<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 September 30, 1999 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
4,995,731 Outstanding (as of September 30, 1999)
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
Part I. Item 1. Financial Information
A. Consolidated Statements of Condition as of September 30, 1999 and
December 31, 1998................................................................ 1
B. Consolidated Statements of Operations for the Three and Nine Month Periods
Ended September 30, 1999 and September 30, 1998.................................. 2
C. Consolidated Statements of Changes in Stockholders' Equity for the Nine
Month Periods Ended September 30, 1999 and September 30, 1998.................... 3
D. Consolidated Statements of Cash Flows for the Nine Month Periods Ended
September 30, 1999 and September 30, 1998........................................ 4
E. Notes to Consolidated Financial Statements......................................... 6
Part I. Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................ 14
Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 27
Part II. Other Information............................................................................. 27
Signatures............................................................................................. 28
Exhibit................................................................................................ 29
</TABLE>
<PAGE>
MECH Financial, Inc. and Subsidiaries
Consolidated Statements of Condition (unaudited)
<TABLE>
<CAPTION>
(dollars in thousands) September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest-bearing deposits and cash $ 17,359 $ 20,567
Short-term investments 3,230 1,420
----------------- ----------------
Cash and cash equivalents 20,589 21,987
Investments:
Available-for-sale, at market value 233,923 205,711
Held-to-maturity (market value at September 30, 1999 - $68,557;
at December 31, 1998 - $80,873) 69,694 80,306
Federal Home Loan Bank stock, at cost 17,188 10,487
Loans, net 717,997 651,858
Bank premises and equipment 4,093 4,633
Investment in Real Estate Partnership - 13,541
Accrued interest receivable 5,926 4,957
Foreclosed real estate owned 436 902
Cash surrender value life insurance 17,488 16,873
Goodwill 672 759
Other assets 9,154 7,355
----------------- ----------------
$ 1,097,160 $ 1,019,369
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 664,690 $ 706,195
Borrowings 330,225 210,225
Mortgage escrow 3,438 1,652
Other liabilities 6,916 5,929
----------------- ----------------
Total liabilities 1,005,269 924,001
----------------- ----------------
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; 5,305,231 issued at September 30, 1999 and
5,297,932 issued at December 31, 1998
Additional paid in capital 51,570 51,430
Retained earnings 52,498 44,205
Accumulated other comprehensive income (loss) (3,227) 160
Less: Treasury stock, at cost, 261,500 shares at September 30, 1999,
none at December 31, 1998 (8,523) -
Less: Unallocated ESOP shares (48,000 shares) (480) (480)
----------------- ----------------
Total stockholders' equity 91,891 95,368
----------------- ----------------
$ 1,097,160 $ 1,019,369
================= ================
</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 For the nine months ended
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 13,353 $ 11,870 $ 39,190 $ 35,490
Interest and dividends on investment securities:
Interest on debt securities 4,738 3,961 13,963 11,189
Dividends on equity securities 309 200 825 546
---------------- ----------------- ----------------- -----------------
5,047 4,161 14,788 11,735
Other interest income 304 625 894 1,610
----------------- ----------------- ----------------- -----------------
Total interest income 18,704 16,656 54,872 48,835
----------------- ------------------ ----------------- -----------------
Interest expense:
Interest on deposits:
Savings deposits 824 786 2,378 2,195
Time deposits 4,464 5,374 13,941 15,990
----------------- ------------------ ----------------- -----------------
Total interest on deposits 5,288 6,160 16,319 18,185
Interest on borrowings 4,397 2,429 11,508 7,110
----------------- ------------------ ----------------- -----------------
Total interest expense 9,685 8,589 27,827 25,295
----------------- ------------------ ----------------- -----------------
Net interest income 9,019 8,067 27,045 23,540
Provision for loan losses - - - 600
----------------- ------------------ ----------------- -----------------
Net interest income after provision for loan losses 9,019 8,067 27,045 22,940
----------------- ------------------ ----------------- -----------------
Other income:
Service charges on deposit accounts 728 673 2,113 1,902
Investment brokerage services commissions 694 576 1,961 1,871
Appreciation of cash surrender value life insurance 239 235 703 694
Loan servicing and other fees 125 141 414 476
Gain on sale of headquarters building owned by
the Real Estate Partnership - - 2,148 -
Net gain on sales of loans 12 1 32 46
Income from investment in Real Estate Partnership - 150 13 518
Net gain on calls / sales of investment securities - - 5 4
Other 214 203 690 820
----------------- ------------------ ----------------- -----------------
Total other income 2,012 1,979 8,079 6,331
----------------- ------------------ ----------------- -----------------
Other expenses:
Salaries, commissions and employee benefits 3,278 2,953 9,935 9,127
Occupancy 756 856 2,286 2,426
Data processing 313 303 931 873
Furniture and equipment 231 245 733 719
Advertising 211 240 644 696
Legal and accounting 157 170 469 498
Communications 123 127 390 384
Operation of foreclosed real estate owned 20 100 189 282
Amortization of goodwill 30 29 88 29
Write-downs and net losses on sale
of foreclosed real estate owned - - - 85
Other 646 711 2,051 2,066
----------------- ------------------ ----------------- -----------------
Total other expenses 5,765 5,734 17,716 17,185
----------------- ------------------ ----------------- -----------------
Income before income taxes and extraordinary item 5,266 4,312 17,408 12,086
Income tax expense 1,779 1,641 5,869 4,606
----------------- ------------------ ----------------- -----------------
Income before extraordinary item 3,487 2,671 11,539 7,480
Extraordinary item, early extinguishment of
borrowings, net of tax - (16) (435) (135)
----------------- ------------------ ----------------- ------------------
Net income $ 3,487 $ 2,655 $ 11,104 $ 7,345
================= ================== ================= ==================
Earnings per share:
Basic:
Income before extraordinary item $ 0.70 $ 0.51 $ 2.30 $ 1.43
Extraordinary item $ - $ - $ (0.09) $ (0.02)
Net income $ 0.70 $ 0.51 $ 2.21 $ 1.41
Diluted:
Income before extraordinary item $ 0.67 $ 0.50 $ 2.21 $ 1.40
Extraordinary item $ - $ - $ (0.08) $ (0.02)
Net income $ 0.67 $ 0.50 $ 2.13 $ 1.38
Weighted average shares outstanding:
Basic 4,996 5,223 5,029 5,223
Diluted 5,196 5,339 5,208 5,335
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
2
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
For the nine months ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other Unallocated
Common Paid in Retained Comprehensive Treasury ESOP
(in thousands) Stock Capital Earnings Income (Loss) Stock Shares Total
---------- ------------ ---------- --------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 53 $ 50,927 $ 37,891 $ 398 $ - $ (720) $ 88,549
Comprehensive income:
1998 net income - - 7,345 - - - 7,345
Net unrealized gains (losses) on
securities, net of
reclassification adjustment - - - 82 - - 82
---------
Comprehensive income 7,427
---------
Dividends paid ($0.30 per share) - - (1,588) - - - (1,588)
Exercise of stock options - 34 - - - - 34
--------- ----------- --------- -------------- --------- ------------ ---------
Balance at September 30, 1998 $ 53 $ 50,961 $ 43,648 $ 480 $ - $ (720) $ 94,422
========= =========== ========= ============== ========= ============ =========
Balance at December 31, 1998 $ 53 $ 51,430 $ 44,205 $ 160 $ - $ (480) $ 95,368
Comprehensive income:
1999 net income - - 11,104 - - - 11,104
Net unrealized gains (losses) on
securities, net of
reclassification adjustment - - - (3,387) - - (3,387)
---------
Comprehensive income 7,717
---------
Treasury stock purchased (261,500
shares) - - - - (8,523) - (8,523)
Dividends paid ($0.55 per share) - - (2,811) - - - (2,811)
Exercise of stock options - 140 - - - - 140
--------- ----------- --------- -------------- --------- ------------ ---------
Balance at September 30, 1999 $ 53 $ 51,570 $ 52,498 $ (3,227) $ (8,523) $ (480) $ 91,891
========= =========== ========= ============== ========= ============ =========
</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 nine months ended
(in thousands) September 30, 1999 September 30, 1998
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 11,104 $ 7,345
---------------- ------------------
Adjustments to reconcile net income to cash provided by operating
activities:
Provision for loan losses - 600
Depreciation and amortization 738 726
Amortization of investment security premiums/discounts, net (21) 77
Deferred loan costs, net of amortization (449) (728)
Net gain on sale of loans (32) (46)
Proceeds from loan sales 2,730 14,388
Originations of loans held for sale (2,697) (14,008)
Loss on retirement of bank premises and equipment 1 5
Decrease in deferred tax assets - 2,830
Realized gains on calls/sales of securities (5) (4)
Increase in interest and dividend receivables (969) (604)
Income from investment in Real Estate Partnership (13) (518)
Gain on sale of 100 Pearl Street (2,148) -
Write-downs and net losses on sale of foreclosed real
estate owned - 85
Increase in cash surrender value life insurance (615) (614)
(Increase) decrease in other assets 50 (833)
Increase (decrease) in other liabilities 987 (569)
----------------- ------------------
Total adjustments (2,443) 787
----------------- ------------------
Net cash provided by operating activities 8,661 8,132
----------------- ------------------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities - 41,171
Proceeds from principal payments on available-for-sale securities 54,657 59,496
Proceeds from principal payments on held-to-maturity securities 18,897 19,085
Proceeds from maturities and calls of available-for-sale securities 3,000 18,847
Proceeds from maturities and calls of held-to-maturity securities 6,000 11,005
Purchases of available-for-sale securities (91,096) (141,502)
Purchases of held-to-maturity securities (14,189) (58,475)
Purchases of Federal Home Loan Bank stock (6,701) (2,587)
Net originations and purchases of loans (66,285) (31,907)
Proceeds from sale of 100 Pearl Street 15,702 -
Decrease in investment in Real Estate Partnership - 1,252
Proceeds from sale of foreclosed real estate owned 1,069 1,280
Purchases of bank premises and equipment (199) (645)
----------------- ------------------
Net cash used in investing activities (79,145) (82,980)
----------------- ------------------
Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts 4,174 14,625
Net (decrease) increase in certificates of deposit (45,679) 8,466
Net increase in mortgage escrow 1,786 1,444
Increase in FHLB borrowings 1,060,871 124,495
Repayments of FHLB borrowings (940,871) (86,688)
Issuance of common stock 140 34
Dividends paid (2,812) (1,588)
Purchases of treasury stock (8,523) -
----------------- ------------------
Net cash provided by financing activities 69,086 60,788
----------------- ------------------
Net decrease in cash and cash equivalents (1,398) (14,060)
----------------- ------------------
Cash and cash equivalents at beginning of period 21,987 33,024
----------------- ------------------
Cash and cash equivalents at end of period $ 20,589 $ 18,964
================= ==================
</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) (continued)
<TABLE>
<CAPTION>
For the nine months ended
(in thousands) September 30, 1999 September 30, 1998
------------------ ------------------
<S> <C> <C>
Non-cash investing and financing activities
Change in net unrealized gain (loss) on securities available-for-sale $ (5,219) $ (33)
Change in net unrealized gain (loss) on securities held-to-maturity 63 146
Transfer of loans to foreclosed real estate owned 725 690
Supplemental disclosures of cash flow information
Income taxes paid 4,853 2,609
Interest paid 27,569 25,044
</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, Mechanics Investment Services, Inc. and Mechanics Mortgage
Company ("MMC") which was funded January 1, 1999.
MMC was formed to take advantage of changes in the Connecticut tax statutes.
The State of Connecticut enacted tax law changes in May 1998, allowing for the
formation of Passive Investment Companies by financial institutions. This new
legislation exempts certain Passive Investment Companies from state income
taxation in Connecticut, as well as exempting from taxation the dividends paid
from a Passive Investment Company to a related financial institution. The law
permits the Bank to contribute certain mortgage assets to its Passive Investment
Company so as to achieve the tax benefits. The Bank qualifies as a financial
institution under the new statute and formed MMC, as a Passive Investment
Company, in 1998. The legislation is effective for tax years beginning on or
after January 1, 1999. The formation of MMC is expected to reduce the Company's
state income tax expense.
The 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 Company's 1998 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. The
results of the interim periods presented are not necessarily indicative of the
results that may be expected for the full year. Dollars are presented in
thousands, except for per share data, in the following footnotes.
6
<PAGE>
Note 2 - Investments
The amortized cost and market values as of September 30, 1999 of available-for-
sale securities were as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------------- -------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
U. S. Government and agency securities $ 14,995 $ - $ 433 $ 14,562
Mortgage-backed securities 200,232 266 3,675 196,823
Debt securities issued by foreign governments 350 - - 350
Corporate debt securities 2,996 - 101 2,895
Marketable equity securities 3,184 36 481 2,739
Mutual funds 16,941 14 401 16,554
--------------- -------------------- ----------------- ---------------
$238,698 $316 $5,091 $233,923
=============== ==================== ================= ===============
</TABLE>
The amortized cost and market values as of December 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 $ 4,995 $ 34 $ - $ 5,029
Mortgage-backed securities 174,543 883 160 175,266
Debt securities issued by foreign governments 350 - - 350
Corporate debt securities 5,996 - 84 5,912
Marketable equity securities 3,187 85 272 3,000
Mutual funds 16,196 60 102 16,154
--------------- ------------------ ------------------- ---------------
$205,267 $1,062 $618 $205,711
=============== ================== =================== ===============
</TABLE>
The amortized cost and market values as of September 30, 1999 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 $27,000 $ - $ 886 $26,114
Mortgage-backed securities 41,694 445 536 41,603
Corporate debt securities 1,000 - 160 840
---------------- ------------------ ---------------- ---------------
$69,694 $445 $1,582 $68,557
================ ================== ================ ===============
</TABLE>
7
<PAGE>
The amortized cost and market values as of December 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 $22,994 $ 67 $120 $22,941
Mortgage-backed securities 56,312 689 30 56,971
Corporate debt securities 1,000 - 39 961
---------------- ---------------- ---------------- ---------------
$80,306 $756 $189 $80,873
================ ================ ================ ===============
</TABLE>
Note 3 - Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
For the nine months ending
September 30, September 30,
1999 1998
--------------------- ---------------------
<S> <C> <C>
Balance at beginning of year $12,301 $14,031
Provision for loan losses - 600
Loan charge-offs (1,612) (2,389)
Loan recoveries 580 430
--------------------- ---------------------
Balance $11,269 $12,672
===================== =====================
</TABLE>
Note 4 - Non-Performing Assets
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
--------------------------- -------------------------
<S> <C> <C>
Non-accrual loans $ 1,981 $ 2,949
Accruing loans past due * 90 days - -
--------------------------- -------------------------
Total non-performing loans 1,981 2,949
Foreclosed real estate owned 436 902
--------------------------- -------------------------
Total non-performing assets $ 2,417 $ 3,851
=========================== =========================
Non-performing assets as a
percentage of total assets 0.22% 0.38%
=========================== =========================
Non-performing assets as a
percentage of gross loans and
foreclosed real estate owned 0.33% 0.58%
=========================== =========================
Allowance for loan losses
as a percentage of
non-performing loans 568.85% 417.12%
=========================== =========================
</TABLE>
* greater than
8
<PAGE>
Note 5 - Investment in Real Estate Partnership
The Bank's subsidiary, Eighty Pearl Street Corporation owns 50% of Pearl Street
Associates Limited Partnership. This partnership previously owned (see below)
the building at 100 Pearl Street, Hartford, CT which houses the Bank's banking
and corporate offices.
During the first quarter of 1999, the Real Estate Partnership sold the building
at 100 Pearl Street to New Boston Limited Partnership, an independent third
party. Eighty Pearl Street Corporation received proceeds of $15,702 and
recognized a $2,148 gain on the sale. The Bank will continue to occupy its
banking and office space at 100 Pearl Street under a long-term lease.
Note 6 - Borrowings
Advances from the Federal Home Loan Bank of Boston ("FHLB") and the repayment
schedule were as follows:
<TABLE>
<CAPTION>
Maturity Date Interest Rate September 30, 1999 December 31, 1998
- ------------------ --------------- ---------------------- ---------------------
<S> <C> <C> <C>
March 3, 1999 5.13 % $ - $ 10,000
August 19, 1999 4.94 - 10,000
October 20, 1999 5.32 28,000 -
October 27, 1999 5.35 35,000 -
November 1, 1999 5.40 22,000 -
November 15, 1999 4.94 7,000 7,000
December 1, 1999 5.05 10,000 -
June 7, 2000 4.85 10,000 10,000
October 20, 2000 6.21 - 10,000
October 20, 2000 6.24 - 20,000
February 27, 2001 5.71 7,000 7,000
June 25, 2001 5.97 30,000 -
December 17, 2001 5.95 10,000 10,000
November 7, 2002 * 5.71 30,000 30,000
March 12, 2003 5.78 8,745 8,745
March 31, 2003 * 4.99 20,000 -
October 21, 2003 4.19 - 5,000
November 3, 2004 * 5.80 10,000 10,000
April 21, 2006* 4.85 20,000 -
January 8, 2008 * 4.99 15,000 15,000
May 8, 2008 * 5.52 10,000 10,000
June 4, 2008 * 5.52 10,000 10,000
October 6, 2008 * 4.49 7,000 7,000
December 8, 2008 * 4.33 20,000 20,000
April 8, 2013 * 5.49 10,000 10,000
March 24, 2014 * 3.99 % 10,000 -
-------------------- --------------------
$ 329,745 $ 209,745
==================== ====================
</TABLE>
* initial call dates ranging from October 1999 to April 2003
During the first quarter of 1999, the Bank prepaid a $20,000 FHLB advance
scheduled to mature October 20, 2000 that carried an interest rate of 6.24%
which resulted in a $432 prepayment penalty. In addition, the Bank prepaid a
$10,000 FHLB advance scheduled to mature on October 20, 2000 that carried an
9
<PAGE>
interest rate of 6.21% and incurred a $223 prepayment penalty. Due to these
prepayment penalties, the Company reported a $435 extraordinary item, which is
net of $220 in taxes, due to the early extinguishment of borrowings during the
first quarter of 1999. This reduced earnings per share by $0.09 and $0.08 on a
basic and diluted basis, respectively.
During the first quarter of 1998, the Bank prepaid an $8,000 FHLB advance
scheduled to mature November 30, 2000 that carried an interest rate of 6.61%
thereby incurring a $192 prepayment penalty. During the third quarter of 1998,
the Bank prepaid a $5,000 FHLB advance scheduled to mature on March 1, 1999 that
carried a rate of 6.35%, which resulted in a $25 prepayment penalty. Due to
these prepayment penalties, the Company reported a $135 extraordinary item,
which is net of $82 in taxes, due to the early extinguishment of borrowings.
These reduced earnings per share by $0.02 on both a basic and diluted basis.
The Bank analyzes its borrowing portfolio on a regular basis through its
asset/liability and investment committees. During the quarters noted above, the
Bank took advantage of fluctuations in interest rates and restructured its
borrowing portfolio accordingly. Management expected these transactions to
improve profitability in future quarters.
The Bank has access to a pre-approved line of credit up to approximately $15,000
and the capacity to borrow in excess of 40% of the Bank's total assets. In
accordance with an agreement with the FHLB, the Bank is required to maintain
qualified collateral, as defined in the FHLB Statement of Credit Policy, free
and clear of liens, pledges and encumbrances as collateral for the advances.
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 September 30, 1999 and December 31, 1998, this borrowing had an outstanding
balance of $480. 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 7 - 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. The option exercise
price for the options granted is the market price at the time of the grant.
The weighted average shares outstanding totaled 4,995,731 and 5,223,266 for the
quarters ended September 30, 1999 and 1998, respectively. The weighted average
shares outstanding totaled 5,029,105 and 5,222,536 for the nine months ended
September 30, 1999 and 1998, respectively. The effect of dilutive stock options
was 200,425 and 116,170 shares for the quarters ended September 30, 1999 and
1998, respectively. The effect of dilutive stock options was 178,734 and
112,947 shares for the nine months ended September 30, 1999 and 1998,
respectively.
Note 8 - Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). This statement
established accounting and reporting standards for derivative instruments,
including certain derivative instruments imbedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. The
accounting for changes in the fair value of a derivative depends on the intended
use of the derivative and the resulting designation. Under this statement, an
entity that elects to apply hedge accounting is required to establish at the
inception of the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement
10
<PAGE>
approach for determining the ineffective aspect of the hedge. Those methods must
be consistent with the entity's approach to managing risk.
This statement amends SFAS No. 52 "Foreign Currency Translation" and SFAS No.
107, "Disclosures about Fair Value of Financial Instruments". This statement
superseded SFAS No. 80, "Accounting for Futures Contracts", SFAS No. 105,
"Disclosure Information about Financial Instruments with Off-balance Sheet Risk
and Financial Instruments with Concentrations of Credit Risk" and SFAS No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments".
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. Initial application of this statement should be as of the
beginning of an entity's fiscal quarter; on that date, hedging relationships
must be designated anew and documented pursuant to the provisions of this
statement. Early adoption is permitted, however, retroactive application is
prohibited. The adoption of SFAS No. 133 is not expected to have a material
impact for the Company.
Note 9 - Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). 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 following table represents the components and the related tax effects
allocated to other comprehensive income for the third quarter of 1999:
<TABLE>
<CAPTION>
Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
---------- ----------- ----------
<S> <C> <C> <C>
Net unrealized gains (losses) on securities
arising during the period $ (1,713) $ 583 $ (1,130)
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 15 (5) 10
---------- ----------- ----------
Net unrealized gains (losses) on securities $ (1,698) $ 578 $ (1,120)
========= =========== ==========
</TABLE>
11
<PAGE>
The following table represents components and the related tax effects allocated
to other comprehensive income for the third 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
arising during the period $ (271) $ 108 $ (163)
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 43 (17) 26
-------- ---------- --------
Net unrealized gains (losses) on securities $ (228) $ 91 $ (137)
======== ========== ========
</TABLE>
The following table represents the components and the related tax effects
allocated to other comprehensive income for the first nine months of 1999:
<TABLE>
<CAPTION>
Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
-------- ---------- --------
<S> <C> <C> <C>
Net unrealized gains (losses) on securities
arising during the period $ (5,219) $ 1,793 $ (3,426)
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 63 (24) 39
-------- ---------- --------
Net unrealized gains (losses) on securities $ (5,156) $ 1,769 $ (3,387)
======== ========== ========
</TABLE>
The following table represents the components and the related tax effects
allocated to other comprehensive income for the first nine months of 1998:
<TABLE>
<CAPTION>
Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
-------- ---------- --------
<S> <C> <C> <C>
Net unrealized gains (losses) on securities
arising during the period $ (27) $ 11 $ (16)
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 145 (66) 79
-------- ---------- --------
Net unrealized gains (losses) on securities $ 114 $ (32) $ 82
======== ========== ========
</TABLE>
12
<PAGE>
Note 10 - Stockholders' Equity
During the first quarter of 1999, the Company announced a stock repurchase
program. The program authorized the Company to repurchase up to 5% of its
issued and outstanding common stock at prevailing market prices in negotiated
and/or open market purchases. The Company completed the program and purchased
261,500 shares of common stock at a cost of $8,523 during the quarter.
On April 20, 1999, the Company declared a quarterly dividend of $0.20 per share
on its common stock. The dividend was paid on May 14, 1999 to shareholders of
record on May 3, 1999.
On July 20, 1999, the Company declared a quarterly dividend of $0.20 per share
on its common stock. The dividend was paid on August 13, 1999 to shareholders
of record on August 2, 1999.
On October 19, 1999, the Company declared a quarterly dividend of $0.20 per
share on its common stock. The dividend will be paid on November 12, 1999 to
shareholders of record on November 1, 1999.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in the following discussion and analysis concerning future
results, performance, expectations, or intentions are forward-looking
statements. Actual results, performance, or developments may differ materially
from forward-looking statements as a result of known or unknown risks,
uncertainties and other factors. Discussion regarding Year 2000 issues
necessarily involve uncertainties in terms of the future consequences to the
Bank of failure of the Bank's suppliers, vendors and customers to effectively
manage their computer issues regarding Year 2000.
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.
Effective January 1, 1999, the Company funded Mechanics Mortgage Company
("MMC"). This subsidiary of the Bank was formed to take advantage of a recent
change in the Connecticut tax statutes. The State of Connecticut enacted tax law
changes in May 1998, allowing for the formation of Passive Investment Companies
by financial institutions. This new legislation exempts certain Passive
Investment Companies from state income taxation in Connecticut, as well as
exempting from taxation the dividends paid from a Passive Investment Company to
a related financial institution. The law permits the Bank to contribute certain
mortgage assets to its Passive Investment Company so as to achieve the tax
benefits. The Bank qualifies as a financial institution under the new statute
and formed MMC, as a Passive Investment Company, in 1998. The legislation is
effective for tax years beginning on or after January 1, 1999. The formation of
MMC is expected to significantly reduce the Company's state income tax expense.
The Company reported net income of $3.49 million for the quarter ended September
30, 1999 compared to $2.66 million for the same period in 1998, an increase of
31.3%. For the nine months ended September 30, 1999 and 1998, the Company
reported net income of $11.10 million and $7.35 million, respectively. During
the first quarter of 1999, the Real Estate Partnership (50% owned by a Bank
subsidiary) sold its interest in 100 Pearl Street in Hartford, CT which houses
the Bank's banking and corporate offices to New Boston Limited Partnership, an
independent third party. The subsidiary received proceeds of $15.70 million and
recognized a $2.15 million gain on the sale. The Bank will continue to occupy
its banking and office space at 100 Pearl Street under a long-term lease.
During the first quarter of 1999, the Company announced a stock repurchase
program. The program authorized the Company to repurchase up to 5% of its issued
and outstanding common stock at prevailing market prices in negotiated and/or
open market purchases. The Company completed the program and purchased 261,500
shares of common stock at a cost of $8.52 million during the quarter.
Financial Condition
Total assets as of September 30, 1999 were $1,097.16 million representing an
increase of $77.79 million or 7.6% from $1,019.37 million at December 31, 1998.
The Company's Tier 1 leverage ratio was 8.53% at September 30, 1999 compared to
9.63% at December 31, 1998. The Company's total risk-based capital ratio was
14.45% at September 30, 1999 compared to 15.75% at December 31, 1998.
14
<PAGE>
Cash and cash equivalents decreased slightly from $21.99 million at December 31,
1998 to $20.59 million at September 30, 1999. 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 $17.60 million or 6.2% from $286.02 million at
December 31, 1998 to $303.62 million at September 30, 1999 primarily due to an
increase in U.S. Government and agency securities of $12.71 million and an
increase in the mortgage-backed securities portfolio of $6.94 million. Funds
available for investment increased mainly due to increased Federal Home Loan
Bank ("FHLB") borrowings. At September 30, 1999, the Company held $69.69 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 $6.70 million from the FHLB during the first
nine months of 1999. The Company believes that these shares provide above
average dividend yields for the risk characteristics of such investments.
Net loans increased $66.14 million or 10.2% from $651.86 million at December 31,
1998 to $718.00 million at September 30, 1999. The majority of the increase came
from a $48.41 million increase in loans secured by one- to four-family real
estate, $8.20 million increase in commercial real estate mortgages and a $7.48
million increase in the installment loan portfolio. The allowance for loan
losses totaled $11.27 million at September 30, 1999 compared to $12.30 million
at December 31, 1998. There were no provisions for loan losses recorded during
the three months ended September 30, 1999 and net charge-offs totaled $548,000
during the third quarter. The allowance for loan losses as a percentage of non-
performing loans was 417.12% and 568.85% at December 31, 1998 and September 30,
1999, respectively.
The Bank's subsidiary, Eighty Pearl Street Corporation owns 50% of Pearl Street
Associates Limited Partnership ("the Real Estate Partnership"). During the first
quarter of 1999, the Real Estate Partnership sold the building at 100 Pearl
Street, Hartford, CT to New Boston Limited Partnership, an independent third
party. Eighty Pearl Street Corporation received proceeds of $15.70 million and
recognized a $2.15 million gain on the sale. The Bank will continue to occupy
its banking and office space at 100 Pearl Street under a long-term lease.
Foreclosed real estate owned decreased from $902,000 at December 31, 1998 to
$436,000 at September 30, 1999. The Company sold twenty-four properties totaling
$1.07 million during the nine months ended September 30, 1999. There were no
write-downs and net losses on sale of foreclosed real estate owned for the first
nine months of 1999, compared to $85,000 for the same period in 1998.
Non-performing assets totaled $2.42 million at September 30, 1999 compared to
$3.85 million at December 31, 1998. Charge-offs on non-performing loans reduced
non-performing assets by $1.61 million. Sales of foreclosed real estate owned
accounted for an additional $1.07 million of the reductions. There were other
reductions of non-performing assets of $2.75 million due to payoffs, payments
and loans returning to accrual status. These reductions were offset by $4.00
million in additions to non-performing assets since December 31, 1998. Non-
performing assets as a percentage of total assets was 0.38% at December 31, 1998
and 0.22% at September 30, 1999. Non-performing assets as a percentage of total
loans and foreclosed real estate owned was 0.58% at December 31, 1998 and 0.33%
at September 30, 1999.
Deposits decreased 5.9% from $706.20 million at December 31, 1998 to $664.69
million at September 30, 1999. The decrease was mainly in one year certificates
of deposits.
Borrowings from the FHLB increased $120.00 million from December 31, 1998 to
September 30, 1999. These borrowings were mainly used to fund investments and
loans. The Bank borrowed on a gross basis $1,060.87 million and repaid $940.87
million during the nine months ended September 30, 1999 as compared to gross
borrowings of $124.50 million and gross repayments of $86.69 million during the
same
15
<PAGE>
period in 1998. During the first nine months of 1999, the Bank took advantage of
low rate shorter term borrowings (ranging from 1 day to 1 month) as compared to
the same period in 1998. The Company's $329.75 million of FHLB advances carry a
weighted average rate of 5.28% and have a weighted average contractual maturity
of 3.9 years. At December 31, 1998, FHLB advances totaled $209.75 million and
carried a weighted average rate of 5.38% and a weighted average contractual
maturity of 5.2 years. In addition, $162.00 million or 49.1% of the FHLB
borrowings at September 30, 1999 were callable and had call dates ranging from
October 1999 to April 2003.
During the first quarter of 1999, the Bank prepaid a $20.00 million FHLB advance
scheduled to mature October 20, 2000 that carried an interest rate of 6.24%
which resulted in a $432,000 prepayment penalty. In addition, the Bank prepaid a
$10.00 million FHLB advance scheduled to mature on October 20, 2000 that carried
an interest rate of 6.21% and incurred a $223,000 prepayment penalty. Due to
these prepayment penalties, the Company reported a $435,000 extraordinary item,
net of $220,000 in taxes due to the early extinguishment of debt during the
first quarter of 1999. This reduced earnings per share by $0.09 and $0.08 on a
basic and diluted basis, respectively.
During the first quarter of 1998, the Bank prepaid the $8.00 million FHLB
advance scheduled to mature November 30, 2000 that carried an interest rate of
6.61% thereby incurring a $192,000 prepayment penalty. During the third quarter
of 1998, the Bank prepaid a $5.00 million FHLB advance scheduled to mature March
1, 1999 which carried an interest rate of 6.35% and incurred a $25,000
prepayment penalty. Due to these prepayment penalties, the Company reported a
$135,000 extraordinary item, net of $82,000 in taxes due to the early
extinguishment of debt. These reduced earnings per share by $0.02 on both a
basic and diluted basis.
The Bank analyzes its borrowing portfolio on a regular basis through its
asset/liability and investment committees. During the quarters noted above, the
Bank took advantage of fluctuations in interest rates and restructured its
borrowing portfolio accordingly. Management expected these transactions to
improve profitability in future quarters.
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 no greater than the Bank's net profit for the then current
year, plus the Bank's retained net profit for the prior two years, unless
specifically approved by the Banking Commissioner ("net profit" is defined as
the remainder of all earnings from current operations). The Bank is also
prohibited from paying a cash dividend 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 September 30, 1999 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
16
<PAGE>
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.
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 September 30, 1999, the Company
was within its policy guideline, and the Company believes its level of interest
rate sensitivity was appropriate.
Capital Resources
At September 30, 1999, the Company's stockholders' equity totaled $91.89 million
representing a 3.7% decrease from the $95.37 million in capital at December 31,
1998. The decrease was due mainly to the purchase of 261,500 shares of treasury
stock during the first quarter 1999 stock repurchase program, a decrease of
$3.39 million in accumulated other comprehensive income due to the net
unrealized loss on the Bank's investment portfolio and $2.81 million in
dividends paid to stockholders which were partially offset by net income. At
September 30, 1999, the Company had a Tier 1 leverage capital ratio of 8.53% and
a total risk-based capital ratio of 14.45%. The Company's Tier 1 leverage
capital ratio was 9.63% and its total risk-based capital ratio was 15.75% at
December 31, 1998.
During the first quarter of 1999, the Company announced a stock repurchase
program. The program authorized the Company to repurchase up to 5% of its
issued and outstanding common stock at prevailing market prices in negotiated
and/or open market purchases. The Company completed the program and purchased
261,500 shares of common stock at a cost of $8.52 million during the quarter.
As of December 31, 1998 and September 30, 1999, 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.
Year 2000 Readiness Disclosure
MECH Financial, Inc. is committed to ensure that the Company will be well
prepared to handle the date change which will occur at midnight on December 31,
1999. The Board of Directors approved a plan for implementing and monitoring
Year 2000 ("Y2K") compliance. All testing and implementation of critical systems
was completed as of June 30, 1999.
The Company has fully completed the awareness and assessment phases of its Y2K
project. During the assessment period, the Company identified over 140
vendors/systems (both information technology ("IT") and non-IT) that would
possibly need to be addressed concerning Y2K. Non-IT systems include equipment
with embedded technology such as elevators, fire safety, ventilation and
security systems. The Company received documentation from virtually all of
these vendors, designating timeframes consistent with the Company's timetable
for Y2K compliance. The Company maintains a Y2K inventory, which is updated
regularly, monitoring vendor compliance levels.
The Company has no internally developed software, therefore no internal
renovation has occurred. Renovation, the actual changing of computer code, is
being monitored closely through regular vendor correspondence. At September 30,
1999, all of the Company's vendors' software has been renovated.
17
<PAGE>
The Company's core processing system is outsourced to Fiserv, Inc., based in
Milwaukee, Wisconsin. Fiserv is a leading data processor for banks and services
approximately 7,000 financial services providers worldwide. The Company
maintains regular contact with Fiserv to ensure progress toward each stage of
completing the Y2K compliance process. Fiserv stated that they completed the
renovation of their system, and placed the system into production. Fiserv
tested the system internally, and determined it to be Y2K compliant. The
Company tested the system on a companywide basis in October 1998 and noted no
significant issues pertaining to Y2K. The Company tested the system again in
May 1999 with a focus on multiple future date testing and noted no significant
issues pertaining to Y2K.
The completion of the successful Fiserv test constitutes a large part of the
Company's internal testing. The Company has also tested all of its computer
hardware, as well as many of its other IT and non-IT systems. At September 30,
1999, the Company had completed its testing.
In its attempt to mitigate risk in its commercial loan portfolio, the Company
will attempt to identify, evaluate and monitor the risks that Y2K poses on its
"material" commercial borrowers. The Company has determined that a "material"
commercial borrower is a borrower with a total relationship of $400,000 or more
as well as any loan with a risk rating warranting further review. Upon
completion, the Company will have reviewed over 75% (based on dollars) of its
commercial portfolio. As of September 30, 1999, this review was approximately
95% completed. This review included loan document reviews and borrower
interviews. The Company determined whether the borrower had a Y2K plan, whether
the borrower had the necessary resources to implement its plan, as well as the
borrowers' overall vulnerability to the Y2K issue. Based on the results of
these reviews, the Company did not identify material exposure to the Y2K issue
in its commercial loan portfolio at this time.
The Company recognizes the Y2K problem as a global issue with potentially
catastrophic consequences. Although the Company is confident of the ability of
its systems to handle data following the January 1, 2000, the ability of its
customers or third party vendors to do so could materially adversely affect the
Company's results of operations. Other than such an unforeseen development, the
most reasonably likely worst case Y2K scenario would probably be a low priority
vendor's software program's short term malfunction. The Company has developed
contingency plans to address various Year 2000 disruption scenarios. These
contingency plans were validated during the third quarter of 1999, noting no
exceptions. For a low priority vendor's software program malfunction, the
Company may choose to purchase and implement a Y2K compliant product from
another vendor, or await further renovation on the currently owned software,
depending on the Company's evaluation of the vendor and the software's day-to-
day criticality to the Company. In either case, the Company would attempt to use
other existing Y2K compliant software in its place until the non-compliant
software is successfully renovated or replaced.
Based on the above efforts and results, the Company currently expects Y2K issues
to have no material effects on results of operations, liquidity or financial
condition. The Company believes that expenditures associated with the Y2K effort
will not exceed $350,000 with approximately $300,000 spent to date. These costs
consist primarily of purchases of new equipment and software which will be
depreciated over their respective useful lives.
Results of Operations
For the quarters ended September 30, 1999 and 1998
For the quarter ended September 30, 1999, the Company reported net income of
$3.49 million or $0.67 per diluted share compared to $2.66 million or $0.50 per
diluted share for the same period in 1998. During the third quarter of 1998,
the Bank prepaid a $5.00 million FHLB advance that carried an interest rate of
6.35%, which resulted in a $25,000 prepayment penalty. Due to this prepayment
penalty, the Company reported a $16,000 extraordinary item, which is net of
$9,000 in taxes, due to the early extinguishment of borrowings.
18
<PAGE>
Net Interest Income
Net interest income totaled $9.02 million for the three months ended September
30, 1999 compared to $8.07 million for the same period in 1998, representing a
$952,000 or 11.8% increase. The net interest margin decreased from 3.58% for the
quarter ended September 30, 1998 to 3.41% for the same period in 1999. Average
interest-earning assets increased $155.56 million while average interest-bearing
liabilities increased $136.69 million. Average net loans and investment
securities increased $119.16 million and $50.51 million, respectively. Average
net loans increased primarily due to a $75.97 million increase in one- to four-
family mortgages, a $19.66 million increase in average commercial real estate
mortgages and a $13.42 million increase in consumer loans. Mortgage-backed
securities were the main reasons for the increase in average investment
securities. Average borrowings increased $164.61 million from quarter to
quarter.
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 September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Average Balance Income / Expense Yield
--------------------------------- ---------------------------------- -----------------------------
Quarters ended September 30, Quarters ended September 30, Quarters ended September 30,
(in thousands) 1999 1998 1999 1998 1999 1998
--------------- -------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 710,224 $ 591,066 $ 13,353 $ 11,870 7.46% 7.97%
Investment securities 336,096 285,589 5,316 4,553 6.28 6.33
Short-term investments 2,776 16,881 35 233 5.00 5.48
-------------- -------------- ---------------- --------------- ----- -----
Total interest-earning
assets 1,049,096 893,536 18,704 16,656 7.07 7.40
Other assets 50,037 66,145
-------------- --------------
Total assets $ 1,099,133 $959,681
============== ==============
Money market checking $ 52,031 $ 37,987 223 116 1.70 1.21
Money market savings 64,122 58,697 424 386 2.62 2.61
Savings and other 110,351 109,127 418 416 1.50 1.51
Certificates of deposit 364,219 412,835 4,223 5,242 4.60 5.04
-------------- -------------- ---------------- --------------- ----- -----
Total interest-
bearing deposits 590,723 618,646 5,288 6,160 3.55 3.95
Borrowings 328,625 164,013 4,397 2,429 5.31 5.88
-------------- -------------- ---------------- --------------- ----- -----
Total interest-bearing
liabilities 919,348 782,659 9,685 8,589 4.18 4.35
Demand deposits 82,999 79,003
Other liabilities 5,777 4,658
Stockholders' equity 91,009 93,361
-------------- --------------
Total liabilities and
equity $ 1,099,133 $ 959,681
============== ==============
Net interest income $ 9,019 $ 8,067
=============== ===============
Spread on interest-bearing funds 2.89% 3.05%
Net interest margin 3.41% 3.58%
</TABLE>
19
<PAGE>
The following table presents the changes in interest and dividend income and the
changes in interest expense, attributable to changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
Quarters ended September 30, 1999 versus 1998
Change in interest due to
--------------------------------------------------------------
(in thousands) Volume Rate Vol/Rate Net
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Loans, net $ 2,393 $ (757) $ (153) $ 1,483
Investment securities 805 (36) (6) 763
Short-term investments (195) (20) 17 (198)
----------- ---------- ---------- -----------
Total 3,003 (813) (142) 2,048
----------- ---------- ---------- -----------
Money market checking 43 47 17 107
Money market savings 36 2 - 38
Savings and other 5 (3) - 2
Certificates of deposit (617) (455) 53 (1,019)
Borrowings 2,438 (235) (235) 1,968
----------- ---------- ---------- -----------
Total 1,905 (644) (165) 1,096
----------- ---------- ---------- -----------
Net change to interest income $ 1,098 $ (169) $ 23 $ 952
=========== ========== ========== ===========
</TABLE>
Interest Income
Interest income increased $2.05 million or 12.3% due primarily to increased
average volumes of net loans and investment securities of $119.16 million and
$50.51 million, respectively. Partially offsetting the increase in average
volumes, overall average yields decreased from 7.40% for the third quarter of
1998 to 7.07% for the same period in 1999. This was primarily due to a 51 basis
point decrease in the average yields for net loans.
Interest Expense
Interest expense increased $1.10 million or 12.8% from the third quarter of 1998
to the same period in 1999. The increase was mainly due to higher average
balances of borrowings. This increase was partially offset by lower cost of
funds on certificates of deposit and borrowings. Overall average rates decreased
from 4.35% for the third quarter of 1998 to 4.18% for the same period in 1999.
Provision for Loan Losses
There was no provision for loan losses during the third quarter of 1999 and
1998. The Company's percentage of allowance for loan losses to non-performing
loans was 568.85% at September 30, 1999 compared to 417.12% at December 31,
1998. The Company's allowance for loan losses to gross loans was 1.85% at
December 31, 1998 compared to 1.55% at September 30, 1999.
20
<PAGE>
Other Income
The Company recorded $2.01 million in other income for the three months ended
September 30, 1999 compared to $1.98 million for the same period in 1998. The
following table shows the components of other income for the quarters ended
September 30, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands) For the quarters ended $ %
September 30, 1999 September 30, 1998 Change Change
--------------------- ------------------ -------- -------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 728 $ 673 $ 55 8.17 %
Investment brokerage services commissions 694 576 118 20.49
Appreciation of cash surrender value life insurance 239 235 4 1.70
Loan servicing and other fees 125 141 (16) (11.35)
Net gain on sales of loans 12 1 11 1,100.00
Income from investment in Real Estate Partnership - 150 (150) (100.00)
Other 214 203 11 5.42
--------------------- ------------------ ---------
Total other income $ 2,012 $ 1,979 $ 33 1.67 %
===================== ================== ========= ========
</TABLE>
Service charges on deposit accounts increased mainly due to overdraft fees.
Investment brokerage services commissions increased primarily due to higher
investment advisory fees in the third quarter of 1999. On February 11, 1999,
the Real Estate Partnership sold the headquarters building which resulted in a
gain of $2.10 million. An additional $51,000 was received during the second
quarter of 1999 as a final reconciliation of the sale proceeds was completed.
Due to the sale, the income from the investment in Real Estate Partnership
decreased from quarter to quarter. Other income increased due mainly to higher
commission income on the sale of tax deferred annuities which was partially
offset by the elimination of rental income the Bank received from the Real
Estate Partnership for the use of the land that the headquarters building is
built on.
Other Expenses
Other expenses totaled $5.77 million for the three months ended September 30,
1999 compared to $5.73 million for the same period in 1998. The following table
details the significant components of other expenses for the periods presented:
<TABLE>
<CAPTION>
(in thousands) For the quarters ended $ %
September 30, 1999 September 30, 1998 Change Change
------------------ ------------------ -------------- ----------
<S> <C> <C> <C> <C>
Salaries, commissions and employee benefits $ 3,278 $ 2,953 $ 325 11.01 %
Occupancy 756 856 (100) (11.68)
Data processing 313 303 10 3.30
Furniture and equipment 231 245 (14) (5.71)
Advertising 211 240 (29) (12.08)
Legal and accounting 157 170 (13) (7.65)
Communications 123 127 (4) (3.15)
Operation of foreclosed real estate owned 20 100 (80) (80.00)
Amortization of goodwill 30 29 1 3.45
Other 646 711 (65) (9.14)
------------------ --------------------- --------------
Total other expenses $ 5,765 $ 5,734 $ 31 0.54 %
================== ===================== ============== ==========
</TABLE>
Salaries, commissions and employee benefits increased primarily due to higher
overall salaries, commissions, ESOP and health insurance expenses. Occupancy
expenses decreased mainly due to a rent reduction at the Bank's headquarters
building, which went into effect in November 1998. Advertising decreased mainly
due to lower direct mail expense. Foreclosed real estate operating expenses
decreased mainly due to reduced expenses for one- to four-family residential
properties. Other expenses decreased primarily due to lower correspondent
banking charges and reduced returned items.
21
<PAGE>
Income Taxes
During the third quarter of 1999, the Company recorded tax expense of $1.78
million compared to $1.64 million for the third quarter of 1998. The effective
tax rates for the three months ended September 30, 1999 and 1998 were 33.8% and
38.1%, respectively. The decrease in the effective tax rate is primarily due to
the reduction of state taxable income as a result of the use of MMC.
For the nine months ended September 30, 1999 and 1998
For the nine months ended September 30, 1999, the Company reported net income of
$11.10 million or $2.13 per diluted share compared to $7.35 million or $1.38 per
diluted share for the same period in 1998. During the first nine months of
1999, the Real Estate Partnership (50% owned by a Bank subsidiary) sold its
interest in 100 Pearl Street, Hartford, CT which houses the Bank's banking and
corporate offices and recognized a $2.15 million gain on the sale. In addition,
net interest income increased $3.51 million or 14.9% for the first nine months
of 1999 as compared to the same period of 1998.
Net Interest Income
Net interest income totaled $27.05 million for the nine months ended September
30, 1999 compared to $23.54 million for the same period in 1998, representing
$3.51 million or a 14.9% increase. The net interest margin decreased from 3.62%
for the nine months ended September 30, 1998 to 3.54% for the same period in
1999. Average interest-earning assets increased $150.92 million while average
interest-bearing liabilities increased $125.27 million. Average net loans and
investment securities were $103.02 million and $59.73 million higher for the
nine months ended September 30, 1999 compared to the same period in 1998,
respectively. Increases in average FHLB borrowings was the main reason for the
increases in interest-bearing liabilities.
22
<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 nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Average Balances Income / Expense Yields
-------------------------------- ------------------------------ ---------------------------
Nine months ended Sept. 30, Nine months ended Sept. 30, Nine months ended Sept. 30,
(in thousands) 1999 1998 1999 1998 1999 1998
-------------- -------------- ------------ -------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 688,987 $ 585,965 $ 39,190 $ 35,490 7.60% 8.10%
Investment securities 327,448 267,717 15,538 12,698 6.34 6.34
Short-term investments 4,031 15,865 144 647 4.78 5.45
---------- ------------ ----------- ----------- ---------- ----------
Total interest-earning 1,020,466 869,547 54,872 48,835 7.19 7.51
assets
Other assets 53,116 68,155
---------- ------------
Total assets $1,073,582 $ 937,702
========== ============
Money market checking $ 47,862 $ 36,789 528 333 1.47 1.21
Money market savings 61,918 54,632 1,182 1,001 2.55 2.45
Savings and other 111,514 110,560 1,257 1,252 1.51 1.51
Certificates of deposit 380,141 406,416 13,352 15,599 4.70 5.13
---------- ------------ ----------- ----------- ---------- ----------
Total interest-bearing 601,435 608,397 16,319 18,185 3.63 4.00
deposits
Borrowings 293,357 161,126 11,508 7,110 5.24 5.90
---------- ------------ ----------- ----------- ---------- ----------
Total interest-bearing 894,792 769,523 27,827 25,295 4.16 4.39
funds
Demand deposits 81,811 72,026
Other liabilities 5,816 4,530
Stockholders' equity 91,163 91,623
---------- ------------
Total liabilities and equity $1,073,582 $ 937,702
========== ============
Net interest income $ 27,045 $ 23,540
=========== ===========
Spread on interest-bearing funds 3.03% 3.12%
Net interest margin 3.54% 3.62%
</TABLE>
23
<PAGE>
The following table presents the changes in interest and dividend income and the
changes in interest expense, attributable to changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
Nine months ended September 30, 1999 versus 1998
Change in interest due to
-------------------------------------------------------------------------------
(in thousands) Volume Rate Vol/Rate Net
---------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Loans, net $ 6,240 $ (2,160) $ (380) $ 3,700
Investment securities 2,833 6 1 2,840
Short-term investments (483) (80) 60 (503)
---------------- --------------- ---------------- ---------------
Total 8,590 (2,234) (319) 6,037
---------------- --------------- ---------------- ---------------
Money market checking 100 73 22 195
Money market savings 133 42 6 181
Savings and other 11 (6) - 5
Certificates of deposit (1,008) (1,324) 85 (2,247)
Borrowings 5,835 (789) (648) 4,398
---------------- --------------- ---------------- ---------------
Total 5,071 (2,004) (535) 2,532
---------------- --------------- ---------------- ---------------
Net change to interest
income $ 3,519 $ (230) $ 216 $ 3,505
================ =============== ================ ===============
</TABLE>
Interest Income
Interest income increased $6.04 million or 12.4% due primarily to average
increased volumes of loans and investment securities. Overall average yields
decreased from 7.51% for the nine months ended September 30, 1998 to 7.19% for
the same period in 1999 primarily due to a 50 basis point decrease in the
average yield on loans.
Interest Expense
Interest expense increased $2.53 million or 10.0% from the first nine months of
1998 to the same period in 1999. The increase was due mainly to higher average
balances of FHLB borrowings. This increase was partially offset by lower
average volumes of certificates of deposits and overall lower rates on deposit
accounts and FHLB borrowings. Overall cost of funds decreased from 4.39% for
the nine months ended September 30, 1998 to 4.16% for the same period in 1999.
Provision for Loan Losses
There was no provision for loan losses during the first nine months of 1999
compared to $600,000 for the same period in 1998. The Company's percentage of
allowance for loan losses to non-performing loans was 568.85% at September 30,
1999 and 417.12% at December 31, 1998. The allowance for loan losses as a
percentage of gross loans was 1.55% at September 30, 1999 and 1.85% at December
31, 1998.
24
<PAGE>
Other Income
The Company recorded $8.08 million in other income for the nine months ended
September 30, 1999 compared to $6.33 million for the same period in 1998,
representing an increase of 27.6%. The following table shows the components of
other income for the nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands) For the nine months ended $ %
September 30, 1999 September 30, 1998 Change Change
-------------------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 2,113 $ 1,902 $ 211 11.09 %
Investment brokerage services commissions 1,961 1,871 90 4.81
Appreciation of cash surrender value life insurance 703 694 9 1.30
Loan servicing and other fees 414 476 (62) (13.03)
Gain on sale of headquarters building owned by
the Real Estate Partnership 2,148 - 2,148 n/a
Net gain on sales of loans 32 46 (14) (30.43)
Income from investment in Real Estate Partnership 13 518 (505) (97.49)
Net gain on calls / sales of investment securities 5 4 1 25.00
Other 690 820 (130) (15.85)
-------------------- ------------------ -----------
Total other income $ 8,079 $ 6,331 $ 1,748 27.61 %
==================== ================== =========== ===========
</TABLE>
During the first quarter of 1999, the Real Estate Partnership sold its interest
in 100 Pearl Street in Hartford, CT which houses the Bank's banking and
corporate offices and recognized a $2.15 million gain on the sale. Service
charges on deposit accounts were higher due mainly to increased rates for
overdrafts. Investment brokerage service commissions include higher investment
advisory fees which were partially offset by lower variable annuity commissions.
Loan servicing and other fees decreased primarily due to large prepayment and
letter of credit fees received during May 1998. Income from the investment in
Real Estate Partnership decreased due to the sale of the headquarters building.
Other income decreased mainly due to the elimination of rental income the Bank
received from the Real Estate Partnership for the use of the land that the
headquarters building is built on and a reduced distribution from the Bank's
investment in a small business investment company.
Other Expenses
Other expenses totaled $17.72 million for the nine months ended September 30,
1999 compared to $17.19 million for the same period in 1998. The following
table details the significant components of other expenses for the periods
presented:
<TABLE>
<CAPTION>
(in thousands) For the nine months ended $ %
September 30, 1999 September 30, 1998 Change Change
-------------------- --------------------- -------------- ----------
<S> <C> <C> <C> <C>
Salaries, commissions and employee
benefits $ 9,935 $ 9,127 $ 808 8.85 %
Occupancy 2,286 2,426 (140) (5.77)
Data processing 931 873 58 6.64
Furniture and equipment 733 719 14 1.95
Advertising 644 696 (52) (7.47)
Legal and accounting 469 498 (29) (5.82)
Communications 390 384 6 1.56
Operation of foreclosed real estate
owned 189 282 (93) (32.98)
Amortization of goodwill 88 29 59 203.45
Write-downs and net losses on sale
of foreclosed real estate owned - 85 (85) (100.00)
Other 2,051 2,066 (15) (0.73)
-------------------- --------------------- --------------
Total other expenses $ 17,716 $ 17,185 $ 531 3.09 %
==================== ===================== ============== ==========
</TABLE>
Salaries, commissions and employee benefits increased primarily due to an
increase in overall salaries and commissions. Occupancy expense decreased due
to a rent reduction at the Bank's headquarters building. Data processing costs
increased due to the purchase of two additional branches in July 1998 and
additional
25
<PAGE>
costs due to Year 2000 preparation. Operation of foreclosed real estate owned
decreased due mainly to lower expenses on one- to four-family residential
properties. Amortization of goodwill is a result of the July 1998 purchase of
two branches from Chase Manhattan Bank.
Income Taxes
During the nine months ended September 30, 1999, the Company recorded income tax
expense of $5.87 million, representing a 33.7% effective tax rate. During the
nine months ended September 30, 1998, the Company recorded income tax expense of
$4.61 million, representing a 38.1% effective tax rate. The decrease in the
effective tax rate is primarily due to the reduction of state taxable income as
a result of the use of MMC.
26
<PAGE>
Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk
At September 30, 1999 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 net interest income for the next twelve
months 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) $ (2,639) $ (1,010)
100 basis point increase in rates (d) (1,178) (505)
100 basis point decrease in rates (d) 4 255
200 basis point decrease in rates (c) 41 491
</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 the next twelve months.
(c) No adjustments are made to the Bank's passbook rates. Money market rates are
shocked/ramped 50 basis points rather than 200 basis points.
(d) No adjustments are made to the Bank's passbook rates. Money market rates are
shocked/ramped 25 basis points, rather than 100 basis points.
Part II. Item 1. Legal Proceedings
none
Part II. Item 2. Changes in Securities and Use of Proceeds
none
Part II. Item 3. Defaults Upon Senior Securities
none
Part II Item 4. Submission of Matters to a Vote of Security Holders
none
Part II Item 5. Other Information
none
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:
none.
27
<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: 11/5/99 /S/ EDGAR C. GERWIG
------- -----------------------------------------------
Chairman, President and Chief Executive Officer
Date: 11/5/99 /S/ THOMAS M. WOOD
------- ---------------------------------------
Executive Vice President and Treasurer
Date: 11/5/99 /S/ BRIAN A. ORENSTEIN
------- ----------------------
Senior Vice President and Controller
28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 17,359
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,230
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 233,923
<INVESTMENTS-CARRYING> 69,694
<INVESTMENTS-MARKET> 68,557
<LOANS> 729,266
<ALLOWANCE> (11,269)
<TOTAL-ASSETS> 1,097,160
<DEPOSITS> 664,690
<SHORT-TERM> 112,000
<LIABILITIES-OTHER> 10,354
<LONG-TERM> 218,225
0
0
<COMMON> 53
<OTHER-SE> 91,838
<TOTAL-LIABILITIES-AND-EQUITY> 1,097,160
<INTEREST-LOAN> 39,190
<INTEREST-INVEST> 14,788
<INTEREST-OTHER> 894
<INTEREST-TOTAL> 54,872
<INTEREST-DEPOSIT> 16,319
<INTEREST-EXPENSE> 27,827
<INTEREST-INCOME-NET> 27,045
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 17,716
<INCOME-PRETAX> 17,408
<INCOME-PRE-EXTRAORDINARY> 11,539
<EXTRAORDINARY> (435)
<CHANGES> 0
<NET-INCOME> 11,104
<EPS-BASIC> 2.21
<EPS-DILUTED> 2.13
<YIELD-ACTUAL> 7.19
<LOANS-NON> 1,981
<LOANS-PAST> 0
<LOANS-TROUBLED> 667
<LOANS-PROBLEM> 13,885
<ALLOWANCE-OPEN> 12,301
<CHARGE-OFFS> 1,612
<RECOVERIES> 580
<ALLOWANCE-CLOSE> 11,269
<ALLOWANCE-DOMESTIC> 6,014
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,255
</TABLE>
