<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 June 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 June 30, 1999)
<PAGE>
Table of Contents
-----------------
<TABLE>
<CAPTION>
Part I. Item 1. Financial Information Page
<S> <C>
A. Consolidated Statements of Condition as of June 30, 1999 and
December 31, 1998 1
B. Consolidated Statements of Operations for the Three and Six Month Periods
Ended June 30, 1999 and June 30, 1998 2
C. Consolidated Statements of Changes in Stockholders' Equity for the Six 3
Month Periods Ended June 30, 1999 and June 30, 1998
D. Consolidated Statements of Cash Flows for the Six Month Periods Ended 4
June 30, 1999 and June 30, 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 25
Part II. Other Information 25
Signatures 27
Exhibit 28
</TABLE>
<PAGE>
MECH Financial, Inc. and Subsidiaries
Consolidated Statements of Condition (unaudited)
<TABLE>
<CAPTION>
(dollars in thousands) June 30, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest-bearing deposits and cash $ 22,940 $ 20,567
Short-term investments 75 1,420
------------- -----------------
Cash and cash equivalents 23,015 21,987
Investments:
Available-for-sale, at market value 255,064 205,711
Held-to-maturity (market value at June 30, 1999 - $71,759;
at December 31, 1998 - $80,873) 72,714 80,306
Federal Home Loan Bank stock, at cost 15,837 10,487
Loans, net 701,522 651,858
Bank premises and equipment 4,293 4,633
Investment in Real Estate Partnership - 13,541
Accrued interest receivable 5,812 4,957
Foreclosed real estate owned 681 902
Cash surrender value life insurance 17,279 16,873
Goodwill 701 759
Other assets 8,567 7,355
------------- -----------------
$ 1,105,485 $ 1,019,369
============= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 686,874 $ 706,195
Borrowings 316,017 210,225
Mortgage escrow 6,566 1,652
Other liabilities 5,496 5,929
------------- -----------------
Total liabilities 1,014,953 924,001
------------- -----------------
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 June 30, 1999 and
5,297,932 issued at December 31, 1998
Additional paid in capital 51,570 51,430
Retained earnings 50,019 44,205
Accumulated other comprehensive income (loss) (2,107) 160
Less: Treasury stock, at cost, 261,500 shares at June 30, 1999,
none at December 31, 1998 (8,523) -
Less: Unallocated ESOP shares (48,000 shares) (480) (480)
------------- -----------------
Total stockholders' equity 90,532 95,368
------------- -----------------
$ 1,105,485 $ 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 six months ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Interest and fees on loans $ 13,099 $ 11,934 $ 25,837 $ 23,620
Interest and dividends on investment securities:
Interest on debt securities 4,839 3,746 9,225 7,228
Dividends on equity securities 284 201 515 346
------------- ------------- ------------- -------------
5,123 3,947 9,740 7,574
Other interest income 264 594 590 985
------------- ------------- ------------- -------------
Total interest income 18,486 16,475 36,167 32,179
------------- ------------- ------------- -------------
Interest expense:
Interest on deposits:
Savings deposits 800 702 1,553 1,409
Time deposits 4,615 5,385 9,478 10,616
------------- ------------- ------------- -------------
Total interest on deposits 5,415 6,087 11,031 12,025
Interest on borrowings 3,869 2,511 7,111 4,681
------------- ------------- ------------- -------------
Total interest expense 9,284 8,598 18,142 16,706
------------- ------------- ------------- -------------
Net interest income 9,202 7,877 18,025 15,473
Provision for loan losses - 300 - 600
------------- ------------- ------------- -------------
Net interest income after provision for loan losses 9,202 7,577 18,025 14,873
------------- ------------- ------------- -------------
Other income:
Service charges on deposit accounts 698 631 1,385 1,229
Investment brokerage services commissions 663 613 1,267 1,295
Appreciation of cash surrender value life insurance 236 225 464 459
Loan servicing and other fees 147 194 289 335
Gain on sale of headquarters building owned by
the Real Estate Partnership 51 - 2,148 -
Net gain on sales of loans 17 20 20 45
Income from investment in Real Estate Partnership - 189 13 368
Net gain on calls / sales of investment securities - - 5 4
Other 203 245 476 773
------------- ------------- ------------- -------------
Total other income 2,015 2,117 6,067 4,508
------------- ------------- ------------- -------------
Other expenses:
Salaries, commissions and employee benefits 3,374 3,030 6,656 6,229
Occupancy 755 787 1,531 1,570
Data processing 305 293 617 570
Furniture and equipment 257 234 503 474
Advertising 182 160 433 456
Legal and accounting 167 170 312 328
Communications 129 123 267 257
Operation of foreclosed real estate owned 66 88 169 182
Amortization of goodwill 29 - 58 -
Write-downs and net losses on sale
of foreclosed real estate owned - 25 - 85
Other 709 706 1,405 1,456
------------- ------------- ------------- -------------
Total other expenses 5,973 5,616 11,951 11,607
------------- ------------- ------------- -------------
Income before income taxes and extraordinary item 5,244 4,078 12,141 7,774
Income tax expense 1,773 1,552 4,090 2,965
------------- ------------- ------------- -------------
Income before extraordinary item 3,471 2,526 8,051 4,809
Extraordinary item, early extinguishment of
borrowings, net of tax (Note 6) - - (435) (119)
------------- ------------- ------------- -------------
Net income $ 3,471 $ 2,526 $ 7,616 $ 4,690
============= ============= ============= =============
Earnings per share:
Basic:
Income before extraordinary item $ 0.70 $ 0.48 $ 1.60 $ 0.92
Extraordinary item $ - $ - $ (0.09) $ (0.02)
Net income $ 0.70 $ 0.48 $ 1.51 $ 0.90
Diluted:
Income before extraordinary item $ 0.67 $ 0.47 $ 1.54 $ 0.90
Extraordinary item $ - $ - $ (0.08) $ (0.02)
Net income $ 0.67 $ 0.47 $ 1.46 $ 0.88
Weighted average shares outstanding:
Basic 4,994 5,223 5,046 5,222
Diluted 5,172 5,364 5,212 5,333
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
2
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
For the six months ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid in Retained Comprehensive Treasury
(in thousands) Stock Capital Earnings Income (Loss) Stock
-------- ---------- ---------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1997 $ 53 $ 50,927 $ 37,891 $ 398 $ -
Comprehensive income:
1998 net income - - 4,690 - -
Net unrealized gains (losses) on securities, net of
reclassification adjustment - - - 219 -
Comprehensive income
Dividends paid ($0.15 per share) - - (794) - -
Exercise of stock options - 34 - - -
-------- ---------- --------- --------------- ----------
Balance at June 30, 1998 $ 53 $ 50,961 $ 41,787 $ 617 $ -
======== ========== ========= =============== ==========
Balance at December 31, 1998 $ 53 $ 51,430 $ 44,205 $ 160 $ -
Comprehensive income:
1999 net income - - 7,616 - -
Net unrealized gains (losses) on securities, net of
reclassification adjustment - - - (2,267) -
Comprehensive income
Treasury stock purchased (261,500 shares) - - - - (8,523)
Dividends paid ($0.35 per share) - - (1,802) - -
Exercise of stock options - 140 - - -
-------- ---------- --------- ---------------- ----------
Balance at June 30, 1999 $ 53 $ 51,570 $ 50,019 $ (2,107) $ (8,523)
======== ========== ========= ================ ==========
<CAPTION>
Unallocated
ESOP
Shares Total
------------ -----------
<S> <C> <C>
Balance at December 31, 1997 $ (720) $ 88,549
Comprehensive income:
1998 net income - 4,690
Net unrealized gains (losses) on securities, net of
reclassification adjustment - 219
-----------
Comprehensive income 4,909
-----------
Dividends paid ($0.15 per share) - (794)
Exercise of stock options - 34
------------ -----------
Balance at June 30, 1998 $ (720) $ 92,698
============ ===========
Balance at December 31, 1998 $ (480) $ 95,368
Comprehensive income:
1999 net income - 7,616
Net unrealized gains (losses) on securities, net of
reclassification adjustment - (2,267)
-----------
Comprehensive income 5,349
-----------
Treasury stock purchased (261,500 shares) - (8,523)
Dividends paid ($0.35 per share) - (1,802)
Exercise of stock options - 140
------------ -----------
Balance at June 30, 1999 $ (480) $ 90,532
============ ===========
</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 six months ended
(in thousands) June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,616 $ 4,690
------------- -------------
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses - 600
Depreciation and amortization 506 471
Amortization of investment security premiums/discounts, net (24) 82
Deferred loan costs, net of amortization (350) (480)
Net gain on sale of loans (20) (45)
Proceeds from loan sales 1,639 14,263
Originations of loans held for sale (1,619) (13,882)
Loss on retirement of bank premises and equipment 1 4
Decrease in deferred tax assets - 1,392
Realized gains on calls/sales of securities (5) (4)
Increase in interest and dividend receivables (855) (664)
Income from investment in Real Estate Partnership (13) (368)
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 (406) (407)
Decrease in other assets 32 48
Decrease in other liabilities (433) (295)
------------- -------------
Total adjustments (3,695) 800
------------- -------------
Net cash provided by operating activities 3,921 5,490
------------- -------------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities - 15,753
Proceeds from principal payments on available-for-sale securities 34,971 42,510
Proceeds from principal payments on held-to-maturity securities 15,857 12,040
Proceeds from maturities and calls of available-for-sale securities 3,000 6,847
Proceeds from maturities and calls of held-to-maturity securities 6,000 11,005
Purchases of available-for-sale securities (90,829) (90,618)
Purchases of held-to-maturity securities (14,189) (42,485)
Purchases of Federal Home Loan Bank stock (5,350) (2,587)
Net originations and purchases of loans (49,797) (19,855)
Proceeds from sale of 100 Pearl Street 15,702 -
Decrease in investment in Real Estate Partnership - 922
Proceeds from sale of foreclosed real estate owned 709 875
Purchases of bank premises and equipment (167) (344)
------------- -------------
Net cash used in investing activities (84,093) (65,937)
------------- -------------
Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts 16,072 5,787
Net (decrease) increase in certificates of deposit (35,393) 11,556
Net increase in mortgage escrow 4,914 4,358
Increase in FHLB borrowings 685,407 110,048
Repayments of FHLB borrowings (579,615) (73,303)
Issuance of common stock 140 34
Dividends paid (1,802) (794)
Purchases of treasury stock (8,523) -
------------- --------------
Net cash provided by financing activities 81,200 57,686
------------- --------------
Net (decrease) increase in cash and cash equivalents 1,028 (2,761)
------------- --------------
Cash and cash equivalents at beginning of period 21,987 33,024
------------- --------------
Cash and cash equivalents at end of period $ 23,015 $ 30,263
============= ==============
</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 six months ended
(in thousands) June 30, 1999 June 30, 1998
------------- -------------
<S> <C> <C>
Non-cash investing and financing activities
Change in net unrealized gain (loss) on securities available-for-sale $ (3,506) $ 239
Change in net unrealized gain (loss) on securities held-to-maturity 48 103
Transfer of loans to foreclosed real estate owned 613 426
Supplemental disclosures of cash flow information
Income taxes paid 3,853 1,788
Interest paid 17,851 16,472
</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
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.
Note 2 - Investments
The amortized cost and market values as of June 30, 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 $ 14,994 $ - $ 285 $ 14,709
Mortgage-backed securities 219,927 368 2,601 217,694
Debt securities issued by foreign governments 350 - - 350
Corporate debt securities 2,996 - 59 2,937
Marketable equity securities 3,185 113 368 2,930
Mutual funds 16,674 51 281 16,444
--------------- -------------------- ----------------- ---------------
$ 258,126 $ 532 $ 3,594 $ 255,064
=============== ==================== ================= ===============
</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 June 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 $ - $ 903 $ 26,097
Mortgage-backed securities 44,714 452 394 44,772
Corporate debt securities 1,000 - 110 890
---------------- ------------------ ---------------- ---------------
$ 72,714 $ 452 $ 1,407 $ 71,759
================ ================== ================ ===============
</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 six months ending
June 30, June 30,
1999 1998
------------------ ------------------
<S> <C> <C>
Balance at beginning of year $ 12,301 $ 14,031
Provision for loan losses - 600
Loan charge-offs (879) (1,916)
Loan recoveries 395 255
------------------ ------------------
Balance $ 11,817 $ 12,970
================== ==================
</TABLE>
Note 4 - Non-Performing Assets
The components of non-performing assets were as follows:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Non-accrual loans $ 2,043 $ 2,949
Accruing loans past due > 90 days - -
------------------ ------------------
Total non-performing loans 2,043 2,949
Foreclosed real estate owned 681 902
------------------ ------------------
Total non-performing assets $ 2,724 $ 3,851
================== ==================
Non-performing assets as a
percentage of total assets 0.25% 0.38%
================== ==================
Non-performing assets as a
percentage of gross loans and
foreclosed real estate owned 0.38% 0.58%
================== ==================
Allowance for loan losses
as a percentage of
non-performing loans 578.41% 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. 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. During the second quarter of 1999,
an additional $51 was received as a final reconciliation of the sale was
concluded. 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 June 30, 1999 December 31, 1998
- ---------------------- ----------------- ----------------------- -----------------------
<S> <C> <C> <C>
March 3, 1999 5.13 % $ - $ 10,000
July 1, 1999 6.15 6,792 -
July 19, 1999 4.83 15,000 -
July 28, 1999 4.79 7,000 -
July 28, 1999 5.18 12,000 -
August 4, 1999 4.83 10,000 -
August 19, 1999 4.94 10,000 10,000
August 26, 1999 4.99 10,000 -
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 -
----------------------- -----------------------
$ 315,537 $ 209,745
======================= =======================
</TABLE>
* initial call dates ranging from July 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
9
<PAGE>
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 believes these 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 June 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 4,993,550 and 5,222,739 for the
quarters ended June 30, 1999 and 1998, respectively. The weighted average shares
outstanding totaled 5,046,069 and 5,222,165 for the six months ended June 30,
1999 and 1998, respectively. The effect of dilutive stock options was 178,020
and 141,591 shares for the quarters ended June 30, 1999 and 1998, respectively.
The effect of dilutive stock options was 165,921 and 111,180 shares for the six
months ended June 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 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
10
<PAGE>
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 second 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 $ (2,753) $ 909 $ (1,844)
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 21 (8) 13
------------- ------------- -------------
Net unrealized gains (losses) on securities $ (2,732) $ 901 $ (1,831)
============= ============= =============
</TABLE>
The following table represents components and the related tax effects allocated
to other comprehensive income for the second 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 $ 278 $ (111) $ 167
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 51 (21) 30
------------- ------------- -------------
Net unrealized gains (losses) on securities $ 329 $ (132) $ 197
============= ============= =============
</TABLE>
The following table represents the components and the related tax effects
allocated to other comprehensive income for the first six months of 1999:
11
<PAGE>
<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 $ (3,506) $ 1,210 $ (2,296)
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 48 (19) 29
-------------- ------------- --------------
Net unrealized gains (losses) on securities $ (3,458) $ 1,191 $ (2,267)
============== ============= ==============
</TABLE>
The following table represents the components and the related tax effects
allocated to other comprehensive income for the first six 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 $ 244 $ (97) $ 147
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 102 (49) 53
------------ ------------- -------------
Net unrealized gains (losses) on securities $ 342 $ (123) $ 219
============ ============= =============
</TABLE>
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.
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 will be paid on August 13, 1999 to
shareholders of record on August 2, 1999.
12
<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 $3.47 million for the quarter ended June 30,
1999 compared to $2.53 million for the same period in 1998, an increase of
37.4%. For the six months ended June 30, 1999 and 1998, the Company reported
net income of $7.62 million and $4.69 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
$15.24 million and recognized a $2.10 million gain on the sale. The subsidiary
received an additional $51,000 during the second quarter of 1999 as a final
reconciliation of the sale was completed. 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 June 30, 1999 were $1,105.49 million representing an increase
of $86.12 million or 8.5% from $1,019.37 million at December 31, 1998. The
Company's Tier 1 leverage ratio was 8.44% at June
13
<PAGE>
30, 1999 compared to 9.63% at December 31, 1998. The Company's total risk-based
capital ratio was 14.06% at June 30, 1999 compared to 15.75% at December 31,
1998.
Cash and cash equivalents increased slightly from $21.99 million at December 31,
1998 to $23.02 million at June 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 $41.76 million or 14.6% from $286.02 million at
December 31, 1998 to $327.78 million at June 30, 1999 primarily due to an
increase in the mortgage-backed securities portfolio of $30.83 million and an
increase in U.S. Government and agency securities of $13.69 million. Funds
available for investment increased mainly due to increased Federal Home Loan
Bank ("FHLB") borrowings. At June 30, 1999, the Company held $72.71 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 $5.35 million from the FHLB during the first
six months of 1999. The Company believes that these shares provide above average
dividend yields for the risk characteristics of such investments.
Net loans increased $49.66 million or 7.6% from $651.86 million at December 31,
1998 to $701.52 million at June 30, 1999. The majority of the increase came from
a $36.71 million increase in loans secured by one- to four-family real estate, a
$5.85 million increase in commercial real estate mortgages and a $4.79 million
increase in the installment loan portfolio. The allowance for loan losses
totaled $11.82 million at June 30, 1999 compared to $12.30 million at December
31, 1998. There were no provisions for loan losses recorded during the three
months ended June 30, 1999 and net charge-offs totaled $37,000 during the second
quarter. The allowance for loan losses as a percentage of non-performing loans
was 417.12% and 578.41% at December 31, 1998 and June 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 $15.24 million and
recognized a $2.10 million gain on the sale. The subsidiary received an
additional $51,000 during the second quarter of 1999 as a final reconciliation
of the sale was completed. 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
$681,000 at June 30, 1999. The Company sold fifteen properties totaling $709,000
during the six months ended June 30, 1999. There were no write-downs and net
losses on sale of foreclosed real estate owned for the first six months of 1999,
compared to $85,000 for the same period in 1998.
Non-performing assets totaled $2.72 million at June 30, 1999 compared to $3.85
million at December 31, 1998. Charge-offs on non-performing loans reduced non-
performing assets by $878,000. Sales of foreclosed real estate owned accounted
for an additional $709,000 of the reductions. There were other reductions of
non-performing assets of $2.16 million due to payoffs, payments and loans
returning to accrual status. These reductions were offset by $2.62 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 0.25%
at June 30, 1999. Non-performing assets as a percentage of total loans and
foreclosed real estate owned was 0.58% at December 31, 1998 and 0.38% at June
30, 1999.
Deposits decreased 2.7% from $706.20 million at December 31, 1998 to $686.87
million at June 30, 1999. The decrease was mainly in one year certificates of
deposits.
14
<PAGE>
Borrowings from the FHLB increased $105.79 million from December 31, 1998 to
June 30, 1999. These borrowings were mainly used to fund investments and loans.
The Bank borrowed on a gross basis $685.41 million and repaid $579.62 million
during the six months ended June 30, 1999 as compared to gross borrowings of
$110.05 million and gross repayments of $73.30 million during the same period in
1998. During the first six 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 $315.54 million of FHLB advances carry a weighted
average rate of 5.21% 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, $162.00 million or 51.3% of the FHLB borrowings at June
30, 1999 were callable and had call dates ranging from July 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. Due to this prepayment
penalty, the Company reported a $119,000 extraordinary item, net of $73,000 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 its borrowing portfolio
accordingly. Management believes these 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 June 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
15
<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 June 30, 1999, the Company was within its policy
guideline, and the Company believes its level of interest rate sensitivity was
appropriate.
Capital Resources
At June 30, 1999, the Company's stockholders' equity totaled $90.53 million
representing a 5.1% 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 and a decrease of
$2.27 million in accumulated other comprehensive income due to the net
unrealized loss on the Bank's investment portfolio. At June 30, 1999, the
Company had a Tier 1 leverage capital ratio of 8.44% and a total risk-based
capital ratio of 14.06%. 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 June 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
has been 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 June 30, 1999,
the Company estimates its vendors' software was 95% 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
16
<PAGE>
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 company wide 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. The Company
estimates its testing to be 90% complete.
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 will be tested during the third quarter of 1999. 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 $250,000 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 June 30, 1999, this review was approximately 95% 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.
Results of Operations
For the quarters ended June 30, 1999 and 1998
For the quarter ended June 30, 1999, the Company reported net income of $3.47
million or $0.67 per diluted share compared to $2.53 million or $0.47 per
diluted share for the same period in 1998.
Net Interest Income
Net interest income totaled $9.20 million for the three months ended June 30,
1999 compared to $7.88 million for the same period in 1998, representing a $1.32
million or 16.8% increase. The net interest margin decreased slightly from 3.59%
for the quarter ended June 30, 1998 to 3.57% for the same period in 1999.
Average interest-earning assets increased $153.67 million while average
interest-bearing liabilities increased $124.78 million. Average net loans and
investment securities increased $101.46 million and $66.28 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 $57.18 million
increase in one- to four-family mortgages, an $18.15 million increase in average
17
<PAGE>
commercial real estate mortgages and a $15.21 million increase in consumer
loans. Average borrowings increased $129.18 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 June 30, 1999 and 1998:
<TABLE>
<CAPTION>
Average Balance Income / Expense Yield
-------------------------- ---------------------------- --------------------------
Quarters ended June 30, Quarters ended June 30, Quarters ended June 30,
(in thousands) 1999 1998 1999 1998 1999 1998
------------- --------- ------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 690,096 $ 588,638 $ 13,099 $ 11,934 7.61% 8.13%
Investment securities 339,464 273,185 5,343 4,299 6.31 6.31
Short-term investments 3,785 17,857 44 242 4.66 5.44
------------- --------- ---------- --------- --------- ---------
Total interest-earning assets 1,033,345 879,680 18,486 16,475 7.18 7.51
Other assets 51,681 68,080
------------- ---------
Total assets $ 1,085,026 $ 947,760
============= =========
Money market checking $ 48,958 $ 37,429 186 112 1.52 1.20
Money market savings 61,837 51,595 393 303 2.55 2.36
Savings and other 115,223 112,482 436 428 1.52 1.53
Certificates of deposit 378,805 407,720 4,400 5,244 4.66 5.16
------------- --------- ---------- --------- --------- ---------
Total interest-bearing deposits 604,823 609,226 5,415 6,087 3.59 4.01
Borrowings 300,869 171,685 3,869 2,511 5.16 5.87
------------- --------- ---------- --------- --------- ---------
Total interest-bearing
liabilities 905,692 780,911 9,284 8,598 4.11 4.42
Demand deposits 82,359 70,522
Other liabilities 6,359 4,706
Stockholders' equity 90,616 91,621
------------- ---------
Total liabilities and equity $ 1,085,026 $ 947,760
============= =========
Net interest income $ 9,202 $ 7,877
========== =========
Spread on interest-bearing funds 3.07% 3.09%
Net interest margin 3.57% 3.59%
</TABLE>
The following table presents the changes in interest and dividend income and the
changes in interest expense, attributable to changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
during the periods indicated:
18
<PAGE>
<TABLE>
<CAPTION>
Quarters ended June 30, 1999 versus 1998
Change in interest due to
----------------------------------------------------------------------------------
(in thousands) Volume Rate Vol/Rate Net
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Loans, net $ 2,057 $ (761) $ (131) $ 1,165
Investment securities 1,043 1 - 1,044
Short-term investments (191) (34) 27 (198)
-------------- -------------- --------------- ---------------
Total 2,909 (794) (104) 2,011
-------------- -------------- --------------- ---------------
Money market checking 34 30 10 74
Money market savings 60 25 5 90
Savings and other 10 (2) - 8
Certificates of deposit (372) (508) 36 (844)
Borrowings 1,889 (303) (228) 1,358
-------------- -------------- --------------- ---------------
Total 1,621 (758) (177) 686
-------------- -------------- --------------- ---------------
Net change to interest income $ 1,288 $ (36) $ 73 $ 1,325
============== ============== =============== ===============
</TABLE>
Interest Income
Interest income increased $2.01 million or 12.2% due primarily to increased
average volumes of net loans and investment securities of $101.46 million and
$66.28 million, respectively. Overall average yields decreased from 7.51% for
the second quarter of 1998 to 7.18% for the same period in 1999. This was
primarily due to a 52 basis point decrease in the average yields for net loans.
Interest Expense
Interest expense increased $686,000 or 8.0% from the second 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 second quarter of 1998 to 4.11% for the same period in 1999.
Provision for Loan Losses
There was no provision for loan losses during the second quarter of 1999
compared to $300,000 for the second quarter of 1998. The Company's percentage of
allowance for loan losses to non-performing loans was 578.41% at June 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 1.66% at June
30, 1999.
19
<PAGE>
Other Income
The Company recorded $2.02 million in other income for the three months ended
June 30, 1999 compared to $2.12 million for the same period in 1998. The
following table shows the components of other income for the quarters ended June
30, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands) For the quarters ended $ %
June 30, 1999 June 30, 1998 Change Change
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 698 $ 631 $ 67 10.62 %
Investment brokerage services commissions 663 613 50 8.16
Appreciation of cash surrender value life
insurance 236 225 11 4.89
Loan servicing and other fees 147 194 (47) (24.23)
Gain on sale of headquarters building owned by
the Real Estate Partnership 51 - 51 n/a
Net gain on sales of loans 17 20 (3) (15.00)
Income from investment in Real Estate Partnership - 189 (189) (100.00)
Other 203 245 (42) (17.14)
------------- ------------- ------------
Total other income $ 2,015 $ 2,117 $ (102) (4.82) %
============= ============= ============ ============
</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 second quarter of 1999. Loan servicing and other
fees decreased primarily due to large prepayment and letter of credit fees
received during May 1998. 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 performed. Due to the sale, the income
from the investment in Real Estate Partnership decreased from quarter to
quarter. Other income decreased due mainly 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 $5.97 million for the three months ended June 30, 1999
compared to $5.62 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 $ %
June 30, 1999 June 30, 1998 Change Change
------------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Salaries, commissions and employee
benefits $ 3,374 $ 3,030 $ 344 11.35 %
Occupancy 755 787 (32) (4.07)
Data processing 305 293 12 4.10
Furniture and equipment 257 234 23 9.83
Advertising 182 160 22 13.75
Legal and accounting 167 170 (3) (1.76)
Communications 129 123 6 4.88
Operation of foreclosed real estate owned 66 88 (22) (25.00)
Amortization of goodwill 29 - 29 n/a
Write-downs and net losses on sale
of foreclosed real estate owned - 25 (25) (100.00)
Other 709 706 3 0.42
------------- ------------- ----------
Total other expenses $ 5,973 $ 5,616 $ 357 6.36 %
============= ============= ========== ========
</TABLE>
Salaries, commissions and employee benefits increased primarily due to an
increase in overall salaries and commissions. Occupancy expenses decreased
mainly due to a rent reduction at the Bank's headquarters building, which went
into effect in November 1998. Furniture and equipment increased mainly due to
general repairs and maintenance. Advertising increased mainly due to newspaper
advertising. Foreclosed
20
<PAGE>
real estate operating expenses decreased mainly due to reduced expenses for
commercial properties. Amortization of goodwill is a result of the July 1998
purchase of the branches from Chase Manhattan Bank.
Income Taxes
During the second quarter of 1999, the Company recorded tax expense of $1.77
million compared to $1.55 million for the second quarter of 1998. The effective
tax rates for the three months ended June 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 six months ended June 30, 1999 and 1998
For the six months ended June 30, 1999, the Company reported net income of $7.62
million or $1.46 per diluted share compared to $4.69 million or $0.88 per
diluted share for the same period in 1998. During the first six 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 $2.55 million or 16.5% for the first six months of
1999 as compared to the same period of 1998.
Net Interest Income
Net interest income totaled $18.02 million for the six months ended June 30,
1999 compared to $15.47 million for the same period in 1998, representing $2.55
million or a 16.5% increase. The net interest margin decreased from 3.64% for
the six months ended June 30, 1998 to 3.61% for the same period in 1999. Average
interest-bearing liabilities increased $119.46 million while average interest-
earning assets increased $148.98 million. Increases in average FHLB borrowings
was the main reason for the increases in interest-bearing liabilities. Average
net loans and investment securities were $94.82 million and $64.84 million
higher for the six months ended June 30, 1999 compared to the same period in
1998, respectively.
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 six months ended June 30, 1999 and 1998:
21
<PAGE>
<TABLE>
<CAPTION>
Average Balances Income / Expense Yields
------------------------- -------------------------- -------------------------
Six months ended June 30, Six months ended June 30, Six months ended June 30,
1999 1998 1999 1998 1999 1998
------------ --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 678,193 $ 583,373 $ 25,837 $ 23,620 7.68% 8.16%
Investment securities 323,474 258,633 10,222 8,145 6.37 6.35
Short-term investments 4,670 15,349 108 414 4.66 5.44
------------ --------- ---------- --------- --------- ----------
Total interest-earning assets 1,006,337 857,355 36,167 32,179 7.25 7.57
Other assets 54,258 69,175
------------ ---------
Total assets $ 1,060,595 $ 926,530
============ =========
Money market checking $ 45,743 $ 36,180 305 217 1.34 1.21
Money market savings 60,798 52,566 758 615 2.51 2.36
Savings and other 112,104 111,288 839 836 1.51 1.51
Certificates of deposit 388,234 403,153 9,129 10,357 4.74 5.18
------------ --------- ---------- --------- --------- ----------
Total interest-bearing deposits 606,879 603,187 11,031 12,025 3.67 4.02
Borrowings 275,431 159,659 7,111 4,681 5.21 5.91
------------ --------- ---------- --------- --------- ----------
Total interest-bearing
liabilities 882,310 762,846 18,142 16,706 4.15 4.42
Demand deposits 81,208 68,479
Other liabilities 5,836 4,465
Capital 91,241 90,740
------------ ---------
Total liabilities and capital $ 1,060,595 $ 926,530
============ =========
Net interest income $ 18,025 $ 15,473
========== =========
Spread on interest-bearing funds 3.10% 3.15%
Net interest margin 3.61% 3.64%
</TABLE>
The following table presents the changes in interest and dividend income and the
changes in interest expense, attributable to changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
during the periods indicated:
<TABLE>
<CAPTION>
Six months ended June 30, 1999 versus 1998
Change in interest due to
----------------------------------------------------------------------
(in thousands) Volume Rate Vol/Rate Net
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Loans, net $3,839 $(1,395) $(227) $ 2,217
Investment securities 2,042 28 7 2,077
Short-term investments (288) (59) 41 (306)
---------- ----------- ---------- ----------
Total 5,593 (1,426) (179) 3,988
---------- ----------- ---------- ----------
Money market checking 57 24 7 88
Money market savings 96 40 7 143
Savings and other 6 (3) - 3
Certificates of deposit (383) (877) 32 (1,228)
Borrowings 3,394 (559) (405) 2,430
---------- ----------- ---------- ----------
Total 3,170 (1,375) (359) 1,436
---------- ----------- ---------- ----------
Net change to interest income $2,423 $ (51) $ 180 $ 2,552
========== =========== ========== ==========
</TABLE>
22
<PAGE>
Interest Income
Interest income increased $3.99 million or 12.4% due primarily to average
increased volumes of loans and investment securities. Overall average yields
decreased from 7.57% for the six months ended June 30, 1998 to 7.25% for the
same period in 1999 primarily due to a 48 basis point decrease in the average
yield on loans.
Interest Expense
Interest expense increased $1.44 million or 8.6% from the first six 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 4.42% for the six
months ended June 30, 1998 to 4.15% for the same period in 1999.
Provision For Loan Losses
There was no provision for loan losses during the first six 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 578.41% at June 30, 1999
and 417.12% at December 31, 1998. The allowance for loan losses as a percentage
of gross loans was 1.66% at June 30, 1999 and 1.85% at December 31, 1998.
Other Income
The Company recorded $6.07 million in other income for the six months ended June
30, 1999 compared to $4.51 million for the same period in 1998, representing an
increase of 34.6%. The following table shows the components of other income for
the six months ended June 30, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands) Six months ended June 30, $ %
1999 1998 Change Change
------------ ----------------- -------------- -----------
<S> <C> <C> <C> <C>
Gain on sale of headquarters building owned by
the Real Estate Partnership $ 2,148 $ - $ 2,148 n/a %
Service charges on deposit accounts 1,385 1,229 156 12.69
Investment brokerage services commissions 1,267 1,295 (28) (2.16)
Appreciation of cash surrender value life insurance 464 459 5 1.09
Loan servicing and other fees 289 335 (46) (13.73)
Net gain on sales of loans 20 45 (25) (55.56)
Income from investment in Real Estate Partnership 13 368 (355) (96.47)
Net gain on sales of investment securities 5 4 1 25.00
Other 476 773 (297) (38.42)
------------ ----------------- --------------
$ 6,067 $ 4,508 $ 1,559 34.58 %
============ ================= ============== ===========
</TABLE>
During the first six months 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. 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.
23
<PAGE>
Other Expenses
Other expenses totaled $11.95 million for the six months ended June 30, 1999
compared to $11.61 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) Six months ended June 30, $ %
1999 1998 Change Change
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Salaries, commissions and employee benefits $ 6,656 $ 6,229 $ 427 6.86 %
Occupancy 1,531 1,570 (39) (2.48)
Data processing 617 570 47 8.25
Furniture and equipment 503 474 29 6.12
Advertising 433 456 (23) (5.04)
Legal and accounting 312 328 (16) (4.88)
Communications 267 257 10 3.89
Operation of foreclosed real estate owned 169 182 (13) (7.14)
Amortization of goodwill 58 - 58 n/a
Write-downs and net losses on sale
of foreclosed real estate owned - 85 (85) (100.00)
Other 1,405 1,456 (51) (3.50)
----------- ----------- -----------
Total other expenses $ 11,951 $ 11,607 $ 344 2.96 %
=========== =========== =========== ==========
</TABLE>
Salaries, commissions and employee benefits increased primarily due to an
increase in overall salaries and commissions. Data processing costs increased
due to the purchase of two additional branches in July 1998 and additional costs
due to Year 2000 preparation. Amortization of goodwill is a result of the July
1998 purchase of two branches from Chase Manhattan Bank.
Income Taxes
During the six months ended June 30, 1999, the Company recorded income tax
expense of $4.09 million, representing a 33.7% effective tax rate. During the
six months ended June 30, 1998, the Company recorded income tax expense of $2.97
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.
24
<PAGE>
Part I. Item 3. Quantitative and Qualitative Disclosures About Market Risk
At June 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) $(1,583) $(1,051)
100 basis point increase in rates (d) (640) (450)
100 basis point decrease in rates (d) (257) 264
200 basis point decrease in rates (c) (437) 526
</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
MECH Financial, Inc. held its annual meeting of shareholders on April 28, 1999.
The items voted upon and the results are in the table below:
<TABLE>
<CAPTION>
Abstentions
Votes Votes Votes Non-broker
For Against Withheld Votes
-------------- ------------ ------------ --------------
<S> <C> <C> <C> <C>
Director Election of Edgar C. Gerwig to a three year term 4,261,741 - 20,028 -
Director Election of John J. Meehan to a three year term 4,261,741 - 20,028 -
Director Election of Donald K. Wilson, Jr. to a three year term 4,261,741 - 20,028 -
Ratification of KPMG LLP as independent auditors 4,247,643 20,406 - 13,720
</TABLE>
25
<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:
none.
26
<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: 8/9/99 /s/ EDGAR C. GERWIG
------ -------------------
Chairman, President and Chief Executive Officer
Date: 8/9/99 /s/ THOMAS M. WOOD
------ ------------------
Executive Vice President and Treasurer
Date: 8/9/99 /s/ BRIAN A. ORENSTEIN
------ ----------------------
Senior Vice President and Controller
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 22,940
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 75
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 255,064
<INVESTMENTS-CARRYING> 72,714
<INVESTMENTS-MARKET> 71,759
<LOANS> 710,364
<ALLOWANCE> (11,817)
<TOTAL-ASSETS> 1,105,485
<DEPOSITS> 686,874
<SHORT-TERM> 97,792
<LIABILITIES-OTHER> 12,062
<LONG-TERM> 218,225
0
0
<COMMON> 53
<OTHER-SE> 90,479
<TOTAL-LIABILITIES-AND-EQUITY> 1,105,485
<INTEREST-LOAN> 25,837
<INTEREST-INVEST> 9,740
<INTEREST-OTHER> 590
<INTEREST-TOTAL> 36,167
<INTEREST-DEPOSIT> 11,031
<INTEREST-EXPENSE> 18,142
<INTEREST-INCOME-NET> 18,025
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 11,951
<INCOME-PRETAX> 12,141
<INCOME-PRE-EXTRAORDINARY> 8,051
<EXTRAORDINARY> (435)
<CHANGES> 0
<NET-INCOME> 7,616
<EPS-BASIC> 1.51
<EPS-DILUTED> 1.46
<YIELD-ACTUAL> 7.25
<LOANS-NON> 2,043
<LOANS-PAST> 0
<LOANS-TROUBLED> 671
<LOANS-PROBLEM> 18,863
<ALLOWANCE-OPEN> 12,301
<CHARGE-OFFS> 879
<RECOVERIES> 395
<ALLOWANCE-CLOSE> 11,817
<ALLOWANCE-DOMESTIC> 6,248
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 5,569
</TABLE>
