<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the quarter ended March 31, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934, for the transition period from ___________ to
__________.
COMMISSION FILE NUMBER 000-23557
MECH FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-1500984
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
100 PEARL STREET
HARTFORD, CONNECTICUT 06103
(Address of principal executive offices) (Zip code)
(860) 293-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(b) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days.
Yes [ X ] No [ ]
Common Stock Par Value $.01 Per Share
5,221,933 Outstanding (as of March 31, 1998)
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Part I. Item 1. Financial Information Page
<S> <C>
A. Consolidated Statements of Condition as of March 31, 1998 and 1
December 31, 1997
B. Consolidated Statements of Operations for the Three Month Periods 2
Ended March 31, 1998 and March 31, 1997
C. Consolidated Statements of Changes in Stockholders' Equity for the Three 3
Month Periods Ended March 31, 1998 and March 31, 1997
D. Consolidated Statements of Cash Flows for the Three Month Periods Ended 4
March 31, 1998 and March 31, 1997
E. Notes to Consolidated Financial Statements 6
Part I. Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information 18
Signatures 19
Exhibit 20
</TABLE>
<PAGE>
MECH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
(dollars in thousands) MARCH 31, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest-bearing deposits and cash $ 21,897 $ 22,884
Short-term investments 19,320 10,140
------------------ -----------------
Cash and cash equivalents 41,217 33,024
Investments:
Available-for-sale, at market value 162,397 152,200
Held-to-maturity (market value at March 31, 1998 - $98,611; 97,757 75,199
at December 31, 1997 - $76,186)
Federal Home Loan Bank stock, at cost 8,687 6,450
Loans, net 581,537 571,112
Loans held-for-sale 2,484 1,922
Bank premises and equipment 4,713 4,823
Investment in Real Estate Partnership 14,110 14,485
Accrued interest receivable 4,721 4,347
Foreclosed real estate owned 1,137 1,204
Cash surrender value life insurance 16,262 16,053
Other assets 10,951 11,552
------------------ -----------------
$ 945,973 $ 892,371
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 685,784 $ 667,564
Borrowings 161,465 129,720
Mortgage escrow 3,473 1,388
Other liabilities 4,505 5,150
------------------ -----------------
Total liabilities 855,227 803,822
------------------ -----------------
Stockholders' Equity:
Preferred stock - par value $.01; 1,000,000 shares - -
authorized, none issued
Common stock - par value $.01; 15,000,000 shares 53 53
authorized; 5,293,933 issued at March 31, 1998 and
5,293,266 issued at December 31, 1997
Additional paid in capital 50,938 50,927
Retained earnings 40,055 37,891
Net unrealized gains on securities 420 398
Less: Unallocated ESOP shares (72,000 shares) (720) (720)
------------------ -----------------
Total stockholders' equity 90,746 88,549
------------------ -----------------
$ 945,973 $ 892,371
================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
1
<PAGE>
MECH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
(in thousands except for earnings per share) FOR THE THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 11,686 $ 10,284
Interest and dividends on investment securities:
Interest on debt securities 3,482 3,104
Dividends on equity securities 145 68
-------------- ------------
3,627 3,172
Other interest income 391 65
-------------- ------------
Total interest income 15,704 13,521
-------------- ------------
Interest expense:
Interest on deposits:
Savings deposits 825 1,024
Time deposits 5,113 4,811
-------------- ------------
Total interest on deposits 5,938 5,835
Interest on securities sold under agreements to repurchase - 146
Interest on other borrowings 2,170 255
-------------- ------------
Total interest expense 8,108 6,236
-------------- ------------
Net interest income 7,596 7,285
Provision for loan losses 300 1,700
-------------- ------------
Net interest income after provision for loan losses 7,296 5,585
-------------- ------------
Other income:
Investment brokerage services commissions 682 1,055
Service charges on deposit accounts 598 552
Loan servicing and other fees 265 187
Appreciation of cash surrender value life insurance 234 -
Income from investment in Real Estate Partnership 179 143
Net gain on sales of loans 25 -
Net gain on sales of investment securities 4 94
Other 404 411
-------------- ------------
Total other income 2,391 2,442
-------------- ------------
Other expenses:
Salaries, commissions and employee benefits 3,199 3,072
Occupancy 783 804
Data processing 277 271
Furniture and equipment 240 244
Advertising 296 187
Legal and accounting 158 220
Communications 134 128
Operation of foreclosed real estate owned 94 144
Write-downs and net losses on sale
of foreclosed real estate owned 60 50
Other 942 745
-------------- ------------
Total other expenses 6,183 5,865
-------------- ------------
Income before income taxes 3,504 2,162
-------------- ------------
Income tax expense 1,340 123
-------------- ------------
Net income $ 2,164 $ 2,039
============== ============
Earnings per share:
Basic $ 0.41 $ 0.39
Diluted $ 0.41 $ 0.39
Weighted average shares outstanding:
Basic 5,222 5,194
Diluted 5,300 5,197
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
2
<PAGE>
MECH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL NET UNREALIZED UNALLOCATED
COMMON PAID IN RETAINED GAINS (LOSSES) ESOP
(in thousands) STOCK CAPITAL EARNINGS ON SECURITIES SHARES
-------- ----------- ---------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 53 $ 50,611 $ 24,815 $ 321 $ (960)
Net income - - 2,039 - -
Change in net unrealized gains (losses) on securities - - - (179) -
--------- ---------- ---------- -------------- -------------
Balance at March 31, 1997 $ 53 $ 50,611 $ 26,854 $ 142 $ (960)
========= ========== ========== ============== =============
Balance at December 31, 1997 $ 53 $ 50,927 $ 37,891 $ 398 $ (720)
Net income - - 2,164 - -
Change in net unrealized gains (losses) on securities - - - 22 -
Exercised stock options - 11 - - -
--------- ---------- ---------- -------------- -------------
Balance at March 31, 1998 $ 53 $50,938 $ 40,055 $ 420 $ (720)
========= ========== ========== ============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
3
<PAGE>
MECH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
(in thousands) MARCH 31, 1998 MARCH 31, 1997
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,164 $ 2,039
---------------- ----------------
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses 300 1,700
Depreciation and amortization 236 234
Amortization of investment security premiums/discounts, net 29 18
Deferred loan costs, net of amortization (172) (125)
Net gain on sale of loans (25) -
Proceeds from loan sales 5,261 299
Originations of loans held for sale (5,798) (297)
Decrease in deferred tax assets 629 -
Realized gains on available-for-sale securities (4) (94)
Increase in interest and dividend receivables (374) (98)
Income from investment in Real Estate Partnership (179) (143)
Write-downs and net losses on sale of foreclosed real estate owned 60 50
Increase in cash surrender value life insurance (209) -
Increase in other assets (19) (963)
Increase in other liabilities 1,440 846
---------------- ----------------
Total adjustments 1,175 1,427
---------------- ----------------
Net cash provided by operating activities 3,339 3,466
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities 15,753 7,257
Proceeds from principal payments on available-for-sale securities 10,696 5,100
Proceeds from principal payments on held-to-maturity securities 10,969 391
Proceeds from maturities of available-for-sale securities 6,552 10,000
Proceeds from maturities of held-to-maturity securities 5,000 -
Purchases of available-for-sale securities (43,253) (49,875)
Purchases of held-to-maturity securities (38,485) -
Purchases of Federal Home Loan Bank stock (2,237) (575)
Net originations and purchases of loans (10,882) (22,368)
Decrease in investment in Real Estate Partnership 554 355
Proceeds from sale of foreclosed real estate owned 337 233
Purchases of bank premises and equipment (126) (12)
---------------- ----------------
Net cash used in investing activities (45,122) (49,494)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, money market and savings
accounts 4,490 (6,896)
Net increase (decrease) in certificates of deposit 13,730 (9,166)
Advances from FHLB 75,068 101,800
Repayments of FHLB borrowings (43,323) (73,800)
Securities sold under agreements to repurchase - 27,183
Issuance of common stock 11 -
---------------- ----------------
Net cash provided by financing activities 49,976 39,121
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 8,193 (6,907)
---------------- ----------------
Cash and cash equivalents at beginning of period 33,024 30,006
---------------- ----------------
Cash and cash equivalents at end of period $ 41,217 $ 23,099
================ ================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
4
<PAGE>
MECH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------ ------------------
(in thousands)
<S> <C> <C>
Non-cash investing and financing activities
Change in net unrealized gain (loss) on securities available-for-sale $ (39) $ (517)
Change in net unrealized gain (loss) on securities held-to-maturity 51 12
Transfer of loans to foreclosed real estate owned 331 398
Supplemental disclosures of cash flow information
Income taxes paid 813 20
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
5
<PAGE>
MECH FINANCIAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
On November 25, 1997, the shareholders of Mechanics Savings Bank (the "Bank")
approved the formation of a holding company, MECH Financial, Inc. (the
"Company"). MECH Financial, Inc. provides 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 holding company 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.
The accompanying unaudited consolidated financial statements include the
accounts of MECH Financial, Inc. and its wholly-owned subsidiary, Mechanics
Savings Bank. Mechanics Savings Bank and its wholly-owned subsidiaries include
Mech Corporation, Mech Two Corporation, Mech Three Corporation, Eighty Pearl
Street Corporation and Mechanics Investment Services, Inc. Mechanics Investment
Services, Inc. ("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.
The condensed consolidated financial statements have been prepared in accordance
with generally accepted accounting principles and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Bank's 1997 Annual Report on
Form 10-K.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Dollars are presented in thousands, except for per share data, in the following
footnotes.
NOTE 2 - INVESTMENTS
The amortized cost and market values as of March 31, 1998 of available-for-sale
securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
U. S. Government and agency securities $ 6,291 $ 2 $ - $ 6,293
Mortgage-backed securities 136,065 916 59 136,922
Debt securities issued by foreign governments 350 - - 350
Corporate debt securities 999 7 - 1,006
Marketable equity securities 2,003 142 - 2,145
Mutual funds 15,684 37 40 15,681
-------------- ------------ -------------- --------------
$ 161,392 $ 1,104 $ 99 $ 162,397
============== ============ ============== ==============
</TABLE>
6
<PAGE>
The amortized cost and market values as of December 31, 1997 of available-for-
sale securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
-------------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
U. S. Government and agency securities $ 2,996 $ 1 $ - $ 2,997
Mortgage-backed securities 126,147 1,045 7 127,185
Debt securities issued by foreign
governments 350 - - 350
Corporate debt securities 999 3 - 1,002
Marketable equity securities 3 20 - 23
Mutual funds 20,662 20 39 20,643
-------------- ------------ ---------- ------------
$ 151,157 $ 1,089 $ 46 $ 152,200
============== ============ ========== ============
</TABLE>
The amortized cost and market values as of March 31, 1998 of held-to-maturity
securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U. S. Government and agency securities $ 8,991 $ - $ 25 $ 8,966
Mortgage-backed securities 88,766 970 91 89,645
------------ ------------ ------------ ------------
$ 97,757 $ 970 $ 116 $ 98,611
============ ============ ============ ============
</TABLE>
The amortized cost and market values as of December 31, 1997 of held-to-maturity
securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
U. S. Government and agency securities $ 5,000 $ 7 $ - $ 5,007
Mortgage-backed securities 70,199 989 9 71,179
------------ ------------ ------------ ------------
$ 75,199 $ 996 $ 9 $ 76,186
============ ============ ============ ============
</TABLE>
NOTE 3 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDING
MARCH 31, MARCH 31,
1998 1997
------------ ------------
<S> <C> <C>
Balance at beginning of year $ 14,031 $ 7,983
Provision for loan losses 300 1,700
Loan charge-offs (802) (786)
Loan recoveries 112 138
------------ ------------
Balance $ 13,641 $ 9,035
============ ============
</TABLE>
7
<PAGE>
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
--------------- -----------------
<S> <C> <C>
Non-accrual loans $ 2,991 $ 2,830
Accruing loans past due more than
90 days - -
--------------- -----------------
Total non-performing loans 2,991 2,830
Foreclosed real estate owned 1,137 1,204
--------------- -----------------
Total non-performing assets $ 4,128 $ 4,034
=============== =================
Non-performing assets as a
percentage of total assets 0.44% 0.45%
=============== =================
Non-performing assets as a
percentage of gross loans and
foreclosed real estate owned 0.69% 0.69%
=============== =================
Allowance for loan losses
as a percentage of
non-performing loans 456.07% 495.80%
=============== =================
</TABLE>
NOTE 5 - BORROWINGS
Advances from the Federal Home Loan Bank of Boston ("FHLB") and the repayment
schedule were as follows:
<TABLE>
<CAPTION>
MATURITY DATE INTEREST RATE MARCH 31, 1998 DECEMBER 31, 1997
- ---------------------- ------------------ ------------------- -----------------------
<S> <C> <C> <C>
January 6, 1998 5.59 % $ - $ 16,000
June 4, 1998 5.56 15,000 -
March 1, 1999 6.35 5,000 5,000
July 1, 1999 6.15 13,000 13,000
August 25, 1999 6.00 7,000 7,000
October 20, 2000 6.21 10,000 10,000
October 20, 2000 6.24 20,000 20,000
November 30, 2000 6.61 - 8,000
February 27, 2001 5.71 7,000 -
December 15, 2001 5.95 10,000 10,000
November 7, 2002 * 5.71 30,000 30,000
February 27, 2003 * 5.19 10,000 -
March 12, 2003 5.78 8,745 -
November 3, 2004 * 5.80 10,000 10,000
January 10, 2008 * 4.99 % 15,000 -
------------------ ----------------------
$ 160,745 $ 129,000
================== ======================
</TABLE>
* callable at dates ranging from January 1999 to April 2003
8
<PAGE>
During the first quarter of 1998, the Bank prepaid the $8,000 FHLB advance
scheduled to mature November 30, 2000 that carried an interest rate of 6.61%
thereby incurring a $192 prepayment penalty. The Bank prepaid this advance in
anticipation of being able to extend its overall maturities of borrowings while
reducing its weighted average interest cost of borrowings. On April 8, 1998, the
Bank accomplished the objectives by taking out a $10,000 advance maturing in
April 2013 carrying an interest rate of 5.49%. This advance is callable in April
2003 and on a quarterly basis thereafter.
The Bank has access to a pre-approved line of credit up to approximately $15,000
and the capacity to borrow in excess of 30% of the Bank's total assets. In
accordance with an agreement with the FHLB, the Bank is required to maintain
qualified collateral, as defined in the FHLB Statement of Credit Policy, free
and clear of liens, pledges and encumbrances as collateral for the advances.
In addition, the Employee Stock Ownership Plan ("ESOP") borrowed $1,200 to
purchase 120,000 shares of the Bank's stock for the ESOP in conjunction with the
Bank's conversion from a Connecticut-chartered mutual savings bank to a
Connecticut-chartered capital stock savings bank, completed on June 25, 1996.
The shares in the ESOP were converted into shares of MECH Financial, Inc. on
January 1, 1998. At March 31, 1998 and December 31, 1997, this borrowing had an
outstanding balance of $720. 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.
NOTE 6 - EARNINGS PER SHARE
Earnings per share is computed based upon the weighted average number of shares
of common stock and common stock equivalents (if dilutive) outstanding during
the periods presented. Common stock equivalents consist of stock options
granted under the 1996 Director and Officer Stock Option Plans. In the earnings
per share calculation, the option exercise price for the options granted was the
market price at the time of the grant.
The weighted average shares outstanding totaled 5,221,585 and 5,194,000 for the
quarters ended March 31, 1998 and 1997, respectively. The effect of dilutive
stock options was 78,327 and 3,482 shares for the quarters ended March 31, 1998
and 1997, respectively.
NOTE 7 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 131 "Disclosures about Segments
of an Enterprise and Related Information" ("SFAS No. 131"). 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. This
statement does not apply to interim financial statements in the initial year of
application. The adoption of SFAS No. 131 is expected to impact the way the
Company reports information about its operating segments but specific
determination has not yet been made as to how this will be implemented.
In February 1998, FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits." This statement revised employers'
disclosure about pension and other post retirement benefits, however, it does
not change the measurement or recognition of those plans. This statement
standardized disclosure requirements to the extent practicable, requires
additional information on changes in the benefits obligations and fair value of
plans assets, and eliminates certain disclosure
9
<PAGE>
requirements of SFAS No. 87 "Employers Accounting for Pensions, SFAS No. 88
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106 "Employers'
Accounting for Post Retirement Benefits Other Than Pensions." This statement
also permits reduced disclosure for nonpublic entities. SFAS No. 132 is
effective for fiscal years beginning after December 31, 1997 and restatement of
disclosures for earlier periods provided for comparative purposes is required
unless the information for comparative purposes is not readily available, in
which case the notes to the financial statements should include all available
information and a description of the information not available. The adoption of
SFAS 132 is expected to impact the disclosures about pension plans for the
Company.
NOTE 8 - COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (such as changes in net unrealized gain (loss) on
securities). Comprehensive income includes net income and any change in net
equity of a business enterprise during a period from non-owner sources that
bypass the income statement. The purpose of reporting comprehensive income is
to report a measure of all changes in equity of an enterprise that result from
recognized transactions and other economic events of the period other than
transactions with owners in their capacity as owners. The Company's one source
of other comprehensive income is the net unrealized gain (loss) on securities.
The components of comprehensive income are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
<S> <C> <C>
Comprehensive income:
Net income $ 2,164 $ 2,039
Net unrealized gains (losses) on securities, net of tax
reclassification adjustment 22 (179)
-------------- --------------
Comprehensive income $ 2,186 $ 1,860
============== ==============
</TABLE>
The following table represents the components and the related tax effects
allocated to other comprehensive income for the first quarter of 1998:
<TABLE>
<CAPTION>
BEFORE TAX NET OF
TAX (EXPENSE) TAX
AMOUNT BENEFIT AMOUNT
------------ ------------- -----------
<S> <C> <C> <C>
Net unrealized gains (losses) on securities $ (34) $ 14 $ (20)
arising during the period
Less: reclassification adjustment for
gain realized in net income 4 (2) 2
Adjustment to tax rate on prior periods'
net unrealized gains on securities - 21 21
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 51 (28) 23
------------ ------------- ----------
Net unrealized gains (losses) on securities $ 13 $ 9 $ 22
============ ============= ==========
</TABLE>
10
<PAGE>
During the first quarter of 1998, the Company adjusted the tax rate used to
determine the tax liability/asset associated with the unrealized gains and
losses on securities.
The following table represents components and the related tax effects allocated
to other comprehensive income for the first quarter of 1997:
<TABLE>
<CAPTION>
BEFORE TAX NET OF
TAX (EXPENSE) TAX
AMOUNT BENEFIT AMOUNT
-------- -------- --------
<S> <C> <C> <C>
Net unrealized gains (losses) on securities $ (423) $ - $ (423)
arising during the period
Less: reclassification adjustment for
gains realized in net income 94 - 94
Reversal of tax effect on prior periods'
net unrealized gains on securities - 326 326
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 12 - 12
-------- -------- --------
Net unrealized gains (losses) on securities $ (505) $ 326 $ (179)
======== ======== ========
</TABLE>
During the first quarter of 1997, the Company reversed the tax expense
associated with its unrealized net gain on securities due to its income tax
position at that time.
NOTE 9 - BRANCH PURCHASES
On March 18, 1998, the Bank announced the purchase of the East Hartford and West
Hartford branches of Chase Manhattan Bank. The transaction is subject to the
approval of state and federal agencies. The purchase will include all retail and
small business deposits totaling $27 million and most loans of the two branches.
This purchase brings to 16 the number of full-service offices Mechanics Savings
Bank has in Central Connecticut. Pending final approval, Mechanics expects to
convert the two Chase Manhattan branches to Mechanics offices within 120 days.
NOTE 10 - SUBSEQUENT EVENTS
On April 21, 1998, the Company declared its first quarterly dividend of $0.15
per share on its common stock. The dividend will be payable on May 15, 1998 to
shareholders of record on May 1, 1998.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
On November 25, 1997, the shareholders of Mechanics Savings Bank (the "Bank")
approved the formation of a holding company, MECH Financial, Inc. (the
"Company"). MECH Financial, Inc. provides 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 holding company 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. On April
21, 1998, the Company declared its first quarterly dividend of $0.15 per share
on its common stock.
The Company reported net income of $2.16 million for the first quarter ended
March 31, 1998 compared to $2.04 million for the same period in 1997. Income
before income taxes was $3.50 million for the first quarter of 1998 representing
a 62.1% increase over the $2.16 million of pretax income for the first quarter
of 1997. The improvement was mainly due to a $1.40 million reduction in the
provision for loan losses.
FINANCIAL CONDITION
Total assets as of March 31, 1998 were $945.97 million representing an increase
of $53.60 million or 6.0% from $892.37 million at December 31, 1997. The
Company's Tier 1 leverage ratio was 9.57% at March 31, 1998 compared to 9.74% at
December 31, 1997. The Company's total risk-based capital ratio was 16.96% at
March 31, 1998 compared to 17.76% at December 31, 1997.
Cash and cash equivalents increased $8.20 million or 24.8% from $33.02 million
at December 31, 1997 to $41.22 million at March 31, 1998. The Company continues
to efficiently manage cash and cash equivalents to balance the need for
liquidity with the need for increased yields.
Investment securities increased $32.75 million or 14.4% from $227.40 million at
December 31, 1997 to $260.15 million at March 31, 1998 primarily due to an
increase in the mortgage-backed securities portfolio of $28.30 million. Funds
available for investment increased mainly due to increased Federal Home Loan
Bank ("FHLB") borrowings and deposits. At March 31, 1998, the Company held
$97.76 million in securities classified as held-to-maturity in accordance with
Statement of Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities".
Due to increased FHLB borrowings, the Company was required to purchase
additional shares of stock totaling $2.24 million from the FHLB during the first
quarter of 1998. The Company believes that these shares provide above average
dividend yields for the risk characteristics of such investments.
Net loans increased $10.43 million or 1.8% from $571.11 million at December 31,
1997 to $581.54 million at March 31, 1998. The majority of the increase came
from a $5.51 million increase in the installment loan portfolio. In addition,
real estate mortgages increased $3.99 million. The allowance for loan losses
totaled $13.64 million at March 31, 1998 compared to $14.03 million at December
31, 1997. Provisions for loan losses during the first quarter ended March 31,
1998 totaled $300,000 and net charge-offs totaled $690,000. The allowance for
loan losses as a percentage of non-performing loans was 495.80% and 456.07% at
December 31, 1997 and March 31, 1998, respectively.
Foreclosed real estate owned decreased slightly from $1.20 million at December
31, 1997 to $1.14 million at March 31, 1998. The Company sold nine properties
totaling $294,000 during the quarter ended March
12
<PAGE>
31, 1998. Write-downs and net losses on sale of foreclosed real estate owned for
the first three months of 1998 totaled $60,000 compared to $50,000 for the same
period in 1997.
Non-performing assets totaled $4.13 million at March 31, 1998 compared to $4.03
million at December 31, 1997. Charge-offs on non-performing loans and write-
downs and net losses on sale of foreclosed real estate owned reduced non-
performing assets by $796,000 and $60,000, respectively. Sales of foreclosed
real estate owned accounted for an additional $294,000 of the reductions. There
were other reductions of non-performing assets of $586,000 due to payoffs,
payments and loans returning to accrual status. These reductions were offset by
$1.83 million in additions to non-performing assets since December 31, 1997.
Non-performing assets as a percentage of total assets was 0.45% at December 31,
1997 and 0.44% at March 31, 1998. Non-performing assets as a percentage of total
loans and foreclosed real estate owned remained steady at 0.69% at December 31,
1997 and at March 31, 1998.
Deposits increased 2.7% from $667.56 million at December 31, 1997 to $685.78
million at March 31, 1998. The increases were mainly in three month and two
year certificates of deposit and in money market business checking.
Borrowings from the FHLB increased $31.75 million from December 31, 1997 to
March 31, 1998. These borrowings were mainly used to fund one- to four-family
real estate mortgages and investments. The Company's $160.75 million of FHLB
advances carry a weighted average rate of 5.79% and have a weighted average
maturity of 3.80 years. In addition, 40% of the FHLB borrowings at March 31,
1998 were callable. During the first quarter of 1998, the Bank prepaid the $8.0
million FHLB advance to mature November 30, 2000 that carried an interest rate
of 6.61% thereby incurring a $192,000 prepayment penalty. The Bank prepaid this
advance in anticipation of being able to extend its overall maturities of
borrowings while reducing its weighted average interest cost of borrowings. On
April 8, 1998, the Bank accomplished the objectives by taking out a $10.0
million advance maturing in April 2013 carrying an interest rate of 5.49%. This
advance is callable April 2003 and on a quarterly basis thereafter.
LIQUIDITY
The Company's liquidity is dependent on dividends provided by the Bank.
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.
The Bank manages its liquidity position to ensure that there is sufficient
funding available at all times to meet both anticipated and unanticipated
deposit withdrawals, new loan originations, securities purchases and other
operating cash outflows. The Bank monitors its liquidity in accordance with
guidelines established under its asset/liability management policy and
applicable regulatory requirements. On a monthly basis, management monitors the
Bank's liquidity position by analyzing the amount of securities available for
repurchase agreements, the Bank's borrowing capacity at the FHLB, the expected
level of cash flows from loans and mortgage-backed securities, the expected
prepayments from loans and mortgage-backed securities, and the Bank's levels of
cash and short-term investments. At March 31, 1998, management believes its
current liquidity level is sufficient to meet normal operating needs.
ASSET/LIABILITY MANAGEMENT
The Company'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 Company's exposure to interest
rate risk is managed strategically through the use of balance sheet simulation.
At March 31, 1998, the Company was slightly asset sensitive.
13
<PAGE>
The Company models its forecasted balance sheet using interest rate ramps,
shocks and a most likely interest rate scenario over a 24 month time horizon. In
accordance with its funds management policy, the Company 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 Company will accept 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 March 31, 1998, the Company was within its policy
guideline, and the Company believes its level of interest rate sensitivity was
appropriate.
CAPITAL RESOURCES
At March 31, 1998, the Company's stockholders' equity totaled $90.75 million
representing a 2.5% increase over the $88.55 million in capital at December 31,
1997. At March 31, 1998, the Company had a Tier 1 leverage capital ratio of
9.57% and a total risk-based capital ratio of 16.96%. The Company's Tier 1
leverage capital ratio was 9.74% and its total risk-based capital ratio was
17.76% at December 31, 1997.
As of December 31, 1997 and March 31, 1998, the Company meets all capital
adequacy requirements to which it is subject and was classified, as of its most
recent notification, as "well capitalized". The Company believes its current
capital is adequate to support operations and anticipated future growth.
RESULTS OF OPERATIONS
FOR THE QUARTER ENDED MARCH 31, 1997 AND 1998
For the quarter ended March 31, 1998, the Company reported net income of $2.16
million or $0.41 per diluted share compared to $2.04 million or $0.39 per
diluted share for the same period in 1997. Income before income taxes was $3.50
million for the first quarter of 1998 representing a 62.1% increase over the
$2.16 million of pretax income for the first quarter of 1997. The improvement
was mainly due to a $1.40 million reduction in the provision for loan losses.
NET INTEREST INCOME
Net interest income totaled $7.60 million for the three months ended March 31,
1998 compared to $7.29 million for the same period in 1997, representing a
$311,000 or 4.3% increase. The net interest margin decreased from 4.17% for the
quarter ended March 31, 1997 to 3.69% for the same period in 1998. Average
interest-bearing liabilities increased $132.17 million while average interest-
earning assets increased $126.01 million. Average borrowing and certificates
of deposit increased $128.00 million and $28.96 million, respectively, from
quarter to quarter. Average net loans and investment securities increased
$74.32 million and $43.31 million, respectively. Average net loans increased
primarily due to a $43.66 million increase in one- to four-family mortgages and
a $20.20 million increase in average consumer loans. Mortgage-backed
securities and mutual funds were the main reasons for the increase in average
investment securities for the quarter. In addition, average other assets were
$24.17 million higher due mainly to increases in the deferred tax asset and the
purchase of cash surrender value life insurance. During the second quarter of
1997, the Bank fully reversed its valuation allowance on its net deferred tax
assets.
14
<PAGE>
The following table sets forth certain information relating to the Company's
average interest-earning assets and interest-bearing liabilities and net
interest income for the quarters ended March 31, 1997 and 1998:
<TABLE>
<CAPTION>
AVERAGE BALANCE INCOME / EXPENSE YIELD
-------------------------------------- --------------------------------- --------------------------------
QUARTERS ENDED MARCH 31, QUARTERS ENDED MARCH 31, QUARTERS ENDED MARCH 31,
(in thousands) 1998 1997 1998 1997 1998 1997
---------------- ---------------- ---------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 578,048 $ 503,730 $ 11,686 $ 10,284 8.20% 8.28%
Investment securities 243,920 200,615 3,846 3,180 6.39 6.43
Short-term investments 12,813 4,422 172 57 5.44 5.23
---------------- ---------------- ---------------- ---------------- ---------------- --------------
Total interest-
earning assets 834,781 708,767 15,704 13,521 7.63 7.74
Other assets 70,284 46,115
---------------- ----------------
Total assets $ 905,065 $ 754,882
================ ================
Money market checking $ 34,917 $ 34,999 105 104 1.22 1.21
Money market savings 53,548 59,557 312 342 2.36 2.33
Savings and other 110,081 117,901 408 578 1.50 1.99
Certificates of deposit 398,535 369,580 5,113 4,811 5.20 5.28
Securities sold under
agreements to repurchase - 10,873 - 146 n/a 5.45
Other borrowings 147,500 19,500 2,170 255 5.97 5.30
---------------- ---------------- ---------------- ---------------- ---------------- --------------
Total interest-bearing
funds 744,581 612,410 8,108 6,236 4.42 4.13
Demand deposits 66,414 63,257
Other liabilities 4,221 3,009
Capital 89,849 76,206
---------------- ----------------
Total liabilities and
capital $ 905,065 $ 754,882
================ ================
Net interest income $ 7,596 $ 7,285
================ ================
Spread on interest-bearing funds 3.21% 3.61%
Net interest margin 3.69% 4.17%
</TABLE>
15
<PAGE>
The following table presents the changes in interest and dividend income and the
changes in interest expense, attributable to changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
QUARTERS ENDED MARCH 31, 1997 VERSUS 1998
CHANGE IN INTEREST DUE TO
----------------------------------------------------------
(in thousands) VOLUME RATE VOL/RATE NET
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
Loans, net $ 1,517 $ (100) $ (15) $ 1,402
Investment securities 686 (17) (3) 666
Short-term investments 108 2 5 115
--------- -------- --------- ---------
Total 2,311 (115) (13) 2,183
--------- -------- --------- ---------
Money market checking - 1 - 1
Money market savings (35) 5 - (30)
Savings and other (38) (141) 9 (170)
Certificates of deposit 377 (69) (6) 302
Securities sold under
agreements to repurchase (146) - - (146)
Other borrowings 1,674 32 209 1,915
--------- -------- --------- ---------
Total 1,832 (172) 212 1,872
--------- -------- --------- ---------
Net change to interest income $ 479 $ 57 $ (225) $ 311
========= ======== ========= =========
</TABLE>
INTEREST INCOME
Interest income increased $2.18 million or 16.2% due primarily to increased
average volumes of net loans and investment securities of $74.32 million and
$43.31 million, respectively. Overall average yields decreased from 7.74% for
the first quarter of 1997 to 7.63% for the same period in 1998. This was
primarily due to a slight decrease in the average yields for net loans and
investment securities.
INTEREST EXPENSE
Interest expense increased $1.87 million or 30.0% from the first quarter of 1997
to the same period in 1998. The increase was mainly due to higher average
balances of borrowings and certificates of deposit. These increases were
partially offset by lower average volumes of the other interest-bearing deposits
and securities purchased under agreements to repurchase. Overall average rates
increased from 4.13% for the first quarter of 1997 to 4.42% for the same period
in 1998. The increase in average rates was mainly due to increased FHLB
borrowings.
PROVISION FOR LOAN LOSSES
The provision for loan losses totaled $300,000 for the three months ended March
31, 1998 compared to $1.70 million for the same period in 1997. The Company's
percentage of allowance for loan losses to non-performing loans was 456.07% at
March 31, 1998 compared to 495.80% at December 31, 1997. The Company's allowance
for loan losses to gross loans was 2.40% at December 31, 1997 compared to 2.29%
at March 31, 1998.
16
<PAGE>
OTHER INCOME
The Company recorded $2.39 million in other income for the three months ended
March 31, 1998 compared to $2.44 million for the same period in 1997. The
following table shows the components of other income for the quarters ended
March 31, 1997 and 1998:
<TABLE>
<CAPTION>
(in thousands) QUARTERS ENDED MARCH 31, $ %
1998 1997 CHANGE CHANGE
------------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Investment brokerage services commissions $ 682 $ 1,055 $ (373) (35.36)%
Service charges on deposit accounts 598 552 46 8.33
Loan servicing and other fees 265 187 78 41.71
Appreciation of cash surrender value life insurance 234 - 234 n/a
Income from investment in Real Estate Partnership 179 143 36 25.17
Net gain on sales of loans 25 - 25 n/a
Net gain on sales of investment securities 4 94 (90) (95.74)
Other 404 411 (7) (1.70)
----------- ---------- ---------
Total other income $ 2,391 $ 2,442 $ (51) (2.09)%
=========== ========== ========= ==========
</TABLE>
Investment brokerage services commissions decreased $373,000 from first quarter
1997 to the same period in 1998 primarily due to a one time $4.55 million
annuity sale in 1997 resulting in $237,000 in commission, and lower
transactional sales in the first quarter of 1998. Loan servicing and other fees
increased mainly due to increased loan activity. During the second half of 1997,
the Bank invested in universal cash surrender value life insurance. The
appreciation of these policies totaled $234,000 during the first quarter of
1998. Income from the investment in Real Estate Partnership increased primarily
due to higher rental income and lower repairs and maintenance expenses.
OTHER EXPENSES
Other expenses totaled $6.18 million for the three months ended March 31, 1998
compared to $5.87 million for the same period in 1997. The following table
details the significant components of other expenses for the periods presented:
<TABLE>
<CAPTION>
(in thousands) QUARTERS ENDED MARCH 31, $ %
1998 1997 CHANGE CHANGE
------------ ----------- ---------- ----------
<S> <C> <C> <C> <C>
Salaries, commissions and employee benefits 3,199 3,072 $ 127 4.13%
Occupancy 783 804 (21) (2.61)
Data processing 277 271 6 2.21
Furniture and equipment 240 244 (4) (1.64)
Advertising 296 187 109 58.29
Legal and accounting 158 220 (62) (28.18)
Communications 134 128 6 4.69
Operation of foreclosed real estate owned 94 144 (50) (34.72)
Write-downs and net losses on sale
of foreclosed real estate owned 60 50 10 20.00
Other 942 745 197 26.44
------------ ----------- ----------
Total other expenses $ 6,183 $ 5,865 $ 318 5.42%
============ =========== ========== ==========
</TABLE>
Salaries, commissions and employee benefits increased $127,000 or 4.1% due
mainly to higher benefit plan expenses. Advertising increased primarily due to
increased activity. Legal and accounting decreased primarily due to reduced
legal fees in the commercial loan work out area. Operation of foreclosed real
estate owned decreased $50,000 mainly to due reduced expenses for one-to
four-family properties. Other expenses increased $197,000 primarily due to a
prepayment penalty of $192,000 associated with a FHLB advance.
17
<PAGE>
INCOME TAXES
During the first quarter of 1998, the Company recorded tax expense of $1.34
million compared to $123,000 for the first quarter of 1997. The effective tax
rate for the three months ended March 31, 1998 was 38.3%. During the first
quarter of 1997, the Company was subject to alternative minimum tax, as any
regular taxable income was offset by net operating loss carryforwards.
PART II ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
The following exhibit is included herein:
27 - Financial Data Schedule
b) Reports on Form 8-K:
The Company filed a Form 8-K on January 23, 1998 concerning the change in
the registrant's certifying accountants. The Board of Directors and the
Audit Committee for MECH Financial, Inc. recommended and approved the
engagement of services of KPMG Peat Marwick LLP as the independent
accountants for MECH Financial, Inc. and its subsidiaries for the fiscal
year ending December 31, 1998.
KPMG Peat Marwick LLP will succeed Coopers and Lybrand, LLP, who declined to
stand for re-election, as independent auditors for the fiscal year ending
December 31, 1998. The report on the financial statements for the two most
recent fiscal years by Coopers & Lybrand, LLP did not contain an adverse
opinion or a disclaimer of opinion and was not qualified or modified as to
any uncertainty, audit scope or accounting principles. There were no
disagreements between Coopers & Lybrand, LLP 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.
The Company filed a Form 8-K on March 24, 1998 announcing the March 18, 1998
agreement to purchase the East Hartford and West Hartford branches of The
Chase Manhattan Bank. The transaction is subject to the approval of state
and federal agencies. The purchase will include all retail and small
business deposits totaling $27 million and most loans of the two branches.
Pending final approval, Mechanics Savings Bank expects to convert the two
Chase Manhattan branches to Mechanics offices within 120 days.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MECH Financial, Inc.
Date: 5/5/98 /S/ EDGAR C. GERWIG
------- -------------------
Chairman, President and Chief Executive Officer
Date: 5/5/98 /S/ THOMAS M. WOOD
-------- ------------------
Executive Vice President and Treasurer
Date: 5/5/98 /S/ BRIAN A. ORENSTEIN
------ ----------------------
Senior Vice President and Controller
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 21,897
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 19,320
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 162,397
<INVESTMENTS-CARRYING> 97,757
<INVESTMENTS-MARKET> 98,611
<LOANS> 593,938
<ALLOWANCE> (13,641)
<TOTAL-ASSETS> 945,973
<DEPOSITS> 685,784
<SHORT-TERM> 20,000
<LIABILITIES-OTHER> 7,978
<LONG-TERM> 141,465
0
0
<COMMON> 53
<OTHER-SE> 90,693
<TOTAL-LIABILITIES-AND-EQUITY> 945,973
<INTEREST-LOAN> 11,686
<INTEREST-INVEST> 3,627
<INTEREST-OTHER> 391
<INTEREST-TOTAL> 15,704
<INTEREST-DEPOSIT> 5,938
<INTEREST-EXPENSE> 8,108
<INTEREST-INCOME-NET> 7,596
<LOAN-LOSSES> 300
<SECURITIES-GAINS> 4
<EXPENSE-OTHER> 6,183
<INCOME-PRETAX> 3,504
<INCOME-PRE-EXTRAORDINARY> 3,504
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,164
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
<YIELD-ACTUAL> 7.63
<LOANS-NON> 2,991
<LOANS-PAST> 0
<LOANS-TROUBLED> 1,555
<LOANS-PROBLEM> 19,121
<ALLOWANCE-OPEN> 14,031
<CHARGE-OFFS> 802
<RECOVERIES> 112
<ALLOWANCE-CLOSE> 13,641
<ALLOWANCE-DOMESTIC> 7,011
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 6,630
</TABLE>
