<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, 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
4,991,565 Outstanding (as of March 31, 1999)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I. Item 1. Financial Information Page
<S> <C>
A. Consolidated Statements of Condition as of March 31, 1999 and 1
December 31, 1998
B. Consolidated Statements of Operations for the Three Month Periods 2
Ended March 31, 1999 and March 31, 1998
C. Consolidated Statements of Changes in Stockholders' Equity for the Three 3
Month Periods Ended March 31, 1999 and March 31, 1998
D. Consolidated Statements of Cash Flows for the Three Month Periods Ended 4
March 31, 1999 and March 31, 1998
E. Notes to Consolidated Financial Statements 6
Part I. Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
Part II. Other Information 22
Signatures 23
Exhibit 24
</TABLE>
<PAGE>
MECH FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION (UNAUDITED)
<TABLE>
<CAPTION>
(dollars in thousands) MARCH 31, 1999 DECEMBER 31, 1998
---------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest-bearing deposits and cash $ 19,750 $ 20,567
Short-term investments 1,915 1,420
---------------- -----------------
Cash and cash equivalents 21,665 21,987
Investments:
Available-for-sale, at market value 242,608 205,711
Held-to-maturity (market value at March 31, 1999 - $78,787;
at December 31, 1998 - $80,873) 78,389 80,306
Federal Home Loan Bank stock, at cost 14,987 10,487
Loans, net 682,321 651,858
Bank premises and equipment 4,450 4,633
Investment in Real Estate Partnership - 13,541
Accrued interest receivable 5,645 4,957
Foreclosed real estate owned 938 902
Cash surrender value life insurance 17,072 16,873
Goodwill 730 759
Other assets 7,791 7,355
---------------- -----------------
$ 1,076,596 $ 1,019,369
================ =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 689,429 $ 706,195
Borrowings 287,225 210,225
Mortgage escrow 3,961 1,652
Other liabilities 6,167 5,929
---------------- -----------------
Total liabilities 986,782 924,001
---------------- -----------------
Stockholders' Equity:
Preferred stock - par value $.01; 1,000,000 shares
authorized, none issued - -
Common stock - par value $.01; 15,000,000 shares
authorized; 5,301,065 issued at March 31, 1999 and
5,297,932 issued at December 31, 1998 53 53
Additional paid in capital 51,485 51,430
Retained earnings 47,555 44,205
Accumulated other comprehensive income (loss) (276) 160
Less: Treasury stock, at cost, 261,500 shares at March 31, 1999,
none at December 31, 1998 (8,523) -
Less: Unallocated ESOP shares (48,000 shares) (480) (480)
---------------- -----------------
Total stockholders' equity 89,814 95,368
---------------- -----------------
$ 1,076,596 $ 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
MARCH 31, 1999 MARCH 31, 1998
-------------- --------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 12,738 $ 11,686
Interest and dividends on investment securities:
Interest on debt securities 4,386 3,482
Dividends on equity securities 232 145
-------------- --------------
4,618 3,627
Other interest income 326 391
-------------- --------------
Total interest income 17,682 15,704
-------------- --------------
Interest expense:
Interest on deposits:
Savings deposits 754 707
Time deposits 4,862 5,231
-------------- --------------
Total interest on deposits 5,616 5,938
Interest on borrowings 3,242 2,170
-------------- --------------
Total interest expense 8,858 8,108
-------------- --------------
Net interest income 8,824 7,596
Provision for loan losses - 300
-------------- --------------
Net interest income after provision for loan losses 8,824 7,296
-------------- --------------
Other income:
Service charges on deposit accounts 687 598
Investment brokerage services commissions 604 682
Appreciation of cash surrender value life insurance 228 234
Loan servicing and other fees 142 141
Income from investment in Real Estate Partnership 13 179
Gain on sale of headquarters building owned by
the Real Estate Partnership 2,096 -
Net gain on calls / sales of investment securities 5 4
Net gain on sales of loans 3 25
Other 274 404
-------------- --------------
Total other income 4,052 2,267
-------------- --------------
Other expenses:
Salaries, commissions and employee benefits 3,283 3,155
Occupancy 775 783
Data processing 313 277
Advertising 251 296
Furniture and equipment 245 240
Legal and accounting 145 158
Communications 138 134
Operation of foreclosed real estate owned 103 94
Write-downs and net losses on sale
of foreclosed real estate owned - 60
Amortization of goodwill 29 -
Other 696 670
-------------- --------------
Total other expenses 5,978 5,867
-------------- --------------
Income before income taxes and extraordinary item 6,898 3,696
Income tax expense 2,317 1,413
-------------- --------------
Income before extraordinary item 4,581 2,283
Extraordinary item, early extinguishment of
borrowings, net of tax (Note 6) (435) (119)
-------------- --------------
Net income $ 4,146 $ 2,164
============== ==============
Earnings per share:
Basic:
Income before extraordinary item $ 0.90 $ 0.43
Extraordinary item $ (0.09) $ (0.02)
Net income $ 0.81 $ 0.41
Diluted:
Income before extraordinary item $ 0.87 $ 0.43
Extraordinary item $ (0.08) $ (0.02)
Net income $ 0.79 $ 0.41
Weighted average shares outstanding:
Basic 5,099 5,222
Diluted 5,251 5,300
The accompanying notes are integral part of these consolidated financial statements
</TABLE>
2
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID IN RETAINED COMPREHENSIVE
(in thousands) STOCK CAPITAL EARNINGS INCOME (LOSS)
------------- -------------- ------------ -----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997 $ 53 $ 50,927 $ 37,891 $ 398
Comprehensive income:
1998 net income - - 2,164 -
Net unrealized gains (losses) on securities, net of
reclassification adjustment - - - 22
Comprehensive income
Exercise of stock options - 11 - -
------------- -------------- ------------ -----------------
Balance at March 31, 1998 $ 53 $ 50,938 $ 40,055 $ 420
============= ============== ============ =================
Balance at December 31, 1998 $ 53 $ 51,430 $ 44,205 $ 160
Comprehensive income:
1999 net income - - 4,146 -
Net unrealized gains (losses) on securities, net of
reclassification adjustment - - - (436)
Comprehensive income
Treasury stock purchased (261,500 shares) - - - -
Dividends paid ($0.15 per share) (796)
Exercise of stock options - 55 - -
------------- -------------- ------------ -----------------
Balance at March 31, 1999 $ 53 $ 51,485 $ 47,555 $ (276)
============= ============== ============ =================
<CAPTION>
UNALLOCATED
TREASURY ESOP
(in thousands) STOCK SHARES TOTAL
------------- -------------- ------------
<S> <C> <C> <C>
Balance at December 31, 1997 $ - $ (720) $ 88,549
Comprehensive income:
1998 net income - - 2,164
Net unrealized gains (losses) on securities, net of
reclassification adjustment - - 22
------------
Comprehensive income 2,186
------------
Exercise of stock options - - 11
------------- -------------- ------------
Balance at March 31, 1998 $ - $ (720) $ 90,746
============= ============== ============
Balance at December 31, 1998 $ - $ (480) $ 95,368
Comprehensive income:
1999 net income - - 4,146
Net unrealized gains (losses) on securities, net of
reclassification adjustment - - (436)
------------
Comprehensive income 3,710
------------
Treasury stock purchased (261,500 shares) (8,523) - (8,523)
Dividends paid ($0.15 per share) (796)
Exercise of stock options - - 55
------------- -------------- ------------
Balance at March 31, 1999 $ (8,523) $ (480) $ 89,814
============= ============== ============
</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, 1999 MARCH 31, 1998
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,146 $ 2,164
---------------- ----------------
Adjustments to reconcile net income to cash provided by operating
activities:
Provision for loan losses - 300
Depreciation and amortization 256 236
Amortization of investment security premiums/discounts, net (13) 29
Deferred loan costs, net of amortization (239) (172)
Net gain on sale of loans (3) (25)
Proceeds from loan sales 302 5,261
Originations of loans held for sale (299) (5,798)
Decrease in deferred tax assets - 629
Realized gains on calls/sales of securities (5) (4)
Increase in interest and dividend receivables (688) (374)
Income from investment in Real Estate Partnership (13) (179)
Gain on sale of headquarters building owned by the Real Estate Partnership (2,096) -
Write-downs and net losses on sale of foreclosed real estate owned - 60
Increase in cash surrender value life insurance (199) (209)
Increase in other assets (117) (19)
Increase (decrease) in other liabilities 238 (645)
---------------- ----------------
Total adjustments (2,876) (910)
---------------- ----------------
Net cash provided by operating activities 1,270 1,254
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of available-for-sale securities - 15,753
Proceeds from principal payments on available-for-sale securities 18,255 10,696
Proceeds from principal payments on held-to-maturity securities 10,152 10,969
Proceeds from maturities and calls of available-for-sale securities 3,000 6,552
Proceeds from maturities and calls of held-to-maturity securities 6,000 5,000
Purchases of available-for-sale securities (58,905) (43,253)
Purchases of held-to-maturity securities (14,189) (38,485)
Purchases of Federal Home Loan Bank stock (4,500) (2,237)
Net originations and purchases of loans (30,709) (10,882)
Proceeds from sale of headquarters building owned by the Real Estate Partnership 15,610 -
Decrease in investment in Real Estate Partnership 40 554
Proceeds from sale of foreclosed real estate owned 448 337
Purchases of bank premises and equipment (73) (126)
---------------- ----------------
Net cash used in investing activities (54,871) (45,122)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, money market and savings accounts 2,898 4,490
Net (decrease) increase in certificates of deposit (19,664) 13,730
Net increase in mortgage escrow 2,309 2,085
Increase in FHLB borrowings 345,540 75,068
Repayments of FHLB borrowings (268,540) (43,323)
Issuance of common stock 55 11
Dividends paid (796) -
Purchases of treasury stock (8,523) -
---------------- ----------------
Net cash provided by financing activities 53,279 52,061
---------------- ----------------
Net (decrease) increase in cash and cash equivalents (322) 8,193
---------------- ----------------
Cash and cash equivalents at beginning of period 21,987 33,024
---------------- ----------------
Cash and cash equivalents at end of period $ 21,665 $ 41,217
================ ================
</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 THREE MONTHS ENDED
(in thousands) MARCH 31, 1999 MARCH 31, 1998
---------------- ----------------
<S> <C> <C>
Non-cash investing and financing activities
Change in net unrealized gain (loss) on securities available-for-sale $ (753) $ (39)
Change in net unrealized gain (loss) on securities held-to-maturity 27 51
Transfer of loans to foreclosed real estate owned 580 331
Supplemental disclosures of cash flow information
Income taxes paid 503 813
Interest paid 8,748 7,964
</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 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 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 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.
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, 1999 of available-for-sale
securities were as follows:
6
<PAGE>
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U. S. Government and agency securities $ 8,995 $ 14 $ 41 $ 8,968
Mortgage-backed securities 210,934 706 546 211,094
Debt securities issued by foreign governments 350 - - 350
Corporate debt securities 2,996 - 66 2,930
Marketable equity securities 3,186 99 376 2,909
Mutual funds 16,455 36 134 16,357
--------- ---------- ---------- ---------
$ 242,916 $ 855 $ 1,163 $ 242,608
========= ========== ========== =========
</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 March 31, 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 $ 26,996 $ 19 $ 207 $ 26,808
Mortgage-backed securities 50,393 709 68 51,034
Corporate debt securities 1,000 - 55 945
--------- ---------- ---------- ---------
$ 78,389 $ 728 $ 330 $ 78,787
========= ========== ========== =========
</TABLE>
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>
7
<PAGE>
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,
1999 1998
-------------- -----------------
<S> <C> <C>
Balance at beginning of year $ 12,301 $ 14,031
Provision for loan losses - 300
Loan charge-offs (624) (802)
Loan recoveries 177 112
-------------- -----------------
Balance $ 11,854 $ 13,641
============== =================
</TABLE>
NOTE 4 - NON-PERFORMING ASSETS
The components of non-performing assets were as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Non-accrual loans $ 2,209 $ 2,949
Accruing loans past due more than 90 days - -
-------------- -----------------
Total non-performing loans 2,209 2,949
Foreclosed real estate owned 938 902
-------------- -----------------
Total non-performing assets $ 3,147 $ 3,851
============== =================
Non-performing assets as a
percentage of total assets 0.29% 0.38%
============== =================
Non-performing assets as a
percentage of gross loans and
foreclosed real estate owned 0.45% 0.58%
============== =================
Allowance for loan losses
as a percentage of
non-performing loans 536.62% 417.12%
============== =================
</TABLE>
NOTE 5 - INVESTMENT IN REAL ESTATE PARTNERSHIP
The Bank's subsidiary, Eighty Pearl Street Corporation owns 50% of Pearl Street
Associates Limited Partnership ("the Real Estate 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 $15.24 million and
recognized a $2.10 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.
NOTE 6 - BORROWINGS
Advances from the Federal Home Loan Bank of Boston ("FHLB") and the repayment
schedule were as follows:
8
<PAGE>
<TABLE>
<CAPTION>
MATURITY DATE INTEREST RATE MARCH 31, 1999 DECEMBER 31, 1998
- ---------------------- --------------- ---------------- -----------------
<S> <C> <C> <C>
March 3, 1999 5.13% $ - $ 10,000
April 7, 1999 4.91 15,000 -
April 21, 1999 4.88 15,000 -
April 26, 1999 4.84 20,000 -
April 30, 1999 4.95 12,000 -
May 24, 1999 4.95 8,000 -
July 28, 1999 4.79 7,000 -
August 4, 1999 4.83 10,000 -
August 19, 1999 4.94 10,000 10,000
November 15, 1999 4.94 7,000 7,000
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
December 15, 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 21, 2003 * 4.99 20,000 -
October 21, 2003 * 4.19 5,000 5,000
November 3, 2004 * 5.80 10,000 10,000
January 10, 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 -
---------------- -----------------
$ 286,745 $ 209,745
================ =================
</TABLE>
* initial call dates ranging from April 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
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. Due to this prepayment penalty, the
Company reported a $119 extraordinary item, which is net of $73 in taxes, due to
the early extinguishment of borrowings. This 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
9
<PAGE>
fluctuations in interest rates and restructured it's borrowing portfolio
accordingly. Management believes both transactions will 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 March 31, 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 5,099,172 and 5,221,585 for the
quarters ended March 31, 1999 and 1998, respectively. The effect of dilutive
stock options was 151,704 and 78,327 shares for the quarters ended March 31,
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 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, 1999. 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
10
<PAGE>
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 first 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 $ (753) $ 301 $ (452)
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 27 (11) 16
--------- --------- ---------
Net unrealized gains (losses) on securities $ (726) $ 290 $ (436)
========= ========= =========
</TABLE>
The following table represents 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
arising during the period $ (34) $ 14 (20)
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>
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 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 $8.52 million during the quarter.
11
<PAGE>
On April 20, 1999, the Company declared a quarterly dividend of $0.20 per share
on its common stock. The dividend will be paid on May 14, 1999 to shareholders
of record on May 3, 1999.
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The statements in the following discussions 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.
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.
The Company reported net income of $4.15 million for the first quarter ended
March 31, 1999 compared to $2.16 million for the same period in 1998. 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 $15.24 million and
recognized a $2.10 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.
FINANCIAL CONDITION
Total assets as of March 31, 1999 were $1,076.60 million representing an
increase of $57.23 million or 5.6% from $1,019.37 million at December 31, 1998.
The Company's Tier 1 leverage ratio was 8.61% at March 31, 1999 compared to
9.63% at December 31, 1998. The Company's total risk-based capital ratio was
14.04% at March 31, 1999 compared to 15.75% at December 31, 1998.
13
<PAGE>
Cash and cash equivalents decreased slightly from $21.99 million at December 31,
1998 to $21.67 million at March 31, 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 $34.98 million or 12.2% from $286.02 million at
December 31, 1998 to $321.00 million at March 31, 1999 primarily due to an
increase in the mortgage-backed securities portfolio of $29.91 million and an
increase in U.S. Government and agency securities of $7.94 million. Funds
available for investment increased mainly due to increased Federal Home Loan
Bank ("FHLB") borrowings. At March 31, 1999, the Company held $78.39 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 $4.50 million from the FHLB during the first
three months of 1999. The Company believes that these shares provide above
average dividend yields for the risk characteristics of such investments.
Net loans increased $30.46 million or 4.7% from $651.86 million at December 31,
1998 to $682.32 million at March 31, 1999. The majority of the increase came
from a $20.46 million increase in loans secured by one- to four-family real
estate, a $4.70 million increase in the installment loan portfolio and a $4.19
million increase in commercial real estate mortgages. The allowance for loan
losses totaled $11.85 million at March 31, 1999 compared to $12.30 million at
December 31, 1998. There were no provisions for loan losses recorded during the
three months ended March 31, 1999 and net charge-offs totaled $447,000. The
allowance for loan losses as a percentage of non-performing loans was 417.12%
and 536.62% at December 31, 1998 and March 31, 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 to New Boston Limited Partnership, an independent third party. Eighty
Pearl Street Corporation received proceeds of $15.24 million and recognized a
$2.10 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 increased from $902,000 at December 31, 1998 to
$938,000 at March 31, 1999. The Company sold eight properties totaling $448,000
during the three months ended March 31, 1999. There were no write-downs and net
losses on sale of foreclosed real estate owned for the first three months of
1999, compared to $60,000 for the same period in 1998.
Non-performing assets totaled $3.15 million at March 31, 1999 compared to $3.85
million at December 31, 1998. Charge-offs on non-performing loans reduced
non-performing assets by $624,000. Sales of foreclosed real estate owned
accounted for an additional $448,000 of the reductions. There were other
reductions of non-performing assets of $1.12 million due to payoffs, payments
and loans returning to accrual status. These reductions were offset by $1.49
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 0.29% at March 31, 1999. Non-performing assets as a percentage of total
loans and foreclosed real estate owned was 0.58% at December 31, 1998 and 0.45%
at March 31, 1999.
Deposits decreased 2.4% from $706.20 million at December 31, 1998 to $689.43
million at March 31, 1999. The decrease was mainly in one year certificates of
deposits.
Borrowings from the FHLB increased $77.00 million from December 31, 1998 to
March 31, 1999. These borrowings were mainly used to fund investments and loans.
The Company's $286.75 million of FHLB advances carry a weighted average rate of
5.08% and have a weighted average contractual maturity of 4.3 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, $147.00 million or 51.3%
14
<PAGE>
of the FHLB borrowings at March 31, 1999 were callable and had call dates
ranging from April 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
interest rate of 6.21% and incurred a $223 prepayment penalty. Due to these
prepayment penalties, the Company reported a $435 extraordinary item, net of
$220 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 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. Due to this prepayment penalty, the
Company reported a $119 extraordinary item, net of $73 in taxes due to the early
extinguishment of debt. This 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 it's borrowing portfolio accordingly. Management believes both
transactions will 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 March 31, 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 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
15
<PAGE>
band. At March 31, 1999, the Company was within its policy guideline, and the
Company believes its level of interest rate sensitivity was appropriate.
CAPITAL RESOURCES
At March 31, 1999, the Company's stockholders' equity totaled $89.81 million
representing a 5.8% decrease from the $95.37 million in capital at December 31,
1998. At March 31, 1999, the Company had a Tier 1 leverage capital ratio of
8.61% and a total risk-based capital ratio of 14.04%. 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 March 31, 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
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. The Company expects all testing and implementation
of critical systems to be completed by 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 March 31,
1999, the Company estimates its vendors' software was 90% renovated.
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 expects to test its core processing system
again with a focus on multiple future date testing during May 1999.
The completion of the successful Fiserv test constitutes a large part of the
Company's internal testing. The Company has also tested substantially all of its
computer hardware, as well as many of its other IT and non-IT systems. The
Company estimates its testing to be 70% complete after the Fiserv test.
The Company expects to be fully compliant with all of its IT and non-IT systems
and vendors by June 30, 1999. The most reasonably likely worst case Y2K scenario
would probably be a low priority vendor's
16
<PAGE>
software program's short term malfunction. The Company has developed contingency
plans to address various Year 2000 disruption scenarios. 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.
The Company expects Y2K issues to have no material effects on results of
operations, liquidity or financial condition. The Company expects that
expenditures associated with the Y2K effort will not exceed $350,000 with
approximately $200,000 spent to date. These costs will consist primarily of
purchases of new equipment and software which will be depreciated over their
respective useful lives.
The Company, in its attempt to mitigate risk in its commercial loan portfolio,
will 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 March 31, 1999, this review was approximately 85% complete.
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 is following up with its borrowers
concerning Y2K during Spring 1999.
RESULTS OF OPERATIONS
FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
For the quarter ended March 31, 1999, the Company reported net income of $4.15
million or $0.79 per diluted share compared to $2.16 million or $0.41 per
diluted share for the same period in 1998. Income before income taxes and
extraordinary items was $6.90 million for the first quarter of 1999 compared to
$3.70 million for the first quarter in 1998. 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 and recognized a $2.10 million gain on the sale. In addition,
net interest income increased $1.22 million from quarter to quarter.
NET INTEREST INCOME
Net interest income totaled $8.82 million for the three months ended March 31,
1999 compared to $7.60 million for the same period in 1998, representing a $1.22
million or 16.2% increase. The net interest margin slightly decreased from 3.69%
for the quarter ended March 31, 1998 to 3.66% for the same period in 1999.
Average interest-earning assets increased $143.40 million while average
interest-bearing liabilities increased $114.09 million. Average net loans and
investment securities increased $88.11 million and $62.54 million, respectively.
U.S. government and agency securities and mortgage-backed securities were the
main reasons for the increase in average investment securities. Average net
loans increased primarily due to a $40.05 million increase in one- to
four-family mortgages, a $17.47 million increase in consumer loans and a $16.31
million increase in average commercial real estate mortgages. Average borrowings
increased $102.21 million from quarter to quarter.
17
<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, 1999 and 1998:
<TABLE>
<CAPTION>
AVERAGE BALANCE INCOME / EXPENSE YIELD
------------------------------- ------------------------------ ----------------------------
QUARTERS ENDED MARCH 31, QUARTERS ENDED MARCH 31, QUARTERS ENDED MARCH 31,
(in thousands) 1999 1998 1999 1998 1999 1998
-------------- ------------- ------------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 666,157 $ 578,048 $ 12,738 $ 11,686 7.75 % 8.20 %
Investment securities 306,455 243,920 4,880 3,846 6.46 6.39
Short-term investments 5,564 12,813 64 172 4.66 5.44
-------------- ------------- ------------- -------------- ------------ ------------
Total interest-earning assets 978,176 834,781 17,682 15,704 7.33 7.63
Other assets 57,717 70,284
-------------- -------------
Total assets $ 1,035,893 $ 905,065
============== =============
Money market checking $ 42,493 $ 34,917 119 105 1.14 1.22
Money market savings 59,747 53,548 365 312 2.48 2.36
Savings and other 108,952 110,081 403 408 1.50 1.50
Certificates of deposit 397,767 398,535 4,729 5,113 4.82 5.20
-------------- ------------- ------------- -------------- ------------ ------------
Total interest-bearing deposits 608,959 597,081 5,616 5,938 3.74 4.03
Borrowings 249,709 147,500 3,242 2,170 5.27 5.97
-------------- ------------- ------------- -------------- ------------ ------------
Total interest-bearing
liabilities 858,668 744,581 8,858 8,108 4.18 4.42
Demand deposits 80,045 66,414
Other liabilities 5,307 4,221
Stockholders' equity 91,873 89,849
-------------- -------------
Total liabilities and equity $ 1,035,893 $ 905,065
============== =============
Net interest income $ 8,824 $ 7,596
============= ==============
Spread on interest-bearing funds 3.15 % 3.21 %
Net interest margin 3.66 % 3.69 %
</TABLE>
18
<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, 1999 VERSUS 1998
CHANGE IN INTEREST DUE TO
-------------------------------------------------------------------
(in thousands) VOLUME RATE VOL/RATE NET
-------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Loans, net $ 1,781 $ (633) $ (96) $ 1,052
Investment securities 986 38 10 1,034
Short-term investments (97) (25) 14 (108)
-------------- ------------- ------------- --------------
Total 2,670 (620) (72) 1,978
-------------- ------------- ------------- --------------
Money market checking 23 (7) (2) 14
Money market savings 36 15 2 53
Savings and other (4) (1) - (5)
Certificates of deposit (10) (375) 1 (384)
Borrowings 1,504 (255) (177) 1,072
-------------- ------------- ------------- --------------
Total 1,549 (623) (176) 750
-------------- ------------- ------------- --------------
Net change to interest income $ 1,121 $ 3 $ 104 $ 1,228
============== ============= ============= ==============
</TABLE>
INTEREST INCOME
Interest income increased $1.98 million or 12.6% due primarily to increased
average volumes of net loans and investment securities of $88.11 million and
$62.54 million, respectively. Overall average yields decreased from 7.63% for
the first quarter of 1998 to 7.33% for the same period in 1999. This was
primarily due to a 45 basis point decrease in the average yields for net loans.
INTEREST EXPENSE
Interest expense increased $750,000 or 9.3% from the first 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
4.42% for the first 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 first quarter of 1999 compared
to $300,000 for the first quarter of 1998. The Company's percentage of allowance
for loan losses to non-performing loans was 536.62% at March 31, 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 1.71% at March 31, 1999.
19
<PAGE>
OTHER INCOME
The Company recorded $4.05 million in other income for the three months ended
March 31, 1999 compared to $2.27 million for the same period in 1998. The
following table shows the components of other income for the quarters ended
March 31, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands) FOR THE QUARTERS ENDED $ %
MARCH 31, 1999 MARCH 31, 1998 CHANGE CHANGE
------------------ ------------------ ----------- ---------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 687 $ 598 $ 89 14.88%
Investment brokerage services commissions 604 682 (78) (11.44)
Appreciation of cash surrender value life insurance 228 234 (6) (2.56)
Loan servicing and other fees 142 141 1 0.71
Income from investment in Real Estate Partnership 13 179 (166) (92.74)
Gain on sale of headquarters building owned by
the Real Estate Partnership 2,096 - 2,096 n/a
Net gain on calls / sales of investment securities 5 4 1 25.00
Net gain on sales of loans 3 25 (22) (88.00)
Other 274 404 (130) (32.18)
------------------ ------------------ -----------
Total other income $ 4,052 $ 2,267 $ 1,785 78.74%
================== ================== =========== =========
</TABLE>
Service charges on deposit accounts increased mainly due to an increase in the
rates charged for overdraft fees. Investment brokerage services commissions
decreased primarily due to lower variable annuity sales in the first quarter of
1999. On February 11, 1999, the Real Estate Partnership sold the headquarters
building which resulted in a gain of $2.10 million. Due to the sale, the income
from the investment in Real Estate Partnership decreased from quarter to
quarter. Other income decreased due mainly to a reduced distribution from the
Bank's investment in a small business investment company and 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.
OTHER EXPENSES
Other expenses totaled $5.98 million for the three months ended March 31, 1999
compared to $5.88 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 $ %
MARCH 31, 1999 MARCH 31, 1998 CHANGE CHANGE
----------------- ---------------- ------- -------
<S> <C> <C> <C> <C>
Salaries, commissions and employee benefits $ 3,283 $ 3,155 $ 128 4.06%
Occupancy 775 783 (8) (1.02)
Data processing 313 277 36 13.00
Advertising 251 296 (45) (15.20)
Furniture and equipment 245 240 5 2.08
Legal and accounting 145 158 (13) (8.23)
Communications 138 134 4 2.99
Operation of foreclosed real estate owned 103 94 9 9.57
Write-downs and net losses on sale
of foreclosed real estate owned - 60 (60) (100.00)
Amortization of goodwill 29 - 29 n/a
Other 696 670 26 3.88
----------------- ---------------- -------
Total other expenses $ 5,978 $ 5,867 $ 111 1.89%
================= ================ ======= ========
</TABLE>
Salaries, commissions and employee benefits increased primarily due to an
increase in overall salaries. Data processing increased mainly due to increases
in fees from the Bank's core system third party provider as a result of two new
branch openings in July 1998 and Year 2000 costs. Advertising decreased mainly
20
<PAGE>
due to print and broadcast expenses. Amortization of goodwill is a result of the
July 1998 purchase of the two branches from Chase Manhattan Bank.
INCOME TAXES
During the first quarter of 1999, the Company recorded tax expense of $2.32
million compared to $1.41 million for the first quarter of 1998. The effective
tax rates for the three months ended March 31, 1999 and 1998 were 33.6% and
38.2%, respectively. The decrease in the effective tax rate is primarily due to
the formation of MMC.
PART I. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 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) $ (1,396) $ (774)
100 basis point increase in rates (d) (534) (231)
100 basis point decrease in rates (d) (278) (70)
200 basis point decrease in rates (c) (116) 91
</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
21
<PAGE>
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:
On January 25, 1999, the Company filed a Form 8-K announcing that its Board
of Directors adopted a stock repurchase program. The program authorized the
Company to repurchase up to 5% of its issued and outstanding common stock
at prevailing market rates in negotiated and/or open market purchases.
On February 19, 1999, the Company filed a Form 8-K announcing the sale of
their banking and office complex at 100 Pearl Street in Hartford to the New
Boston Pearl Limited Partnership, an independent third party. The sale
resulted in $15.2 million in net proceeds and a $2.1 million gain.
Mechanics Savings Bank will continue to occupy its banking and office space
at 100 Pearl Street under a long term lease.
22
<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: 5/3/99 /S/ EDGAR C. GERWIG
-------------------
Chairman, President and Chief Executive
Officer
Date: 5/3/99 /S/ THOMAS M. WOOD
------------------
Executive Vice President and Treasurer
Date: 5/3/99 /S/ BRIAN A. ORENSTEIN
----------------------
Senior Vice President and Controller
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 19,750
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,915
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 242,608
<INVESTMENTS-CARRYING> 78,389
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<LOANS> 691,492
<ALLOWANCE> (11,854)
<TOTAL-ASSETS> 1,076,596
<DEPOSITS> 689,429
<SHORT-TERM> 104,000
<LIABILITIES-OTHER> 10,128
<LONG-TERM> 183,225
0
0
<COMMON> 53
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<EXPENSE-OTHER> 5,978
<INCOME-PRETAX> 6,898
<INCOME-PRE-EXTRAORDINARY> 4,581
<EXTRAORDINARY> (435)
<CHANGES> 0
<NET-INCOME> 4,416
<EPS-PRIMARY> 0.81
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<LOANS-NON> 2,209
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