== =========
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>
Expected maturities of certain available-for-sale and held-to-maturity
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, the majority of which are 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, 1997 or 1996.
Proceeds from sales of mortgage-backed securities classified as available-for-
sale in 1997 were $34,675, including gross realized gains of $301 and gross
realized losses of $92. During 1996, proceeds from sales of mortgage-backed
securities classified as available-for-sale were $33,819, including gross
realized gains of $91 and gross realized losses of $230. There were no other
sales of debt securities in 1997 or 1996. During 1996, proceeds from the sale of
available-for-sale equity securities totaled $430,000, including gross realized
gains of $61,000. During 1995 there were no sales of mortgage-backed securities.
At December 31, 1997, investment securities with a carrying amount of $3,688
were pledged as collateral for Treasury Tax and Loan accounts and public
deposits and $890 were pledged as collateral for borrowings.
Mechanics Savings Bank 36 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS:
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
DECEMBER 31,
------------------------
1997 1996
--------- ---------
<S> <C> <C>
Real estate mortgages:
One- to four-family $ 396,390 $ 341,372
Multi-family 13,497 14,187
Commercial 99,252 95,923
Construction and land development 3,602 6,173
Commercial and industrial 33,699 26,072
Home equity lines of credit 3,003 2,302
Other consumer loans 34,620 15,818
--------- ---------
Total loans, gross 584,063 501,847
Deferred loan origination costs, net 1,080 427
Allowance for possible loan losses (14,031) (7,983)
--------- ---------
Total loans, net $ 571,112 $ 494,291
========= =========
- --------------------------------------------------------------------------
</TABLE>
Changes in the allowance for possible loan losses were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $ 7,983 $ 11,597 $ 7,108
Provision for possible loan losses 9,100 6,400 12,850
Loan charge-offs (4,012) (10,444) (9,105)
Loan recoveries 960 430 744
-------- -------- --------
Balance at end of year $ 14,031 $ 7,983 $ 11,597
======== ======== ========
- --------------------------------------------------------------------------
</TABLE>
Mechanics Savings Bank 37 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997
Commercial loans and mortgages $ 183 $ 927 $ 1,110
Residential mortgages and other
loans measured collectively - 1,720 1,720
----------------- ---------------- --------------
Total impaired loans $ 183 $ 2,647 $ 2,830
================= ================ ==============
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
================= ================ ==============
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Impaired loans with no valuation allowance because the loans' fair value exceeds
their carrying value totaled $2,518 at December 31, 1997 and $6,580 at December
31, 1996. Impaired loans with a corresponding valuation allowance totaled $312
at December 31, 1997 and $1,276 at December 31, 1996. The valuation allowance
allocated to impaired loans was $53 at December 31, 1997 and $360 at December
31, 1996.
The average recorded investment in impaired loans was approximately $5,983 and
$11,405 for the years ended December 31, 1997 and 1996, respectively. During
1997, the Bank recognized $14 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 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.
As part of the Bank's loan workout efforts, the Bank periodically entered into
troubled debt restructurings. 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 $1,160,
$4,651 and $14,247 at December 31, 1997, 1996 and 1995, respectively. As of
December 31, 1997, 100% 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>
- -----------------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income in accordance with original terms $ 107 $ 373 $ 1,085
Income recognized 107 370 1,059
-------- -------- --------
Reduction in interest income $ - $ 3 $ 26
======== ======== ========
- -----------------------------------------------------------------------------------------
</TABLE>
There were no outstanding commitments to lend additional funds to any debtor who
is a party to a restructuring as of December 31, 1997.
Mechanics Savings Bank 38 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NON-PERFORMING ASSETS:
The components of non-performing assets were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
December 31,
---------------------------------------------------
1997 1996
-------------- ----------------
<S> <C> <C>
Non-accrual loans $2,830 $7,856
Accruing loans past due 90 days or more - -
-------------- ----------------
Total non-performing loans 2,830 7,856
Foreclosed real estate owned 1,204 679
-------------- ----------------
Total non-performing assets $4,034 $8,535
============== ================
- -----------------------------------------------------------------------------------------------------
</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.
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 of 1996.
The reductions in interest income associated with non-accrual loans were as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Years ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Income in accordance with original terms $ 217 $ 517 $1,229
Income recognized 14 8 -
---------- ---------- ----------
Reduction in interest income $ 203 $ 509 $1,229
========== ========== ==========
- ----------------------------------------------------------------------------------------
</TABLE>
The components of foreclosed real estate owned expenses (including subsidiaries
holding foreclosed properties) were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Years ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Expenses of holding and operating
foreclosed real estate owned $ 425 $ 600 $1,167
Net losses on sale of foreclosed real estate owned 67 48 238
Write-downs 54 3,444 2,023
---------- ---------- ----------
Total foreclosed real estate owned expense $ 546 $4,092 $3,428
========== ========== ==========
- ----------------------------------------------------------------------------------------
</TABLE>
Changes in the foreclosed real estate owned valuation reserve were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Years ended December 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Valuation reserve at beginning of year $ - $ - $ -
Write-downs and net losses on sale 121 3,492 2,261
Provision 121 3,492 2,261
---------- ---------- ----------
Valuation reserve at end of year $ - $ - $ -
========== ========== ==========
- ----------------------------------------------------------------------------------------
</TABLE>
Mechanics Savings Bank 39 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1997 December 31, 1996
--------------------------------- ----------------------------------
Accumulated Accumulated
Depreciation and Depreciation and
Cost Amortization Cost Amortization
------------ ------------------ ------------ -------------------
<S> <C> <C> <C> <C>
Bank premises and land $ 1,976 $1,172 $ 1,974 $ 1,101
Leasehold improvements 5,272 2,900 5,137 2,629
Furniture and equipment 5,929 4,282 5,827 3,695
---------- ---------- ---------- ---------
$ 13,177 $8,354 $12,938 $ 7,425
========== ========== ========== ==========
- ----------------------------------------------------------------------------------------------------------------------
</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. During 1997 and 1996, the Bank received
dividend distributions from the Partnership of $1,375 and $1,000, respectively.
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.
8. DEPOSITS:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
December 31,
-------------------------------------------------
1997 1996
-------------- -----------
<S> <C> <C>
Savings:
Regular $107,146 $115,208
Other 161 141
Certificates of deposit 398,433 374,738
Money Market:
Checking 36,361 37,312
Savings 53,609 59,511
---------- ---------
Total savings and time deposits 595,710 586,910
Demand deposits 71,854 68,133
---------- ---------
Total $667,564 $655,043
========== =========
- ------------------------------------------------------------------------------------------------
</TABLE>
The Bank paid interest on deposits, escrow accounts, securities sold under
agreements to repurchase and advances from the Federal Home Loan Bank of Boston
("FHLB") of $27,471, $23,525 and $21,986 for the years ended December 31, 1997,
1996 and 1995, respectively.
Mechanics Savings Bank 40 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. BORROWINGS:
Descriptions 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, 1997 December 31, 1996
- ---------------- ------------- ----------------- -----------------
<S> <C> <C> <C>
October 6, 1997 4.72 % $ - $ 11,000
January 6, 1998 5.59 16,000 -
March 1, 1999 6.35 5,000 -
July 1, 1999 6.15 13,000 -
August 25, 1999 6.00 7,000 -
October 20, 2000 6.21 10,000 -
October 20, 2000 6.24 20,000 -
November 30, 2000 6.61 8,000 -
December 15, 2001 5.95 10,000 -
November 7, 2002 5.71 30,000 -
November 3, 2004 5.80 % 10,000 -
----------------- -----------------
$ 129,000 $ 11,000
================= =================
- --------------------------------------------------------------------------------
</TABLE>
The Bank has access to a pre-approved line of credit up to approximately $15,000
and the capacity to borrow 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 ESOP borrowed $1,200 to purchase shares of the Bank's stock for
the ESOP in conjunction with the Conversion. This borrowing had an outstanding
balance of $720 at December 31, 1997 and $960 at December 31, 1996. 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.
Mechanics Savings Bank 24 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INVESTMENT BROKERAGE SERVICES:
The Bank offers investment products and services to its customers through its
wholly-owned subsidiary, MIS. 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 the subsidiary, MIS, with the
intent of becoming its own broker/dealer in 1997. On July 2, 1997, MIS became
licensed as a broker/dealer and registered investment advisor. MIS is regulated
by the NASD and is a member of the Security Investors Protection Corporation
(:"SIPC"). MIS offers a wide variety of investments products, including mutual
funds, stock and bonds as well as investment advisory services. MIS also offers
fixed and variable annuity products and is licensed as an insurance agency in
the State of Connecticut. MIS earns its commissions by selling investment
products and by providing investment advisory services to its customers.
Commissions, salaries and benefits expense related to this service approximated
$1,994, $1,113, and $907 in 1997, 1996 and 1995, respectively.
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, 1997, 1996 and 1995 was $480, $110 and $396, 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 25% in 1997, -0-% in 1996 and 25% in
1995.
The Bank's contribution to the 401(k) Plan was $73, $-0-, and $58 for the years
ended December 31, 1997, 1996 and 1995, 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.
On December 14, 1987 the Bank adopted a non-qualified Long Term Deferred
Incentive Plan ("LTDIP") for its executive officers. The LTDIP, as amended,
awards a bonus to executive officers based upon a formula approved by the Board
of Directors. Amounts are awarded after the end of each fiscal year. Awards
under the LTDIP recorded as compensation expense were $151, $78, and $-0- in
1997, 1996, and 1995, respectively. Such awards vest 20% per additional year of
service subsequent to the year with respect to which the award is granted. If a
participant dies while serving as an executive of the Bank, the amount payable
to the participant's beneficiary is the amount equal to the participant's
projected retirement benefit (as defined in the LTDIP) if the Bank has acquired
and continues to maintain a corporate life insurance policy on the life of the
participant at the time of death (see below).
Effective July 1, 1997, the Bank adopted an Outside Director Deferred
Compensation Plan ("DDCP"). The DDCP allows a director to defer the receipt of
all or a specified amount or percentage of director and retainer fees, and have
earnings accrue on such amounts at the prime rate or at a rate equivalent to the
appreciation in the Bank's stock price over the period of time for which the
fees are in the DDCP. All amounts in the DDCP are fully vested and
nonforfeitable at all times. If a participant dies while serving as an outside
director of the Bank, the amount payable to the participant's beneficiary is the
amount equal to the participant's projected retirement benefit (as defined in
the DDCP) if the Bank has acquired and continues to maintain a corporate life
insurance policy on the life of the participant at the time of death (see
below).
During 1997, the Bank invested $15.7 million in universal cash surrender value
life insurance. Twenty polices were acquired on the lives of seven executive
officers and six directors and are designed to recover the costs of the Bank's
LTDIP and DDCP. The policy death benefit also indemnifies the Bank against the
death benefit provision of these benefit plans. The policies were paid with a
single premium and have a combined death benefit of $41.3 million. Policy cash
values earn interest at a current rate of 6% and policy mortality costs are
charged against the cash value monthly. There are no loads or surrender charges
associated with the policies.
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
Mechanics Savings Bank 42 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
in the ESOP over five years. At both December 31, 1997 and December 31, 1996,
24,000 shares were allocated to employees in connection with the ESOP. The Bank
recognized expense of $498 and $337 during 1997 and 1996, respectively, relating
to the ESOP. The expenses were calculated based on the average closing stock
price for the years ended December 31, 1997 and December 31, 1996.
During 1996, the Board of Directors of the Bank adopted the 1996 Officer Stock
Option Plan (the "Officer Option PlanO) and a separate 1996 Director Stock
Option Plan (the "Director Option PlanO) which is similar in many respects to
the Officer Option Plan. Both plans were approved by the stockholders of the
Bank at the first annual meeting of stockholders which was held on April 23,
1997. At December 31,1996, no options could be exercised since it was 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. The options are exercisable over a ten-
year period, and generally vest over four to five years.
Had compensation cost for the Bank's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Bank's net income and basic and diluted EPS for
the year ended December 31, 1997 would have been reduced to the pro forma
amounts indicated below.
<TABLE>
<CAPTION>
- --------------------------------------------------
1997
-----------------------------------
Net Basic Diluted
Income EPS EPS
-------- ------- --------
<S> <C> <C> <C>
As reported $ 13,076 $ 2.52 $ 2.49
Pro forma $ 12,761 $ 2.52 $ 2.43
- --------------------------------------------------
</TABLE>
At December 31, 1996, the Bank could not determine the fair value estimate of
these shares and the subsequent pro forma effect on net income since the grant
price of the options issued was not determined until the April 23, 1997
stockholders' meeting. Therefore, net income and EPS for the year ended December
31, 1996 under SFAS 123 were the same as that disclosed in the consolidated
financial statements.
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: an expected option term of 5 years, expected volatility of 25%,
dividend yield of 2.5% and a risk-free interest rate of 6.2% for the year ended
December 31, 1997.
A summary of the status of the Bank's stock option plans as of December 31, 1997
and 1996 and the changes during the year ending on those dates is presented
below.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
FOR THE YEAR AVERAGE FOR THE YEAR AVERAGE
ENDED PRICE PER ENDED PRICE PER
1997 SHARE 1996 SHARE
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
Balance at January 1, 265,000 $ 17.50 - $ -
Granted 81,666 17.89 265,000 17.50
Exercised (3,266) 17.50 - -
Canceled (7,734) 17.50 - -
Balance at year end 335,666 $ 17.59 265,000 $17.50
Options exercisable
at year end 132,134 $ 17.55 - $ -
Weighted average fair -
value per option granted $ 4.68
- -------------------------------------------------------------------------------
</TABLE>
As of December 31, 1997, there were 335,666 options outstanding. These options
ranged in exercise price between $17.50 and $22.25 and had a weighted average
remaining contractual life of 8.65 years. An additional 190,068 and 264,000
shares were available for future grants at December 31, 1997 and December 31,
1996, respectively.
Mechanics Savings Bank 43 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Earnings Per Share:
The following is a reconciliation of the denominators of the basic and diluted
EPS computations.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Basic EPS 5,195,224 5,170,066 5,170,000
Effect of dilutive stock options 47,197 - -
--------- --------- ---------
Diluted EPS 5,242,421 5,170,066 5,170,000
========= ========= =========
- --------------------------------------------------------------------------------
</TABLE>
There were no adjustments to net income (loss) and no antidilutive stock options
for the years ended December 31, 1997, 1996 and 1995.
13. LEASES:
Rental expense for operating leases amounted to $1,710, $1,673 and $1,647 in
1997, 1996 and 1995, 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, 1997:
<TABLE>
- --------------------------------------------------------------------------------
<S> <C>
1998 $ 1,670
1999 1,743
2000 1,735
2001 1,699
2002 1,673
Thereafter 1,463
----------
$ 9,983
==========
- --------------------------------------------------------------------------------
</TABLE>
Renewal options are available for periods ranging from one to twenty years.
14. Income Taxes:
The components of income tax expense (benefit) for the years ended December 31,
1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $ 1,437 $ (316) $ -
State 165 50 40
-------- ------- --------
Total current 1,602 (266) 40
-------- ------- --------
Deferred:
Federal 919 175 (4,374)
State (667) 317 136
Valuation allowance (9,662) (492) 5,738
-------- ------- --------
Total deferred (9,410) - 1,500
-------- ------- --------
$ (7,808) $ (266) $ 1,540
======== ======= ========
- --------------------------------------------------------------------------------
</TABLE>
Mechanics Savings Bank 44 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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>
- ----------------------------------------------------------------------------------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Income tax expense (benefit)
at statutory rate of 34% $ 1,791 $ 298 $(4,331)
Increase (decrease) resulting from:
Connecticut corporation tax, net of federal
tax benefit (331) 33 40
Dividends received deduction (4) (4) (20)
Change in deferred tax valuation allowance (9,662) (492) 5,738
Amendment of prior years' tax returns 501 - -
Other items, net (103) (101) 113
-------- ------ -------
Income tax expense (benefit) $ (7,808) $ (266) $ 1,540
======== ====== =======
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The significant components of the BankOs net deferred tax assets (tax effected)
at December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
FEDERAL STATE FEDERAL STATE
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Deferred tax assets:
Allowance for possible loan losses $ 4,852 $ 1,281 $ 2,714 $ 838
Net operating loss carryforwards 1,493 1,676 5,158 1,502
Alternative minimum tax credits 1,256 - 570 -
Deferred compensation 359 95 129 40
Charitable contributions - - 123 38
Investments in real estate 105 28 143 44
Securities mark to market 233 62 340 105
Accrued and other items 176 45 157 49
------- ------- ------- -------
Total deferred tax assets 8,474 3,187 9,334 2,616
------- ------- ------- -------
Deferred tax liabilities:
State taxes 994 - 768 -
Securities mark to market 189 99 - -
Depreciation 57 15 345 106
Bad debt recapture 426 112 532 164
Deferred mortgage fees 367 97 147 45
Other 145 38 138 43
------- ------- ------- -------
Total deferred tax liabilities 2,178 361 1,930 358
------- ------- ------- -------
Net deferred tax assets before valuation allowance 6,296 2,826 7,404 2,258
Valuation allowance - - 7,404 2,258
------- ------- ------- -------
Net deferred tax assets $ 6,296 $ 2,826 $ - $ -
======= ======= ======= =======
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
The Bank only recognizes a deferred tax asset when, based upon available
evidence, realization is more likely than not. Accordingly, at December 31, 1997
the Bank has recorded no valuation allowance against its deferred tax assets
based on sufficient expected taxable income in future years.
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
Mechanics Savings Bank 45 1997 Annual Report
<PAGE>
Notes to Consolidated Financial Statements
offset the impact of improved earnings and lower non-performing assets in the
last six months of 1996. In the second quarter of 1997, the Bank recorded a
deferred tax benefit of $10.33 million primarily attributable to the 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 1998 that indicated continued profitability, the Bank determined that it was
more likely than not that it would realize its net deferred tax assets. The Bank
reviews the net deferred tax asset and its valuation allowance on a quarterly
basis.
The allocation of deferred tax expense (benefit) involving items charged to
current year income and items charged directly to capital for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
1997 1996
---------------------- -------------------
FEDERAL STATE FEDERAL STATE
------------ --------- --------- ---------
<S> <C> <C> <C> <C>
Deferred tax expense allocated to capital $ 189 $ 99 $ - $ -
Deferred tax benefit allocated to income (6,485) (2,925) - -
-------- -------- ----- ------
Total deferred tax benefit $ (6,296) $ (2,826) $ - $ -
======== ======== ===== ======
- ------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to the Small Business Job Protection Act of 1996, the Bank has changed
its method of accounting with respect to its tax bad debt reserves. The change
resulted in taxable income of approximately $1,880 which will be recognized
ratably over a six year period. A deferred tax liability has been established
for the unrecognized portion.
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 of
Federal Generated Expiration State Generated Expiration
- ------------ ------------ --------------- ------------ ------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 4,630 1996 2011 $ 13,297 1995 2000
============
5,357 1996 2001
-----------
$ 18,654
===========
- ---------------------------------------------- ----------------------------------------------
</TABLE>
The net operating loss carryforwards reflect the utilization of approximately
$10,540 and $10,103 of federal and state net operating losses, respectively, for
the year ended December 31, 1997. State net operating loss carryforwards were
increased by approximately $16,558 due to amendment of prior year income tax
returns. The amendments had no impact on federal net operating loss
carryforwards.
Mechanics Savings Bank 46 1997 Annual Rock
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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
-----------------------
1997 1996
---------- -----------
<S> <C> <C>
Loan commitments:
Mortgage and equity loan commitments $11,733 $17,586
Unadvanced portion of construction loans 1,284 546
Unadvanced portion of:
Commercial lines of credit 17,483 15,508
Home equity lines of credit 3,754 2,196
Overdraft protection 325 326
Standby letters of credit 742 665
---------- -----------
$35,321 $36,827
========== ===========
- -------------------------------------------------------------------------------------
</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 counter party. 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, 1997 and 1996, the Bank had $914 and -$0- 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, results of operations or cash flows.
16. RECENT ACCOUNTING PRONOUNCEMENTS:
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 but specific determination has
not yet been made as to how this will be implemented.
Mechanics Savings Bank 51 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. 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 Tier 1 capital (as defined) to average assets (as defined) and total
and Tier 1 capital (as defined) to risk-weighted assets (as defined). As of
December 31, 1997, the Bank meets all capital adequacy requirements to which it
is subject.
At December 31, 1997, the Bank 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" at December 31, 1996, the
FDIC, through prompt corrective action provisions, had the ability to, and did
reduce the Bank's capital category by one level. No such action was taken in
1997.
The Bank's capital position is outlined below.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
------------------- -------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
-------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997
Tier one leverage $84,027 9.74% (greater than or equal to) $34,512 (greater than or equal to) 4.00%
Tier one risk-based $84,027 16.49% (greater than or equal to) $20,381 (greater than or equal to) 4.00%
Total risk-based $90,491 17.76% (greater than or equal to) $40,762 (greater than or equal to) 8.00%
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%
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
-------------------------------------------------------
Amount Ratio
---------- ---------
<S> <C> <C> <C> <C>
As of December 31, 1997
Tier one leverage (greater than or equal to) $43,140 (greater than or equal to) 5.00%
Tier one risk-based (greater than or equal to) $25,477 (greater than or equal to) 5.00%
Total risk-based (greater than or equal to) $50,953 (greater than or equal to) 10.00%
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%
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
On December 27, 1996, the FDIC removed the Order and the Bank was operating
under a Memorandum of Understanding ("MOU") as of December 31, 1996. On
September 30, 1997, the FDIC and the State Department of Banking terminated the
MOU. Therefore, at December 31, 1997, the Bank is not operating under any
regulatory enforcement action.
The Federal Deposit Insurance Corporation Insurance Act ("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.
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
Mechanics Savings Bank 48 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $18,884 at December 31, 1997 and $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.
18. 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; accordingly, the carrying
amounts are reasonable approximations of fair values.
AVAILABLE-FOR-SALE SECURITIES
Available-for-sale securities are carried at market value. Such values are
generally based on quoted market prices.
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.
Mechanics Savings Bank 49 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
CASH SURRENDER VALUE LIFE INSURANCE
Cash surrender value life insurance is carried at market value. Such value is
calculated as the initial premium plus appreciation, less mortality costs.
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 counter-parties or on the
estimated cost to terminate them or to otherwise settle with the counter-
parties.
The estimated fair values of the Bank's financial instruments at December 31,
were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
1997 1996
----------------------- ----------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
---------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 22,884 $ 22,884 $ 29,541 $ 29,541
Short-term investments 10,140 10,140 465 465
Available-for-sale securities 152,200 152,200 147,356 147,356
Held-to-maturity securities 75,199 76,186 43,218 43,781
Federal Home Loan Bank stock 6,450 6,450 4,289 4,289
Loans, net 571,112 596,378 494,291 501,040
Loans held-for-sale 1,922 1,922 87 87
Accrued interest receivable 4,347 4,347 4,468 4,468
Cash surrender value life insurance 16,053 16,053 - -
Financial Liabilities:
Deposits 667,564 653,311 655,043 642,800
Borrowings 129,720 114,175 11,960 11,476
Accrued interest payable 673 673 92 92
Other Unrecognized Financial Instruments
Commitments to extend credit and standby letters of credit - (117) - (175)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
Mechanics Savings Bank 50 1997 Annual Report
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
19. SELECTED QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED):
The following table presents quarterly financial information of the Bank for
1997 and 1996.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
1997 1997 1997 1997 1996 1996 1996 1996
-------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $15,064 $14,507 $ 14,223 $13,521 $13,158 $12,557 $12,036 $11,826
Interest expense 7,797 7,194 6,826 6,236 6,081 5,779 5,845 5,821
-------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Net interest income 7,267 7,313 7,397 7,285 7,077 6,778 6,191 6,005
Provision for possible
loan losses 300 600 6,500 1,700 645 655 4,925 175
-------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Net interest income after
provision for possible
loan losses 6,967 6,713 897 5,585 6,432 6,123 1,266 5,830
Other income 1,926 1,953 1,973 2,442 1,344 1,358 1,122 1,492
Write-downs and net losses
(gains) on sale
of foreclosed real
estate owned 1 - 70 50 (3) 95 2,825 575
Other expenses 5,683 5,565 6,004 5,815 5,211 4,826 5,175 5,387
-------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Income (loss) before
income taxes 3,209 3,101 (3,204) 2,162 2,568 2,560 (5,612) 1,360
Income tax expense (benefit) 1,206 1,191 (10,328) 123 (316) - - 50
-------- ---------- ---------- ---------- ---------- ---------- ----------- ----------
Net income (loss) $ 2,003 $ 1,910 $ 7,124 $ 2,039 $ 2,884 $ 2,560 $(5,612) $ 1,310
======== ========== ========== ========== ========== ========== =========== ==========
Earnings per share and pro forma
earnings (loss) per share
Basic $ 0.39 $ 0.37 $ 1.37 $ 0.39 $ 0.56 $ 0.50 $ (1.09) $ 0.25
Diluted $ 0.38 $ 0.36 $ 1.37 $ 0.39 $ 0.56 $ 0.50 $ (1.09) $ 0.25
Weighted average outstanding
shares and pro forma weighted
average outstanding shares
Basic 5,198 5,195 5,194 5,194 5,170 5,170 5,170 5,170
Diluted 5,305 5,268 5,202 5,198 5,170 5,170 5,170 5,170
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Mechanics Savings Bank 51 1997 Annual Report
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1997 and 1996, 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, 1997. 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
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Mechanics Savings Bank and subsidiaries as of December 31, 1997 and 1996, and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997 in conformity with
generally accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
Hartford, Connecticut
January 20, 1998
Mechanics Savings Bank 52 1997 Annual Report
<PAGE>
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
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 1997,
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, accounting control and
financial reporting matters and to ensure 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
Mechanics Savings Bank 53 1997 Annual Report
<PAGE>
OFFICE LOCATIONS
HARTFORD
Main Office
100 Pearl Street
692-2880
Farmington Avenue
202 Farmington Avenue
692-2810
Park Street
Park Street at Lawrence
692-2812
WEST HARTFORD
Bishops Corner
722 North Main Street
692-2805
Elmwood
1126 New Britain Avenue
692-2809
West Hartford Center
124 LaSalle Road
692-2811
Avon
Nod Brook Mall
692-2923
Bloomfield
Copaco Shopping Center
692-2806
East Hartford
1491 Silver Lane
692-2808
Glastonbury
2450 Main Street
692-2970
Manchester
341 Broad Street
692-2959
New Britain
446 South Main Street
692-2930
Wethersfield
Wethersfield Shopping Center
692-2910
Windsor
156 Broad Street
692-2914
Mechanics Savings Bank 54 1997 Annual Report
<PAGE>
DIRECTORS AND OFFICERS
DIRECTORS
- --------------------------------------------------------------------------------
Richard H. Booth
Executive Vice President
Phoenix Home Life Mutual Insurance Company
David Freeman
Chairman and Chief Executive Officer
Loctite Corporation
Edgar C. Gerwig
Chairman, President and Chief Executive Officer
John J. Meehan
President and Chief Executive Officer
The Hartford Hospital
Kevin A. North
President
Talcott Corporation
Robert G. Rayve
Chairman, President and Chief Executive Officer
The Spencer Turbine Company
Alfred R. Rogers
President and Chief Executive Officer
Urban League of Greater Hartford
Donald K. Wilson, Jr.
Consultant
American Phoenix Corp. of Connecticut
Barbara Brown Zikmund
President
Hartford Seminary
OFFICERS
- --------------------------------------------------------------------------------
Edgar C. Gerwig
Chairman, President and Chief Executive Officer
Thomas M. Wood
Executive Vice President and 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
Brian A. Orenstein
Senior Vice President and Controller
Gary J. Roman
Senior Vice President
Lael K. Noel
Corporate Secretary
Vice Presidents
Donald L. Clark
Luis M. Ferreira
Charles R. Glendon
Theodore R. Goodman
Brent B. Gottier
Janice H. Kelley
Marsha L. Keppler
Mary-Lynn Kinney
Teresa E. Knox
Mark A. Kucia
Mark P. Labbe
Dean Marchessault
Mary G. Murphy
Judith I. Nokes
Ralph K. Ovalle
Kathleen P. Sullivan
Padma Vatti
William J. Wallace
Gregory A. White
N. Robert Young
Steven J. Zarrella
Assistant Vice Presidents
Perry F. DePaolo
William P. Dunn
Carolyn Lee Forst
Barbara C. Giggie
David B. Gregoire
Harold L. Harper
Edward J. Hazuka
Peter K. Heger, Jr.
Lauren D. Kilpatrick
William M. Leonard
Luis J. Marrero
Santina T. Pace
Frank W. Salamon
Scott A. Silvay
Patricia R. Taylor
Frank J. Tycz
Assistant Treasurers
Mary A. Ames
Dani S. Ayotte
Alan G. Baker
John W. Baker
Wayne I. Benjamin
J. Richard Bradshaw
Phyllis Buccheri
Theresa M. Corkum
David C. Donaldson, Jr.
Anabela Gomes
Robert J. Halldin
Donald J. Heath
Daniel M. Lacy
Maria J. Laureano
Dennis B. Mulry
Ricardo F. Punzalan
Janina Mroz Rocheleau
Susan C. Rusk
Nicholas F. Russillo
Anthony G. Russo
Mary M. Shackelford
Georgeta I. Turculet
- --------------------------------------------------------------------------------
Mechanics Savings Bank 55 1997 Annual Report
<PAGE>
SHAREHOLDER INFORMATION
ANNUAL MEETING
The Annual Meeting of Shareholders will be held on Wednesday, April 29, 1998 at
The Hartford Club, 46 Prospect Street, Hartford, CT. Holders of common stock as
of March 4, 1998 will be eligible to vote.
CORPORATE OFFICES
Mechanics Savings Bank
100 Pearl Street
Hartford, CT 06103
(860)293-4000
Web site: www.mechanicsbank.com
TRANSFER AGENT AND REGISTRAR
ChaseMellon Shareholder Services
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
(800)288-9541
TDD: (800)231-5469
Web site: www.chasemellon.com
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand, L.L.P.
100 Pearl Street
Hartford, CT 06103
COMMON STOCK INFORMATION
The common stock began trading on the NASDAQ National Market on June 25, 1996
under the symbol "MECHO". The following table indicates the high and low bid
quotations for the periods indicated.
<TABLE>
<CAPTION>
- ------------------------------------------------
Quarter ended High Low
- ------------- ------ --------
<S> <C> <C>
June 30, 1996 11 7/8 11
September 30, 1996 15 10 13/16
December 31, 1996 16 5/8 14 7/8
March 31, 1997 19 1/8 15 3/8
June 30, 1997 19 5/8 16 5/8
September 30, 1997 26 1/4 18 7/8
December 31, 1997 28 5/8 23
- ------------------------------------------------
</TABLE>
As of December 31, 1997, there were approximately 3,800 shareholders of record.
No dividends have been paid to date. The Company plans to consider initiating
cash dividends beginning in 1998. Federal and state law imposes restrictions on
the payment of dividends by banks and bank holding companies generally based on
the history of net profits.
ADDITIONAL INFORMATION
A copy of the December 31, 1997 Annual Report to the Federal Deposit Insurance
Corporation and the Securities and Exchange Commission (Form 10-K) may be
obtained without charge upon written request to:
Mechanics Savings Bank
Investor Relations
100 Pearl Street
Hartford, CT 06103
Mechanics Savings report 56 1997 Annual Report
<PAGE>
[LOGO OF MECHANICS SAVINGS BANK APPEARS HERE]
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 22,884
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 10,140
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 152,200
<INVESTMENTS-CARRYING> 75,199
<INVESTMENTS-MARKET> 76,186
<LOANS> 584,063
<ALLOWANCE> (14,031)
<TOTAL-ASSETS> 892,371
<DEPOSITS> 667,564
<SHORT-TERM> 16,000
<LIABILITIES-OTHER> 6,538
<LONG-TERM> 113,720
0
0
<COMMON> 53
<OTHER-SE> 88,496
<TOTAL-LIABILITIES-AND-EQUITY> 892,371
<INTEREST-LOAN> 43,799
<INTEREST-INVEST> 12,723
<INTEREST-OTHER> 793
<INTEREST-TOTAL> 57,315
<INTEREST-DEPOSIT> 23,843
<INTEREST-EXPENSE> 28,053
<INTEREST-INCOME-NET> 29,262
<LOAN-LOSSES> 9,100
<SECURITIES-GAINS> 209
<EXPENSE-OTHER> 23,188
<INCOME-PRETAX> 5,268
<INCOME-PRE-EXTRAORDINARY> 5,268
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,076
<EPS-PRIMARY> 2.52
<EPS-DILUTED> 2.49
<YIELD-ACTUAL> 7.64
<LOANS-NON> 2,830
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,160
<LOANS-PROBLEM> 17,405
<ALLOWANCE-OPEN> 7,983
<CHARGE-OFFS> 4,012
<RECOVERIES> 960
<ALLOWANCE-CLOSE> 14,031
<ALLOWANCE-DOMESTIC> 6,889
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 7,142
</TABLE>
