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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission File Number 000-23557
MECH FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
State of Connecticut 06-1500984
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) Identification Number)
100 Pearl Street, Hartford, CT 06103
(Address of principal office) (zip code)
Registrant's Telephone including area code: (860) 293-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirement for
the past 90 days.
YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of February 29, 2000, the aggregate market value of the 5,071,971 shares of
common stock of the registrant issued and outstanding on such date was $157
million . As of that same date, the aggregate market value of the voting stock
held by non-affiliates of the registrant was $152 million.
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TABLE OF CONTENTS
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Part I
Item 1. Business 3
Item 2. Properties 10
Item 3 Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Common Equity and Related Shareholder Matters 11
Item 6. Selected Consolidated Financial Data 12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations and Quantitative and Qualitative Disclosures about Market Risk 14
Item 8. Financial Statements and Supplementary Data 39
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 76
Part III
Item 10. Directors and Executive Officers of the Registrant 77
Item 11. Executive Compensation 79
Item 12. Security Ownership of Certain Beneficial Owners and Management 87
Item 13. Certain Relationships and Related Transactions 89
Part IV
Item 14. Exhibits, Financial Statements and Reports on Form 8-K 90
Signatures 92
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PART I
Item 1. Business
General
MECH Financial, Inc., (the "Company" or "MECH"), a Connecticut corporation, is
the bank holding company for Mechanics Savings Bank (the "Bank"), a wholly-owned
subsidiary. The Bank's shareholders approved the formation of the Company at a
special meeting held on November 25, 1997. The Company was formed on January 1,
1998 to provide additional corporate structuring opportunities and powers to
respond to the expanding needs of the Bank's customers and to the competitive
conditions in the financial services industry.
On December 1, 1999, the Company and Webster Financial Corporation ("Webster")
entered into an Agreement and Plan of Merger (the "Agreement") which provides
for, among other things, the acquisition of MECH by Webster through a stock-for-
stock exchange. Contemporaneous with the completion of the acquisition,
Mechanics Savings Bank, a wholly-owned subsidiary of MECH, will merge with and
into Webster Bank, a wholly-owned subsidiary of Webster. The Agreement provides
that shareholders of MECH will receive 1.52 shares of Webster common stock for
each share of MECH common stock. The transaction is designed to be a tax-free
exchange to the holders of MECH common stock and is to be accounted for as a
purchase transaction. The Boards of Directors of MECH and Webster expect the
transaction to close in the second quarter of 2000.
The Bank is a state chartered capital stock savings bank, which operates 16
banking offices in Hartford County and offers a full range of banking services
to individuals and corporate customers primarily located in Central Connecticut.
The Bank was organized in 1861 and is the largest banking institution
headquartered in the City of Hartford. The Bank completed its subscription and
community offerings of common stock on June 25, 1996, thereby completing its
conversion from a Connecticut-chartered mutual savings bank to a Connecticut-
chartered capital stock savings bank. The Bank sold the maximum number of shares
offered in the conversion, as adjusted, issuing 5.29 million shares for total
gross proceeds of $52.90 million.
The Bank is a community bank with a broad range of products and services. The
Bank's lending focus is on making commercial loans to small and medium sized
businesses as well as originating residential mortgages and consumer loans. The
Bank's results of operations depend primarily on net interest income, which is
the difference between the income earned on its loan and securities portfolios,
and its cost of funds, consisting of interest paid on its deposits and
borrowings. The Bank's results of operations also depend upon the commissions
and fees earned from the Bank's investment brokerage program, as well as other
banking fees which contribute to non-interest income. The Bank's operating
expenses consist principally of employee compensation, occupancy expenses, data
processing expenses and other general and administrative expenses. The Bank's
results of operations are also significantly affected by general economic and
competitive conditions, the real estate market, changes in interest rates,
government policies and actions of regulatory authorities.
Market Area and Competition
The Bank has 16 retail banking offices, located in Hartford (3), and the Greater
Hartford communities of West Hartford (4), Avon, Bloomfield, Windsor,
Manchester, East Hartford (2), Glastonbury, Wethersfield and New Britain. All of
the Bank's office facilities and its primary market area are located in Hartford
County, Connecticut. According to the 1990 U.S. Census, the City of Hartford and
Hartford County had populations of 139,739 and 851,738, respectively.
Hartford County is located halfway, approximately two hours driving time,
between Boston and New York City. The region serves as the governmental and
financial center of the state. Hartford County has a diversified mix of industry
groups, including insurance and financial services, manufacturing, service,
government and corporate offices, and retail. The City of Hartford is the hub of
the region and is a major employment center. Hartford is best noted as the home
office of several international and national insurance companies and
manufacturing companies. Hartford County
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employers include Fortune 500 companies, regional banks and the State of
Connecticut.
Intense competition exists in all major lines of business in which the Bank is
presently engaged. The Bank's market area contains a significant number of
financial institutions, including commercial banks, thrift institutions, credit
unions, insurance companies, mortgage brokers and brokerage firms. The Bank
competes with a variety of other community banking institutions as well as
regional, super-regional and also several money center institutions which have
located branch offices in the Hartford County market. Many of the larger
institutions offer a full array of consumer and business products, which compete
directly with those products and services offered by the Bank. In addition, the
community banks compete directly with the Bank by attempting to differentiate
themselves from larger rivals in the same manner that the Bank does, namely
through providing first class, personalized service.
Lending Activities
General.
The Bank concentrates primarily upon its traditional residential mortgage, home
equity and other consumer loan products, in addition to commercial loans that
meet the needs of small- to medium-sized businesses. Commercial real estate
lending is restricted to owner occupied business realty and non-speculative,
already improved investor properties owned by creditworthy, substantive
borrowers.
One- to Four-Family Residential Lending.
The Bank continues to focus on the origination of loans collateralized primarily
by first mortgages on existing one- to four-family residences, offering a
variety of fixed and adjustable rate mortgage loan products. At December 31,
1999, $481.64 million, or 64.3%, of the Bank's gross loan portfolio consisted of
one- to four-family mortgage loans, substantially all of which are conventional
loans (i.e., loans that are neither insured by the Federal Housing
Administration nor partially guaranteed by the Veterans Administration).
The Bank actively solicits one- to four-family residential mortgage loan
applications primarily through its branches, loan originators and
correspondents. In addition, the Bank periodically conducts first-time home
buyer seminars in an effort to increase residential loan originations. The Bank
periodically purchases residential mortgage loans from correspondents.
The Bank originates residential mortgage loans which qualify for sale to the
Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). The Bank originates both fixed rate and
adjustable rate mortgage loans with loan terms of between 10 and 30 years. The
Bank offers a variety of adjustable rate mortgage programs. Adjustable rate
mortgage loans have interest rates that adjust periodically based upon an index
tied to the weekly average yield on U. S. Treasury securities, adjusted to a
constant maturity of one year. These loans typically provide that the amount of
any increase or decrease in the interest rate is limited to two percentage
points per adjustment period and is limited to an aggregate of six percentage
points by which the rate can increase or decrease over the life of the loan.
Borrower demand for adjustable rate versus fixed rate mortgage loans is a
function of the level of interest rates, expectations as to future changes in
interest rates and pricing differences between fixed rate mortgage loans and
adjustable rate mortgage loans. The relative amount of fixed rate and adjustable
rate residential loans that are originated at any time is therefore largely
determined by market and financial conditions.
At December 31, 1999, $288.40 million, or 59.9%, of the Bank's one- to four-
family residential mortgage loan portfolio carried fixed interest rates.
Although these loans generally provide for repayment of principal over a fixed
period of 10 to 30 years, the Bank's experience, because of prepayments and due-
on-sale clauses, is that such loans generally remain outstanding for a
substantially shorter period of time. At December 31, 1999, $193.24 million or
40.1% of the Bank's residential mortgage portfolio carried adjustable interest
rates.
Adjustable rate loans tend to decrease the risks to the Bank's net interest
income associated with changes in interest rates, but involve credit risk,
primarily because if interest rates rise, the payment by the borrower rises to
the extent permitted by the terms of the loan, thereby increasing the potential
for default. At the same time, the market value of
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the underlying property may be adversely affected by higher interest rates. The
Bank offers introductory rates on its adjustable rate residential mortgage
loans, which typically are lower than the fully indexed rate on adjustable rate
loans but which are competitive with other lenders in the Bank's market. The
Bank underwrites the ability of borrowers to service adjustable rate mortgage
loans at interest rates higher than the introductory rates.
The Bank's general practice is to lend up to 80% of the appraised value of the
property collateralizing a one- to four-family residential loan. Under certain
circumstances, the Bank will lend up to 97% of the appraised value. To the
extent that a loan exceeds 80% of the appraised value of the property, the
borrower generally must obtain private mortgage insurance, which effectively
reduces the loss exposure to a 75% loan-to-value ratio or less. Appraisals on
property collateralizing the Bank's one- to four-family residential loans are
made by independent licensed appraisers or the Bank's licensed, in-house
appraisal staff.
The Bank's policy also requires that appraisals be performed in accordance with
applicable federal and state laws and regulations. Borrowers must obtain hazard
and flood insurance, when required, prior to closing. The Bank generally has
required borrowers to pay funds, with each monthly payment of principal and
interest, to a loan escrow account from which the Bank makes disbursements for
items such as real estate taxes and hazard, flood and mortgage insurance
premiums as they become due.
Multi-family, Commercial Real Estate, Land and Construction Lending.
Multi-family, commercial real estate, land and construction lending to builders
involves a higher degree of risk than one- to four-family residential lending.
Construction financing is generally considered to involve a higher degree of
risk of loss than long-term financing on improved, owner-occupied real estate.
Commercial construction loans are made on a limited basis. Either the borrower
has requested and qualifies for a permanent mortgage from the Bank, or the
borrower has had a long borrowing relationship with the Bank and would qualify
for permanent financing should it be requested. The Bank's lending policy
allows for permanent commercial real estate loans collateralized by multi-family
properties and commercial real estate with a maximum loan-to-value ratio of 80%.
The Bank typically offers maturities of 10 to 20 years and loan terms which
provide for both variable and fixed interest rates. The Bank generally obtains
personal guarantees from the principals of the borrowing entities. Appraisals of
the property collateralizing such loans are made by independent licensed
appraisers.
At December 31, 1999, $15.01 million, or 2.0%, of the Bank's gross loan
portfolio consisted of loans collateralized by multi-family properties. Multi-
family loans are comprised primarily of loans collateralized by income producing
properties with five or greater residential units.
At December 31, 1999, $134.50 million, or 18.0%, of the Bank's gross loan
portfolio consisted of loans collateralized by commercial real estate, with the
largest share centered in professional office buildings ($57.10 million), retail
stores ($35.34 million), and industrial/warehouse properties ($23.95 million).
Of the remaining balance, $3.33 million was secured by restaurants, $3.05
million by church properties, $1.45 million by nursing home facilities, $1.32
million by schools, and $8.96 million by other non-residential properties. The
latter includes fitness centers, motels, and mixed use properties. Also at
December 31, 1999, $5.70 million, or 0.8% of the Bank's gross loan portfolio,
were construction and land loans, of which $4.54 million was for the contruction
of commercial properties and $1.16 million was for the construction of one- to
four-family residential units.
As of December 31, 1999, the Bank's largest loan outstanding was a $4.25 million
performing commercial mortgage. The largest single exposure was a performing
$5.00 million line of credit. The largest lending relationship aggregated $7.86
million, which was also performing.
Commercial and Industrial Lending.
The Bank has focused a major portion of its business development on small- to
medium-sized businesses within the central Connecticut market. Such loans
diversify the Bank's portfolio and reduce the Bank's interest rate risk by
originating loans that adjust with changes in the prime rate. These loans
typically generate fee income and often have compensating deposit balances.
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The Bank seeks to expand its current relationships with existing borrowers that
have a superior reputation and a consistent history of profitability. The Bank
also seeks to develop new relationships with creditworthy small- to medium-sized
business customers in towns in which the Bank has branches and within certain
contiguous communities.
The Bank also cross sells depository, cash management and investment products.
The Bank's loan policy generally discourages transactional lending. Potential
customers include those customers that meet the Bank's risk tolerance levels by
industry, collateral type and debt service capacity.
At December 31, 1999, $35.91 million or 4.8% of the Bank's gross loan portfolio
consisted of commercial and industrial loans. At that date, the Bank had
outstanding unadvanced commitments on commercial and industrial lines of credit
of $28.67 million.
Home Equity Lending.
Originations of home equity lines of credit increased during 1999, mainly due to
increased marketing during the year. Gross new line approvals increased from
$9.96 million in 1998 to $17.45 million in 1999. At December 31, 1999, the Bank
had $28.19 million in approved home equity lines of credit with $12.81 million
outstanding.
The Bank offers amortizing second mortgage loans to enable homeowners to access
equity in their home. The Bank offers repayment schedules of up to 20 years. The
Bank's loan policy permits home equity and second mortgage loans up to 80% of
the appraised value of the property collateralizing the loan, less any existing
encumbrances. Appraisals on the property collateralizing the Bank's home equity
and second mortgage loan products and lines are made by independent licensed
appraisers or the Bank's licensed, in-house appraisal staff.
Consumer Lending.
The Bank offers an expanding variety of consumer loan products including both
secured and unsecured loans. Interest rates are generally competitive to those
in the Bank's market. At December 31, 1999, the Bank's consumer loans totaled
$63.40 million or 8.5% of its gross loan portfolio. The Bank has continued to
pursue consumer lending more actively in 1999 through various loan programs. New
loan volume in 1999 remained consistent to that achieved in 1998 at $40.53
million which has accounted for an increase in outstanding loans of 20% at year
end 1999. Management believes that prudent underwriting, higher interest rates
and shorter maturities associated with this type of lending will complement both
earnings and asset/liability management objectives.
Residential Mortgage Loan Servicing. The Bank has historically serviced loans
sold to other institutions as a means of maintaining customer relationships and
generating fee income. These loans were originated by the Bank and sold to
private banking institutions, FNMA or FHLMC. The Bank serviced 880 loans
totaling $48.22 million as of December 31, 1999 compared to 972 loans totaling
$53.77 million at December 31, 1998.
Asset Quality. Asset quality is of significant importance to the Bank. All
commercial loans in relationships greater than $250 thousand are risk-rated at
least annually by each loan officer and reviewed by either internal or external
loan review personnel. A review group meets regularly to adopt action plans for
all adversely graded loans and reviews monthly compliance with previously agreed
upon remediation programs.
Non-Performing, Delinquent and Classified Assets
General.
Non-performing assets totaled $2.29 million, or 0.20% of total assets, at
December 31, 1999 compared to $3.85 million, or 0.38% of total assets, at
December 31, 1998. At December 31, 1999, non-performing assets were comprised of
$1.99 million of non-performing loans and $0.30 million of other real estate
owned ("OREO").
The Bank identifies certain Other Assets Especially Mentioned ("OAEM") that
include performing loans which management believes exhibit a higher than normal
degree of risk due to a variety of factors, such as geographic and industry
related weaknesses, a downturn in operations in recent years, bankruptcy of a
related company, or other loans from the same borrower that are classified as
non-performing. The OAEM list included loans totaling $13.37 million at
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December 31, 1999, a decrease of $7.15 million or 34.8% from $20.52 million at
December 31, 1998.
The Bank also maintains lists of adversely classified credits (substandard,
doubtful or loss credits, referred to as the "Classified Asset Lists"). The
Classified Asset Lists included loans totaling $3.10 million at December 31,
1999, a decrease of $1.63 million or 34.5% from $4.73 million at December 31,
1998. Of the loans on the Classified Asset Lists, non-performing loans totaled
$1.99 million at December 31, 1999, a decrease of $0.96 million or 32.5% from
$2.95 million at December 31, 1998.
Non-Performing Assets.
Management of the Bank regularly reviews delinquent loans, which are placed on
non-accrual status when, in its judgment, management believes the probability of
collection is uncertain. All loans 90 days or more past due as to interest or
principal are placed on non-accrual status unless, in exceptional circumstances,
the loan is both well collateralized and in the process of collection. At
December 31, 1999, the Bank had no loans accruing interest which were 90 days or
more past due.
Allowance for Loan Losses.
The Bank uses various guidelines for determining the allowance for loan losses.
The Bank primarily relies on its risk rating system as a means to derive
commercial loan reserves by applying loss experience ratios to individual risk
rating categories. Management also analyzes peer industry data to assess the
reserve adequacy of the commercial real estate and commercial and industrial
loan portfolios.
Management analyzes the historical charge-off information by product type to
assess the reserve adequacy of the residential and consumer loan portfolios.
Management believes that the Bank's allowance for loan losses adequately
estimates the probable loan losses in the respective portfolios.
The Bank regards its allowance for loan losses as a reserve which is available
to absorb losses from all types of loans. Additional factors included in the
Bank's determination of appropriate levels of the allowance for loan losses
include the size and nature of troubled loans, collateral values and credit
concentrations within a portfolio, general delinquency levels, regional and
national economic trends and regulatory policy. The Bank's allowance for loan
losses includes an unallocated allowance which is intended to absorb losses
across all loan portfolios, that cannot be predicted based upon current
economic conditions.
Investment Activities
General.
Under Connecticut law, the Bank has authority to purchase a wide range of
investment securities. In accordance with federal banking laws, however,
financial institutions such as the Bank may not engage in any activities that
are not permissible for a national bank, unless the Federal Deposit Insurance
Corporation ("FDIC") has determined that the activity would pose no significant
risk to the Bank Insurance Fund and the bank is in compliance with applicable
capital standards.
The Bank is engaged in the purchase and sale of mortgage-backed securities, U.S.
Treasury securities and obligations of other U.S. government agencies. The Bank
has not invested in derivative investments other than collateralized mortgage
obligations which are either guaranteed by FNMA or FHLMC or are rated AAA by at
least one nationally recognized rating agency. The Bank's investment policy
contemplates investments by the Bank in U.S. Treasury securities, mortgage-
backed securities, federal agency securities, corporate debt securities, stock
in the Federal Home Loan Bank of Boston ("FHLB"), federal funds, common or
preferred stock listed on a national securities exchange and shares of
investment companies registered under the Investment Company Act of 1940.
Mortgage-Backed Securities and Secondary Market Activities.
Mortgage-backed securities increase the Bank's asset quality, are more liquid
than individual mortgage loans, and may be more readily available to
collateralize borrowings or other obligations of the Bank. Mortgage-backed
securities owned by the Bank at December 31, 1999 had maturities of 1 to 30
years, although the Bank expects the average lives will be significantly shorter
due to principal amortization and prepayments.
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Sources of Funds
General.
The principal sources of funds for the Company are proceeds from stock offerings
and dividends from the Bank. The principal sources of funds for the Bank's
activities are deposit accounts, amortization and prepayment of loans and
mortgage-backed securities, borrowings from the FHLB and funds provided from
operations. Loan repayments and funds provided from operations are relatively
stable sources of funds, while deposit inflows and outflows are significantly
influenced by prevailing interest rates, competition and general economic
conditions.
The Bank offers a variety of deposit accounts having a wide range of interest
rates and terms. The Bank attempts to control the flow of funds in its deposit
accounts according to its need for funds and the cost of alternative sources of
funds primarily through the pricing of deposits and, to a lesser extent, by
promotional activities. The Bank's deposit accounts consist of demand and money
market accounts, statement and passbook savings, and time accounts.
Borrowings.
Although deposits are the Bank's primary source of funds, the Bank also utilizes
borrowings from the FHLB. The Federal Home Loan Bank System functions in a
reserve credit capacity for savings institutions and certain other home
financing institutions. The Bank is required to own capital stock in the FHLB in
order to access the System and is authorized to apply for advances
collateralized by residential mortgages and other qualified collateral. The Bank
has access to a pre-approved line of credit up to approximately $15 million and
the capacity to borrow up to 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.
Retail, Non-Depository Products
Mechanics Investment Services, Inc. ("MIS").
The Bank offers investment products and services to its customers through its
wholly-owned subsidiary, MIS. The program, which began in 1986, has evolved from
its original emphasis on transactional business to its current focus on
relationship business including asset allocation accounts with so-called wrap
fees. In 1996, the Bank hired additional staff and formed the subsidiary, MIS,
with the intent of becoming its own broker/dealer in 1997. On July 2, 1997, MIS
became licensed as a broker/dealer and registered investment advisor. MIS is
regulated by the National Association of Security Dealers ("NASD") and is a
member of the Security Investors Protection Corporation ("SIPC"). MIS offers a
wide variety of investment products, including mutual funds, stocks and bonds as
well as investment advisory services. MIS also offers fixed and variable annuity
products and is licensed as an insurance agency in the State of Connecticut. MIS
earns its commissions by selling investment products and by providing investment
advisory services to its customers. Commissions, salaries and benefits expense
related to this service approximated $1.99 million, $1.76 million and $1.99
million in 1999, 1998 and 1997, respectively.
Savings Bank Life Insurance.
The Bank offers Savings Bank Life Insurance ("SBLI") to customers which includes
insurance and annuity products. The Bank also offers mortgage life, disability
and credit life insurance relating to loans as part of its SBLI business. During
1999, 1998 and 1997, the Bank had pre-tax income of $472,000, $387,000 and
$317,000 respectively, from sales of SBLI insurance including credit and
mortgage life and SBLI annuities.
Subsidiaries
The Company has one subsidiary, Mechanics Savings Bank. The Bank has six wholly-
owned subsidiaries, three of which facilitate the ownership, management and
disposition of OREO (at December 31, 1999 these three subsidiaries owned no
properties), one which owns a 50% interest in the Real Estate Partnership which
owned the building that houses the Bank's headquarters, one formed in 1996 (MIS)
to enable the Bank to serve its customers with a wholly-owned broker/dealer and
one formed in 1998 (MMC) in order to take advantage of a recent change in the
Connecticut tax statutes. On February 9, 1999, the Bank sold its interest in its
headquarters building for $15.70 million in net
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proceeds and a gain of $2.15 million. Refer to Note 7 of the Consolidated
Financial Statements.
Employees
The Bank had 214 full-time employees and 52 part-time employees as of December
31, 1999.
Supervision and Regulation
Federal Bank Holding Company Regulation
MECH is registered under, and is subject to, the Bank Holding Company Act of
1956, as amended. This Act limited the types of companies which MECH may
acquire or organize and the activities in which it or they may engage. In
general, MECH and the Bank are prohibited from engaging in or acquiring direct
or indirect control of any corporation engaged in non-banking activities unless
such activities are so closely related to banking as to be a proper incident
thereto. In addition, MECH must obtain the prior approval of the Board of
Governors of the Federal Reserve System to acquire control of any bank; to
acquire, with certain exceptions, more than 5 percent of the outstanding voting
stock of any other corporation; or, to merge or consolidate with another bank
holding company. As a result of such laws and regulation, MECH is restricted as
to the types of business activities it may conduct and the Bank is subject to
limitations on, among others, the types of loans and the amount of loans it may
make to any one borrower.
Federal Reserve System
MECH is required by the Board of Governors of the Federal Reserve System to
maintain cash reserves against its deposits. After exhausting all other sources
of funds, MECH may request to borrow from the Federal Reserve. Bank holding
companies registered with the FRB are, among other things, restricted from
making direct investments in real estate. Both MECH and the Bank are subject to
extensive supervision and regulation, which focus on, among other things, the
protection of depositors' funds.
The Federal Reserve System also regulates the national supply of bank credit in
order to influence general economic conditions. These policies have a
significant influence on overall growth and distribution of loans, investments
and deposits, and affect the interest rates charged on loans or paid for
deposits.
Fluctuations in interest rates, which may result from government fiscal policies
and the monetary policies of the Federal Reserve System, have a strong impact on
income.
Federal Deposit Insurance Corporation and Connecticut Banking Department
The Bank's deposits are insured up to legal limits by the FDIC and it is
chartered by the Connecticut Department of Banking. The FDIC and Connecticut
Department of Banking periodically examine the Bank for safety and soundness
considerations as well as compliance with consumer laws and the Community
Reinvestment Act. Under laws and regulations enforced by the FDIC and
Connecticut Department of Banking, the Bank's activities, directly and through
subsidiaries, are restricted generally to those related to banking and/or which
have been determined, by law, regulation or interpretation, to be appropriate
for a banking institution.
Gramm Leach Bliley Act of 1999 ("GLB")
On November 12, 1999 the GLB Act was signed into law by President Clinton. GLB
eliminates many of the historical barriers to affiliations among banks,
securities firms and insurance companies. GLB provides flexibility to these
institutions by use of a new entity, the "financial holding company". GLB
retains for MECH and similarly situated bank holding companies the regulatory
structure described above, but adopts a system of functional regulation of
activities to include various state and federal supervisory agencies depending
upon the activity being conducted. The trend of the banking industry toward
consolidation and the offering of diversified products and services is expected
to be enhanced by the adoption of GLB. The adoption of GLB is expected to
increase competition for all financial institutions, including MECH, although
the actual effects thereof can not be predicted at this time.
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Item 2. Properties
At December 31, 1999, the Bank had 16 banking offices, each of which is a full-
service office. The following table lists information at December 31, 1999 for
the properties of the Bank.
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(Dollars in thousands)
Year Office Area Amount of Owned or Lease
Location Opened by Square Feet Deposits Leased Expiration
- -------- ------ -------------- --------- ------ ----------
<S> <C> <C> <C> <C> <C>
100 Pearl Street, Hartford, CT/(a)/......... 1861 6,156 $87,636 Lease 2008
202 Farmington Ave., Hartford, CT........... 1951 5,200 14,262 Own N/A
680 Park Street, Hartford, CT............... 1957 5,400 24,691 Own N/A
1126 New Britain Ave., West Hartford, CT.... 1961 4,300 88,350 Lease 2003
124 LaSalle Road, West Hartford, CT......... 1963 4,268 66,537 Own N/A
722 North Main Street, West Hartford, CT.... 1976 2,662 59,238 Lease 2005
927 Farmington Ave., West Hartford, CT...... 1998 2,436 14,387 Lease 2007
321 West Main Street, Avon, CT.............. 1978 2,639 22,061 Lease 2003
275 Cottage Grove Road, Bloomfield, CT...... 1962 4,000 27,988 Lease 2002
1491 Silver Lane, East Hartford, CT......... 1975 2,288 38,625 Lease 2005
1065 Main Street, East Hartford, CT......... 1998 3,080 5,774 Lease 2000
156 Broad Street, Windsor, CT............... 1961 3,000 54,878 Lease 2001
1063 Silas Deane Highway, Wethersfield, CT.. 1980 3,500 61,672 Lease 2004
341 Broad Street, Manchester, CT............ 1989 2,760 29,516 Lease 2003
446 South Main Street, New Britain, CT...... 1989 2,964 24,686 Lease 2004
2450 Main Street, Glastonbury, CT........... 1991 2,594 21,463 Lease 2003
</TABLE>
/(a)/ In addition to the banking office at 100 Pearl Street, the Bank also
maintains its headquarters and executive offices at that location,
consisting of 41,714 square feet of office space on four floors leased
from an independent third party expiring in 2003.
Item 3. Legal Proceedings
The Company from time to time becomes involved in or is threatened with legal
proceedings occurring in the ordinary course of business. In the opinion of
management, final disposition of matters pending or threatened will not
individually or in the aggregate have a material adverse effect on the financial
condition or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
10
<PAGE>
PART II
ITEM 5. Market for Common Equity and Related Shareholder Matters.
The common stock began trading on the National Association of Securities Dealers
Automated Quotations System ("NASDAQ") National Market on June 25, 1996 under
the symbol "MECH". The following table indicates the high and the low last sale
prices of the Common Stock for the past two fiscal years, as reported by NASDAQ.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Quarter ended Cash Dividend ($) High ($) Low ($)
- ------------- ----------------- -------- -------
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
March 31, 1998 - 30 1/2 24 1/8
- ---------------------------------------------------------------------------------
June 30, 1998 .15 31 1/2 27 7/8
- ---------------------------------------------------------------------------------
September 30, 1998 .15 31 13/16 21 7/8
- ---------------------------------------------------------------------------------
December 31, 1998 .15 29 20 5/8
- ---------------------------------------------------------------------------------
March 31, 1999 .15 34 27 7/8
- ---------------------------------------------------------------------------------
June 30, 1999 .20 37 1/2 29 3/4
- ---------------------------------------------------------------------------------
September 30, 1999 .20 39 3/8 33
- ---------------------------------------------------------------------------------
December 31, 1999 .20 37 5/16 31 3/4
- ---------------------------------------------------------------------------------
</TABLE>
As of December 31,1999 there were approximately 3,800 shareholders of record.
The Company declared its first quarterly cash dividend of $0.15 per share to
shareholders of record as of May 1, 1998 payable on May 15, 1998. The Company
increased the quarterly dividend to $0.20 per share to shareholders of record on
May 3, 1999 payable May 14, 1999.
Connecticut law generally provides that the Bank may pay cash dividends only if
the amount does not exceed the Bank's net profits from that year combined with
retained net profits from the previous two years. MECH Financial, Inc., cannot
declare or pay a dividend if it were to reduce its capital below the amount
required to be maintained by federal and state laws and regulations. The payment
of dividends may be limited by other factors, including applicable regulatory
capital requirements and enforcement by the federal bank regulatory agencies.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
generally prohibits a depository institution from making any capital
distribution (including the payment of a dividend) or paying any management fee
to its holding company if any subsidiary depository institution would thereafter
be undercapitalized.
11
<PAGE>
ITEM 6. Selected Consolidated Financial Data
The following tables set forth certain selected consolidated financial and other
data of the Company at or for the dates indicated. This information should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
As of or for the years ended December 31,
---------------------------------------------------------------
(dollars in thousands except per share data) 1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Interest and dividend income $ 73,751 $ 65,706 $ 57,315 $ 49,577 $ 47,540
Interest expense 37,800 33,928 28,053 23,526 21,942
----------- ----------- ------------- ---------- -----------
Net interest income 35,951 31,778 29,262 26,051 25,598
Provision for loan losses - 600 9,100 6,400 12,850
Other income:
Service charges on deposit
accounts and other 4,581 4,585 3,737 3,219 2,713
Investment brokerage services
commissions 2,668 2,412 2,927 1,136 1,455
Gain on the sale of headquarters building
owned by the Real Estate Partnership 2,148 - - - -
Loan servicing and other fees 552 630 600 595 735
Income from investment in
Real Estate Partnership 13 606 579 272 504
Net gains (losses) on sales of
marketable equity securities - (20) - 61 140
Net gains (losses) on sales of debt
securities 5 4 209 (139) 222
Net gains on sales of loans 44 59 52 43 69
Other expenses:
Operating expenses (a) 23,742 22,639 22,452 19,870 20,501
Operation of foreclosed
real estate owned 222 372 425 600 1,167
Write-down of investment in Real
Estate Partnership - - - - 6,697
Write-downs and net losses on sale
of foreclosed real estate owned - 85 121 3,492 2,261
Write-down of real estate agency
subsidiary - - - - 700
----------- ----------- ------------- ---------- -----------
Income (loss) before income taxes and
extraordinary item 21,998 16,358 5,268 876 (12,740)
Income tax expense (benefit) (b) 7,101 7,419 (7,808) (266) 1,540
----------- ----------- ------------- ---------- -----------
Income (loss) before extraordinary item 14,897 8,939 13,076 1,142 (14,280)
Extraordinary item, early extinguishment of debt
net of tax (435) (243) - - -
----------- ----------- ------------- ---------- -----------
Net income (loss) $ 14,462 $ 8,696 $ 13,076 $ 1,142 $ (14,280)
=========== =========== ============= ========== ===========
Diluted earnings and pro forma diluted earnings
(loss) per share (c):
Income (loss) before extraordinary item $ 2.86 $ 1.68 $ 2.49 $ 0.22 $ (2.76)
Extraordinary item $ (0.08) $ (0.05) $ - $ - $ -
Net income (loss) $ 2.78 $ 1.63 $ 2.49 $ 0.22 $ (2.76)
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
As of or for the years ended December 31,
---------------------------------------------------------------------------------
(dollars in thousands) 1999 1998 1997 1996 1995
------------- --------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Financial Condition:
Total assets $ 1,119,693 $ 1,019,369 $ 892,371 $ 746,685 $ 662,201
Loans, net 741,722 651,858 571,112 494,291 517,789
Allowance for loan losses (11,305) (12,301) (14,031) (7,983) (11,597)
Securities (d) 312,491 296,504 233,849 194,863 39,315
Deposits 641,764 706,195 667,564 655,043 620,802
Borrowings 376,985 210,225 129,720 11,960 11,000
Stockholders' equity $ 93,931 $ 95,368 $ 88,549 $ 74,840 $ 23,726
Non-performing loans (e) $ 1,992 $ 2,949 $ 2,830 $ 7,856 $ 16,355
Foreclosed real estate owned 298 902 1,204 679 5,393
Non-performing assets (f) $ 2,290 $ 3,851 $ 4,034 $ 8,535 $ 21,748
Performance Ratios:
Return (loss) on average total assets (g) 1.34 % 0.92 % 1.61 % 0.16 % (2.14)%
Return (loss) on average equity (g) 15.81 9.40 15.99 2.34 (39.13)
Interest rate spread (h) 2.97 3.10 3.38 3.63 4.03
Net interest margin (i) 3.49 3.61 3.90 4.03 4.24
Efficiency ratio (j) 51.65 56.52 60.09 63.61 65.22
Efficiency ratio with write-downs and
OREO expenses (k) 52.14 % 57.66 % 61.55 % 76.71 % 99.65 %
Asset Quality Data:
Non-performing loans as a % of gross
loans (e) (l) 0.26 % 0.44 % 0.48 % 1.56 % 3.09 %
Non-performing assets as a % of
gross loans and OREO (f) 0.30 0.58 0.69 1.70 4.07
Non-performing assets as a % of
total assets (f) 0.20 0.38 0.45 1.14 3.28
Allowance for loan losses
as a % of gross loans (l) 1.47 1.85 2.40 1.59 2.19
Allowance for loan losses as
a % of non-performing loans (e) 553.97 417.12 495.80 101.62 70.91
Net charge-offs as a % of average
gross loans (g) 0.18 % 0.38 % 0.56 % 1.99 % 1.54 %
Capital Ratios:
Tier 1 leverage capital (m) 8.75 % 9.63 % 9.74 % 10.20 % 3.57 %
Tier 1 risk-based capital (n) 13.57 14.49 16.49 18.28 5.65
Total risk-based capital (o) 14.82 % 15.75 % 17.76 % 19.54 % 6.90 %
Other Selected Financial and Statistical Data:
Number of:
Deposit accounts 63,986 69,385 67,751 68,212 67,125
Bank offices 16 16 14 14 14
Full-time staff 214 216 202 192 203
Stockholders' equity to assets 8.39 % 9.36 % 9.92 % 10.02 % 3.58 %
Cash dividends declared per share (p) $ 0.75 $ 0.45 $ - $ - n/a
Dividend payout ratio 26.98 % 27.11 % - % - % n/a
</TABLE>
a) Operating expenses exclude write-downs and operating expenses related to
foreclosed real estate owned.
b) In 1995, based on then-current operating and asset quality trends, management
recorded an additional deferred tax valuation reserve of $1.50 million thereby
determining that as of December 31, 1995, it was more likely than not that the
deferred tax asset would not be realized. In the second quarter of 1997, the
Company recognized a tax benefit of $10.33 million primarily due to the full
reversal of its deferred tax asset valuation allowance. Based on three
consecutive prior quarters of income and projections for the second half of 1997
and 1998 that indicated continued profitability, the Company determined that it
was more likely than not that it would realize its net deferred tax assets.
During 1998, the Company recorded $1.19 million in net tax expense due to the
tax implications of the creation of
13
<PAGE>
Mechanics Mortgage Company, a passive investment company. This charge was the
result of establishing a deferred tax asset valuation allowance against the
Company's state deferred tax asset.
c) Diluted earnings and proforma diluted earnings (loss) per share is computed
based upon the weighted average number of shares of common stock and common
stock equivalents (if dilutive) outstanding during the periods presented. Common
stock equivalents consist of stock options. For earnings (loss) per share
purposes, the common stock has been assumed to be outstanding for all periods
presented.
d) Includes FHLB stock and excludes short-term investments classified as cash
equivalents.
e) Non-performing loans are loans that are contractually past due in excess of
90 days or loans that are not 90 days past due but which the Company has decided
to stop the accrual of interest based on management's assessment regarding the
full collectibility of principal and interest. Troubled debt restructured loans
which are performing in accordance with their restructured terms are not
included in non-performing loans.
f) Non-performing assets are the combination of non-performing loans and
foreclosed real estate owned.
g) Averages based on daily average balances.
h) Difference between the weighted average yield on loans, and the investment
securities and short-term investments and the weighted average cost of funds.
i) Represents net interest income divided by average total interest-earning
assets.
j) Represents operating expenses divided by the sum of net interest income and
total other income.
k) Represents operating expenses, operation of foreclosed real estate owned,
write-down of investment in Real Estate Partnership, write-downs and net losses
on sale of foreclosed real estate owned and write-down of real estate agency
subsidiary divided by the sum of net interest income and total other income.
l) Gross loans excludes loans held-for-sale.
m) The Tier 1 leverage capital ratio established by the Federal Reserve Board
("FRB") and the Federal Deposit Insurance Corporation ("FDIC") measures the
ratio of Tier 1 capital to average quarterly total assets. Tier 1 capital is
generally defined as common stock, additional paid in capital, surplus, retained
earnings, adjustments for unrealized losses on equity securities classified as
available-for-sale, treasury stock and unallocated Employee Stock Ownership Plan
("ESOP") shares. Tier 1 capital excludes goodwill and other intangibles.
n) The Tier 1 risk-based capital ratio established by the FRB and the FDIC
measures the ratio of Tier 1 leverage capital to total "risk-weighted" assets.
The Company's assets and certain off-balance sheet items are assigned to broad
risk categories. Basically, the higher percentage of riskier assets an
institution has, the more capital it must have to satisfy the risk-based
guidelines; the lower the risk, the lower the required capital.
o) The total risk-based capital ratio established by the FRB and the FDIC is
calculated as described in (n) above but allows the Company to include Tier II
capital in addition to Tier 1 capital. Tier II capital generally consists of the
general allowance for loan losses. The Company recorded the full amount of the
general allowance for loan losses (1.25% of risk based assets) in Tier II
capital for the years presented, in accordance with FDIC regulations. Not more
than one-half of the capital used to calculate the total risk-based capital
ratio may come from Tier II capital.
p) The Bank completed its subscription and community offering of common stock on
June 25, 1996.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The statements in the following discussion and analysis concerning the 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. The following discussion and analysis of the
Company's financial condition and results of operations should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto, which are included elsewhere herein.
MECH Financial, Inc. has one subsidiary, Mechanics Savings Bank. The Bank is a
state-chartered capital stock savings bank which operates 16 banking offices in
Hartford County and offers a full range of banking services to individuals and
corporate customers primarily located in Central Connecticut. The Bank was
organized in 1861 and is the largest banking institution headquartered in the
City of Hartford. The Bank completed its subscription and community
14
<PAGE>
offerings of common stock on June 25, 1996, thereby completing its conversion
from a Connecticut-chartered mutual savings bank to a Connecticut-chartered
capital stock savings bank. The Bank sold the maximum number of shares offered
in the conversion, as adjusted, issuing 5.29 million shares for total gross
proceeds of $52.90 million.
On November 25, 1997, the shareholders of the Bank approved the formation of a
holding company, MECH Financial Inc. Effective January 1, 1998, the formation of
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 Board
of Directors believes the formation of MECH Financial, Inc. will enhance the
Bank's competitive position and result in greater long-term shareholder value.
During 1997, MIS became a licensed broker/dealer and insurance agency in the
State of Connecticut as well as a registered investment advisor. Effective
January 1, 1999, the Bank funded a passive investment company, MMC, to take
advantage of recent state legislation which is expected to reduce the Company's
state tax liability.
On December 1, 1999, the Company and Webster entered into an Agreement and Plan
of Merger which provides for, among other things, the acquisition of MECH by
Webster through a stock-for-stock exchange. Contemporaneous with the completion
of the acquisition, Mechanics Savings Bank, a wholly-owned subsidiary of MECH,
will merge with and into Webster Bank, a wholly-owned subsidiary of Webster. The
Agreement provides that shareholders of MECH will receive 1.52 shares of Webster
common stock for each share of MECH common stock. The transaction is designed to
be a tax-free exchange to the holders of MECH common stock and is to be
accounted for as a purchase transaction. The Boards of Directors of MECH and
Webster expect the transaction to close in the second quarter of 2000.
The Bank is a community bank with a broad range of products and services. The
Bank's lending focus is on making commercial loans to small and medium-sized
businesses as well as originating residential mortgages and consumer loans. The
Bank's results of operations depend primarily on net interest income, which is
the difference between the income earned on its loan and securities portfolios,
and its cost of funds, consisting of interest paid on its deposits and
borrowings. The Bank may set aside a provision for loan losses, which, in the
past and potentially in the future, has had or may have a significant impact on
its results of operations. The Bank's results of operations also depend upon the
commissions and fees earned from the Bank's investment brokerage program, as
well as other banking fees which contribute to non-interest income. The Bank's
operating expenses consist principally of employee compensation, occupancy
expenses, data processing expenses and other general and administrative
expenses. The Bank's results of operations are also significantly affected by
general economic and competitive conditions, the real estate market, changes in
interest rates, government policies and actions of regulatory authorities.
Overview
The Company reported net income of $14.46 million for the year ended December
31, 1999 compared to $8.70 million for the year ended December 31, 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 $15.70 million and
recognized a $2.15 million gain on the sale. The Bank will continue to occupy
its banking and office space at 100 Pearl Street under a long-term lease. During
1998, the Company recorded a net tax expense of $1.19 million for the tax
implications of the creation of MMC in January 1999.
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 during 1999. Due to
this program and to shares tendered to the Company from stock options, the
Company purchased 262,394 shares of its common stock at a cost of $8.56 million
during 1999.
Net income before income taxes totaled $22.00 million for the year ended
December 31, 1999 compared to $16.36 million for the year ended December 31,
1998. The increase was mainly due to a $4.17 million increase in net interest
income and a $600,000 decrease in the provision for loan losses. Net interest
income increased mainly due to a higher volumes of interest-bearing assets.
15
<PAGE>
During 1999, the Company increased its assets to $1,119.69 million at December
31, 1999 or 9.8% over the $1,019.37 million at December 31, 1998. The increase
in assets reflects increased activity in lending and investing which was funded
primarily with increased borrowings from the FHLB and federal funds purchased.
Non-performing assets as a percentage of total assets was 0.20% at December 31,
1999 as compared to 0.38% at December 31, 1998. The Company's allowance for loan
losses represented 553.97% of non-performing and restructured loans at December
31, 1999, compared to 339.24% at December 31, 1998.
Financial Condition
Total assets as of December 31, 1999 were $1,119.69 million, representing an
increase of $100.32 million or 9.8% from $1,019.37 million at December 31, 1998.
During the year, the Company emphasized increased lending and investing
activities which resulted in increases in one- to four-family and commercial
real estate mortgages and consumer loans. The major source of funding these
increases was expanded borrowings.
Securities
The securities portfolio consists primarily of U.S. Treasury and Government
agency securities, mortgage-backed securities and mutual funds. There are no
derivative instruments (other than collateralized mortgage obligations, the
majority of which are guaranteed by the Federal National Mortgage Association,
the Government National Mortgage Association, and the Federal Home Loan Mortgage
Corporation), structured notes, inverse floating notes or interest or principal
only strips in the Company's securities portfolio.
The following table sets forth the composition of the Company's investment
portfolios at the dates indicated:
<TABLE>
<CAPTION>
At December 31,
-------------------------------------------------
(in thousands) 1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Securities held-to-maturity:
U.S. Treasury securities and other U.S. Government agencies $ 27,000 $ 22,994 $ 5,000
Corporate debt securities 1,000 1,000 -
Debt securities issued by foreign governments 250 - -
Mortgage-backed securities 40,469 56,312 70,199
------------- ------------- -------------
Total securities held-to-maturity, at amortized cost $ 68,719 $ 80,306 $ 75,199
============= ============= =============
Securities available-for-sale:
U.S. Treasury securities and other U.S. Government agencies $ 14,107 $ 5,029 $ 2,997
Corporate debt securities 2,927 5,912 1,002
Debt securities issued by foreign governments 100 350 350
Mortgage-backed securities 189,567 175,266 127,185
Marketable equity securities 2,613 3,000 23
Mutual funds 16,713 16,154 20,643
------------- ------------- -------------
Total securities available-for-sale, at fair value $ 226,027 $ 205,711 $ 152,200
============= ============= =============
FHLB stock $ 17,745 $ 10,487 $ 6,450
============= ============= =============
</TABLE>
Investment securities increased $8.73 million or 3.1% from $286.02 million at
December 31, 1998 to $294.75 million at December 31, 1999 due primarily to a
$13.08 million increase in the U.S. Treasury and other U.S. Government agency
securities. Funds available for investment increased mainly from additional
borrowings.
Due to increased FHLB borrowings, the Company was required to purchase
additional shares of FHLB stock totaling $7.26 million. The Company believes
that these shares provide above average dividend yields for the risk
16
<PAGE>
characteristics of such investments.
At December 31, 1999, the Company had a net unrealized loss of $6.80 million
included in its $226.03 million available-for-sale securities portfolio and a
net unrealized loss of $2.77 million on its $68.72 million held-to-maturity
securities portfolio. Fair market values for both debt and equity securities
have declined largely due to the rise in market interest rates. Management
believes that overall market interest rates are cyclical in nature, and the fair
market value of securities would increase when market interest rates fall. In
Management's opinion, there has been no credit impairment, change in contractual
terms or any other form of other-than-temporary impairment to its securities
portfolio. Fluctuations in fair market value caused by movements in interest
rates and market conditions will not necessarily have a significant effect on
future earnings.
The following table sets forth the contractual maturities of investment
securities (excluding equity securities and mutual funds) at December 31, 1999,
and the weighted average yields of such securities. The weighted average yields
are calculated based on the cost and the effective yields to maturity of each
security.
<TABLE>
<CAPTION>
Carrying Amount
--------------------------------------------------------------
Less than After One After Five
One Year Through Five Years Through Ten Years
------------------- ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
(in thousands) Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Securities held-to-maturity:
U.S. Treasury and other U.S.
Government agencies $ - - $ - - $ 21,000 6.38%
Mortgage-backed securities - - - - - -
Corporate debt securities - - - - - -
Foreign debt securities - - - - 250 6.46
---------- --------- ---------
Total securities held-to-
maturity $ - - $ - - $ 21,250 6.38%
---------- --------- ---------
Securities available-for-sale:
U.S. Treasury and other U.S.
Government agencies $ - - $ 5,934 5.88% $ 6,613 6.56%
Mortgage-backed securities 1,834 6.31% 9,572 6.78 913 6.41
Corporate debt securities - - 961 7.38 - -
Foreign debt securities - - 100 7.75 - -
---------- --------- ----------
Total securities available-for-
sale $1,834 6.31% $16,567 6.50% $ 7,526 6.54%
---------- --------- ----------
Total $1,834 6.31% $16,567 6.50% $ 28,776 6.42%
========== ==== ======== ===== ======== ======
<CAPTION>
------------------------------------------
After
Ten Years Totals
------------------- --------------------
Weighted Weighted
Average Average
(in thousands) Amount Yield Amount Yield
------ ----- ------ -----
<S> <C> <C> <C> <C>
Securities held-to-maturity:
U.S. Treasury and other U.S.
Government agencies $ 6,000 6.66% $ 27,000 6.44%
Mortgage-backed securities 40,469 6.63 40,469 6.63
Corporate debt securities 1,000 7.65 1,000 7.65
Foreign debt securities - - 250 6.46
---------- ----------
Total securities held-to-
maturity $ 47,469 6.66% $ 68,719 6.57%
---------- ----------
Securities available-for-sale:
U.S. Treasury and other U.S.
Government agencies $ 1,560 5.07% $ 14,107 6.11%
Mortgage-backed securities 177,248 6.42 189,567 6.44
Corporate debt securities 1,966 6.87 2,927 7.04
Foreign debt securities - - 100 7.75
---------- ----------
Total securities available-for-
sale $180,774 6.42% $206,701 6.43%
---------- ----------
Total $228,243 6.47% $275,420 6.46%
========== ====== ========== ======
</TABLE>
Refer to Note 4 of the consolidated financial statements for information related
to unrealized gains and losses on the available-for-sale investment securities.
17
<PAGE>
Loans
The following table details the composition of the loan portfolio as of the
periods presented.
<TABLE>
<CAPTION>
At December 31,
--------------------------------------------------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
----------------- -------------- --------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Real estate mortgages:
One- to four-family $ 481,637 $ 423,308 $ 396,390 $ 341,372 $ 348,783
Multi-family 15,013 16,056 13,497 14,187 19,803
Commercial real estate 134,504 117,373 99,252 95,923 111,836
Construction and land development 5,704 4,480 3,602 6,173 4,485
Commercial and industrial 35,913 41,516 33,699 26,072 26,435
Home equity lines of credit 12,810 6,736 3,003 2,302 2,237
Other consumer loans 63,399 52,269 34,620 15,818 15,135
----------------- -------------- --------------- --------------- ----------------
Total loans, gross 748,980 661,738 584,063 501,847 528,714
Deferred loan origination costs, net 3,777 2,421 1,080 427 672
Allowance for loan losses (11,035) (12,301) (14,031) (7,983) (11,597)
----------------- -------------- --------------- --------------- ----------------
Total loans, net $ 741,722 $ 651,858 $ 571,112 $ 494,291 $ 517,789
================= ============== =============== =============== ================
</TABLE>
Gross loans increased $87.24 million or 13.2% from $661.74 million at December
31, 1998 to $748.98 million at December 31, 1999. The increase was due primarily
to increases of $58.33 million of one- to four-family mortgages, $17.13 million
of commercial real estate mortgages and $11.13 million of consumer loans due to
increased origination activity which was partially offset by amortization and
prepayments. The increased origination activity during 1999 was due mainly to
increased marketing campaigns and the expansion of the network of automotive
dealers offering the Company's lending programs as well as favorable market
interest rate conditions during the beginning of the year. There were no loans
held-for-sale at December 31, 1999 and December 31, 1998 since the Company is
now maintaining most originated loans for its own portfolio.
The following table sets forth certain information at December 31, 1999
regarding the dollar amount of loans maturing in the Company's loan portfolio.
Demand loans and loans having no stated schedule of repayments and no stated
maturity are reported in the maturing within one year category.
<TABLE>
<CAPTION>
After One After Five
Within through through After
(in thousands) Amount One Year Five Years Ten Years Ten Years
------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Real estate mortgages:
One- to four-family $481,637 $ 146 $ 9,801 $ 40,070 $431,620
Multi-family 15,013 - 660 3,697 10,656
Commercial real estate 134,504 1,905 28,016 44,777 59,806
Construction and land development 5,704 345 271 83 5,005
Commercial and industrial 35,913 13,119 15,142 6,977 675
Home equity lines of credit 12,810 17 97 12,696 -
Other consumer loans 63,399 1,468 57,293 3,783 855
------------ ------------ ------------- ------------- ------------
Total loans, gross $748,980 $ 17,000 $ 111,280 $ 112,083 $508,617
============ ============ ============= ============= ============
</TABLE>
At December 31, 1999, $429.90 million of the Company's loans with contractual
maturities after December 31, 2000 were fixed rate loans and $302.08 million had
adjustable interest rates. The following table sets forth the dollar amount of
all loans maturing after December 31, 2000 by fixed or adjustable interest
rates.
18
<PAGE>
(in thousands) Fixed Adjustable
--------------- ----------------
Real estate mortgages:
One- to four-family $ 278,641 $ 202,850
Multi-family 7,986 7,027
Commercial real estate 62,179 70,420
Construction and land development 4,358 1,001
Commercial and industrial 15,657 7,137
Home equity lines of credit 60 12,733
Other consumer loans 61,022 909
--------------- ----------------
Total loans, gross $ 429,903 $ 302,077
=============== ================
The allowance for loan losses totaled $11.04 million at December 31, 1999
compared to $12.30 million at December 31, 1998. Due to the Company's declining
levels of non-performing assets, there was no provision for loan losses in 1999.
Net charge-offs totaled $1.27 million during 1999. Provisions for loan losses
during the year ended December 31, 1998 totaled $600,000 and net charge-offs
totaled $2.33 million. The allowance for loan losses as a percentage of non-
performing loans increased from 417.1% at December 31, 1998 to 554.0% at
December 31, 1999.
The following table sets forth an analysis of activity in the allowance for loan
losses at and during the periods indicated.
<TABLE>
<CAPTION>
At or for the years ended December 31,
---------------------------------------------------------------------------
(in thousands) 1999 1998 1997 1996 1995
------------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at beginning of period $ 12,301 $ 14,031 $ 7,983 $ 11,597 $ 7,108
Add:
Provision charged to operations - 600 9,100 6,400 12,850
Recoveries 705 516 960 430 744
Less:
Charge-offs:
Real estate mortgages:
One- to four-family 511 2,132 1,840 2,966 1,829
Multi-family 200 71 694 1,677 2,083
Commercial real estate - 62 987 4,878 4,549
Construction and land development - - - 15 -
Consumer and commercial and industrial 1,260 581 491 908 644
------------- ----------- ------------ ------------ -----------
Total charge-offs 1,971 2,846 4,012 10,444 9,105
------------- ----------- ------------ ------------ -----------
Balance at end of period $ 11,035 $ 12,301 $ 14,031 $ 7,983 $ 11,597
============= =========== ============ ============ ===========
Net charge-offs $ 1,266 $ 2,330 $ 3,052 $ 10,014 $ 8,361
============= =========== ============ ============ ===========
Total loans, gross $ 748,980 $ 661,738 $ 584,063 $ 501,847 $ 528,714
============= =========== ============ ============ ===========
Net charge-offs to gross loans 0.17% 0.35% 0.52% 2.00% 1.58%
</TABLE>
19
<PAGE>
The following table shows the allocation of the allowance for loan losses to
various types of loans at December 31.
<TABLE>
<CAPTION>
% of Loan % of Loan % of Loan
Type to Type to Type to
(in thousands) 1999 Total Loans 1998 Total Loans 1997 Total Loans
-------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Real estate mortgages:
One- to four-family $ 1,214 64.31 % $ 1,679 63.97 % $ 2,549 67.87 %
Multi-family 305 2.01 435 2.42 399 2.31
Commercial real estate 2,901 17.96 2,661 17.74 2,397 16.99
Construction and
land development 186 0.76 82 0.68 36 0.62
Commercial and industrial 1,152 4.79 1,262 6.27 1,085 5.77
Home equity lines of credit
and consumer loans 2,138 10.17 365 8.92 423 6.44
Unallocated 3,139 n/a 5,817 n/a 7,142 n/a
------- ---------- ------- ---------- ------- ----------
Total allowance for loan losses $11,035 100.00 % $12,301 100.00 % $14,031 100.00 %
======= ========== ======= ========== ======= ==========
<CAPTION>
% of Loan % of Loan
Type to Type to
(in thousands) 1996 Total Loans 1995 Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Real estate mortgages:
One- to four-family $1,724 68.02 % $ 1,302 65.97 %
Multi-family 592 2.83 806 3.75
Commercial real estate 2,935 19.11 2,114 21.15
Construction and
land development 239 1.23 90 0.85
Commercial and industrial 848 5.20 3,397 5.00
Home equity lines of credit
and consumer loans 395 3.61 366 3.28
Unallocated 1,250 n/a 3,522 n/a
------ ----------- ------- -----------
Total allowance for loan losses $7,983 100.00 % $11,597 100.00 %
====== =========== ======= ===========
</TABLE>
The Company allocates the allowance for loan losses based on historic loss
ratios for its one- to four-family mortgages, home equity lines of credit and
consumer loans. The Bank uses various guidelines for determining the allowance
for loan losses. The Bank primarily relies on its risk rating system as a means
to derive commercial loan reserves by applying loss experience ratios to
individual risk rating categories. Management also analyzes peer industry data
to assess the reserve adequacy of the commercial real estate and commercial and
industrial loan portfolios.
Management analyzes the historical charge-off information by product type to
assess the reserve adequacy of the residential and consumer loan portfolios.
Management believes that the Bank's allowance for loan losses adequately
estimates the probable loan losses in the respective portfolios.
The Bank regards its allowance for loan losses as a reserve which is available
to absorb losses from all types of loans. Additional factors included in the
Bank's determination of appropriate levels of the allowance for loan losses
include the size and nature of troubled loans, collateral values and credit
concentrations within a portfolio, general delinquency levels, regional and
national economic trends and regulatory policy. The Bank's allowance for loan
losses includes an unallocated allowance which is intended to absorb losses
across all loan portfolios, that cannot be predicted based upon current economic
conditions.
Depending upon the Company's asset/liability position, the Company may sell
fixed rate one- to four-family real estate mortgages on a servicing-retained
basis. At December 31, 1999 and 1998, loans serviced for others totaled $48.22
million and $53.77 million, respectively.
Adverse market interest rate changes between the time the customer receives a
rate-lock commitment and the time the fully-funded mortgage loan is sold to an
investor can erode the value of that mortgage. Therefore, the Company enters
into forward sales contracts, generally for periods not exceeding ninety days,
to mitigate the interest rate risk associated with the origination and sale of
mortgage loans. The Company accepts credit risk in forward sales contracts to
the extent of nonperformance by a counterparty, in which case the Company would
be compelled to sell the mortgages to another party at the current market price.
The credit exposure of forward sales contracts represents the aggregate value of
contracts with a positive fair value. These credit exposures at both December
31, 1999 and December 31, 1998 were not significant. If the Company did not have
sufficient loans to fulfill the contract, it would purchase mortgages from
others at the prevailing market rates to satisfy the contracts. The cost of
forward sales contracts, and any related gain or loss, are deferred and
recognized when the mortgages are sold and were not material in 1999, 1998 and
1997.
20
<PAGE>
Non-Performing Assets
The following table summarizes changes in non-performing assets during the
periods presented.
(in thousands) For the years ended December 31,
---------------------------------
1999 1998 1997
------- -------- --------
Balance, beginning of year $ 3,851 $ 4,034 $ 8,535
Loans placed on non-accrual status 5,551 10,152 12,194
Payments on non-performing assets (1,878) (1,671) (8,308)
Loans returned to accrual status (1,777) (941) (2,988)
Loans charged-off (1,971) (2,846) (3,052)
Sales of loans and
foreclosed real estate owned (1,486) (4,792) (2,226)
Write-downs and net losses on sale
of foreclosed real estate owned - (85) (121)
------- -------- --------
Total reductions (7,112) (10,335) (16,695)
------- -------- --------
Balance, end of year $ 2,290 $ 3,851 $ 4,034
======= ======== ========
Percent of total assets 0.20% 0.38% 0.45%
21
<PAGE>
The following table details the composition of non-performing assets and
troubled debt restructuring as of the dates presented.
<TABLE>
<CAPTION>
Accruing Loans Foreclosed Total Troubled
Non-Accrual Past Due 90 Real Estate Non-Performing Debt
(in thousands) Loans or More Days Owned Assets Restructurings
----------- ------------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
December 31, 1999
Real estate mortgages:
One- to four-family $ 1,440 $ - $ 298 $ 1,738 $ -
Multi-family 100 - - 100 -
Commercial real estate 64 - - 64 -
Construction and land development - - - - -
Commercial and industrial 229 - - 229 -
Home equity lines of credit and consumer loans 159 - - 159 -
------- -------------- ----------- -------------- --------------
Total $ 1,992 $ - $ 298 $ 2,290 $ -
======= ============== =========== ============== ==============
December 31, 1998
Real estate mortgages:
One- to four-family $ 1,810 $ - $ 809 $ 2,619 $ -
Multi-family 300 - - 300 677
Commercial real estate 150 - 93 243 -
Construction and land development - - - - -
Commercial and industrial 469 - - 469 -
Home equity lines of credit and consumer loans 220 - - 220 -
------- ------------- ----------- -------------- --------------
Total $ 2,949 $ - $ 902 $ 3,851 $ 677
======= ============= =========== ============== ==============
December 31, 1997
Real estate mortgages:
One- to four-family $ 1,713 $ - $ 828 $ 2,541 $ -
Multi-family 78 - - 78 1,160
Commercial real estate 681 - 164 845 -
Construction and land development 2 - 212 214 -
Commercial and industrial 286 - - 286 -
Home equity lines of credit and consumer loans 70 - - 70 -
------- ------------- ----------- -------------- --------------
Total $ 2,830 $ - $ 1,204 $ 4,034 $ 1,160
======= ============= =========== ============== ==============
December 31, 1996
Real estate mortgages:
One- to four-family $ 3,636 $ - $ 653 $ 4,289 $ 178
Multi-family 187 - - 187 1,259
Commercial real estate 2,103 - - 2,103 3,214
Construction and land development 895 - 26 921 -
Commercial and industrial 887 - - 887 -
Home equity lines of credit and consumer loans 148 - - 148 -
------- ------------- ----------- -------------- --------------
Total $ 7,856 $ - $ 679 $ 8,535 $ 4,651
======= ============= =========== ============== ==============
December 31, 1995
Real estate mortgages:
One- to four-family $ 3,304 $ - $ 593 $ 3,897 $ 340
Multi-family - - - - 3,355
Commercial real estate 11,964 - 1,748 13,712 8,981
Construction and land development 622 - 3,052 3,674 1,017
Commercial and industrial 431 - - 431 554
Home equity lines of credit and consumer loans 34 - - 34 -
------- ------------- ----------- -------------- --------------
Total $16,355 $ - $ 5,393 $ 21,748 $ 14,247
======= ============= =========== ============== ==============
</TABLE>
The Company places a loan on non-accrual status when it is 90 days or more past
due or based on management's assessment that the full collectibility of
principal and interest is uncertain. Non-performing assets as a percentage of
total assets decreased from 0.38% at December 31, 1998 to 0.20% at December 31,
1999. Non-performing assets as a percentage of total loans and foreclosed real
estate owned decreased from 0.58% at December 31, 1998 to 0.30% at December 31,
1999. The Company also maintains lists of adversely classified credits
(substandard, doubtful, or loss credits) as defined by the FDIC. The Classified
Asset Lists included loans totaling $3.10 million at December 31, 1999, a
decrease of $1.63 million or 34.5% from $4.73 million at December 31, 1998. Of
the loans on the Classified Asset
22
<PAGE>
Lists, non-performing loans totaled $1.99 million, at December 31, 1999, a
decrease of $957,000 or 32.5% from $2.95 million at December 31, 1998. The
Company, through its workout department, pursues the resolution of all
classified and/or non-performing assets through restructuring, credit
modifications or collections. When these procedures do not bring a loan into
performing or restructured status, the Company generally initiates action to
foreclose the collateral or to acquire it by deed in lieu of foreclosure.
As part of its loan workout efforts, the Company periodically enters into
troubled debt restructurings. As of December 31, 1999, 1998 and 1997, the
Company had $-0-, $677,000 and $1.16 million, respectively, in troubled debt
restructurings.
The foregoing tables do not include OAEM loans. Although not impaired, OAEM
loans, in the opinion of management, exhibit a higher than normal degree of risk
and warrant monitoring due to various considerations, including (i) the degree
of documentation supporting the borrower's current financial position, (ii)
potential weaknesses in the borrowers' ability to service the loan, (iii)
possible collateral value deficiency, and (iv) other risk factors such as
geographic location, industry focus and negatively trending financial results.
These OAEM loans approximated $13.37 million at December 31, 1999 and $20.52
million at December 31, 1998. Properties collateralizing these loans are located
in Connecticut, primarily in Hartford County, and consist primarily of
commercial real estate mortgages. The above mentioned deficiencies have created
some uncertainty, but not serious doubt, as to the borrowers' ability to comply
with the loan repayment terms in the future. Management believes the reserves
for these loans are adequate.
Foreclosed real estate owned decreased from $902,000 at December 31, 1998 to
$298,000 at December 31, 1999. The Company foreclosed upon 22 properties
totaling $1.04 million during 1999. The Company sold 29 properties totaling
$1.49 million during the year ended December 31, 1999. Write-downs and net
losses on sale of foreclosed real estate owned for the year totaled $-0-,
$85,000 and $121,000 for the years ended December 31, 1999, 1998 and 1997,
respectively.
Cash and Cash Equivalents
Cash and cash equivalents increased $8.21 million or 37.3% from $21.99 million
at December 31, 1998 to $30.20 million at December 31, 1999. The Company's non-
interest-bearing deposits and cash increased $8.87 million from December 31,
1998 to December 31, 1999 due in part to increased currency retained in
preparation for the century date change.
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"). During the first
quarter of 1999, the Real Estate Partnership sold the building at 100 Pearl
Street, Hartford, CT to New Boston Limited Partnership, an independent third
party. Eighty Pearl Street Corporation received proceeds of $15.70 million and
recognized a $2.15 million gain on the sale. The Bank will continue to occupy
its banking and office space at 100 Pearl Street under a long-term lease. The
Real Estate Partnership has since been dissolved.
Cash Surrender Value Life Insurance
Cash surrender value life insurance totaled $17.69 million at December 31, 1999
compared to $16.87 million at December 31, 1998. During 1997, twenty policies
were acquired on the lives of seven executive officers and six directors and are
designed to recover the costs of the Company's Long Term Deferred Incentive Plan
("LTDIP") and Outside Director Deferred Compensation Plan ("DDCP"). The policy
death benefit also will enable the Company to fund the death benefit provision
of the DDCP. The policies were paid with a single premium and have a combined
death benefit of $41.3 million. Policy cash values earn interest at a current
tax-free rate of 5.4% and policy mortality costs are charged against the cash
value monthly. There are no loads or surrender charges associated with the
policies.
23
<PAGE>
Deposits and Borrowings
Deposits decreased $64.43 million or 9.1% from $706.19 million at December 31,
1998 to $641.76 million at December 31, 1999. Certificates of deposit decreased
$72.99 million during the period primarily due to decreases in one year
certificates of deposit.
The following table presents the amounts of certificates of deposit of the
Company at December 31, 1999 maturing during the periods reflected below and the
weighted average interest rates of such accounts.
Weighted Average
(in thousands) Amount Interest Rate
---------- ----------------
Certificates of deposit maturing during
the 12 months ending:
December 31, 2000 $ 275,487 4.54 %
December 31, 2001 37,106 5.12
December 31, 2002 15,915 5.82
Thereafter 6,949 5.32
---------
Total $ 335,457 4.68 %
========= ==============
The following table presents the maturities of the Company's certificates of
deposit in amounts of $100,000 or more at December 31, 1999 by time remaining to
maturity.
(in thousands) Maturing
--------
Three months or less $ 21,240
Over three through six months 8,678
Over six through twelve months 12,820
Over twelve months 9,434
--------
Total $ 52,172
========
At December 31, 1999, the Company had $34.00 million in federal funds purchased
compared to $-0- at December 31, 1998. These funds were borrowed from Webster
Bank at market rates.
Borrowings increased $132.76 million from December 31, 1998 to December 31, 1999
due to additional FHLB borrowings primarily to fund the increases in the loan
and investment portfolios. At December 31, 1999, the FHLB borrowings had a
weighted average rate of 5.54% and a weighted average remaining term of 2.9
years. During 1996, the Company financed the purchase of the Company's common
stock for the ESOP. There were 24,000 and 48,000 unallocated ESOP shares at
December 31, 1999 and December 31, 1998, respectively.
During 1999, the Bank prepaid $30.00 million of FHLB advances that carried a
weighted average interest rate of 6.23% which resulted in $655,000 of prepayment
penalties. 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 1999. This reduced earnings per share by $0.09 and $0.08 on a basic
and diluted basis, respectively.
During 1998, the Bank prepaid four FHLB advances totaling $33.00 million
carrying a weighted average rate of 6.26% which resulted in $392,000 in
prepayment penalties. Due to these prepayment penalties, the Company reported a
$243,000 extraordinary item, net of $149,000 in taxes due to the early
extinguishment of debt. These reduced earnings per share by $0.05 on both a
basic and diluted basis.
The following table sets forth, at the dates indicated, information regarding
the weighted average cost of funds and balances at December 31, 1999, 1998 and
1997 and the highest and average month end balances of the Company's total
borrowings.
24
<PAGE>
<TABLE>
<CAPTION>
At and for the years ended December 31,
-------------------------------------------
1999 1998 1997
---------- ---------- ---------
<S> <C> <C> <C>
(in thousands)
Weighted average interest rate of total borrowings 5.59% 5.39% 6.00%
Highest outstanding balance of total borrowings $ 377,225 $ 210,465 $ 129,960
Average month end balance of total borrowings $ 311,711 $ 168,202 $ 76,865
Total borrowings $ 376,985 $ 210,225 $ 129,720
</TABLE>
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 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 primary sources of liquidity for the Bank are
principal payments and maturities of securities and loans, short-term borrowings
through repurchase agreements and FHLB advances, net deposit growth and funds
provided by operations. Liquidity can also be provided through sales of loans
and available-for-sale securities.
The Company's most liquid assets are cash and cash equivalents, which include
investments in liquid short-term instruments, such as federal funds sold. The
level of these liquid assets is dependent upon the Company's operating,
financing and investing activities during any given period. At December 31,
1999, the Company's primary liquidity, consisting of cash and federal funds
sold, was $30.20 million, or 2.7% of total assets, compared to $21.99 million,
or 2.2% of total assets, at December 31, 1998. The increase was mainly due to
increased cash supply for the century date change.
The Bank monitors its liquidity in accordance with guidelines established under
its asset/liability management policy and applicable regulatory requirements.
Management believes its current liquidity level, which is within policy
guidelines, is sufficient to meet normal operating needs. As part of its
asset/liability management strategy as well as to meet unexpected demands, the
Bank has available a line of credit with the FHLB. At December 31, 1999, the
Bank had no borrowings under its line of credit. The Bank may borrow
approximately $15 million under that line of credit. Additional borrowings may
be made upon the pledge of additional qualifying collateral.
Asset/Liability Management and Interest Rate Sensitivity
The 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 several interest rate scenarios over a 24-month time horizon. In
accordance with its asset/liability 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's policy is to achieve equal to
or less than a 10% change in net interest income over the next 12 months within
the selected 400 basis point band. At December 31, 1999, the Company was within
its policy guideline, and the Company believes its level of interest rate
sensitivity was appropriate.
25
<PAGE>
The Company analyzes its interest rate sensitivity position to manage the risk
associated with interest rate movements through the use of gap analysis and
balance sheet simulation. Interest rate risk arises from mismatches in the
repricing of assets and liabilities within a given time period. Gap analysis is
an approach used to quantify these differences.
With a positive gap, in which interest-earning assets maturing or repricing
exceed interest-bearing liabilities maturing or repricing within the same
period, earnings will generally increase in a rising interest rate environment
and decrease in a declining interest rate environment. Conversely, with a
negative gap, in which interest-bearing liabilities maturing or repricing exceed
interest-earning assets maturing or repricing within the same period, earnings
will generally decrease in a rising interest rate environment and increase in a
declining interest rate environment.
While gap analysis is a general indicator of the potential effect that changing
interest rates may have on net interest income, the gap itself does not present
a comprehensive view of interest rate sensitivity. First, changes in the general
level of interest rates do not affect all categories of assets and liabilities
equally or simultaneously. Second, assumptions must be made to construct a gap
table. Money market deposits, for example, which have no contractual maturity,
are assigned a repricing interval of within one year. Management can influence
the actual repricing of these deposits independent of the gap assumption. Third,
the gap table represents a one-day position and cannot incorporate a changing
mix of assets and liabilities over time as interest rates change. For those
reasons, the Company primarily uses simulation techniques derived from interest
rate risk management computer models, to analyze and project future net interest
income streams, incorporating the current gap position, the forecasted balance
sheet mix, and the anticipated spread relationships between market rates and
Company products, under varying interest rate scenarios.
The following table sets forth the Company's interest rate sensitivity position
at December 31, 1999, measured in terms of the volume of interest rate sensitive
assets and liabilities that are subject to repricing in future time periods. For
purposes of this analysis, money market deposits have been presented in the
within one year category and savings and other deposits have been presented in
the one to five year category, although the interest rate elasticity of money
market, savings and other deposits cannot be tied to any one time category. Non-
accrual loans have been presented in the repricing over five years category.
Significant variations may exist in the degree of interest rate sensitivity
between individual asset and liability types within the repricing periods
presented due to differences in the repricing elasticity relative to changes in
the general level of interest rates. No assurance can be made that these
assumptions will be indicative of future withdrawals of deposits or repayments.
26
<PAGE>
<TABLE>
<CAPTION>
Repricing Repricing Repricing
Total Percent of Within Within Over
(in thousands) Amount Total One Year 1-5 Years 5 Years
-------------- ------------ --------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Assets:
Securities $ 312,491 27.91% $ 96,608 $ 133,841 $ 82,042
Short-term investments 760 0.07 760 - -
Loans, net 741,722 66.24 234,141 176,489 331,092
-------------- ------------ -------------- ------------- ------------
Total rate sensitive assets 1,054,973 94.22 331,509 310,330 413,134
Other assets 64,720 5.78
-------------- ------------
Total assets $ 1,119,693 100.00%
============== ============
Liabilities and Stockholders' Equity:
Deposits:
Savings and other $ 101,742 9.09% - 101,742 -
Money market 115,570 10.32 115,570 - -
Certificates of deposit 335,457 29.95 275,487 59,970 -
Demand deposits 88,995 7.95 - - 88,995
Borrowings:
FHLB advances 342,745 30.61 240,000 72,745 30,000
Federal funds purchased 34,000 3.04 34,000 - -
Other borrowings 240 0.02 240 - -
-------------- ------------ -------------- ------------- -----------
Total rate sensitive liabilities 1,018,749 90.98 665,297 234,457 118,995
Other liabilities 7,013 0.63
Stockholders' equity 93,931 8.39
-------------- ------------
Total liabilities and equity $ 1,119,693 100.00%
============== ============
Period repricing difference (gap) $ (333,788) $ 75,873 $ 294,139
============== ============= ===========
Cumulative repricing difference $ (333,788) $ (257,915) $ 36,224
Cumulative repricing difference to total assets (29.81)% (23.03)% 3.24%
</TABLE>
At December 31, 1999, the Company was liability sensitive as measured by a
negative cumulative one year gap of $333.79 million, or 29.8% of total assets.
As a result according to the gap analysis, the Company's net interest income
could be adversely affected by a sudden increase in interest rates.
Based upon various earnings simulations, which include 100 basis point to 200
basis point increases and decreases in interest rates, management projected the
effect on 2000 and 1999 net interest income as follows:
<TABLE>
<CAPTION>
Effect on 2000 net interest income as Effect on 1999 net interest income as
projected on December 31, 1999 projected on December 31, 1998
-------------------------------------- --------------------------------------
Shock Ramp Shock Ramp
(in thousands) Scenario (a) Scenario (b) Scenario (a) Scenario (b)
--------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C>
200 basis point increase in rates (c) $ (3,979) $ (1,905) $ 984 $ 306
100 basis point increase in rates (d) (1,921) (1,010) 519 156
100 basis point decrease in rates (d) 937 801 (450) (144)
200 basis point decrease in rates (c) 1,581 1,323 (553) (270)
</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 year.
(c) No adjustments are made to the Company's passbook rates. Money market rates
are shocked/ramped 50 basis points rather than 200 basis points.
27
<PAGE>
(d) No adjustments are made to the Company's passbook rates. Money market rates
are shocked/ramped 25 basis points, rather than 100 basis points.
Management believes some of the potential effects of the Company's interest rate
risk will be mitigated as essentially all of the Company's deposit base is
composed of local retail deposit accounts which tend to be somewhat less
sensitive to moderate interest fluctuations than other funding sources and,
therefore, provide a reasonably stable and cost-effective source of funds.
Managing these core deposits is a significant factor in determining the
Company's ability to maintain its net interest margin in a changing interest
rate environment. The entry of additional competitors into the Company's market
area may create additional competitive pressures on the Company to raise rates
on its deposit accounts, which may negatively affect the Company's net interest
margin. The Bank has become more asset sensitive during 1999 as compared to 1998
due to the shortening of maturities of FHLB borrowings. The Company structures
its borrowing, loan and securities portfolio to provide for portfolio repricing
consistent with its interest rate risk objectives.
Capital Resources
At December 31, 1999, stockholders' equity totaled $93.93 million, representing
a 1.5% decrease over the $95.37 million in capital at December 31, 1998. At
December 31, 1999, the Company's Tier 1 leverage capital ratio was 8.75% and its
total risk-based capital ratio was 14.82%. At December 31, 1998, the Company's
Tier 1 leverage capital ratio was 9.63% and its total risk-based capital ratio
was 15.75%. The Company was classified as "well capitalized" at December 31,
1999 and December 31, 1998. The Bank believes its current capital is adequate to
support operations and anticipated future growth.
During the first quarter of 1999, the Company announced its adoption of 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. On February 23, 1999, the program was
completed. As a result of this program and tendered stock options, the Company
has 262,394 shares of treasury cost totaling $8.56 million at December 31, 1999.
Impact of Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 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".
As amended by SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of Statement 133", SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
Initial application of this statement should be as of the beginning of an
entity's fiscal quarter; on that date, hedging relationships must be designated
anew and documented pursuant to the provisions of this statement. Early adoption
is permitted, however, retroactive application is prohibited. The adoption of
SFAS 133 is not expected to have a material impact for the Company.
28
<PAGE>
Impact of Inflation and Changing Prices
The Company's consolidated financial statements and related notes thereto
presented elsewhere herein have been prepared in accordance with generally
accepted accounting principles which require the measurement of financial
position and operating results in terms of historical dollars, without
considering changes in the relative purchasing power of money over time due to
inflation. Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effect of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the
prices of goods and services. Notwithstanding this, inflation can directly
affect the value of loan collateral, in particular, real estate. Sharp decreases
in real estate prices, as discussed previously, have resulted in significant
loan losses and losses on foreclosed real estate owned in the past. Inflation,
or disinflation, could significantly affect the Company's earnings in future
periods.
Tax Legislation
The State of Connecticut enacted tax law changes in May 1998, allowing for the
formation of Passive Investment Companies by financial institutions. This
legislation exempts 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 was effective for tax years beginning on or after January 1,
1999. The formation of MMC reduced the Company's state income tax expense in
1999. A deferred tax charge of $1.19 million was taken in the fourth quarter of
1998 in connection with the formation of MMC.
Other Risks and Uncertainties
The Company's financial performance is influenced significantly by interest rate
movements. The Company has traditionally been able to retain its core depositors
despite offering lower rates on deposits than some savings institutions in
surrounding markets. However, in recent years, the Company has had to offer more
competitive rates to retain core deposits, some of which have moved into higher
cost time deposit accounts. In addition, the entry of additional competitors
into the Company's market area may create additional competitive pressures on
the Company to raise rates on its deposit accounts or accept lower yields on its
loan products, which may negatively affect the Company's net interest margin in
the future. Management believes it is likely that interest rate spreads will
continue to narrow in the near future. The Company attempts to manage this
interest rate risk by monitoring interest rate movements, making investments,
and adjusting its deposit and asset pricing accordingly. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Asset/Liability Management and Interest Rate Sensitivity."
Intense competition exists in all major lines of business in which the Company
is presently engaged. The City of Hartford and the surrounding communities in
which the Company maintains branches constitutes the Company's principal market
area. This market also includes numerous national, regional, and local financial
institutions of various types. Competition for the Company, and the banking
industry in general, has also increased dramatically from non-bank competitors
such as mortgage and finance companies, insurance companies, mutual funds, and
securities firms. Recent bank consolidations affecting the Company's market area
have brought to the area new institutions against whom the Bank has not
previously competed. This consolidation and expected future consolidation
activity has and is expected to continue to produce a dynamic and challenging
competitive environment for the Company. Economic conditions at the local and
national levels, as well as government policies and regulations concerning,
among other things, monetary and fiscal policies, significantly affect the
operations of financial institutions such as the Company. In particular, local
real estate values affect institutions like the Company, which have substantial
amounts of loans collateralized by real estate. Excess real estate inventory,
coupled with a previous general economic decline, adversely affected real estate
markets in general and the Company's market area in particular in recent years
and contributed to increases in the Company's non-performing assets during such
years. Although Connecticut and Hartford County continue to reflect personal
wealth characteristics above national averages, the economies of both continue
to lag behind many areas of the country which have shown strong recoveries in
recent years.
29
<PAGE>
Results of Operations
For the year ended December 31, 1999 compared to the year ended December 31,
1998
For the year ended December 31, 1999, the Company reported net income of $14.46
million or $2.78 per diluted share compared to $8.70 million or $1.63 per
diluted share for the same period in 1998. Net interest income increased 13.1%
or $4.17 million from 1998 to 1999. During the first quarter of 1999, the Real
Estate Partnership (50% owned by a Bank subsidiary) sold its interest in 100
Pearl Street in Hartford, CT which houses the Bank's banking and corporate
offices to New Boston Limited Partnership, an independent third party. The
subsidiary received proceeds of $15.70 million and recognized a $2.15 million
gain on the sale. During 1998, the Company recorded an additional $1.19 million
in net tax expense due to the tax implications of the January 1, 1999 funding of
Mechanics Mortgage Company, a passive investment company.
Net Interest Income
Net interest income totaled a record $35.95 million for the year ended December
31, 1999 compared to $31.78 million for the same period in 1998, representing a
$4.17 million or 13.1% increase. The increase was primarily a result of a
$148.59 million or 16.9% increase in average interest-earning assets. Average
net loans increased $103.67 million due mainly to increased one- to four-family
and commercial mortgages and consumer loans as a result of increased origination
activity in excess of prepayments and amortization during 1999. Average
investment securities increased $54.76 million primarily due to increased
investments in mortgage-backed securities. Funding the increases in interest-
earning assets, average balances of other borrowings increased $136.28 million.
The net interest margin decreased from 3.61% for the year ended December 31,
1998 to 3.49% for the same period in 1999. The decrease was mainly due to a
decrease in the average yields on loans and to increased use of other
borrowings.
The following table sets forth certain information relating to the Company's
average interest-earning assets, interest-bearing liabilities and net interest
income for the years ended December 31, 1999 and 1998. Non-accrual loans have
been included in the appropriate average balance loan category but unpaid
interest on non-accrual loans has not been included for purposes of determining
interest income. For investment securities, the yield calculations are based on
the average amortized cost. Included in loan interest income is $1.38 million
and $837,000 of amortization of net deferred costs for the years ended December
31, 1999 and 1998, respectively.
30
<PAGE>
<TABLE>
<CAPTION>
Average Balances Income / Expense Yield
------------------------------ ----------------------------- ----------------------------
(in thousands) 1999 1998 1999 1998 1999 1998
-------------- ------------- ------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 698,663 $ 594,997 $ 52,875 $ 47,758 7.57 % 8.03%
Investment securities 326,398 271,637 20,664 17,192 6.33 6.33
Short-term investments 4,315 14,154 212 756 4.91 5.34
------------- ------------ ------------ -----------
Total interest-earning assets 1,029,376 880,788 73,751 65,706 7.16 7.46
Other assets 52,526 67,853
------------- ------------
Total assets $ 1,081,902 $ 948,641
============= ============
Money market checking $ 48,606 $ 37,653 763 435 1.57 1.16
Money market savings 62,850 56,117 1,626 1,409 2.59 2.51
Savings and other 110,794 110,364 1,671 1,671 1.51 1.51
Certificates of deposit 374,510 406,305 17,571 20,684 4.69 5.09
------------- ------------ ------------ -----------
Total interest-bearing deposits 596,760 610,439 21,631 24,199 3.62 3.96
Federal funds purchased 1,423 - 86 - 6.04 n/a
Other borrowings 303,172 166,894 16,083 9,729 5.30 5.83
------------- ------------ ------------ -----------
Total interest-bearing funds 901,355 777,333 37,800 33,928 4.19 4.36
Demand deposits 82,967 74,111
Other liabilities 6,083 4,686
Stockholders' equity 91,497 92,511
------------- ------------
Total liabilities and equity $ 1,081,902 $ 948,641
============= ============
Net interest income $ 35,951 $ 31,778
============ ===========
Spread on interest-bearing funds 2.97 % 3.10%
Net interest margin 3.49 % 3.61%
</TABLE>
The following table presents the changes in interest and dividend income and the
changes in interest expense, attributable to changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
during the periods indicated.
<TABLE>
<CAPTION>
Years ended December 31, 1999 versus 1998
Change in interest due to
-------------------------------------------------------------------
(in thousands) Volume Rate Vol/Rate Net
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Loans, net $ 8,321 $ (2,728) $ (476) $ 5,117
Investment securities 3,466 5 1 3,472
Short-term investments (526) (61) 43 (544)
------------- ------------ ------------- -------------
Total 11,261 (2,784) (432) 8,045
------------- ------------ ------------- -------------
Money market checking 127 156 45 328
Money market savings 169 43 5 217
Savings and other 7 (6) (1) -
Certificates of deposit (1,619) (1,621) 127 (3,113)
Federal funds purchased 86 - - 86
Other borrowings 7,944 (875) (715) 6,354
------------- ------------ ------------- -------------
Total 6,714 (2,303) (539) 3,872
------------- ------------ ------------- -------------
Net change to interest income $ 4,547 $ (481) $ 107 $ 4,173
============= ============ ============= =============
</TABLE>
Interest Income
Interest income increased $8.05 million or 12.2% due primarily to increased
average volume of net loans and
31
<PAGE>
investment securities of $103.67 million and $54.76 million, respectively, for
the year ended December 31, 1999. Partially offsetting these increases, overall
average yields decreased 30 basis points from 7.46% for the year ended December
31, 1998 to 7.16% for the year ended December 31, 1999. The decrease was mainly
a result of a 46 basis point decrease in the average yield on loans.
Interest Expense
Interest expense increased $3.87 million or 11.4% for the year ended December
31, 1999 as compared to the same period in 1998. The increase was primarily due
to an increase in average volume of borrowings. Overall, the average cost of
funds decreased from 4.36% for the year ended December 31, 1998 to 4.19% for the
year ended December 31, 1999. This decrease was mainly due lower overall rates
on both borrowings and deposits.
Provision and Allowance For Loan Losses
The Company determines its allowance and provision for loan losses based upon a
detailed evaluation of the loan portfolio through a process which considers
numerous factors, including estimated credit losses based upon internal and
external portfolio reviews and credit risk ratings, delinquency levels and
trends, estimates of the current value of underlying collateral, concentrations,
portfolio volume and mix, changes in lending policy, historical loan loss
experience, current economic conditions and examinations performed by regulatory
authorities. Determining the level of the allowance at any given period is
difficult, particularly during deteriorating or uncertain economic periods.
Management must make estimates using assumptions and information which is often
subjective and rapidly changing. The review of the loan portfolio is a
continuing process in the light of a changing economy and the dynamics of the
banking and regulatory environment. In management's judgment, based upon an
analysis of the above factors and considering recent charge-offs and delinquency
activity, the allowance for loan losses at December 31, 1999 is adequate. Should
the economic climate deteriorate, borrowers could experience difficulty in
repaying their obligations, and the level of non-performing loans, charge-offs
and delinquencies could rise and require increased provisions. In addition,
various regulatory agencies, as an integral part of their examination process,
periodically review the Company's allowance for loan losses. Such agencies could
require the Company to recognize additions to the allowance based on their
judgments of information available to them at the time of their examination.
The provision for loan losses decreased from $600,000 for the year ended
December 31, 1998 to $-0- for the same period in 1999. At December 31, 1999, the
allowance for loan losses represents 554.0% of non-performing and restructured
loans compared to 339.2% at December 31, 1998.
The following table shows the activity in the Company's allowance for loan
losses for the three years ended December 31.
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
------------- ----------- ------------
<S> <C> <C> <C>
Balance, beginning of year $ 12,301 $ 14,031 $ 7,983
Provision for loan losses - 600 9,100
Charge-offs (1,971) (2,846) (4,012)
Recoveries 705 516 960
------------ ---------- -----------
Balance, end of year $ 11,035 $ 12,301 $ 14,031
============ ========== ===========
Ratio of allowance for loan losses:
To non-performing loans 553.97% 417.12% 495.80%
To total gross loans 1.47% 1.85% 2.40%
</TABLE>
While all segments of the Company's loan portfolio are subject to continuous
quality evaluation, a precise method for predicting loan losses does not exist.
Many of the components of the evaluation require the exercise of management's
judgment. While management believes that actions taken with respect to the
provision and the allowance for loan
32
<PAGE>
losses have been adequate, there are many factors which may influence future
provisions.
Other Income
The Company recorded $10.01 million in other income for the year ended December
31, 1999 compared to $8.28 million for the same period in 1998, representing a
21.0% increase. The following table shows the components of other income for the
years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
(in thousands) $ %
1999 1998 Change Change
----------- ----------- ---------- ------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 2,837 $ 2,621 $ 216 8.24%
Investment brokerage services commissions 2,668 2,412 256 10.61
Gain on sale of headquarters building owned by
the Real Estate Partnership 2,148 - 2,148 n/a
Appreciation of cash surrender value life insurance 939 929 10 1.08
Loan servicing and other fees 552 630 (78) (12.38)
Net gain on sales of loans 44 59 (15) (25.42)
Income from investment in Real Estate Partnership 13 606 (593) (97.85)
Net gain (loss) on calls / sales of investment securities 5 (16) 21 (131.25)
Other 805 1,035 (230) (22.22)
---------- ----------- ----------
Total other income $ 10,011 $ 8,276 $ 1,735 20.96%
========== =========== ========== ===========
</TABLE>
Service charges increased mainly due to higher overdraft fees. Investment
brokerage services commissions increased mainly due to higher investment
advisory fees which was partially offset by lower variable annuity commissions.
During 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 recognized a $2.15 million gain on the sale. The Bank will
continue to occupy its banking and office space at 100 Pearl Street under a
long-term lease. Loan servicing and other fees decreased due mainly to lower
servicing fees and prepayment penalties. During 1999, the Company reported a
$5,000 gross gain on a call of a debt security. During 1998, the Company
reported gross losses of $20,000 on the sale of equity securities and gross
gains of $4,000 on the sale of mortgage-backed securities. Other income
decreased mainly due to the elimination of ground rent from 100 Pearl Street.
Other Expenses
Other expenses totaled $23.96 million for the year ended December 31, 1999,
compared to $23.10 million for the same period in 1998, representing a 3.8%
increase. The following table shows the components of other expenses for the
years ended December 31, 1999 and 1998.
33
<PAGE>
<TABLE>
<CAPTION>
(in thousands) $ %
1999 1998 Change Change
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Salaries, commissions and employee benefits $ 13,831 $ 12,211 $ 1,620 13.27 %
Occupancy 3,065 3,238 (173) (5.34)
Data processing 1,226 1,194 32 2.68
Furniture and equipment 949 1,012 (63) (6.23)
Advertising 791 840 (49) (5.83)
Legal and accounting 653 708 (55) (7.77)
Communications 506 519 (13) (2.50)
Operation of foreclosed real estate owned 222 372 (150) (40.32)
Amortization of goodwill 117 58 59 101.72
Write-downs and net losses on sale
of foreclosed real estate owned - 85 (85) (100.00)
Other 2,604 2,859 (255) (8.92)
----------- ----------- ----------
Total other expenses $ 23,964 $ 23,096 $ 868 3.76 %
=========== =========== ========== ===========
</TABLE>
Salaries, commissions and benefits were higher due mainly to higher overall
salary expense, commissions and increased costs for the Company's ESOP.
Occupancy decreased due mainly to lower rent expense at 100 Pearl Street which
was partially offset by a full year of rental expense for the two branches
purchased in July 1998. Operation of foreclosed real estate owned decreased
mainly due to lower volumes of foreclosed properties. Other expenses decreased
mainly due to lower appraisal and consulting expenses.
Income Taxes
The Company recognized income tax expense of $7.10 million for the year ended
December 31, 1999 compared to $7.42 million for the year ended December 31,
1998. During 1998, the Company recorded $1.19 million in net tax expense due to
the tax implications of the January 1, 1999 creation of MMC, a passive
investment company. Income of this passive investment company subsidiary and its
dividends to the parent are exempt from the Connecticut Corporation Business
Tax. Due to the creation of the passive investment company, the Company no
longer expects to recognize its previously recorded state deferred tax asset.
Without that expense, the Company's effective tax rate was 38.1% in 1998. The
1999 effective tax rate of 32.3% reflects reduction in state income tax expense
as a result of the creation of MMC.
Results of Operations
For the year ended December 31, 1998 compared to the year ended December 31,
1997
For the year ended December 31, 1998, the Company reported net income of $8.70
million or $1.63 per diluted share compared to $13.08 million or $2.49 per
diluted share for the same period in 1997. The results in both years were
effected by one time income tax events. In the second quarter of 1997, the
Company recognized a tax benefit of $10.33 million primarily due to the full
reversal of its deferred tax asset valuation allowance. Based on three
consecutive prior quarters of income and projections for the second half of 1997
and for 1998 that indicated continued profitability, the Company determined that
it was more likely than not that it would realize its net deferred tax assets.
During 1998, the Company recorded an additional $1.19 million in net tax expense
due to the tax implications of the January 1, 1999 funding of Mechanics Mortgage
Company, a passive investment company.
The Company recorded $600,000 in provisions for loan losses during 1998 compared
to $9.10 million during 1997. Also contributing to the 1998 results, was an 8.6%
increase in net interest income as compared to the year ended December 31, 1997.
34
<PAGE>
Net Interest Income
Net interest income totaled $31.78 million for the year ended December 31, 1998
compared to $29.26 million for the same period in 1997, representing a $2.52
million or 8.6% increase. The increase was primarily a result of a $130.76
million or 17.4% increase in average interest-earning assets. Average investment
securities increased $62.59 million primarily due to increased investments in
mortgage-backed securities and mutual funds. Average net loans increased $62.27
million due mainly to increased one- to four-family and commercial mortgages and
consumer loans as a result of increased origination activity in excess of
prepayments and amortization during 1998. Funding the increases in
interest-earning assets, average balances of borrowings and certificates of
deposit increased $99.72 million and $27.30 million, respectively. The net
interest margin decreased from 3.90% for the year ended December 31, 1997 to
3.61% for the same period in 1998. The decrease was mainly due to a decrease in
the average yields on loans and to the changed composition of interest-bearing
liabilities which resulted in a higher overall average cost of funds by 10 basis
points.
The following table sets forth certain information relating to the Company's
average interest-earning assets, interest-bearing liabilities and net interest
income for the years ended December 31, 1998 and 1997. Non-accrual loans have
been included in the appropriate average balance loan category but unpaid
interest on non-accrual loans has not been included for purposes of determining
interest income. For investment securities, the yield calculations are based on
the average amortized cost. Included in loan interest income is $837,000 and
$369,000 of amortization of net deferred costs for the years ended December 31,
1998 and 1997, respectively.
<TABLE>
<CAPTION>
Average Balance Income / Expense Yield
--------------------- --------------------- --------------------
(in thousands) 1998 1997 1998 1997 1998 1997
--------- --------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Loans, net $ 594,997 $ 532,726 $ 47,758 $ 43,799 8.03% 8.22%
Investment securities 271,637 209,044 17,192 13,067 6.33 6.25
Short-term investments 14,154 8,261 756 449 5.34 5.44
--------- --------- --------- ---------
Total interest-earning assets 880,788 750,031 65,706 57,315 7.46 7.64
--------- ---------
Other assets 67,853 59,978
--------- ---------
Total assets $ 948,641 $ 810,009
========= =========
Money market checking $ 37,653 $ 34,306 435 408 1.16 1.19
Money market savings 56,117 57,066 1,409 1,334 2.51 2.34
Savings and other 110,364 117,242 1,671 2,247 1.51 1.92
Certificates of deposit 406,305 379,006 20,684 19,854 5.09 5.24
--------- --------- --------- ---------
Total deposits 610,439 587,620 24,199 23,843 3.96 4.06
Securities sold under
agreements to repurchase - 4,468 - 243 n/a 5.44
Other borrowings 166,894 67,177 9,729 3,967 5.83 5.91
--------- --------- --------- ---------
Total interest-bearing liabilities 777,333 659,265 33,928 28,053 4.36 4.26
--------- ---------
Demand deposits 74,111 64,921
Other liabilities 4,686 4,039
Stockholders' equity 92,511 81,784
--------- ---------
Total liabilities and equity $ 948,641 $ 810,009
========= =========
Net interest income $ 31,778 $ 29,262
========= =========
Spread on interest-bearing funds 3.10 % 3.38%
Net interest margin 3.61 % 3.90%
</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.
35
<PAGE>
<TABLE>
<CAPTION>
Years ended December 31, 1998 versus 1997
Change in interest due to
----------------------------------------------
(in thousands) Volume Rate Vol/Rate Net
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Loans, net $ 5,120 $ (1,039) $ (122) $ 3,959
Investment securities 3,913 163 49 4,125
Short-term investments 320 (8) (5) 307
--------- --------- --------- ---------
Total 9,353 (884) (78) 8,391
--------- --------- --------- ---------
Money market checking 40 (12) (1) 27
Money market savings (22) 99 (2) 75
Savings and other (132) (472) 28 (576)
Certificates of deposit 1,430 (560) (40) 830
Securities sold under
agreements to repurchase (243) - - (243)
Other borrowings 5,889 (51) (76) 5,762
--------- --------- --------- ---------
Total 6,962 (996) (91) 5,875
--------- --------- --------- ---------
Net change to interest income $ 2,391 $ 112 $ 13 $ 2,516
========= ========= ========= =========
</TABLE>
Interest Income
Interest income increased $8.39 million or 14.6% due primarily to increased
average volume of investment securities and net loans of $62.59 million and
$62.27 million, respectively, for the year ended December 31, 1998. Partially
offsetting these increases, overall average yields decreased 18 basis points
from 7.64% for the year ended December 31, 1997 to 7.46% for the year ended
December 31, 1998. The decrease was mainly a result of a 19 basis point decrease
in the average yields on loans as a result of the lower interest rate
environment during 1998 compared to 1997.
Interest Expense
Interest expense increased $5.88 million or 20.9% for the year ended December
31, 1998 as compared to the same period in 1997. The increase was primarily due
to an increase in average volume of borrowings and certificates of deposit of
$99.72 million and $27.30 million, respectively. Overall, the average cost of
funds increased to 4.36% for the year ended December 31, 1998 from 4.26% for the
year ended December 31, 1997. This increase was mainly due to the shift in the
composition of interest-bearing liabilities to higher cost FHLB borrowings.
Provision and Allowance For Loan Losses
The provision for loan losses decreased from $9.10 million for the year ended
December 31, 1997 to $600,000 for the same period in 1998. At December 31, 1998,
the allowance for loan losses represents 339.2% of non-performing and
restructured loans compared to 351.7% at December 31, 1997. During 1997 with
intense competition in a continued sluggish Central Connecticut economy,
management believed increasing the allowance for loan losses and the reserve
coverage ratios while maintaining high credit quality were prudent strategies to
implement.
Other Income
The Company recorded $8.28 million in other income for the year ended December
31, 1998 compared to $8.10 million for the same period in 1997, representing a
2.1% increase. The following table shows the components of other income for the
years ended December 31, 1998 and 1997.
36
<PAGE>
<TABLE>
<CAPTION>
$ %
(in thousands) 1998 1997 Change Change
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Service charges on deposit accounts $ 2,621 $ 2,246 $ 375 16.70 %
Investment brokerage services commissions 2,412 2,927 (515) (17.59)
Appreciation of cash surrender value life insurance 929 421 508 120.67
Loan servicing and other fees 630 600 30 5.00
Income from investment in Real Estate Partnership 606 579 27 4.66
Net (loss) gain on sales of investment securities (16) 209 (225) (107.66)
Other 1,094 1,122 (28) (2.50)
----------- ----------- ------------
Total other income $ 8,276 $ 8,104 $ 172 2.12 %
=========== =========== ============ ============
</TABLE>
Service charges increased mainly due to higher overdraft fees. Investment
brokerage services commissions decreased primarily due to lower annuity and
transactional sales. During 1997, the Company invested in universal cash
surrender value life insurance to recover costs of the Company's LTDIP and DDCP.
Appreciation of cash surrender value life insurance was higher in 1998 since the
majority of that asset was purchased during June 1997. During 1998, the Company
reported gross losses of $20,000 on the sale of equity securities and gross
gains of $4,000 from the sale of mortgage-backed securities. During 1997, the
Company reported gross gains and gross losses on the sale of mortgage-backed
securities of $301,000 and $92,000, respectively.
Other Expenses
Other expenses totaled $23.10 million for the year ended December 31, 1998,
compared to $23.00 million for the same period in 1997. The following table
shows the components of other expenses for the years ended December 31, 1998 and
1997.
<TABLE>
<CAPTION>
$ %
(in thousands) 1998 1997 Change Change
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Salaries, commissions and employee benefits $12,211 $12,104 $ 107 0.88 %
Occupancy 3,238 3,196 42 1.31
Data processing 1,194 1,083 111 10.25
Furniture and equipment 1,012 953 59 6.19
Advertising 840 835 5 0.60
Legal and accounting 708 880 (172) (19.55)
Communications 519 502 17 3.39
Operation of foreclosed real estate owned 372 425 (53) (12.47)
Write-downs and net losses on sale
of foreclosed real estate owned 85 121 (36) (29.75)
FDIC insurance 81 270 (189) (70.00)
Amortization of goodwill 58 - 58 n/a
Other 2,778 2,629 149 5.67
----------- ----------- ------------
Total other expenses $23,096 $22,998 $ 98 0.43 %
=========== =========== ============ ============
</TABLE>
Salaries, commissions and benefits were higher due mainly to increased costs for
the Company's ESOP. Data processing increased mainly due to the purchase of the
two branches from Chase Manhattan Bank and Year 2000 costs. Legal and accounting
fees were lower mainly due to reduced legal expenses in the commercial loan
work-out area. Due to the Company's improved capital position and
classification, FDIC insurance premiums were lower. The 1998 expense for
goodwill relates to the purchase of the two branches. During 1998, the Company
recorded $818,000 of goodwill which is being amortized over seven years. Other
expenses increased mainly due to higher collections, title
37
<PAGE>
search and recording expenses and a higher mark to market on the Company's held
for sale loan portfolio.
Income Taxes
The Company recognized income tax expense of $7.42 million for the year ended
December 31, 1998 compared to an income tax benefit of $7.81 million for the
year ended December 31, 1997. Both years results include one time tax events.
During 1998, the Company recorded $1.19 million in net tax expense due to the
tax implications of the January 1, 1999 creation of MMC, a passive investment
company. Income of this passive investment company subsidiary and its dividends
to the parent are exempt from the Connecticut Corporation Business Tax. Due to
the creation of the passive investment company, the Company no longer expects to
recognize its previously recorded state deferred tax asset.
During 1997, the Company recorded a tax benefit of $10.33 million and fully
reversed its valuation allowance on its net deferred tax assets. Based on three
consecutive prior quarters of income and projections for the second half of 1997
and for 1998 that indicated continued profitability, the Company determined that
it was more likely than not that it would realize its net deferred tax assets.
38
<PAGE>
Item 8. Financial Statements and Supplemental Data
Consolidated Statements of Condition
December 31, 1999 and 1998
<TABLE>
<CAPTION>
(dollars in thousands) 1999 1998
-------------- -------------
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest-bearing deposits and cash $ 29,440 $ 20,567
Short-term investments 760 1,420
-------------- -------------
Cash and cash equivalents 30,200 21,987
Investments:
Available-for-sale, at market value 226,027 205,711
Held-to-maturity (market value at December 31, 1999 - $65,949; 68,719 80,306
at December 31, 1998 - $80,873)
Federal Home Loan Bank stock, at cost 17,745 10,487
Loans, net 741,722 651,858
Bank premises and equipment 3,880 4,633
Investment in Real Estate Partnership - 13,541
Accrued interest receivable 5,571 4,957
Foreclosed real estate owned 298 902
Cash surrender value life insurance 17,694 16,873
Goodwill 643 759
Other assets 7,194 7,355
-------------- -------------
$ 1,119,693 $ 1,019,369
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits $ 641,764 $ 706,195
Federal funds purchased 34,000 -
Other borrowings 342,985 210,225
Mortgage escrow 1,792 1,652
Other liabilities 5,221 5,929
-------------- -------------
Total liabilities 1,025,762 924,001
-------------- -------------
Commitments and contingencies (Notes 14 and 16)
Stockholders' Equity:
Preferred stock - par value $.01; 1,000,000 shares
authorized, none issued - -
Common stock - par value $.01; 15,000,000 shares
authorized; 5,331,763 issued at December 31, 1999 and
5,297,932 issued at December 31, 1998 53 53
Additional paid in capital 52,676 51,430
Retained earnings 54,847 44,205
Accumulated other comprehensive income (loss) (4,850) 160
Less: Treasury stock, at cost, 262,394 at December 31, 1999,
none at December 31, 1998 (8,555) -
Less: Unallocated ESOP shares (24,000 at December 31, 1999
and 48,000 shares at December 31, 1998) (240) (480)
-------------- -------------
Total stockholders' equity 93,931 95,368
-------------- -------------
$ 1,119,693 $ 1,019,369
============== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
39
<PAGE>
Consolidated Statements of Operations
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
(in thousands except for earnings per share)
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $ 52,875 $ 47,758 $ 43,799
Interest and dividends on investment securities:
Interest on debt securities 18,516 15,267 12,403
Dividends on equity securities 1,157 737 320
-------- -------- --------
19,673 16,004 12,723
Other interest income 1,203 1,944 793
-------- -------- --------
Total interest income 73,751 65,706 57,315
-------- -------- --------
Interest expense:
Interest on deposits:
Savings deposits 3,214 3,000 3,503
Time deposits 18,417 21,199 20,340
-------- -------- --------
Total interest on deposits 21,631 24,199 23,843
Interest on securities sold under agreements to repurchase - - 243
Interest on federal funds purchased 86 - -
Interest on other borrowings 16,083 9,729 3,967
-------- -------- --------
Total interest expense 37,800 33,928 28,053
-------- -------- --------
Net interest income 35,951 31,778 29,262
Provision for loan losses - 600 9,100
-------- -------- --------
Net interest income after provision for loan losses 35,951 31,178 20,162
-------- -------- --------
Other income:
Service charges on deposit accounts 2,837 2,621 2,246
Investment brokerage services commissions 2,668 2,412 2,927
Gain on sale of headquarters building owned by
the Real Estate Partnership 2,148 - -
Appreciation of cash surrender value life insurance 939 929 421
Loan servicing and other fees 552 630 600
Net gain on sales of loans 44 59 52
Income from investment in Real Estate Partnership 13 606 579
Net gain (loss) on calls / sales of investment securities 5 (16) 209
Other 805 1,035 1,070
-------- -------- --------
Total other income 10,011 8,276 8,104
-------- -------- --------
Other expenses:
Salaries, commissions and employee benefits 13,831 12,211 12,104
Occupancy 3,065 3,238 3,196
Data processing 1,226 1,194 1,083
Furniture and equipment 949 1,012 953
Advertising 791 840 835
Legal and accounting 653 708 880
Communications 506 519 502
Operation of foreclosed real estate owned 222 372 425
Amortization of goodwill 117 58 -
Write-downs and net losses on sale
of foreclosed real estate owned - 85 121
Other 2,604 2,859 2,899
-------- -------- --------
Total other expenses 23,964 23,096 22,998
-------- -------- --------
Income before income taxes and extraordinary item 21,998 16,358 5,268
Income tax expense (benefit):
Current 3,087 3,088 1,602
Deferred 4,014 4,331 (9,410)
-------- -------- --------
Income tax expense (benefit) 7,101 7,419 (7,808)
-------- -------- --------
Income before extraordinary item 14,897 8,939 13,076
Extraordinary item, early extinguishment of
borrowings, net of tax (435) (243) -
-------- -------- --------
Net income $ 14,462 $ 8,696 $ 13,076
======== ======== ========
Earnings per share:
Basic:
Income before extraordinary item $ 2.97 $ 1.71 $ 2.52
Extraordinary item $ (0.09) $ (0.05) $ -
Net income $ 2.88 $ 1.66 $ 2.52
Diluted:
Income before extraordinary item $ 2.86 $ 1.68 $ 2.49
Extraordinary item $ (0.08) $ (0.05) $ -
Net income $ 2.78 $ 1.63 $ 2.49
Weighted average shares outstanding:
Basic 5,021 5,223 5,195
Diluted 5,199 5,332 5,242
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
40
<PAGE>
Consolidated Statements of Changes in Stockholders' Equity
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Additional Other Unallocated
Common Paid in Retained Comprehensive Treasury ESOP
(in thousands) Stock Capital Earnings Income (Loss) Stock Shares Total
-------- ------------ ---------- --------------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 53 $ 50,611 $ 24,815 $ 321 $ - $ (960) $ 74,840
Comprehensive income:
1997 net income - - 13,076 - - - 13,076
Net unrealized gains (losses) on securities,
net of reclassification adjustment - - - 77 - - 77
--------
Comprehensive income 13,153
--------
Exercise of stock options - 58 - - - - 58
Allocation of ESOP shares - 258 - - - 240 498
-------- ----------- ---------- ------------- ---------- ------------ ---------
Balance at December 31, 1997 53 50,927 37,891 398 - (720) 88,549
Comprehensive income:
1998 net income - - 8,696 - - - 8,696
Net unrealized gains (losses) on securities,
net of reclassification adjustment - - - (238) - - (238)
---------
Comprehensive income 8,458
---------
Dividends paid ($0.45 per share) - - (2,382) - - - (2,382)
Exercise of stock options - 81 - - - - 81
Allocation of ESOP shares - 422 - - - 240 662
-------- ----------- ---------- ------------ ---------- ------------ ---------
Balance at December 31, 1998 53 51,430 44,205 160 - (480) 95,368
Comprehensive income:
1999 net income - - 14,462 - - - 14,462
Net unrealized gains (losses) on securities,
net of reclassification adjustment - - - (5,010) - - (5,010)
---------
Comprehensive income 9,452
---------
Treasury stock purchased (262,394 shares) - - - - (8,555) - (8,555)
Dividends paid ($0.75 per share) - - (3,820) - - - (3,820)
Exercise of stock options - 667 - - - - 667
Allocation of ESOP shares - 579 - - - 240 819
-------- ----------- ---------- ------------ ---------- ------------ ---------
Balance at December 31, 1999 $ 53 $ 52,676 $ 54,847 $ (4,850) $ (8,555)$ (240) $ 93,931
======== =========== ========== ============ ========== ============ =========
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
41
<PAGE>
Consolidated Statements of Cash Flows
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
------------------- ------------------ ------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 14,462 $ 8,696 $ 13,076
----------------- ----------------- ------------------
Adjustments to reconcile net income to
cash provided by operating activities:
Provision for loan losses - 600 9,100
Depreciation and amortization 964 987 944
Amortization of investment security premiums/discounts, net (14) 79 186
Deferred loan costs, net of amortization (532) (1,017) (681)
Net gain on sale of loans (44) (59) (52)
Proceeds from loan sales 3,694 15,285 7,987
Originations of loans held for sale (3,657) (14,892) (9,769)
Loss on retirement of bank premises and equipment 1 5 -
Decrease (increase) in deferred tax assets 4,014 4,331 (9,410)
Realized losses on available-for-sale securities - 20 92
Realized gains on available-for-sale securities (5) (4) (301)
(Increase) decrease in interest and dividend receivables (614) (610) 121
Income from investment in Real Estate Partnership (13) (606) (579)
Gain on sale of Real Estate Partnership (2,148) - -
Writedowns and net losses on sale of foreclosed real estate owned - 85 121
Increase in cash surrender value life insurance (821) (820) (16,053)
Increase in other assets (1,578) (712) (527)
(Decrease) increase in other liabilities (708) 779 2,723
Allocation of Employee Stock Ownership Plan shares 819 662 498
----------------- ---------------- -----------------
Total adjustments (642) 4,113 (15,600)
----------------- ---------------- ------------------
Net cash provided by (used in) operating activities 13,820 12,809 (2,524)
----------------- ---------------- ------------------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities - 43,151 41,675
Proceeds from principal payments on available-for-sale securities 67,398 78,209 37,445
Proceeds from principal payments on held-to-maturity securities 20,132 31,931 3,982
Proceeds from maturities and calls of available-for-sale securities 3,250 22,847 19,513
Proceeds from maturities and calls of held-to-maturity securities 6,000 27,598 5,820
Purchases of available-for-sale securities (98,222) (198,395) (103,458)
Purchases of held-to-maturity securities (14,439) (64,471) (41,741)
Purchases of Federal Home Loan Bank stock (7,258) (4,037) (2,161)
Net originations and purchases of loans (90,205) (79,977) (88,134)
Proceeds from sale of Real Estate Partnership 15,702 - -
Decrease in investment in Real Estate Partnership - 1,550 1,295
Proceeds from sale of foreclosed real estate owned 1,486 1,451 2,248
Purchases of bank premises and equipment (212) (802) (254)
----------------- ----------------- ------------------
Net cash used in investing activities (96,368) (140,945) (123,770)
------------------ ----------------- ------------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, money market and
savings accounts 8,563 28,613 (11,174)
Net (decrease) increase in certificates of deposit (72,994) 10,018 23,695
Net increase (decrease) in mortgage escrow 140 264 (1,027)
Increase in FHLB borrowings 1,416,008 247,747 368,188
Repayments of FHLB borrowings (1,283,008) (167,002) (250,188)
Repayment of financing of Employee Stock Ownership Plan (240) (240) (240)
Increase in federal funds purchased 215,500 - -
Repayment of federal funds purchased (181,500) - -
Issuance of common stock 667 81 58
Dividends paid (3,820) (2,382) -
Purchases of treasury stock (8,555) - -
----------------- ----------------- ------------------
Net cash provided by financing activities 90,761 117,099 129,312
----------------- ----------------- ------------------
Net increase (decrease) in cash and cash equivalents 8,213 (11,037) 3,018
----------------- ----------------- ------------------
Cash and cash equivalents at beginning of period 21,987 33,024 30,006
----------------- ----------------- ------------------
Cash and cash equivalents at end of period $ 30,200 $21,987 $ 33,024
================= ================= ==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
42
<PAGE>
Consolidated Statements of Cash Flows (continued)
For the years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
(in thousands) 1999 1998 1997
------------------- -------------------- --------------------
<S> <C> <C> <C>
Noncash investing and financing activities
Change in net unrealized gain (loss) on securities available-for-sale $ (7,240) $ (599) $ (36)
Change in net unrealized gain (loss) on securities held-to-maturity 70 180 74
Transfer of loans to foreclosed real estate owned 1,039 1,283 3,042
Supplemental disclosures of cash flow information
Income taxes paid 4,853 3,492 641
Income tax refunds received 36 40 54
Interest paid 37,189 33,623 27,471
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Business
On November 25, 1997, the shareholders of Mechanics Savings Bank (the "Bank")
approved the formation of a holding company, MECH Financial, Inc. ("MECH" or the
"Company"). MECH Financial, Inc. provides additional corporate structuring
opportunities and powers to respond to changing and expanding needs of the
Bank's customers and to the competitive conditions in the financial services
industry. The Board of Directors believed the formation of MECH Financial, Inc.
would enhance the Bank's competitive position and result in greater long-term
shareholder value. The new structure became effective January 1, 1998, as
approved by the appropriate regulatory agencies. Shares of common stock of the
Bank were automatically converted into shares of the Company on a one-for-one,
tax-free exchange basis on that date.
Mechanics Savings Bank provides a full range of banking and financial services
to individuals and small to medium-sized businesses located primarily in Central
Connecticut. The Company competes with banks, brokerage firms, mortgage bankers
and other financial institutions. The Company and its subsidiaries are subject
to the regulations of certain state and federal agencies and receives periodic
examinations by these authorities.
On December 1, 1999, MECH and Webster Financial Corporation ("Webster") entered
into an Agreement and Plan of Merger (the "Agreement") which provides for, among
other things, the acquisition of MECH by Webster through a stock-for-stock
exchange. Contemporaneous with the completion of the acquisition, Mechanics
Savings Bank, a wholly-owned subsidiary of MECH, will merge with and into
Webster Bank, a wholly-owned subsidiary of Webster. The Agreement provides that
shareholders of MECH will receive 1.52 shares of Webster common stock for each
share of MECH common stock. The transaction is designed to be a tax-free
exchange to the holders of MECH common stock and is to be accounted for as a
purchase transaction. The Boards of Directors of MECH and Webster expect the
transaction to close in the second quarter of 2000.
Basis of Financial Statement Presentation
The preparation of the consolidated financial statements, in accordance with
generally accepted accounting principles, requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the balance
sheet and revenues and expenses for the period. Actual results could differ
significantly from those estimates.
Material estimates that are particularly susceptible to change in the near-term
relate to the determination of the allowance for loan losses and the valuation
of foreclosed real estate owned. In connection with the determination of the
allowance for loan losses and valuation of foreclosed real estate owned,
management obtains independent appraisals for significant relationships.
A substantial portion (83%) of the Company's loans and commitments are
collateralized by real estate in Connecticut. In addition, all of the foreclosed
real estate owned is located in that same market. Accordingly, a substantial
portion of the Company's loan portfolio and foreclosed real estate owned are
susceptible to changes in market conditions in Connecticut.
Management believes that the allowance for loan losses is adequate and that
foreclosed real estate owned is properly valued. While management uses available
information to recognize losses on loans and foreclosed real estate owned,
future additions to the allowance for loan losses or write-downs on foreclosed
real estate owned may be necessary based on changes in economic conditions,
particularly in Connecticut. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the Company's
allowance for loan losses and the valuation of foreclosed real estate owned.
Such agencies may require the Company to recognize additions to the allowance
for loan losses or additional write-downs on foreclosed real estate owned based
on their judgments of
44
<PAGE>
information available to them at the time of their examination.
Principles of Consolidation
The 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 Corp., Mechanics
Mortgage Company ("MMC") and Mechanics Investment Services, Inc. ("MIS"). MIS
was formed during 1996 to enable the Bank to serve its customers with a wholly-
owned fully disclosed broker/dealer. On July 2, 1997, MIS became a licensed
broker/dealer and registered investment advisor. Effective January 1, 1999, the
Bank funded a passive investment company, MMC, to take advantage of changes in
the Connecticut tax statutes. Connecticut enacted a law which allows state-
chartered banks and thrifts to transfer mortgages into passive investment
subsidiaries. Income of the subsidiaries and its dividends to the parent are
exempt from the Connecticut Corporation Business Tax. Intercompany accounts and
transactions have been eliminated in consolidation.
Investments
The Company accounts for its securities in accordance with Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities" ("SFAS 115"). Securities that the Company has the
ability and positive intent to hold to maturity are classified as held-to-
maturity and carried at amortized cost. Securities that may be sold as part of
the Company's asset/liability or liquidity management or in response to or in
anticipation of changes in interest rates and resulting prepayment risk, or for
other similar factors, are classified as available-for-sale and carried at fair
market value. Unrealized gains and losses on available-for-sale securities are
reported as a separate component of stockholders' equity, net of taxes. From
time to time, the Company may classify a security as a trading security when the
intent is to sell the security in the near future to generate profits.
Unrealized gains and losses on such securities are reported in earnings.
Realized gains and losses on the sales of all securities are reported in
earnings and computed using the specific identification cost basis. Premiums are
amortized and discounts are accreted into interest income using the level yield
method. On a periodic basis, management reviews securities for impairment due to
other-than-temporary declines in value. If any other-than-temporary impairment
is identified, the security is written down to fair value.
Loans
Loans are generally recorded at the contractual amounts owed by borrowers, less
unearned discounts, deferred origination fees and costs, the undisbursed portion
of any loans in process, and the allowance for loan losses. Fixed rate one- to
four-family mortgages that were originated with the intent to sell in the
secondary mortgage market or those loans which have been identified as assets
which may be sold prior to maturity or for which there is not a positive intent
to hold to maturity, based on foreseeable conditions, are classified as
held-for-sale and carried at the lower of cost or market value on an aggregate
basis.
Allowance for Loan Losses
The Company adopted Statement of Financial Accounting Standards No. 114,
"Accounting by Creditors for Impairment of a Loan" ("SFAS 114"), and Statement
of Financial Accounting Standards No. 118, "Accounting by Creditors for
Impairment of a Loan--Income Recognition and Disclosures" ("SFAS 118"),
effective January 1, 1995. Under these standards, a loan is considered impaired,
based on current information and events, if it is probable that the Company will
be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. The measurement of
impaired loans is generally based on the present value of expected future cash
flows discounted at the loan's historical effective interest rate, except that
all collateral-dependent loans are measured for impairment based on the fair
value of the collateral. Smaller balance, homogeneous loans, considered to be
other consumer loans, are excluded from the Company's individual impairment
measurement assessment, as loans within this scope are collectively evaluated
for impairment. Such loans are collectively evaluated for impairment using
historical charge-off data, industry data and other trend analysis.
45
<PAGE>
Factors which affect management's judgment in determining when a loan is
impaired include the length of the loan's current delinquency and the historical
number of times delinquent, the nature of the customer's industry focus, the
customer's financial stability as documented by its financial records, and
historical financial facts and estimates observed as part of the Company's
relationship with the customer. However, another factor which may affect
management's judgment in determining impairment is a continuing insignificant
delay or shortfall in the amount of payments by the customer. Management
considers an insignificant delay in payment to be a delay of thirty days or
less, and considers an insignificant shortfall in payment amount of less than
10% of the required payment amount. However, an insignificant delay or shortfall
in the amount of payment is not an event that, when considered in isolation,
would automatically cause a loan to be considered impaired.
A loan continues to be classified as impaired until it is brought fully current
and the collection of scheduled interest and principal is considered probable.
Management reviews all loans classified as loss, doubtful, substandard and other
assets especially mentioned ("OAEM") to determine impairment. Other risk
categories used to identify impaired loans include non-accrual loans and
chronically delinquent loans. Loans restructured prior to the Company's adoption
of SFAS 114 are not evaluated for impairment, as allowed by that Statement,
unless such loans exhibit other impairment characteristics.
The adequacy of the allowance for loan losses is periodically evaluated by the
Company in order to maintain the allowance at a level that is sufficient to
absorb probable credit losses. Management's evaluation of the adequacy of the
allowance is based on a review of the Company's historical loss experience,
known and inherent risks in the loan portfolio, including adverse circumstances
that may affect the ability of the borrower to repay interest and/or principal,
the estimated value of collateral, and an analysis of the levels and trends of
delinquencies, charge-offs, and the risk ratings of the various loan categories.
Such factors as the level and trend of interest rates and the condition of the
national and local economies are also considered.
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. Increases and decreases in the required
allowance, based on management's periodic evaluation of various risk factors and
due to changes in the measurement of impaired loans, are included in the
provision for loan losses.
When a loan or portion of a loan, including impaired loans, is determined to be
uncollectible, the portion deemed uncollectible is charged against the allowance
and subsequent recoveries, if any, are credited to the allowance.
Income Recognition on Accruing, Impaired and Non-Accrual Loans
Interest on loans is credited to income as earned based on outstanding principal
balances. Nonrefundable loan origination fees and certain direct loan
origination costs are deferred and the net amounts are amortized over the
contractual life of the related loans using the level-yield method. Loans,
including impaired loans, are generally classified as non-accrual if they are
past due as to maturity or payment of principal or interest for a period of 90
days or more, unless such loans are well-collateralized and in the process of
collection. If collection of a loan or a portion of a loan is in doubt, the loan
is classified as non-accrual and is considered impaired. Loans that are current
or past due less than 90 days may also be classified as non-accrual and impaired
if repayment in full of principal and/or interest is in doubt. Management
generally considers non-accrual and impaired loans to be one and the same. Loans
which are determined to be impaired but which are not yet past due greater than
90 days, are placed on non-accrual at management's discretion.
Loans may be returned to accrual status when all principal and interest amounts
contractually due (including arrearages) have been brought current, and there is
a sustained period of repayment performance (generally a minimum of six months)
by the borrower in accordance with the contractual terms of interest and
principal payment.
While a loan is classified as non-accrual and impaired and the future
collectibility of the recorded loan balance is doubtful, collections of interest
and principal are generally applied as a reduction to principal outstanding.
When the recorded loan balance is expected to be collected, interest income may
be recognized on a cash basis. In the case where a non-accrual or an impaired
loan had been partially charged off, recognition of interest on a cash basis is
limited to that which would be recognized on the recorded loan balance at the
contractual interest rate. Cash interest receipts in
46
<PAGE>
excess of that amount are recorded as recoveries to the allowance for loan
losses until prior charge-offs have been fully recovered.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated depreciation,
computed by the straight-line method over the estimated useful lives of the
assets. Accumulated depreciation is reduced upon the sale of Bank premises and
equipment and any resulting gain or loss is recorded as income or expense. The
depreciable lives of major classifications of assets range from three years to
fifteen years.
Foreclosed Real Estate Owned
Foreclosed real estate owned consists principally of properties acquired through
mortgage loan foreclosure proceedings. These properties are recorded at the
lower of the carrying value of the related loans, including costs of
foreclosure, or the estimated fair value of the real estate acquired, less the
estimated selling expenses.
Cash Surrender Value Life Insurance
Cash surrender value life insurance represents the original single premiums paid
for the policies plus the cash value earned less the mortality costs. There are
no loads or surrender charges associated with the policies.
Goodwill
Goodwill is the excess of cost over the fair value of tangible net assets
acquired in bank acquisitions accounted for using the purchase accounting method
and not allocated to any specific asset or liability category. The Company's
goodwill is amortized on a straight-line basis over seven years. The Company
also reviews goodwill on a periodic basis for events or changes in circumstances
that may indicate that the carrying amount of goodwill may not be recoverable.
Loan Sales
From time to time, the Company sells residential mortgage loans in the secondary
market and retains the servicing rights. The Company recognizes an asset for
rights to service mortgage loans for others, however those servicing rights are
acquired. The Company also assesses its capitalized mortgage servicing rights
for impairment based on the fair value of those servicing rights. The
implementation of this statement did not have a material effect on the Company's
financial condition or results of operations.
Effective January 1, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). SFAS 125
provides accounting and reporting standards for transfers and servicing of
financial assets and extinguishing of liabilities occurring after December 31,
1996, on a prospective basis. The adoption of this standard did not have a
material effect on the Company's financial condition or its results of
operations.
Income Taxes
The Company and its subsidiaries file consolidated federal and state income tax
returns. In accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109"), the Company uses the asset/liability
method of accounting for income taxes. Deferred income taxes and tax benefits
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The Company provides deferred taxes for the estimated future tax
effects attributable to temporary differences and carryforwards. The deferred
tax asset is subject to reduction by a valuation allowance in certain
circumstances. This valuation allowance is recognized if, based on an analysis
of available evidence, management determines that it is more likely than not
that some portion or all of the deferred tax asset will not be realized. The
valuation allowance is
47
<PAGE>
subject to ongoing adjustment based on changes in circumstances that affect
management's judgment about the realization of the deferred tax asset.
Adjustments to increase or decrease the valuation allowance are charged or
credited, respectively, to income tax expense.
Earnings Per Share
Effective December 31, 1997, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 establishes standards for computing and presenting earnings per share
("EPS"). It replaces the presentation of primary EPS with a presentation of
basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures.
This statement was effective for financial statements issued for periods ending
after December 15, 1997 and has been applied for all periods presented.
Diluted 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 granted stock
options. For EPS purposes, the common stock has been assumed to be outstanding
for all periods presented. Unallocated shares held for the Employee Stock Option
Plan ("ESOP") are not considered outstanding until such shares are committed to
be allocated to the ESOP.
In October 1995, the FASB issued Statement of Financial Accounting Standards No.
123, "Accounting for Stock-based Compensation" ("SFAS 123"). SFAS 123
encourages, but does not require, the Company to recognize compensation expense
for grants of stock, stock options and other equity instruments to employees
based on fair value accounting rules. That Statement also allows the Company to
account for stock-based compensation under Accounting Principles Board Opinion
No. 25 ("APB 25"), under which no compensation expense is recognized in certain
circumstances. However, SFAS 123 requires the Company to disclose pro forma net
income and earnings per share using the fair value based method. SFAS 123 was
required for years beginning after December 15, 1995. The Company did not adopt
the expense recognition provisions of SFAS 123 but rather elected to follow APB
25 upon the implementation of stock-based compensation programs. The fair value
estimate of these shares and the subsequent pro forma effect on net income and
EPS for the years ended December 31, 1999, 1998 and 1997 are contained herein.
Cash Equivalents
Cash equivalents include non-interest bearing amounts due from banks and
short-term investments with original maturities of 90 days or less.
Segments of an Enterprise and Related Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 131 "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 131"). SFAS 131 requires public
companies to report financial and descriptive information about operating
segments in annual financial statements and requires selected information about
operating segments to be reported in interim financial reports issued to
shareholders. Operating segment financial information is required to be reported
on the basis that it is used internally for evaluating segment performance and
allocation of resources. SFAS 131 is effective for financial statements for
periods beginning after December 15, 1997 and requires presentation of
comparative information for prior periods presented. The Company does not have
operating segments, as defined by SFAS 131, and therefore, has not disclosed the
additional information.
Reclassifications
Certain amounts in the 1998 and 1997 financial statements have been reclassified
to conform with the current year's presentation. These reclassifications had no
effect on earnings in 1998 or 1997. Dollars are presented in thousands, except
for per share data, in the following footnotes.
48
<PAGE>
2. Restrictions on Cash and Due From Banks:
The Bank is required by the Federal Reserve Bank to maintain reserves against
its respective transaction accounts and non-personal time deposits. At December
31, 1999, the Company was required to have cash and liquid assets of
approximately $450 to meet these requirements.
As a broker/dealer, MIS is required to maintain a minimum amount of net capital
as defined by the National Association of Securities Dealers ("NASD"). MIS can
maintain its capital requirements in the form of cash or marketable securities.
At December 31, 1999, MIS held $129 at a non-affiliated financial institution to
meet this requirement.
3. Short-Term Investments:
Short-term investments consisted of:
December 31,
-------------------------
1999 1998
---------- ----------
Federal funds sold $ 760 $ 1,420
========== ==========
49
<PAGE>
4. Investment Securities:
The amortized cost amounts and market values of investment securities as of
December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Available-For-Sale
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States Government
obligations (due after one through five years) $ 6,000 $ - $ 66 $ 5,934
United States Government
obligations (due after five through ten years) 7,000 - 387 6,613
United States Government
obligations (due after ten years) 1,996 - 436 1,560
Debt securities issued by foreign governments
(due after one through five years) 100 - - 100
Corporate debt securities (due after one year through
five years) 1,000 - 39 961
Corporate debt securities (due after ten years) 1,997 - 31 1,966
Mortgage-backed securities (due in one year or less) 1,837 - 3 1,834
Mortgage-backed securities (due after one year through
five years) 9,658 2 88 9,572
Mortgage-backed securities (due after five years through
ten years) 906 7 - 913
Mortgage-backed securities (due after ten years) 181,967 211 4,930 177,248
Marketable equity securities 3,182 44 613 2,613
Mutual funds 17,181 1 469 16,713
------------- ------------- ------------- -------------
$ 232,824 $ 265 $ 7,062 $ 226,027
============= ============= ============= =============
Held-to-Maturity
-------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States Government
obligations (due after five years through ten years) $ 21,000 $ - $ 1,330 $ 19,670
United States Government
obligations (due after ten years) 6,000 - 553 5,447
Debt securities issued by foreign governments
(due after five through ten years) 250 - - 250
Corporate debt securities (due after ten years) 1,000 - 208 792
Mortgage-backed securities (due after ten years) 40,469 300 979 39,790
------------- ------------- ------------- -------------
$ 68,719 $ 300 $ 3,070 $ 65,949
============= ============= ============= =============
</TABLE>
50
<PAGE>
The amortized cost amounts and market values of investment securities as of
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
Available-For-Sale
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States Government
obligations (due after five through ten years) $ 3,000 $ 29 $ - $ 3,029
United States Government
obligations (due after ten years) 1,995 5 - 2,000
Debt securities issued by foreign governments
(due in one year or less) 250 - - 250
Debt securities issued by foreign governments
(due after one through five years) 100 - - 100
Corporate debt securities (due in one year or less) 3,000 - - 3,000
Corporate debt securities (due after one year through five years) 1,000 - 6 994
Corporate debt securities (due after ten years) 1,996 - 78 1,918
Mortgage-backed securities (due after one year through
five years) 12,424 154 - 12,578
Mortgage-backed securities (due after five years through
ten years) 5,332 45 3 5,374
Mortgage-backed securities (due after ten years) 156,787 684 157 157,314
Marketable equity securities 3,187 85 272 3,000
Mutual funds 16,196 60 102 16,154
------------- ------------- ------------- -------------
$ 205,267 $ 1,062 $ 618 $ 205,711
============= ============= ============= =============
Held-to-Maturity
-----------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
United States Government
obligations (due after five years through ten years) $ 19,994 $ 67 $ 95 $ 19,966
United States Government
obligations (due after ten years) 3,000 - 25 2,975
Corporate debt securities (due after ten years) 1,000 - 39 961
Mortgage-backed securities (due after ten years) 56,312 689 30 56,971
------------- ------------- ------------- -------------
$ 80,306 $ 756 $ 189 $ 80,873
============= ============= ============= =============
</TABLE>
Last payment dates were used as actual maturity dates in the above tables.
Mortgage-backed securities actually amortize over the lives of the underlying
loans. Actual maturities of certain available-for-sale and held-to-maturity
securities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment
penalties.
There were no derivative instruments (other than collateralized mortgage
obligations, the majority of which are guaranteed by the Federal National
Mortgage Association, the Government National Mortgage Association and the
Federal Home Loan Mortgage Corporation), structured notes, inverse floating rate
notes or interest or principal only strips in the Company's or Bank's investment
securities portfolio at December 31, 1999 or 1998.
During 1999, the proceeds from calls/sales of mortgage-backed securities were
$3,000, including gross realized gains of $5 and gross realized loss of $-0-.
The proceeds from sales of mortgage-backed securities classified as available-
for-sale in 1998 were $5,567, including gross realized gains of $4 and gross
realized loss of $-0-. Proceeds from the sale of available-for-sale equity
securities and mutual funds in 1998 totaled $36,980, including gross realized
gains of $-0- and
51
<PAGE>
gross realized losses of $20. During 1997, proceeds from sales of mortgage-
backed securities classified as available-for-sale were $34,675, including gross
realized gains of $301 and gross realized losses of $92. The proceeds from sales
of mutual funds in 1997 totaled $7,000, with no realized gain or loss. There
were no sales of U.S. Government, foreign government or corporate debt
securities in 1999, 1998 or 1997.
At December 31, 1999, investment securities with a carrying amount of $4,767
were pledged as collateral for Treasury Tax and Loan accounts and public
deposits and $24,434 were pledged as collateral for borrowings.
5. Loans:
The composition of the loan portfolio was as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Real estate mortgages:
One- to four-family $ 481,637 $ 423,308
Multi-family 15,013 16,056
Commercial 134,504 117,373
Construction and land development 5,704 4,480
Commercial and industrial 35,913 41,516
Home equity lines of credit 12,810 6,736
Other consumer loans 63,399 52,269
-------------- --------------
Total loans, gross 748,980 661,738
Deferred loan origination costs, net 3,777 2,421
Allowance for loan losses (11,035) (12,301)
-------------- --------------
Total loans, net $ 741,722 $ 651,858
============== ==============
</TABLE>
Changes in the allowance for loan losses were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- -------------- -------------
<S> <C> <C> <C>
Balance at beginning of year $ 12,301 $ 14,031 $ 7,983
Provision for loan losses - 600 9,100
Loan charge-offs (1,971) (2,846) (4,012)
Loan recoveries 705 516 960
------------ ------------ -----------
Balance at end of year $ 11,035 $ 12,301 $ 14,031
============ ============ ===========
</TABLE>
52
<PAGE>
The following table summarizes the Company's impaired loans.
<TABLE>
<CAPTION>
Measured by the Measured by the
Present Value of Fair Value of
Expected Cash Flows the Collateral Total
------------------- -------------- -----
<S> <C> <C> <C>
At December 31, 1999
Commercial loans and mortgages $ 177 $ 254 $ 431
Residential mortgages and other loans measured
collectively - 1,561 1,561
------------- ------------- -------------
Total impaired loans $ 177 $ 1,815 $ 1,992
============= ============= =============
At December 31, 1998
Commercial loans and mortgages $ 126 $ 845 $ 971
Residential mortgages and other loans measured
collectively - 1,978 1,978
------------- ------------- -------------
Total impaired loans $ 126 $ 2,823 $ 2,949
============= ============= =============
</TABLE>
Impaired loans with no valuation allowance because the loans' fair value exceeds
their carrying value totaled $1,741 at December 31, 1999 and $2,070 at December
31, 1998. Impaired loans with a corresponding valuation allowance totaled $251
at December 31, 1999 and $879 at December 31, 1998. The valuation allowance
allocated to impaired loans was $141 at December 31, 1999 and $290 at December
31, 1998.
The average recorded investment in impaired loans was approximately $2,306,
$3,216 and $5,983 for the years ended December 31, 1999, 1998 and 1997,
respectively. During 1999, the Company recognized $7 of interest on impaired
loans (during the portion of the year that they were impaired), all of which
related to impaired loans for which interest income is recognized on the cash
basis. In 1998 and 1997, the Company recognized $22 and $14 of interest on
impaired loans (during the portion of the year that they were impaired), all of
which related to impaired loans for which interest income is recognized on the
cash basis.
6. Non-Performing Assets:
The components of non-performing assets were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Non-accrual loans $ 1,992 $ 2,949
Accruing loans past due 90 days or more - -
------------- --------------
Total non-performing loans 1,992 2,949
Foreclosed real estate owned, net 298 902
------------- --------------
Total non-performing assets $ 2,290 $ 3,851
============= ==============
</TABLE>
Non-accrual loans are defined as loans past due ninety days or more, loans which
management believes will not be repaid in full, and loans which are ninety days
or more past contractual maturity.
53
<PAGE>
The reductions in interest income associated with non-accrual loans were as
follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Income in accordance with original terms $ 96 $ 188 $ 217
Income recognized 7 22 14
------------ ------------ ------------
Reduction in interest income $ 89 $ 166 $ 203
============ ============ ============
</TABLE>
The components of foreclosed real estate owned expenses (including subsidiaries
holding foreclosed properties) were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Expenses of holding and operating
foreclosed real estate owned $ 222 $ 372 $ 425
Net (gains) losses on sale of foreclosed real estate owned (10) (103) 67
Write-downs and current year unused provisions 12 188 54
---------------- ---------------- ----------------
Total foreclosed real estate owned expense $ 224 $ 457 $ 546
================ ================ ================
</TABLE>
Changes in the foreclosed real estate owned valuation reserve were as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------------------------------------
1999 1998 1997
--------------- ---------------- ---------------
<S> <C> <C> <C>
Valuation reserve at beginning of year $ 70 $ - $ -
Write-downs and net losses on sale 2 15 121
Provision - 85 121
--------------- ---------------- ---------------
Valuation reserve at end of year $ 68 $ 70 $ -
=============== ================ ===============
</TABLE>
7. Bank Premises and Equipment:
Cost and accumulated depreciation and amortization of the various categories of
Company premises and equipment were as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
----------------------------------------------- -------------------------------------------------
Accumulated Accumulated
Depreciation and Depreciation and
Cost Amortization Net Cost Amortization Net
----------- ----------------- ---------- ----------- ------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Bank premises and land $ 2,004 $ 1,302 $ 702 $ 1,976 $ 1,239 $ 737
Leasehold improvements 5,616 3,528 2,088 5,665 3,200 2,465
Furniture and equipment 6,329 5,239 1,090 6,216 4,785 1,431
----------- ----------------- ---------- ----------- ------------------- -----------
$ 13,949 $ 10,069 $ 3,880 $ 13,857 $ 9,224 $ 4,633
=========== ================= ========== =========== =================== ===========
</TABLE>
The Bank, through its wholly-owned subsidiary, Eighty Pearl Street Corp. (the
"Corporation"), has a 50% interest in the Pearl Street Associates Limited
Partnership (the "Real Estate Partnership") which owned the building that houses
the Bank's headquarters. The Bank's investment in the Real Estate Partnership
was accounted for under the equity method of accounting. During 1999 and 1998,
the Bank received dividend distributions from the Real Estate Partnership of
$-0-and $1,613, respectively.
During the first quarter of 1999, the Real Estate Partnership sold the building
at 100 Pearl Street to New Boston Pearl Limited Partnership, an independent
third party. Eighty Pearl Street Corp. received proceeds of $15,702 and
recognized a $2,148 one-time gain on the sale. The Bank will continue to occupy
its banking and office space at 100
54
<PAGE>
Pearl Street under a long-term lease.
8. Deposits:
December 31,
-------------------------------
1999 1998
------------- --------------
Savings:
Regular $ 101,593 $ 105,067
Other 149 138
Certificates of deposit 335,457 408,451
Money Market:
Checking 51,627 43,087
Savings 63,943 60,478
------------- --------------
Total savings and time deposits 552,769 617,221
Demand deposits 88,995 88,974
------------- --------------
Total: $ 641,764 $ 706,195
============= ==============
The following table presents the amounts of certificates of deposit of the
Company at December 31, 1999 maturing during the periods reflected below and the
weighted average rates of such accounts.
<TABLE>
<CAPTION>
Weighted Average
(in thousands) Amount Interest Rate
------------- ------------------
<S> <C> <C>
Certificates of deposit maturing during the
12 months ending:
December 31, 2000 $ 275,487 4.54 %
December 31, 2001 37,106 5.12
December 31, 2002 15,915 5.82
Thereafter 6,949 5.32
-------------
Total $ 335,457 4.68 %
============= ==================
</TABLE>
The following table presents the maturities of the Company's certificates of
deposit in amounts of $100,000 or more at December 31, 1999 by time remaining to
maturity.
(in thousands) Maturing
----------------
Three months or less $ 21,240
Over three through six months 8,678
Over six through twelve months 12,820
Over twelve months 9,434
----------------
Total $ 52,172
================
On March 18, 1998, the Bank announced the purchase of the East Hartford and West
Hartford branches of Chase Manhattan Bank. The transaction was approved by state
and federal agencies. The purchase included all retail and small business
deposits totaling approximately $23,000 and loans totaling approximately $700 of
the two branches. Goodwill of $818 was recorded as a result of the purchase and
is being amortized over seven years.
55
<PAGE>
9. Borrowings:
Descriptions of the advances from the Federal Home Loan Bank of Boston and the
repayment schedule were as follows:
<TABLE>
<CAPTION>
Maturity Date Interest Rate December 31, 1999 December 31, 1998
- ---------------------- -------------- ----------------- -----------------
<S> <C> <C> <C>
March 3, 1999 5.13% $ - $ 10,000
August 19, 1999 4.94 - 10,000
November 15, 1999 4.94 - 7,000
January 14, 2000 5.79 30,000 -
January 26, 2000 6.17 25,000 -
February 2, 2000 5.91 10,000 -
February 4, 2000 5.72 30,000 -
February 7, 2000 6.03 7,000 -
February 16, 2000 5.12 20,000 -
March 24, 2000 5.82 28,000 -
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
March 12, 2003 5.78 8,745 8,745
March 21, 2003 * 4.99 20,000 -
October 21, 2003 4.19 - 5,000
November 3, 2004 * 5.80 10,000 10,000
November 8, 2004 * 5.44 30,000 -
April 21, 2006* 4.85 20,000 -
January 10, 2008 * 4.99 - 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
April 8, 2013 * 5.49 10,000 10,000
March 24, 2014 * 3.99% 10,000 -
----------------- -----------------
$ 342,745 $ 209,745
================= =================
</TABLE>
* initial call dates ranging from March 2000 to April 2003
During 1999, the Bank prepaid $30,000 of FHLB advances carrying a weighted
average rate of 6.23% which resulted in $655 in prepayment penalties. 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 1999. This reduced earnings per share by $0.09 and $0.08 on a basic and
diluted basis, respectively.
During 1998, the Bank prepaid four FHLB advances totaling $33,000 carrying a
weighted average rate of 6.26% which resulted in $392 in prepayment penalties.
Due to these prepayment penalties, the Company reported a $243
56
<PAGE>
extraordinary item, which is net of $149 in taxes, due to the early
extinguishment of borrowings. These reduced earnings per share by $0.05 on both
a basic and diluted basis.
The Bank has access to a pre-approved line of credit up to approximately $15,000
and the capacity to borrow up to 40% of the Bank's total assets. In accordance
with an agreement with the Federal Home Loan Bank of Boston, the Bank is
required to maintain qualified collateral, as defined in the FHLB Statement of
Credit Policy, free and clear of liens, pledges and encumbrances as collateral
for the advances.
In addition, the ESOP borrowed $1,200 from an unaffiliated institution to
purchase shares of the Company's stock for the ESOP in conjunction with
conversion from a Connecticut-chartered mutual savings bank to a Connecticut-
chartered capital stock savings bank (the "Conversion"). This borrowing had an
outstanding balance of $240 at December 31, 1999 and $480 at December 31, 1998.
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.
10. Investment Brokerage Services:
The Bank offers investment products and services to its customers through its
wholly-owned subsidiary, MIS. The program, which began in 1986, has evolved from
its original emphasis on transactional business to its current focus on
relationship business including asset allocation accounts with wrap fees. In
1996, the Bank hired additional staff and formed the subsidiary, MIS, with the
intent of becoming its own broker/dealer in 1997. On July 2, 1997, MIS became
licensed as a broker/dealer and registered investment advisor. MIS is regulated
by the NASD and is a member of the Security Investors Protection Corporation
("SIPC"). MIS offers a wide variety of investments products, including mutual
funds, stock and bonds as well as investment advisory services. MIS also offers
fixed and variable annuity products and is licensed as an insurance agency in
the State of Connecticut. MIS earns its commissions by selling investment
products and by providing investment advisory services to its customers.
Commissions, salaries and benefits expense related to this service approximated
$1,994, $1,764, and $1,994 in 1999, 1998 and 1997, respectively.
11. Employee Benefits:
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post Retirement Benefits" ("SFAS 132"). This statement
revised employers' disclosure about pension and other post retirement benefits,
however, it does not change the measurement or recognition of those plans. This
statement standardized disclosure requirements to the extent practicable,
requires additional information on changes in the benefits obligations and fair
value of plans assets, and eliminates certain disclosure requirements of SFAS
No. 87 "Employers Accounting for Pensions", SFAS No. 88 "Employers' Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS No. 106 "Employers' Accounting for Post
Retirement Benefits Other Than Pensions." The adoption of SFAS 132 has not
impacted the Company's disclosures about pension plans for the Company, as SFAS
132 did not change the disclosures for defined contribution pension plans.
On November 1, 1990, the Company instituted a defined contribution pension plan
including all employees who have completed one year of service, have attained
age 21, and have worked a minimum of 1,000 hours during the plan year. The
Company makes annual contributions based on a percentage of the total payroll
for eligible employees. Pension expense related to the plan for the years ended
December 31, 1999, 1998 and 1997 was $594, $546 and $480, respectively.
Effective January 1, 1987, the Company adopted the Mechanics Savings Bank 401(k)
Plan. The Bank is also the trustee for the 401(k) Plan. Employees of the Bank
who have attained age 21, completed one year of service and worked a minimum of
1,000 hours during the plan year are eligible for the 401(k) Plan. Each employee
who elects to participate in the 401(k) Plan authorizes a payroll deduction of
an amount not less than 2% or greater than 15%, in increments of 1% of
compensation (as defined), for contribution to his or her account in the 401(k)
Plan. The employer's matching contribution of each participant's contribution up
to 5% of the participant's compensation was 25% in 1999, 1998 and 1997.
The Company's contribution to the 401(k) Plan was $89, $82 and $73 for the years
ended December 31, 1999, 1998
57
<PAGE>
and 1997, respectively. As directed by each individual participant, the 401(k)
Plan's investments are in a certificate of deposit held at the Bank, MECH
Financial, Inc. common stock and several mutual funds.
On December 14, 1987 the Company adopted a non-qualified Long Term Deferred
Incentive Plan ("LTDIP") for its executive officers. The LTDIP, as amended,
awards a bonus to executive officers based upon a formula approved by the Board
of Directors. Amounts are awarded after the end of each fiscal year and can be
deferred into the plan or paid out. During 1999 and 1998, all executives chose a
direct payout. Therefore, no deferrals occurred during 1999 or 1998. Deferred
awards under the LTDIP recorded as compensation expense was $151 in 1997. The
plan was terminated effective October 31, 1999 as all participants were paid
out. The total amount paid to all participants was $577.
Effective July 1, 1997, the Company adopted an Outside Director Deferred
Compensation Plan ("DDCP"). The DDCP allows a director to defer the receipt of
all or a specified amount or percentage of director and retainer fees, and have
earnings accrue on such amounts at the prime rate or at a rate equivalent to the
appreciation in the Company's stock price over the period of time for which the
fees are in the DDCP. All amounts in the DDCP are fully vested and
nonforfeitable at all times. During the years ended December 31, 1999, 1998 and
1997, the amounts deferred under the DDCP totaled $94, $90 and $33,
respectively. If a participant dies while serving as an outside director of the
Company, the amount payable to the participant's beneficiary is the amount equal
to the participant's projected retirement benefit (as defined in the DDCP) if
the Company has acquired and continues to maintain a corporate life insurance
policy on the life of the participant at the time of death (see below).
During 1997, the Company invested $15.7 million in universal cash surrender
value life insurance. Twenty polices were acquired on the lives of seven
executive officers and six directors and were designed to recover the costs of
the Company's LTDIP and DDCP. The policy death benefit also indemnifies the
Company against the death benefit provision of the DDCP. The policies were paid
with a single premium and have a combined death benefit of $41.3 million. Policy
cash values earn interest at a rate of 5.4% on December 31, 1999 and policy
mortality costs are charged against the cash value monthly. There are no loads
or surrender charges associated with the policies.
As part of the Conversion from a mutual to a capital stock savings bank, the
Board of Directors adopted a leveraged ESOP. The ESOP purchased 120,000 shares
of stock issued as part of the Conversion. The ESOP is subject to the
eligibility, funding, participation, fiduciary, reporting and disclosure
requirements of ERISA. Under existing circumstances all Company employees are
eligible to participate in the ESOP once they have attained age 21 and completed
one year of service (which requires employment for 1,000 or more hours in a
period of twelve consecutive months, including pre-Conversion service). The
stock will be allocated to the accounts of the Company's employees participating
in the ESOP over five years. At both December 31, 1999 and December 31, 1998,
24,000 shares were allocated to employees in connection with the ESOP. The
Company recognized expense of $819, $662 and $498 during 1999, 1998 and 1997,
respectively, relating to the ESOP. The expenses were calculated based on the
average quarterly closing stock price during December 31, 1999 and based on the
average closing stock price for the year ended December 31, 1998. Cash dividends
are allocated to the individual participants based on the number of allocated
common shares in each participants account.
During 1996, the Board of Directors of the Company adopted the 1996 Officer
Stock Option Plan (the "Officer Option Plan") and a separate 1996 Director Stock
Option Plan (the "Director Option Plan") which is similar in many respects to
the Officer Option Plan. Both plans were approved by the stockholders of the
Company at the first annual meeting of stockholders which was held on April 23,
1997. Because the Director Option Plan contains many of the same provisions as
the Officer Option Plan, the following description of the Officer Option Plan is
applicable to the Director Option Plan, except as otherwise indicated.
The number of shares of authorized but unissued stock to be reserved under the
Officer Option Plan and the Director Option Plan is 423,200 and 105,800
respectively. The option exercise price will not be less than the greater of par
value or the "fair market value" of the Company's Stock (as defined) on the date
of grant. The maximum option term will be 10 years from the date of grant.
However, upon the occurrence of various changes in capitalization, including a
change in control of the Company, and unless otherwise provided for in such
transaction, all options outstanding shall fully vest. The options are
exercisable over a ten-year period, and generally vest over four to five years,
however, all of
58
<PAGE>
the 145,000 shares granted in 1998 were exercisable at December 31, 1998. There
were no additional options granted in 1999.
Had compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates as calculated in
accordance with SFAS 123, the Company's net income and basic and diluted EPS for
the years ended December 31, would have been reduced to the pro forma amounts
indicated below.
1999
------------------------------------------
Net Basic Diluted
Income EPS EPS
----------- ------------ -------------
As reported $14,462 $ 2.88 $ 2.78
Pro forma $14,248 $ 2.84 $ 2.74
1998
------------------------------------------
Net Basic Diluted
Income EPS EPS
----------- ------------ -------------
As reported $ 8,696 $ 1.66 $ 1.63
Pro forma $ 7,888 $ 1.51 $ 1.48
1997
------------------------------------------
Net Basic Diluted
Income EPS EPS
----------- ------------ -------------
As reported $13,076 $ 2.52 $ 2.49
Pro forma $12,761 $ 2.52 $ 2.43
The fair value of each stock option is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: an expected option term of 4 years, expected volatility of 30%,
dividend yield of 3.6% and a risk-free interest rate of 5.4-5.6% for the year
ended December 31, 1998. For the year ended December 31, 1997, the assumptions
were an expected option term of 5 years, expected volatility of 25%, dividend
yield of 2.5% and a risk-free interest rate of 6.2%. There were no grants in
1999.
A summary of the status of the Company's stock option plans as of December 31,
1999, 1998 and 1997 and the changes during the year ending on those dates is
presented below.
59
<PAGE>
<TABLE>
<CAPTION>
For the year Average For the year Average For the year Average
ended Price Per ended Price Per ended Price Per
1999 Share 1998 Share 1997 Share
-------------- ------------- --------------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 472,000 $ 20.50 335,666 $ 17.59 265,000 $ 17.50
Granted - 145,000 27.05 81,666 17.89
Exercised (33,831) 19.27 (4,666) 17.50 (3,266) 17.50
Canceled (4,000) 22.25 (4,000) 17.50 (7,734) 17.50
-------------- --------------- -----------
Balance at year end 434,169 $ 20.58 472,000 $ 20.50 335,666 $ 17.59
============== =============== ===========
Options exercisable 369,436 $ 21.12 338,534 $ 21.63 132,134 $ 17.55
at year end
Weighted average fair
value of options granted n/a $ 5.38 $ 4.68
</TABLE>
As of December 31, 1999, there were 434,169 options outstanding. There were
293,669 options at $17.50, 122,000 options at $26.625 and 18,500 options at
$29.625. The outstanding options had a weighted average remaining contractual
life of 7.10 years. An additional 53,068 and 49,068 shares were available for
future grants at December 31, 1999 and December 31, 1998, respectively.
12. Earnings Per Share:
The following is a reconciliation of the denominators of the basic and diluted
EPS computations.
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------------------
1999 1998 1997
-------------- --------------- --------------
<S> <C> <C> <C>
Basic EPS 5,021,095 5,222,968 5,195,224
Effect of dilutive stock options 177,691 109,231 47,197
------------- -------------- --------------
Diluted EPS 5,198,786 5,332,199 5,242,421
============= ============== ==============
</TABLE>
There were no adjustments to net income and no antidilutive stock options for
the years ended December 31, 1999, 1998 and 1997.
13. Comprehensive Income:
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS 130"). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components (such as changes in net unrealized gain
(loss) on securities). Comprehensive income includes net income and any change
in net equity of a business enterprise during a period from non-owner sources
that bypass the income statement. The purpose of reporting comprehensive income
is to report a measure of all changes in equity of an enterprise that result
from recognized transactions and other economic events of the period other than
transactions with owners in their capacity as owners. The Company's one source
of other comprehensive income is the net unrealized gain (loss) on securities.
The components of comprehensive income for the years ended December 31, 1999,
1998 and 1997 are included in the Consolidated Statement of Changes in
Stockholders' Equity.
The following table represents components and the related tax effects allocated
to other comprehensive income for the years ended December 31, 1999, 1998 and
1997:
60
<PAGE>
<TABLE>
<CAPTION>
For the year ended December 31, 1999
--------------------------------------------
Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
----------- ------------ -----------
<S> <C> <C> <C>
Net unrealized gains (losses) on securities
arising during the period $ (7,240) $ 2,187 $ (5,053)
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 70 (27) 43
---------- ----------- ----------
Other comprehensive income $ (7,170) $ 2,160 $ (5,010)
========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1998
-----------------------------------------------
Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
-------------- ------------ -------------
<S> <C> <C> <C>
Net unrealized gains (losses) on securities
arising during the period $ (594) $ 238 $ (356)
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 179 (80) 99
------------- ------------- -------------
Other comprehensive income $ (419) $ 181 $ (238)
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
For the year ended December 31, 1997
--------------------------------------------
Before Tax Net of
Tax (Expense) Tax
Amount Benefit Amount
--------------- ------------ -----------
<S> <C> <C> <C>
Net unrealized gains (losses) on securities $ 245 $ (338) $ (93)
arising during the period
Less: reclassification adjustment for
gains realized in net income 281 (118) 163
Change in tax effect on prior periods'
net unrealized gains on securities - 285 285
Accretion of unrealized loss on securities
transferred from available-for-sale to
held-to-maturity 75 (27) 48
--------------- ------------ -----------
Other comprehensive income $ 39 $ 38 $ 77
=============== ============ ===========
</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. During the second quarter of 1997, the Company recognized
a tax benefit of $10,330 primarily due to the full reversal of its deferred tax
asset valuation allowance. Based on three consecutive prior quarters of income
and projections that indicated continued profitability, the Bank determined that
it was more likely than not that it would realize its net deferred tax assets.
As a consequence of this action, the Company
61
<PAGE>
began recording a tax asset / liability related to its unrealized gains and
losses on securities in June 1997.
14. Leases:
Rental expense for operating leases amounted to $1,520, $1,734 and $1,710 in
1999, 1998 and 1997, respectively. Future minimum lease payments, by year and in
the aggregate, under noncancelable operating leases with initial or remaining
terms of one year or more consisted of the following at December 31, 1999:
2000 $ 1,440
2001 1,349
2002 1,306
2003 975
2004 125
Thereafter 23
-------
$ 5,218
=======
Renewal options are available for periods ranging from five to fifteen years.
15. Income Taxes:
The components of income tax expense (benefit) for the years ended December 31,
1999, 1998 and 1997 were as follows
<TABLE>
<CAPTION>
1999 1998 1997
---------- ----------- ----------
<S> <C> <C> <C>
Current:
Federal $ 2,940 $ 2,946 $ 1,437
State 147 142 165
---------- ----------- ----------
Total current 3,087 3,088 1,602
---------- ----------- ----------
Deferred:
Federal 4,161 2,070 919
State (330) 1,076 (667)
Valuation allowance 183 1,185 (9,662)
---------- ----------- ----------
Total deferred 4,014 4,331 (9,410)
---------- ----------- ----------
$ 7,101 $ 7,419 $ (7,808)
========== =========== ==========
</TABLE>
The following is a reconciliation of the expected federal income tax expense to
the actual income tax expense (benefit) for the years ended December 31.
62
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- -----------
<S> <C> <C> <C>
Income tax expense at statutory rate of 35%
in 1999, 34% in 1998 and 1997 $ 7,699 $ 5,562 $ 1,791
Increase (decrease) resulting from:
Connecticut corporation tax, net of federal
tax benefit - 804 (331)
Dividends received deduction (79) (43) (4)
Change in deferred tax valuation allowance - 1,185 (9,662)
Amendment of prior years' tax returns - - 501
Other items, net (519) (89) (103)
------------ ----------- -----------
Income tax expense (benefit) $ 7,101 $ 7,419 $ (7,808)
============ =========== ===========
</TABLE>
During 1999, the Company prepaid $30,000 FHLB borrowing which resulted in
prepayment penalties of $655 and $220 in tax benefits. During 1998, the Company
prepaid $33,000 FHLB borrowing which resulted in prepayment penalties of $392
and $149 in tax benefits.
The significant components of the Company's net deferred tax assets (tax
effected) at December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 4,370 $ 4,900
Alternative minimum tax credits - 1,169
Net operating loss carryforwards 1,330 729
Deferred compensation 513 623
Investments in real estate 44 64
Unrealized net losses on securities 2,761 -
Accrued and other items 743 376
---------- ----------
Total deferred tax assets 9,761 7,861
Valuation allowance 2,068 1,185
---------- ----------
Deferred tax assets after
valuation allowance 7,693 6,676
---------- ----------
Deferred tax liabilities:
Deferred mortgage fees 1,409 959
Bad debt recapture 249 372
Securities mark to market, section 475 2,753 -
Unrealized net gains on securities - 107
Other 155 266
---------- ----------
Total deferred tax liabilities 4,566 1,704
---------- ----------
Net deferred tax assets $ 3,127 $ 4,972
========== ==========
</TABLE>
The Company only recognizes a deferred tax asset when, based upon available
evidence, realization is more likely than not. During 1998, the Company recorded
a valuation allowance of $1,185 against its state deferred tax asset in
connection with the creation of MMC which operates as a Connecticut passive
investment company pursuant to legislation enacted in May 1998. Because it is
expected to earn sufficient income from the passive investment company
subsidiary and its dividends to the parent are exempt from Connecticut
Corporation Business Tax, the Company no longer expects to recognize its state
deferred tax assets. During 1999 the Company increased its valuation allowance
by $183 to offset an increase in the state deferred tax asset attributable to
increased net deductible temporary differences
63
<PAGE>
arising during the year. Additionally, the valuation allowance increased by $700
to offset the increase in the state deferred tax asset for net unrealized losses
which are a component of stockholders' equity. At December 31, 1997 the Company
recorded no valuation allowance against its deferred tax assets based on
sufficient expected taxable income to realize the recorded amounts.
In the second quarter of 1997, the Company recorded a deferred tax benefit of
$10.33 million primarily attributable to the reversal of its valuation allowance
on its net deferred tax assets. Based on three consecutive prior quarters of
income and projections for the second half of 1997 and 1998 that indicated
continued profitability, the Company determined that it was more likely than not
that it would realize its net deferred tax assets. The Company reviews the net
deferred tax asset and its valuation allowance on a quarterly basis.
Pursuant to the Small Business Job Protection Act of 1997, the Company has
changed its method of accounting with respect to its tax bad debt reserves. The
change resulted in taxable income of approximately $1,880 which will be
recognized ratably over a six year period. A deferred tax liability has been
established for the unrecognized portion.
The Company has not provided deferred taxes for the tax reserve for bad debts of
approximately $9,050 that arose in tax years beginning before 1988 because it
expected that the requirements of Section 593, as amended by the Small Business
Protection Act of 1997, will be met in the foreseeable future.
At December 31, 1999, the Company has $367 in federal net operating loss
carryforwards which expire in 2006. At December 31, 1999, the Company had
$24,645 in state net operating loss carryforwards for tax return purposes of
which $4,766 expires in 2000, $4,925 expires in 2001 and $14,954 expires in
2004. Due to the establishment of the passive investment company, the Company
does not expect to recognize the benefits of the state net operating loss
carryforwards. Therefore, the Company has a valuation allowance against the
state net operating loss carryforwards. The net operating loss carryforwards
reflect the utilization of approximately $108 of federal net operating losses
for the year ended December 31, 1999.
16. Commitments and Contingencies:
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
instruments expose the Company to credit risk in excess of the amount recognized
in the Statement of Condition.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual amount of those instruments. The Company uses the
same credit policies in making commitments and conditional obligations as it
does for on-balance sheet instruments. Total credit exposure related to these
items is summarized below.
<TABLE>
<CAPTION>
Contract Amount
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
Loan commitments:
Mortgage and equity loan commitments $ 10,571 $ 29,386
Unadvanced portion of construction loans 9,977 1,777
Unadvanced portion of:
Commercial lines of credit 28,674 21,875
Home equity lines of credit 15,379 7,901
Overdraft protection 373 121
Standby letters of credit 322 350
---------- ----------
$ 65,296 $ 61,410
========== ==========
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition
64
<PAGE>
established in the contract. Commitments generally have fixed expiration dates
or other termination clauses and may require payment of a fee. The Company
evaluates each customer's credit worthiness on a case-by-case basis. The amount
of collateral obtained, if deemed necessary by the Company upon extension of
credit, is based on management's credit evaluation of the counter party.
Collateral held is primarily residential property. Interest rates on home equity
lines of credit are variable for a term of 10 years. All other commitments are a
combination of fixed and variable rates with maturities of one year or more.
Commitments to sell to investors are contracts for delayed delivery of first
mortgage loans in which the Company agrees to make delivery at a specified
future date at a specified price or yield. The Company controls the risk of
nonperformance of investors by periodically monitoring the investors' financial
condition. The Company controls the interest rate risk of commitments to extend
credit to mortgagors by receiving purchase commitments at yields which fluctuate
with interest rates. As of both December 31, 1999 and 1998, the Company had no
commitments to sell to investors.
The Company and its subsidiaries are defendants in proceedings arising out of,
and incidental to, activities conducted in the normal course of business. In the
opinion of management, resolution of these matters will not have a material
effect on the Company's financial condition, results of operations or cash
flows.
17. Dividends:
During 1998, the Company issued three quarterly dividends of $0.15 per share of
its common stock. These dividends were paid on May 15, 1998 to shareholders of
record on May 1, 1998, on August 17, 1998 to shareholders of record on August 3,
1998 and on November 16, 1998 to shareholders on record on November 2, 1998.
During 1999, the Company paid a quarterly dividend of $0.15 per share of its
common stock on February 8, 1999 to shareholders of record on January 25, 1999.
In addition, there were 3 quarterly dividends payments of $0.20 per share of
common stock. These dividends were paid on May 14, 1999 to shareholders of
record on May 3, 1999, on August 13, 1999 to shareholders of record on August 2,
1999 and on November 12, 1999 to shareholders on record on November 1, 1999.
On January 25, 2000, the Company announced a quarterly dividend of $0.20 per
share of common stock payable on February 18, 2000 to shareholders of record on
February 7, 2000.
18. Recent Accounting Pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 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".
As amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of Statement 133", SFAS 133 is
effective for all fiscal quarters of fiscal years beginning after June 15,
65
<PAGE>
2000. Initial application of this statement should be as of the beginning of an
entity's fiscal quarter; on that date, hedging relationships must be designated
anew and documented pursuant to the provisions of this statement. Early adoption
is permitted, however, retroactive application is prohibited. The adoption of
SFAS 133 is not expected to have a material impact for the Company.
19. Regulatory Matters:
The Company and the Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly additional and
discretionary actions by the regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company must meet specific guidelines that involve quantitative measures of the
Company's assets, liabilities, and certain off-balance sheet items as calculated
under regulatory accounting practices. The Company's and Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of Tier 1 capital (as defined) to average assets (as
defined) and total and Tier 1 capital (as defined) to risk-weighted assets (as
defined). As of December 31, 1999, the Company and the Bank meet all capital
adequacy requirements to which it is subject.
At December 31, 1999 and December 31, 1998, the Bank was classified, as of its
most recent notification, as "well capitalized".
The Company's capital position is outlined below.
<TABLE>
<CAPTION>
Actual For Capital Adequacy Purposes
-------------------------- -------------------------------------------
Amount Ratio Amount Ratio
---------- ---------- -------------- ------------
<S> <C> <C> <C> <C>
As of December 31, 1999
Tier one leverage $ 97,096 8.75% (greater than)= $ 44,362 (greater than)= 4.00%
Tier one risk-based $ 97,096 13.57% (greater than)= $ 28,627 (greater than)= 4.00%
Total risk-based $ 106,068 14.82% (greater than)= $ 57,253 (greater than)= 8.00%
As of December 31, 1998
Tier one leverage $ 94,304 9.63% (greater than)= $ 39,190 (greater than)= 4.00%
Tier one risk-based $ 94,304 14.49% (greater than)= $ 26,037 (greater than)= 4.00%
Total risk-based $ 102,492 15.75% (greater than)= $ 52,073 (greater than)= 8.00%
<CAPTION>
To Be Well Capitalized
Under Prompt Corrective
Action Provisions
-----------------------------------
Amount Ratio
------------ -----------
<S> <C> <C>
As of December 31, 1999
Tier one leverage (greater than)= $ 55,453 (greater than)= 5.00%
Tier one risk-based (greater than)= $ 35,783 (greater than)= 5.00%
Total risk-based (greater than)= $ 71,566 (greater than)= 10.00%
As of December 31, 1998
Tier one leverage (greater than)= $ 48,987 (greater than)= 5.00%
Tier one risk-based (greater than)= $ 32,546 (greater than)= 5.00%
Total risk-based (greater than)= $ 65,091 (greater than)= 10.00%
</TABLE>
On a regular basis, the Company and /or its subsidiaries are examined by the
Connecticut State Banking Department, the Federal Reserve Bank and the FDIC. The
Federal Deposit Insurance Corporation Insurance Act ("FDICIA") was signed into
law on December 19, 1991. Regulations implementing the prompt corrective action
provisions of FDICIA became effective on December 19, 1992. In addition to the
prompt corrective action requirements, FDICIA includes significant changes to
the legal and regulatory environment for insured depository institutions,
including reductions in insurance coverage for certain kinds of deposits,
increased supervision by the federal regulatory agencies, increased reporting
requirements for insured institutions, and new regulations concerning internal
controls, accounting and operations.
On June 25, 1996, the Bank converted from mutual to stock ownership. At the time
of the Conversion, the Bank
66
<PAGE>
established a liquidation account in an amount equal to the Bank's capital
accounts at May 31, 1996 ($25,476). The liquidation account is being maintained
for the benefit of those deposit account holders who qualified as eligible
account holders at the time of the Conversion and who have continued to maintain
their eligible deposit accounts with the Bank following the Conversion. The
liquidation account, which totaled $15,637 at December 31, 1999 and $17,944 at
December 31, 1998, is reduced annually by an amount proportionate to the
decrease in eligible deposit accounts. In the event of the complete liquidation
of the Bank, each eligible deposit account holder will be entitled to receive
their proportionate interest in the liquidation account, after the payment of
all creditor's claims, but before any distributions on the Bank's common stock.
Connecticut banking laws limit the amount of annual dividends that the Bank may
pay to the Company an amount which approximates the Bank's net income for the
then current year, plus the Bank's net income for the prior two years. The
Company and the Bank are also prohibited from paying a cash dividend or
repurchasing any of its common stock if the effect thereof would reduce its
capital accounts below minimum regulatory requirements or below the amount
required to be maintained in the liquidation account.
20. Disclosures about Fair Value of Financial Instruments:
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" ("SFAS 107"), requires that the Company disclose
the estimated fair values for certain of its financial instruments. Financial
instruments include items such as loans, deposits, securities, Federal Home Loan
Bank advances and other items as defined in SFAS 107.
Fair value estimates are intended to represent estimates of the amounts at which
a financial instrument could be exchanged between willing parties in a current
transaction other than in a forced liquidation. However, in many instances
current exchange prices are not available for certain of the Company's financial
instruments. Accordingly, the Company uses other valuation techniques to
estimate the fair values of its financial instruments such as discounted cash
flow methodologies and other methods allowable under SFAS 107.
Fair value estimates are subjective in nature and are dependent on a number of
significant assumptions based on management's judgment regarding future expected
loss experience, current economic conditions, risk characteristics of various
financial instruments and other factors. In addition, because SFAS 107 allows a
wide range of valuation techniques, it may be difficult to compare the Company's
fair value information to independent markets or to other financial
institutions' fair value information.
The Company generally holds its earning assets to maturity and settles its
liabilities at maturity. However, fair value estimates are made at a specific
point in time and are based on relevant market information and information about
the financial instrument. These estimates do not reflect any premium or discount
that could result from offering for sale at one time the Company's entire
holdings of a particular instrument. Accordingly, as assumptions change, such as
interest rates, fair value estimates change and these amounts could not
necessarily be realized in an immediate sale. In addition, differences between
carrying values under historical cost accounting and fair value estimates can be
significant and, in particular, such differences arise in the loan portfolio,
where the net carrying value represents management's estimate of ultimate
recoverable amounts versus fair value estimates that represent a theoretical
exchange value based on current market conditions.
SFAS 107 does not require disclosures about fair value information for items
that do not meet the definition of a financial instrument or certain other
financial instruments specifically excluded from its requirements. These items
include core deposit intangibles and other customer relationships, premises and
equipment, leases, income taxes, foreclosed properties, investments accounted
for under the equity method of accounting and capital accounts. Furthermore,
SFAS 107 does not attempt to value future income or business. These items are
material and, accordingly, the fair value information presented does not purport
to represent, nor should it be construed to represent the underlying "market" or
franchise value of the Company.
The methods and assumptions used to estimate the fair values of each class of
financial instruments are as follows:
67
<PAGE>
Cash and Due From Banks, Accrued Interest Receivable, Short-Term Investments
and Federal Home Loan Bank Stock
These items are generally short-term in nature; accordingly, the carrying
amounts are reasonable approximations of fair values.
Available-For-Sale Securities
Available-for-sale securities are carried at market value. Such values are
generally based on quoted market prices.
Held-To-Maturity Securities
Fair values for held-to-maturity securities are based upon quoted market prices.
For items in which no quoted market price exists, the carrying amount is a
reasonable estimate of fair value.
Loans
For commercial loans whose interest rates adjust at time intervals greater than
one year or are fixed, fair value is estimated by discounting the expected
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and remaining maturities. For
commercial loans whose interest rates adjust at time intervals of less than one
year, the carrying amounts are a reasonable estimate of fair value.
For residential real estate mortgages and loans held-for-sale, the fair values
are based upon quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics.
For installment loans, fair value is estimated by discounting the expected
future cash flows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and remaining maturities.
For non-accrual loans which are not collateral dependent, fair value is
estimated by discounting the expected future cash flows using the interest rate
at the time the loan went into non-accrual status. For non-accrual loans which
are collateral dependent, the fair value of the collateral is obtained from
independent appraisals.
Cash Surrender Value Life Insurance
Cash surrender value life insurance is carried at market value. Such value is
calculated as the initial premium plus appreciation, less mortality costs.
Deposits
The fair value of demand deposits, savings accounts, money market deposits and
fixed-maturity certificates of deposit of six months or less is the amount
payable on demand on the balance sheet date. The fair value of fixed-maturity
certificates of deposit of greater than six months and individual retirement
accounts is estimated by discounting the expected future cash flows using the
rates currently offered for deposits of similar remaining maturities.
Federal Home Loan Bank Borrowings
The fair value of advances maturing in six months or less is the amount payable
to the Federal Home Loan Bank. The fair value of advances maturing in greater
than six months is estimated by discounting the expected future cash flows using
the rates currently offered for advances with similar remaining maturities.
Commitments To Extend Credit And Standby Letters Of Credit
The fair value of commitments is estimated using the fees currently charged to
enter into similar agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the counter-parties or on the
68
<PAGE>
estimated cost to terminate them or to otherwise settle with the counter-
parties. The fair value of commitments was immaterial at December 31, 1998 and
1999.
The estimated fair values of the Company's financial instruments at December 31,
were as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and due from banks $ 29,440 $ 29,440 $ 20,567 $ 20,567
Short-term investments 760 760 1,420 1,420
Available-for-sale securities 226,027 226,027 205,711 205,711
Held-to-maturity securities 68,719 65,949 80,306 80,873
Federal Home Loan Bank stock 17,745 17,745 10,487 10,487
Loans, net 741,722 731,476 651,858 672,246
Accrued interest receivable 5,571 5,571 4,957 4,957
Cash surrender value life insurance 17,694 17,694 16,873 16,873
Financial Liabilities:
Deposits 641,764 642,910 706,195 709,554
Federal Funds Purchased 34,000 34,000 - -
Borrowings 342,985 336,147 210,225 205,496
Accrued interest payable 1,350 1,350 978 978
</TABLE>
69
<PAGE>
21. Selected Quarterly Consolidated Financial Information (unaudited):
The following table presents quarterly financial information of the Company for
1999 and 1998.
<TABLE>
<CAPTION>
Fourth Third Second First Fourth Third Second First
Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
1999 1999 1999 1999 1998 1998 1998 1998
------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest and dividend income $18,879 $18,704 $18,486 $17,682 $16,871 $16,656 $16,475 $15,704
Interest expense 9,973 9,685 9,284 8,858 8,633 8,589 8,598 8,108
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 8,906 9,019 9,202 8,824 8,238 8,067 7,877 7,596
Provision for loan losses - - - - - - 300 300
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 8,906 9,019 9,202 8,824 8,238 8,067 7,577 7,296
Other income 1,932 2,012 2,015 4,052 1,945 1,979 2,085 2,267
Write-downs and net losses on sale
of foreclosed real estate owned - - - - - - 25 60
Other expenses 6,248 5,765 5,973 5,978 5,911 5,734 5,559 5,807
------- ------- ------- ------- ------- ------- ------- -------
Income before income taxes 4,590 5,266 5,244 6,898 4,272 4,312 4,078 3,696
Income tax expense 1,232 1,779 1,773 2,317 2,813 1,641 1,552 1,413
------- ------- ------- ------- ------- ------- ------- -------
Net income before extraordinary item 3,358 3,487 3,471 4,581 1,459 2,671 2,526 2,283
Extraordinary item, early extinguishment
of borrowings, net of tax - - - (435) (108) (16) - (119)
------- ------- ------- ------- ------- ------- ------- -------
Net income $ 3,358 $ 3,487 $ 3,471 $ 4,146 $ 1,351 $ 2,655 $ 2,526 $ 2,164
======= ======= ======= ======= ======= ======= ======= =======
Earnings per share
Basic:
Income before extraordinary item $ 0.67 $ 0.70 $ 0.70 $ 0.90 $ 0.28 $ 0.51 $ 0.48 $ 0.43
Extraordinary item - - - (0.09) (0.02) - - (0.02)
Net income $ 0.67 $ 0.70 $ 0.70 $ 0.81 $ 0.26 $ 0.51 $ 0.48 $ 0.41
Diluted:
Income before extraordinary item $ 0.65 $ 0.67 $ 0.67 $ 0.87 $ 0.27 $ 0.50 $ 0.47 $ 0.43
Extraordinary item - - - (0.08) (0.02) - - (0.02)
Net income $ 0.65 $ 0.67 $ 0.67 $ 0.79 $ 0.25 $ 0.50 $ 0.47 $ 0.41
Weighted average outstanding shares
Basic 4,997 4,996 4,994 5,099 5,224 5,223 5,223 5,222
Diluted 5,172 5,196 5,172 5,251 5,321 5,303 5,364 5,300
</TABLE>
During the first quarter of 1999, the Real Estate Partnership sold the building
at 100 Pearl Street to New Boston Pearl Limited Partnership, an independent
third party. The Company recognized a $2,148 one-time gain on the sale. During
the fourth quarter of 1998, the Company recorded a $1,185 valuation allowance on
its deferred state tax assets due to the creation of a passive investment
company.
22. Parent Company Only Financials:
On November 25, 1997, the shareholders of the Bank approved the formation of a
holding company, MECH Financial, Inc. which became effective January 1, 1998.
The Statement of Condition for December 31, 1999 and 1998 and the Statements of
Income and Cashflows for the years ended December 31, 1999 and 1998 are
presented below:
70
<PAGE>
Statement of Condition
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
ASSETS
Cash and due from banks:
Non-interest-bearing deposits and cash $ 671 $ 160
Short-term investments 70 995
------------------ ------------------
Cash and cash equivalents 741 1,155
Investment in Mechanics Savings Bank 93,115 94,220
Other assets 93 -
------------------ ------------------
Total assets $ 93,949 $ 95,375
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 18 $ 7
Stockholders' equity 93,931 95,368
------------------ ------------------
Total liabilities and stockholders' equity $ 93,949 $ 95,375
================== ==================
</TABLE>
Statement of Operations
<TABLE>
<CAPTION>
For the year ended For the year ended
December 31, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Dividends received from Mechanics Savings Bank $ 11,360 $ -
Interest income 40 127
Other expenses 17 10
------------------ ------------------
Income before income taxes and
effect of Mechanics Savings Bank's earnings 11,383 117
Income tax expense 8 47
------------------ ------------------
Income before income from Mechanics Savings Bank 11,375 70
Undistributed income from Mechanics Savings Bank 3,087 8,626
------------------ ------------------
Net income $ 14,462 $ 8,696
================== ==================
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Statement of Cash Flows For the year ended For the year ended
December 31, 1999 December 31, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 14,462 $ 8,696
------------------ ------------------
Adjustments to reconcile net income to cash provided by operating
activities:
Undistributed income from Mechanics Savings Bank (3,087) (8,626)
Amortization of investment security premiums/discounts, net - (49)
Increase in other assets (92) -
Increase in other liabilities 11 7
------------------ ------------------
Total adjustments (3,168) (8,668)
------------------ ------------------
Net cash provided by operating activities 11,294 28
------------------ ------------------
Cash flows from investing activities:
Proceeds from sale of available-for-sale securities - 3,300
Purchases of available-for-sale securities - (3,251)
------------------ ------------------
Net cash provided by investing activities - 49
------------------ ------------------
Cash flows from financing activities:
Original capitalization, net of expenses - 3,379
Exercise of stock options 667 82
Repurchase common stock (8,555) -
Dividends paid (3,820) (2,383)
------------------ ------------------
Net cash (used in) provided by financing activities (11,708) 1,078
------------------ ------------------
Net (decrease) increase in cash and cash equivalents $ (414) $ 1,155
------------------ ------------------
Cash and cash equivalents at beginning of period $ 1,155 $ -
------------------ ------------------
Cash and cash equivalents at end of period $ 741 $ 1,155
================== ==================
</TABLE>
23. Acquisition of MECH by Webster:
On December 1, 1999, MECH and Webster entered into an Agreement which provides
for, among other things, the acquisition of MECH by Webster through a
stock-for-stock exchange. Contemporaneous with the completion of the
acquisition, Mechanics Savings Bank, a wholly-owned subsidiary of MECH, will
merge with and into Webster Bank, a wholly-owned subsidiary of Webster. The
Agreement provides that shareholders of MECH will receive 1.52 shares of Webster
common stock for each share of MECH common stock. The transaction is designed to
be a tax-free exchange to the holders of MECH common stock and is to be
accounted for as a purchase transaction. The Boards of Directors of MECH and
Webster expect the transaction to close in the second quarter of 2000.
The Acquisition is subject to customary conditions, including but not limited
to, the approval of federal bank regulatory authorities, the Connecticut Banking
Commissioner and MECH shareholders, the issuance of a fairness opinion of MECH's
financial advisor indicating that the transaction is fair to MECH shareholders,
and the absence of a material adverse change in the business of Webster or MECH.
The transaction may be terminated by one or both of the companies' Boards of
Directors if, among other things: (i) the average price of Webster stock during
a trading period specified in the Agreement declines 20% or more on an absolute
basis and 15% or more relative to a bank stock index created for this
transaction; (ii) MECH Shareholders do not approve the transaction; (iii) all
regulatory approvals are not obtained; (iv) the closing does not occur by August
31, 2000; (v) a breach of a representation or warranty made in the Agreement
occurs that has or is likely to have a material adverse effect on either
company; or (vi) there has been a material breach of any covenant or agreement
contained in the Agreement.
72
<PAGE>
In connection with the Agreement, MECH has issued an option to Webster, which,
upon the occurrence of certain events, may result in the issuance of 19.9% of
the outstanding MECH common stock to Webster at a per share exercise price equal
to $34.50. The Agreement also includes a provision for break-up fees to either
party upon the occurrence of certain events should the transaction not close as
presently anticipated.
73
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of MECH Financial, Inc.:
We have audited the accompanying consolidated statements of condition of MECH
Financial, Inc. and subsidiaries (the "Company") as of December 31, 1999 and
1998, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MECH Financial, Inc.
and subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
Hartford, Connecticut
January 25, 2000
74
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Mechanics Savings Bank:
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of Mechanics Savings Bank and
subsidiaries for the year ended December 31, 1997. These consolidated financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these consolidated financial statements based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of Mechanics Savings Bank and subsidiaries for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut
January 20, 1998
75
<PAGE>
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
To Our Stockholders:
The accompanying consolidated financial statements of MECH Financial, Inc. and
subsidiaries have been prepared by management, which is responsible for the
accuracy and reliability of the financial statements and other information in
this Annual Report. The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and, of necessity, include certain amounts that are based on
management's best judgments and estimates.
Management is responsible for maintaining internal control and has established
internal control components designed to provide reasonable assurance that
transactions are recorded properly to permit preparation of financial
statements, that transactions are executed in accordance with management's
authorizations, and that assets are safeguarded from significant loss or
unauthorized use. During 1999, management believes internal control was adequate
to accomplish these objectives.
The Audit Committee of the Board of Directors, composed of non-management
directors, meets periodically with the independent external auditors, the
internal auditors and management to discuss auditing, accounting control and
financial reporting matters and to ensure that each is properly discharging its
responsibilities. In addition, the Audit Committee annually recommends to the
Board of Directors the selection of independent auditors.
/s/ Edgar C. Gerwig /s/ Thomas M. Wood
- ----------------------- --------------------------
Edgar C. Gerwig Thomas M. Wood
Chairman, President and Executive Vice President
Chief Executive Officer and Treasurer
Item 9. Changes and Disagreements With Accountants on Accounting and Financial
Disclosure
None
76
<PAGE>
Item 10. Directors and Executive Officers of the Registrant
DIRECTORS
Director Term
Age Since (1) Expires
--- --------- -------
David Freeman 55 1992 2001
Edgar C. Gerwig 58 1985 2002
John J. Meehan 54 1993 2002
Kevin A. North 47 1995 2001
Robert G. Rayve 62 1995 2001
Alfred R. Rogers 68 1979 2000
Donald K. Wilson, Jr. 64 1991 2002
Barbara Brown Zikmund 60 1995 2000
______________
(1) The years of service as a Director in this column include the years of
service by such person as a member of the Bank's Board of Directors.
Presented below is certain additional information concerning the directors of
MECH Financial.
David Freeman recently retired (2000) as the Chairman and Chief Executive
Officer of Loctite Corporation (a specialty chemical company). From 1991 to
1993, he was the President and Chief Operating Officer and from 1990 to 1991 he
served as Executive Vice President and Chief Operating Officer, of Loctite. He
is a Director of Loctite, Lydall, Inc. and of Sealed Air Corporation.
Edgar C. Gerwig joined the Bank in 1985 as President, Chief Executive
Officer and Director. He was named to the additional post of Chairman in 1988.
From 1975 to 1985 he was with The Norwich Savings Society, serving as President
from 1981 to 1985. He began his banking career in 1962 at The Connecticut Bank
and Trust Company, being elected a Vice President in 1975.
John J. Meehan is the President and Chief Executive Officer of Hartford
Hospital, the largest hospital located in the Hartford area. He has been
employed in various capacities at Hartford Hospital since 1979.
Kevin A. North has served as the President of Talcott Corporation, a
privately held real estate advisory and property management company located in
Hartford since July, 1995. Previously, until June 30, 1995, he served as Vice
President and Director of Real Estate for the ITT Hartford Insurance Group.
Robert G. Rayve is the Chairman, President and Chief Executive Officer and
a Director of The Spencer Turbine Company (a manufacturer of air moving
equipment). He has been employed by Spencer Turbine Company in various
capacities since 1986. He is a member of the Board of Directors of Kingsbury,
Inc.
Alfred R. Rogers is currently an independent management consultant. On
November 30, 1998 he retired as the President and Chief Executive Officer of the
Urban League of Greater Hartford, which position he had held since July of 1995.
He began with the Urban League as a management consultant in July 1994. Prior
to that, he was a Regional Vice President of Connecticut Light and Power Company
(the largest electric utility in Connecticut).
Donald K. Wilson, Jr., is currently a partner of Green, Wilson &
Associates, management consultants, Hartford. From 1994 until December 31,
1998, Mr. Wilson was a consultant with American Phoenix Corporation of
Connecticut (an insurance brokerage company). In 1994 he retired as Executive
Vice President from The Hartford Steam Boiler Insurance and Inspection Company
which he had served in various capacities since 1962. He is a Director of
Spencer Turbine Company and Salient 3 Communications, Inc.
Barbara Brown Zikmund is President of the Hartford Seminary (a graduate
school for religious leadership education and research). She has held this post
since 1990. Before that she was Dean of the Faculty at Pacific School of
Religion, Berkeley, California.
77
<PAGE>
EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
TERM AT BUSINESS EXPERIENCE
NAME AGE POSITION BANK (LAST 5 YEARS)
<S> <C> <C> <C> <C>
Edgar C. Gerwig 58 Chairman, President and CEO 1985 Same
Thomas M. Wood 47 Executive Vice President, Treasurer 1986 Same
Richard W. Stout 55 Executive Vice President 1987 Same
Brian A. Orenstein 39 Senior Vice President, Controller 1988 Same
Eugene B. Marinelli 49 Senior Vice President, Commercial Lending 1994 Same
Gary J. Roman 45 Senior Vice President, Credit Administration 1996 Senior Vice President /
Commercial Lending Officer
Advest Bank 1991 -1995
Mary D. Negro 58 Senior Vice President, President of 1987 Same
Mechanics Investment Services
Gregory A. White 34 Senior Vice President, Investments 1993 Same
</TABLE>
78
<PAGE>
Item 11. Executive Compensation
Compensation of Directors
All Directors of the Company presently serve as Directors of the Bank, and are
not separately compensated for that dual service. Each Director receives $600
for each Board meeting attended and $500 for each Committee meeting attended.
Directors also receive an annual retainer of $6,000. The Chairman of the Audit
Committee and the Chairman of the Organization and Compensation Committee each
receives a fee of $1,000 as Chairman.
Mechanics Savings Bank 1996 Director Stock Option Plan
Effective with the Bank's conversion from mutual to stock form on June 25, 1996,
the Bank's Board of Directors adopted the Mechanics Savings Bank 1996 Director
Stock Option Plan (the "Director Plan"). The Director Plan was approved by the
Bank's shareholders on April 23, 1997. In connection with the Reorganization of
the Bank into a bank holding company structure, MECH Financial assumed certain
obligations of the Bank under the Director Plan, including the substitution of
the Company's common stock as the stock for which Options may be granted under
the Director Plan. The Directors Plan is administered by the Organization and
Compensation Committee. Under the Director Plan, each non-employee director who
was a member of the Bank's Board of Directors on June 25, 1996, was granted
options to purchase 6,666 shares of common stock of the Company over a 10-year
period at an exercise price of $17.50 per share. The options are exercisable
ratably (unless accelerated under certain conditions) over a five year period
beginning on December 31, 1996. Non-employee Directors who are elected to the
Board subsequent to June 25, 1996, receive similar stock options at an exercise
price equal to the fair market value of the Company's common stock on the date
of grant. Non-employee Directors receive annual grants of 1,000 stock options
exercisable at the fair market value of the stock on the date of grant
commencing in the fifth year after his or her receipt of initial options, with
all such options exercisable six months after grant. An aggregate of 105,800
stock options were originally available for grant under the Director Plan, of
which 52,468 presently remain available for future grants.
79
<PAGE>
Executive Compensation
All of the executive officers listed below are currently executive officers of
the Bank. The Company has no existing plan or arrangement to pay any
remuneration to executive officers of the Company in addition to the
compensation that they receive as executive officers of the Bank.
The following table sets forth for the fiscal years ended December 31, 1997,
1998, and 1999 the cash and non-cash compensation paid or awarded by both the
Company or the Bank to the five most highly compensated executive officers whose
total annual salary and bonus for 1999 exceeded $100,000 (the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
--------------------------
<TABLE>
<CAPTION>
Name and Principal Position Year Salary Bonus (1) Other Annual Long Term Insurance Pension
Compensation Compensation Premiums (5) Contributions (6)
(2) (3) Payout (4)
<S> <C> <C> <C> <C> <C> <C> <C>
Edgar C. Gerwig 1999 $319,982 $384,000 $2,000 $320,673 $11,226 $583,582
Chairman, President and 1998 $274,610 $108,750 $2,000 $ - $10,586 $136,821
Chief Executive Officer 1997 $248,102 $ 56,616 $1,382 $ - $ 9,977 $128,992
Thomas M. Wood 1999 $159,423 $157,000 $1,594 $ 28,162 $ 2,885 $ 36,225
Executive Vice President and 1998 $152,423 $ 53,106 $1,580 $ - $ 2,754 $ 20,470
Treasurer 1997 $145,504 $ 27,820 $1,993 $ - $ 2,668 $ 14,992
Richard W. Stout, Jr. 1999 $141,750 $139,250 $2,000 $119,171 $ 5,672 $ 43,327
Executive Vice President 1998 $135,350 $ 46,944 $1,350 $ - $ 5,442 $ 18,066
1997 $128,739 $ 24,620 $1,763 $ - $ 5,277 $ 13,392
Eugene B. Marinelli 1999 $115,231 $ 90,800 $ - $ 35,242 $ 2,651 $ 14,582
Senior Vice President 1998 $110,231 $ 30,740 $ - $ - $ 2,498 $ 12,887
1997 $105,327 $ 16,160 $ - $ - $ 2,347 $ 9,815
Brian A. Orenstein 1999 $112,231 $ 88,400 $1,943 $ 32,156 $ 1,116 $ 14,582
Senior Vice President and 1998 $107,230 $ 29,870 $1,713 $ - $ 1,059 $ 12,266
Controller 1997 $102,314 $ 15,664 $1,377 $ - $ 1,030 $ 9,280
</TABLE>
(1) Represents amounts awarded to such officers as a cash bonus. The 1999 bonus
represents awards for performance under the 1998 and 1999 bonus plans.
Additional information on the cash bonus can be found under the caption
"Organization and Compensation Committee Report" below.
(2) Includes contributions by the Bank matching the named officers'
contributions to their 401(k) Plan accounts in accordance with the terms of
that plan.
(3) No named executive officer received other perquisites, or any other
personal benefits, securities or property exceeding $50,000 or 10% of the
named officer's salary and bonus.
(4) Represents amounts previously earned and deferred (including interest
thereon) in prior years and paid out in 1999. Additional information can be
found under the caption "Long Term Incentive Compensation Plan" below.
(5) Represents premiums paid by the Bank for Individual Ordinary Life Insurance
Policies for each of the named executive officers.
(6) Represents the contributions by the Bank allocated to such officers'
accounts in connection with the Bank's Defined Contribution Pension Plan,
amounts accrued to the SERP accounts of Mr. Wood and Mr. Stout and, in Mr.
Gerwig's case only, amounts accrued by the Bank in connection with the
Benefit Equalization Agreement. Additional information can be found under
the captions "Benefit Equalization Agreement" and "Supplemental Employee
Retirement Plan" below.
80
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of Securities In-The-Money
Underlying Unexercised Options/SARs At Fiscal
Options/SARs At Fiscal Year-End ($)
Shares Acquired Value Realized Year-End (#) Exercisable/ Exercisable/
Name on Exercise (#) ($) (1) Unexercisable Unexercisable (2)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Edgar C. Gerwig 15,000 255,945 57,000 / 12,000 753,591 / 204,756
- -----------------------------------------------------------------------------------------------------------------------------
Thomas M. Wood 0 0 54,000 / 9,000 757,152 / 153,567
- -----------------------------------------------------------------------------------------------------------------------------
Richard W. Stout, Jr. 0 0 48,000 / 8,000 673,024 / 136,504
- -----------------------------------------------------------------------------------------------------------------------------
Eugene B. Marinelli 0 0 24,000 / 4,000 336,512 / 68,252
- -----------------------------------------------------------------------------------------------------------------------------
Brian A. Orenstein 0 0 24,000 / 4,000 336,512 / 68,252
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based on an Option Price of $17.50 and a fair market value of $34.563 on
December 31, 1999.
(2) Based on a fair market value of $34.563 on December 31, 1999 and Option
Prices of $17.50 and $26.625 for various options.
Information Concerning Compensation Committee Interlocks
The Bank's Organization and Compensation ("O&C") Committee approves base
salaries for executive officers of the Bank, and administers and grants awards
under the Bank's stock option plans. None of the members of that Committee is
or has previously been an officer or employee of the Company or the Bank, nor
have any of the Company's or the Bank's executive officers served on the Board
of Directors or compensation committee of a company employing any of the
Company's or the Bank's directors.
Organization and Compensation Committee Report on Executive Compensation
The Organization & Compensation ("O&C") Committee of the Board of Directors
makes recommendations on compensation for executive officers. Mr. Gerwig, who
is both an executive officer and a director, participates in Committee
discussions generally but does not participate in the decisions concerning his
compensation. The Committee is currently comprised of three members, Donald K.
Wilson, Jr. (Chairman), David Freeman, and Robert G. Rayve. No member of the
Committee is employed by the Company or the Bank, nor do they participate in any
of the Company's or the Bank's executive compensation plans.
The O&C Committee also makes recommendations to the Board of Directors
concerning the grant of stock options plans pursuant to the 1996 Officer Stock
Option Plan. Based on these recommendations, the Board makes decisions
regarding the grant of any such options (with Mr. Gerwig not participating in
decisions concerning himself). This Committee also makes recommendations to the
Board of Directors on the Bonus Plan and other benefit plans for employees of
the Bank.
The O&C Committee has a compensation policy for executive officers which takes
into account the Company's and the Bank's performance, the accomplishment of
business objectives, and the individual executive officer's contribution to
earnings and shareholder value in setting executive officer compensation levels.
The O&C Committee also considers the compensation paid by peer group
institutions with the goal of being competitive in the attraction and retention
of qualified executives. The three principal components of executive officer
compensation are salary, bonus and stock options. The O&C Committee considers
granting bonuses annually, but only when it determines that performance is
meritorious and exceptional. For 1999, bonuses were determined pursuant to a
formula which took into account consideration of such factors as the Bank's
financial (a comparison of budgeted earnings per share and peer bank earnings
per share) and regulatory performance for such year. For the year 1999, Mr.
Gerwig received a salary of $319,982, a 16.52% increase from the salary of
$274,610 for 1998. Mr. Gerwig's salary level is based on a comparison of
compensation paid to chief executive officers of a peer group of New England and
New York financial institutions with a similar asset size and on the performance
of the Bank and of Mr. Gerwig, as judged by the O&C Committee. In 1999, Mr.
Gerwig was paid bonuses of $192,000 for 1998 performance and $192,000 for 1999
performance based on the executive officer bonus formula discussed above. The
Board of Directors did not reject or modify in any material way the
recommendations of the O&C Committee for 1999 compensation.
81
<PAGE>
EXECUTIVE COMPENSATION PURSUANT TO PLANS
Defined Contribution Money Purchase Pension Plan
The Bank has a Defined Contribution Money Purchase Pension Plan (the "Pension
Plan") established in 1990. Employees become eligible for participation in the
Pension Plan on attainment of age 21 and completion of one year of service with
the Bank. The Pension Plan is subject to the requirements of the Employee
Retirement Income Security Act of 1974 ("ERISA").
Each year the Bank makes a contribution to the Pension Plan in an aggregate
amount sufficient to allocate to each eligible participant's account an amount
equal to such participant's compensation percentage and his or her excess
compensation percentage. For plan years prior to 1996, the compensation
percentage was 6% of an eligible employee's compensation (which was $160,000 in
1999 and varies from year to year due to changes in the cost of living). In
1995, the Bank amended the Pension Plan effective January 1, 1996 to reduce the
compensation percentage to 2% of an eligible employee's compensation. For plan
years prior to 1996, the pension plan provided that the excess compensation was
5.7% of an eligible employee's compensation (limited as set forth above) in
excess of the applicable annual social security wage base. The 1995 amendment
also reduced the excess compensation percentage to 2% of an eligible employee's
excess compensation. In 1996, the pension plan was amended, effective January
1, 1997, to restore the 6% level of compensation (which would include for such
calculation earnings up to $160,000) and 5.7% of excess compensation.
Participants become 100% vested in their Pension Plan accounts after five years
employment with the Bank. Termination of employment prior to vesting results in
a forfeiture by the employee of his or her account. Amounts in forfeited
accounts are used to fund the Bank's aggregate Pension Plan contribution in the
year of forfeiture.
The Bank's contributions to the Pension Plan are held and invested as a Trust
Fund by the Bank as the Pension Plan's Trustee.
401(k) Plan
The Bank also has a 401(k) defined contribution plan (the "401(k) Plan") which
was established in 1987. Employees become eligible for participation on
attainment of age 21 and completion of one year of service with the Bank. The
401(k) Plan is also subject to the requirements of ERISA.
An eligible employee becomes a participant in the 401(k) Plan by authorizing the
Bank to reduce the participant's base pay and to make a corresponding pre-tax
contribution to the 401(k) Plan on the participant's behalf ranging from 2% to
15% of base pay. The Bank may also elect, on an annual basis, to match a
portion of the employee's elective contributions for a plan year in an amount
not to exceed 50% of an employee's elective contributions not exceeding 5% of
such employee's compensation during the plan year. Matching contributions by
the Bank are not required and are made at the sole discretion of the Bank. In
1999, the Bank made matching contributions to the 401(k) Plan equal to 25% of an
employee's elective contribution up to 5% of compensation.
In addition, the Bank may choose to make supplemental contributions for a plan
year in an amount to be determined by the Board of Directors. Any such
supplemental contributions would not depend on whether an employee elected to
defer any of his or her pay for the plan year. The Bank has not made any
supplemental contributions to the 401(k) Plan.
Participants in the 401(k) Plan are 100% vested in their elective contributions
account at all times. Participants are vested in Bank matching contributions
made on their behalf at 20% of such contributions after one year (1,000 hours)
of employment increasing by 20% for each subsequent year of employment with full
vesting after five years. Forfeiture of Bank contributions are used to reduce
future Bank contributions. The Bank is the 401(k) Plan's Trustee.
82
<PAGE>
Long Term Incentive Compensation Plan
The Bank has a Long Term Incentive Plan (the "Bonus Plan") for senior officers,
including the Named Executive Officers. The Board of Directors, based on
Organization and Compensation Committee recommendations, determines awards under
the Bonus Plan, which are paid each year following the end of the Bank's fiscal
year based on the achievement of certain performance targets. Awards are made
based only upon the level of performance as to articulated performance targets.
Performance targets are established in the early part of each year. All awards
are money awards, payable in cash, provided however that a senior officer may
elect in advance to accept a certain percentage of the award in the form of a
deferred payment. An executive officer electing deferral will have his award
deemed to be placed in a nominal account (unsecured and unsegregated) at the
Bank earning a return that is either based on the prime rate or the appreciation
in fair market value of the Company's Common Stock during the period of
deferral. The amounts by which deferral accounts constituted "above-market" or
"preferential" earnings in 1999 (i.e., exceeded 120% of the applicable federal
long-term rate as prescribed by Internal Revenue Code Section 1274(d)) for each
Named Executive Officers are included in the "Other Annual Compensation" column
of the Summary Compensation Table above. The deferral option in this plan was
terminated during 1999. All deferral amounts were paid out during the fourth
quarter of 1999.
The performance targets for the Bonus Plan vary each year as determined by the
Board of Directors. In recent years, the targets have focused on improvements
in the Bank's earnings performance and as measured against the performance of
identified peer groups and Community Reinvestment Act performance.
Employee Stock Ownership Plan
The Bank has a leveraged Employee Stock Ownership Plan (the "ESOP"). The ESOP
is subject to the eligibility, funding, participation, fiduciary, reporting and
disclosure requirements of ERISA. Under existing circumstances, all Bank
employees are eligible to participate in the ESOP once they have attained age 21
and completed one year of service with the Bank. The Bank may make
contributions to the ESOP in cash or in Common Stock. The contributions are
allocated to the accounts of the ESOP participants in the same proportion that
their compensation for a Plan Year bears to the compensation of all ESOP
participants for that year. The percentage of a participant's account that is
non-forfeitable upon termination of employment before normal retirement at age
65 (the "vesting percentage") remains at zero in years one through five of the
participant's employment with the Bank. All ESOP participants with more than
five years of service with the Bank will be 100% vested in their ESOP accounts.
The Bank purchased 120,000 shares of the Bank's Common Stock (the "ESOP Stock")
for the ESOP Plan on June 25, 1996 in connection with the Bank's conversion from
mutual to capital stock form (the "Conversion"). The Bank borrowed $1.2 million
from another financial institution to fund that purchase, the repayment of which
is guaranteed by the Bank and secured by the Trustee's pledge of the Bank's
Common Stock purchased with the ESOP. Upon the reorganization of the Bank into
a holding company structure, the Bank's Common Stock that comprised the stock
subject to the ESOP was exchanged for an equal number of shares of MECH
Financial Common Stock ("ESOP Stock") which is awardable pursuant to the terms
of the ESOP. The ESOP Stock will be allocated to the accounts of Bank employees
participating in the ESOP over time, as the Bank's annual contributions are used
to pay down the loan, freeing the ESOP Stock from the pledge. Contributions
made to the ESOP by the Bank, as well as dividends on or proceeds from the sale
of unallocated shares of ESOP Stock, may be applied to the payment of principal
and interest on the loan. The ESOP is intended to comply with Sections 401(a),
and (m), 409, 501(a) and 4975(e) of the Internal Revenue Code of 1986, as
amended.
Employment Agreement
The Bank has entered into an employment agreement (the "Employment Agreement")
with Mr. Gerwig, the Chairman, President and Chief Executive Officer of the
Company and the Bank. The Employment Agreement, which became effective upon the
completion of the Conversion, replaced an employment agreement between Mr.
Gerwig and the Bank executed in June of 1985. The Company and the Bank are
jointly and severally liable for certain obligations under the Employment
Agreement.
83
<PAGE>
The term of employment under the Employment Agreement currently extends until
June 30, 2000 (the "Employment Period"). On July 1, 2000, and on the first day
of July each year thereafter, the Employment Period will automatically be
extended by successive one year terms unless either Mr. Gerwig or the Bank gives
notice of his or its intention to terminate to the other prior to April 1 of
that year. The Employment Agreement provides for an annual base salary and also
provides for increases in subsequent years and for certain insurance, disability
and other benefits as the Bank may make available to its employees. The Board
of Directors may grant to Mr. Gerwig additional annual and long-term incentive
compensation at its discretion.
The Bank may terminate Mr. Gerwig for cause (as defined in the Employment
Agreement) at any time. In such event, Mr. Gerwig is entitled to receive
compensation and benefits only up to the termination date. If the Bank
terminates Mr. Gerwig without cause (which it may do at any time), or he leaves
for good reason, Mr. Gerwig is entitled to severance of one year of base salary
plus employee benefits for a one year period.
The Employment Agreement also provides a covenant not to compete with the
business of the Bank for a period of one year after termination of employment
and contains non-disclosure and non-interference covenants. The employment
agreement is integrated with Mr. Gerwig's Change in Control Agreement (see
below) such that the Employment Agreement terminates coincident with a Change in
Control Agreement lump-sum payment.
Benefit Equalization Agreement
At the time Mr. Gerwig became employed by the Bank, the Bank agreed that it
would provide Mr. Gerwig with retirement benefits such that he would not suffer
a reduction in benefits from those he would have received had he remained with
his previous employer through normal retirement age and received benefits under
that employer's defined benefit pension plan.
Mr. Gerwig and the Bank agreed in 1991, which agreement was amended as set forth
in a Benefit Equalization Agreement dated December 19, 1995, that the Bank will
provide Mr. Gerwig with a lump sum payment at the time of his retirement or
separation from service with the Bank. The amount of the payment will be an
amount equal to the actuarial equivalent of an annual pension benefit, payable
for ten years certain and life thereafter, of 60% of his average annual
compensation (as defined below) less (i) the lump sum payment payable to him as
a result of the termination in 1990 of the Bank's defined benefit pension plan,
(ii) the lump sum benefit payable to him under the Bank's existing Pension Plan,
and (iii) the lump sum actuarial equivalent of the benefit payable to him under
his previous employer's defined benefit pension plan. The payment will be
reduced if Mr. Gerwig terminates his employment with the Bank prior to his
reaching age 62. Average annual compensation is defined to mean the monthly
average of Mr. Gerwig's compensation during the highest consecutive 36 months
within 10 years from the date of separation, times 12.
The Benefit Equalization Agreement with Mr. Gerwig provides generally that the
Bank's obligations thereunder shall not be funded and shall be paid out of the
Bank's general funds as to any other of the Bank's general, unsecured creditors.
In the event of a change in control of the Bank, however, the Bank shall fund
the annual amounts necessary to make the required payment through the use of a
non-qualified irrevocable trust, provided that (a) the assets of the trust shall
be subject to the claim of the Bank's general creditors, and (b) the assets and
income of the trust are not includable in Mr. Gerwig's gross taxable income
under Section 83 or 402(b) of the Internal Revenue Code of 1986, as amended.
The Conversion did not constitute a change of control for the purposes of the
Benefit Equalization Agreement.
Supplemental Employee Retirement Plan
The Bank adopted a Supplemental Employee Retirement Plan ("SERP") in 1998,
effective January 1, 1998. The SERP is intended to supplement the retirement
benefits payable to executives under the Bank's Pension Plan. Only Messrs. Wood
and Stout have been included in the SERP.
The amount of annual compensation that the Pension Plan can take into account
for any one year is limited by Internal Revenue Code Section 401(a)(17); the
limit, which varies each year with increases in the cost of living, was $160,000
for 1999. The difference between that limit and the executive's total
compensation for the year (assuming a positive difference) is multiplied by a
percentage determined by the Board of Directors based on the percentage of
compensation
84
<PAGE>
that would have been contributed to the executive but for the Internal Revenue
Code limit (11.7% in 1999). The amount so determined is credited to a book
account and deemed invested in an interest bearing account at a variable rate
equal to the "Prime Rate" as published in the "Money Rates" column of the Wall
Street Journal. Although any payment under the SERP is an unsecured, general
obligation of the Bank, contractual payments are determined based on that
formula.
If either executive terminates employment for reasons other than death or
disability prior to the earlier of completion of five years of service (as
determined under the Pension Plan) or the executive's normal retirement date, no
benefits under the SERP are payable. Both Mr. Wood and Mr. Stout have completed
five years of service.
Change in Control Agreements
The Bank has entered into change in control agreements (the "Change in Control
Agreements") with the Named Executive Officers, and three other officers ("the
executives"). The Change in Control Agreements became effective in June 1996.
Upon the reorganization of the Bank into a holding company structure, the
Company became a party to, and obligated under, the Change in Control
Agreements. If a change in control of the Company or the Bank takes place while
the executive is a full-time officer of the Company or the Bank, the executive
generally is entitled to receive a lump sum severance payment equal to three
times the higher of the executive's compensation (including long term
compensation) for the most recently completed full calendar year or the average
of the executive's latest three years of annual compensation. The executive is
not entitled to receive, however, any payment under the Change in Control
Agreements that would be considered an "excess parachute payment" under the
Internal Revenue Code or which would be prohibited by order or regulation of the
Federal Deposit Insurance Corporation.
A "change in control" is deemed to have occurred, with certain exceptions, if
(i) a person beneficially owns 25% or more of any class of voting securities of
the Bank or the Company, without the approval of at least 75% of the members of
the Company's or the Bank's Board of Directors prior to such person obtaining
such percentage interest, (ii) a proxy contest to which the Company is a party
takes place, as a consequence of which members of the Company's Board of
Directors in office immediately prior to such event constitute less than 75% of
the Board of Directors after such event, (iii) the Company or the Bank
consummates certain mergers or consolidations or a sale of substantially all of
its assets where the successor entity's voting power is not owned at least 50%
by the shareholders of the Company, or (iv) the Board of Directors of the
Company or the Bank determines that a person directly or indirectly exercises a
controlling influence over the management or policies of the Company or the
Bank.
Insurance Plans
The Company provides its full-time officers and employees with medical, major
medical, life, dental, accidental death and dismemberment, and long-term
disability insurance coverage under group plans which are available generally
and on the same basis to all full-time employees. The Named Executive Officers
have the option of obtaining Ordinary Life Insurance Policies in lieu of the
above, the premiums for which are paid by the Bank and are disclosed in the
Summary Compensation Table above.
85
<PAGE>
PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total shareholder return on the Company's common stock with the
cumulative total return of the companies on the S&P 500 Index and the reported
total return of companies on the Keefe, Bruyette & Woods, Inc. New England Bank
Index for the period commencing June 30, 1996 and ended December 31, 1999. The
graph assumes a $100 investment on June 30, 1996.
[add performance graph insert here]
KBW NEW Price Plus
S & P 500 ENGLAND MECH Cumulative
Date Index Index Indexed Dividends
---- ----- ------- ------- ----------
6/30/96 100.00 100.00 100.00 $ 11.500
9/30/96 103.07 112.37 129.35 $ 14.875
12/31/96 111.65 129.96 136.96 $ 15.750
3/31/97 114.66 134.95 145.65 $ 16.750
6/30/97 134.64 162.16 164.13 $ 18.875
9/30/97 144.71 191.36 228.26 $ 26.250
12/31/97 148.85 223.42 226.63 $ 26.063
3/31/98 169.57 237.02 265.22 $ 30.500
6/30/98 175.15 231.14 253.48 $ 29.150
9/30/98 157.76 181.19 219.83 $ 25.280
12/31/98 191.30 206.47 245.33 $ 28.213
3/31/99 200.82 189.09 280.91 $ 32.305
6/30/99 214.95 212.94 334.87 $ 38.510
9/30/99 201.55 192.39 296.47 $ 34.094
12/31/99 231.50 183.24 312.31 $ 35.915
86
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires MECH Financial's directors and
executive officers, and persons who own more than ten percent (10%) of the
Common Stock of MECH Financial, to file with the Securities Exchange Commission
initial reports of ownership and reports of changes in ownership of MECH
Financial's Common Stock. Officers, directors and ten percent (10%)
shareholders are required by the Securities Exchange Commission's regulations to
furnish MECH Financial with copies of all Section 16(a) forms they file.
To MECH Financial's knowledge, based solely on a review of the copies of such
reports furnished to MECH Financial and written representations that no other
reports were required, during the fiscal year ended December 31, 1999, all
Section 16(a) filing requirements applicable to its officers and directors were
complied with. The Company is unaware of any ten percent (10%) shareholder, and
the Company's Certificate of Incorporation prohibits ownership of 10% or more
except under limited circumstances.
87
<PAGE>
Stock Ownership of Directors and Officers
The following table shows the beneficial ownership of shares of the Common Stock
by individual directors, those executive officers named in the Summary
Compensation Table, and by all directors and executive officers as a group as of
the most recent practicable date (February 18, 2000).
<TABLE>
<CAPTION>
Amount and Nature
-----------------
of Beneficial
-------------
Name of Beneficial Owner Ownership (1) Percent of Class (2)
- ------------------------ ------------- --------------------
<S> <C> <C>
Directors:
David Freeman 7,334 (3) *
Edgar C. Gerwig 116,533 (4) (5) 2.18%
John J. Meehan 6,834 (3) *
Kevin A. North 11,195 (3) *
Robert G. Rayve 7,934 (3) *
Alfred R. Rogers 6,440 (6) *
Donald K. Wilson 9,633 (7) *
Barbara Brown Zikmund 5,833 (3) *
Named Officers:
Thomas M. Wood 75,319 (8) *
Richard W. Stout, Jr. 57,805 (9) *
Eugene B. Marinelli 38,137(10) *
Brian A. Orenstein 33,539(11) *
All Directors and Executive 461,519(12) 8.63%
Officers as a group (15)
</TABLE>
(1) Beneficial ownership is direct except as otherwise indicated by footnote.
All persons shown in the table have sole voting and investment power except
as otherwise indicated.
(2) Based upon 5,347,705 shares issued and outstanding and subject to options
exercisable within 60 days. No individual director or nominee, or executive
officer beneficially owns more than one percent of the total number of
outstanding shares, other than as shown above.
(3) Includes 5,333 stock options exercisable within 60 days.
(4) Mr. Gerwig is both a director and an executive officer.
(5) Includes 57,000 stock options exercisable within 60 days and 2,184 shares
received pursuant to the Employee Stock Ownership Plan (the "ESOP"), and
38,059 shares held in the 401(K) Plan.
(6) Includes 1,335 stock options exercisable within 60 days.
(7) Includes 1,334 stock options exercisable within 60 days.
(8) Includes 54,000 options exercisable within 60 days, 2,184 shares received
pursuant to the ESOP and 16,035 shares held in the 401(K) Plan.
(9) Includes 48,000 options exercisable within 60 days, 2,031 shares received
pursuant to the ESOP and 7,131 shares held in the 401(K) Plan.
(10) Includes 24,000 options exercisable within 60 days, 1,765 shares received
pursuant to the ESOP, and 12,373 shares held in the 401(K) Plan.
(11) Includes 24,000 options exercisable within 60 days, 1,712 shares received
pursuant to the ESOP, and 4,648 shares held in the 401(K) Plan.
(12) Includes 302,336 stock options exercisable within 60 days.
88
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Related Persons
As of December 31, 1999, there were no loans from the Bank or MECH Financial to
directors, executive officers and their associates and affiliated businesses.
There were no reportable transactions with such persons.
89
<PAGE>
EXHIBIT DESCRIPTION
- ------- -----------
2 Agreement and Plan of Merger dated December 1, 1999 between Registrant
and Webster Financial Corporation.
2.1 Amendment Number 1 to the Agreement and Plan of Merger dated December
21, 1999 between Registrant and Webster Financial Corporation.
3.1(i) Certificate of Incorporation of MECH Financial, Inc. (incorporated by
reference from Exhibit 3(i) to Form 8-A filed by the Registrant on
December 29, 1997).
3.1(ii) Bylaws of MECH Financial, Inc. (incorporated by reference from Exhibit
3(ii) to Form 8-A filed by the Registrant on December 29, 1997).
10.1 1996 Mechanics Savings Bank Officer Stock Option Plan (incorporated by
reference from Exhibit 10.1 to the 1997 Annual Report on Form 10-K
filed by the Registrant on March 30, 1998).
10.2 1996 Mechanics Savings Bank Director Stock Option Plan (incorporated
by reference from Exhibit 10.2 to the 1997 Annual Report on Form 10-K
filed by the Registrant on March 30, 1998).
10.3 Change of Control Agreement between Mechanics Savings Bank and Edgar
C. Gerwig (incorporated by reference from Exhibit 10.1 to Form 8-A
filed by the Registrant on December 29, 1997).
10.4 Change of Control Agreement between Mechanics Savings Bank and Thomas
M. Wood (incorporated by reference from Exhibit 10.2 to Form 8-A filed
by the Registrant on December 29, 1997).
10.5 Change in Control Agreement between Mechanics Savings Bank and Richard
W. Stout Jr. (incorporated by reference from Exhibit 10.3 to Form 8-A
filed by the Registrant on December 29, 1997).
10.6 Change in Control Agreement between Mechanics Savings Bank and Eugene
B. Marinelli (incorporated by reference from Exhibit 10.4 to Form 8-A
filed by the Registrant on December 29, 1997).
10.7 Change in Control Agreement between Mechanics Savings Bank and Mary D.
Negro (incorporated by reference from Exhibit 10.5 to Form 8-A filed
by the Registrant on December 29, 1997).
10.8 Change in Control Agreement between Mechanics Savings Bank and Brian
A. Orenstein (incorporated by reference from Exhibit 10.6 to Form 8-A
filed by the Registrant on December 29, 1997).
10.9 Change in Control Agreement between Mechanics Savings Bank and Gary J.
Roman (incorporated by reference from Exhibit 10.7 to Form 8-A filed
by the Registrant on December 29, 1997).
10.10 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Edgar C. Gerwig (incorporated by reference
from Exhibit 10.10 to the 1997 Annual Report on Form 10-K filed by the
Registrant on March 30, 1998).
10.11 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Thomas M. Wood (incorporated by reference
from Exhibit 10.11 to the 1997 Annual
90
<PAGE>
Report on Form 10-K filed by the Registrant on March 30, 1998).
10.12 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Richard W. Stout Jr. (incorporated by
reference from Exhibit 10.12 to the 1997 Annual Report on Form 10-K
filed by the Registrant on March 30, 1998).
10.13 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Eugene B. Marinelli (incorporated by
reference from Exhibit 10.13 to the 1997 Annual Report on Form 10-K
filed by the Registrant on March 30, 1998).
10.14 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Mary D. Negro (incorporated by reference
from Exhibit 10.14 to the 1997 Annual Report on Form 10-K filed by the
Registrant on March 30, 1998).
10.15 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Brian A. Orenstein (incorporated by
reference from Exhibit 10.15 to the 1997 Annual Report on Form 10-K
filed by the Registrant on March 30, 1998).
10.16 Amendment No. 1 to Change of Control Agreement between the Registrant,
Mechanics Savings Bank and Gary J. Roman (incorporated by reference
from Exhibit 10.16 to the 1997 Annual Report on Form 10-K filed by the
Registrant on March 30, 1998).
10.17 Employment Agreement between Mechanics Savings Bank and Edgar C.
Gerwig (incorporated by reference from Exhibit 10.8 to Form 8-A filed
by the Registrant on December 29, 1997).
10.18 Change in Control Agreement between Mechanics Savings Bank and Gregory
A. White dated May 19, 1998 (incorporated by reference from Exhibit
10.18 to the 1998 Annual Report on Form 10-K filed by the Registrant
on March 24, 1999).
10.19 Specimen Stockholder Agreement dated December 1, 1999, fifteen
identical versions of which have been entered into by and between
Webster Financial Corporation and, in each instance, one of each of
the following shareholders of the Registrant: Edgar C. Gerwig; Thomas
M. Wood; Richard W. Stout, Jr.; Eugene B. Marinelli; Brian A.
Orenstein; Gary J. Roman; Gregory A. White; Mary D. Negro; David
Freeman; John J. Meehan; Kevin A. North; Robert G. Rayve; Alfred R.
Rogers; Donald K. Wilson, Jr.; and Barbara Brown Zikmund.
10.20 Option Agreement dated December 1, 1999 between MECH Financial, Inc.
and Webster Financial Corporation.
21 Information regarding subsidiaries of Mechanics Savings Bank is hereby
incorporated by reference from "Item 1 Business-Subsidiaries" of this
Form 10-K.
23.1 Consent of KPMG LLP.
23.2 Consent of PricewaterhouseCoopers LLP.
27 Financial Data Schedule
(b) Reports on Form 8-K:
On December 10, 1999, the Registrant filed a Form 8-K that announced that
the Registrant and Webster Financial Corporation ("Webster") had entered into an
Agreement and Plan of Merger that provides for, among other things, the
acquisition of the Registrant by Webster through a stock for stock exchange and
the extemporaneous merger of Mechanics Savings Bank with and into Webster Bank.
The Agreement and Plan of Merger provides that shareholders of the Registrant
will receive 1.52 shares of Webster common stock for each share of the
Registrant's common stock.
(c) The exhibits required by Item 601 of Regulation S-K are filed as a separate
part of this report.
91
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
behalf by the undersigned, thereunto duly authorized.
MECH Financial, Inc.
- --------------------
Registrant
By /s/ Edgar C. Gerwig By: /s/ Thomas M. Wood
- --------------------------------- ---------------------------------
Edgar C. Gerwig Thomas M. Wood
Chairman, President and Executive Vice President and
Chief Executive Officer Treasurer
By: /s/ Brian A. Orenstein
- ---------------------------------
Brian A. Orenstein
Senior Vice President and Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated:
Signatures/Title Date
/s/ Edgar C. Gerwig March 21, 2000
- --------------------------------- --------------
Edgar C. Gerwig / Chairman
President and Chief Executive Officer
/s/ David Freeman March 21, 2000
- --------------------------------- --------------
David Freeman / Director
/s/ Robert G. Rayve March 21, 2000
- --------------------------------- --------------
Robert G. Rayve / Director
/s/ Alfred R. Rogers March 21, 2000
- --------------------------------- --------------
Alfred R. Rogers / Director
/s/ Donald K. Wilson, Jr. March 21, 2000
- --------------------------------- --------------
Donald K. Wilson, Jr. / Director
/s/ Barbara Brown Zikmund March 21, 2000
- --------------------------------- --------------
Barbara Brown Zikmund / Director
92
<PAGE>
Exhibit 2
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
WEBSTER FINANCIAL CORPORATION
AND
MECH FINANCIAL, INC.
DATED AS OF
DECEMBER 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I THE MERGER...................................................... 1
1.1 The Merger...................................................... 1
1.2 Effective Time.................................................. 1
1.3 Effects of the Merger........................................... 2
1.4 Conversion of MECH Common Stock................................. 2
1.5 Options......................................................... 3
1.6 Certificate of Incorporation.................................... 4
1.7 Bylaws.......................................................... 4
1.8 Directors and Officers.......................................... 4
1.9 Tax Consequences................................................ 4
1.10 Accounting Treatment............................................ 4
ARTICLE II EXCHANGE OF SHARES............................................. 5
2.1 Webster to Make Shares Available................................ 5
2.2 Exchange of Shares.............................................. 5
2.3 Disclosure Schedule............................................. 6
2.4 Standards....................................................... 6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF MECH........................ 7
3.1 Corporate Organization.......................................... 7
3.2 Capitalization.................................................. 7
3.3 Authority; No Violation......................................... 8
3.4 Consents and Approvals.......................................... 9
3.5 Loan Portfolio; Reports......................................... 10
3.6 Financial Statements; Exchange Act Filings; Books and Records... 10
3.7 Broker's Fees................................................... 11
3.8 Absence of Certain Changes or Events............................ 11
3.9 Legal Proceedings............................................... 11
3.10 Taxes and Tax Returns........................................... 11
3.11 Employee Plans.................................................. 13
3.12 Certain Contracts............................................... 14
3.13 Agreements with Governmental Agencies........................... 14
3.14 State Takeover Laws; Certificate of Incorporation............... 15
3.15 Environmental Matters........................................... 15
3.16 Reserves for Losses............................................. 16
3.17 Properties and Assets........................................... 16
3.18 Insurance....................................................... 17
3.19 Mechanics Investment Services, Inc.............................. 17
3.20 Compliance with Applicable Laws................................. 17
3.21 Loans........................................................... 17
3.22 Affiliates...................................................... 18
3.23 Ownership of Webster Common Stock............................... 19
3.24 Year 2000 Compliance............................................ 19
3.25 Intellectual Property........................................... 19
3.26 MECH Information................................................ 19
3.27 Fairness Opinion................................................ 20
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF WEBSTER...................... 20
4.1 Corporate Organization.......................................... 20
4.2 Capitalization.................................................. 20
4.3 Authority; No Violation......................................... 21
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
4.4 Regulatory Approvals............................................ 22
4.5 Financial Statements; Exchange Act Filings; Books and Records... 22
4.6 Agreements with Governmental Agencies........................... 23
4.7 Legal Proceedings............................................... 23
4.8 Webster Information............................................. 23
4.9 Absence of Certain Changes or Events............................ 23
4.10 Compliance with Applicable Laws................................. 24
4.11 Tax and Accounting Treatment of Merger.......................... 24
4.12 Year 2000....................................................... 24
ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS....................... 24
5.1 Covenants of MECH............................................... 24
5.2 Covenants of Webster............................................ 27
5.3 Merger Covenants................................................ 28
5.4 Compliance with Antitrust Laws.................................. 28
5.5 Qualified Plans................................................. 28
ARTICLE VI ADDITIONAL AGREEMENTS.......................................... 28
6.1 Regulatory Matters.............................................. 28
6.2 Access to Information........................................... 30
6.3 Shareholder Meetings............................................ 31
6.4 Legal Conditions to Merger...................................... 31
6.5 Stock Exchange Listing.......................................... 31
6.6 Employees....................................................... 31
6.7 Indemnification................................................. 32
6.8 Subsequent Interim and Annual Financial Statements.............. 34
6.9 Additional Agreements........................................... 34
6.10 Advice of Changes............................................... 34
6.11 Current Information............................................. 34
6.12 Execution and Authorization of Bank Merger Agreement............ 34
6.13 Change in Structure............................................. 34
6.14 Transaction Expenses of MECH.................................... 35
6.15 Further Actions of MECH......................................... 35
6.16 Publication of Earnings......................................... 35
ARTICLE VII CONDITIONS PRECEDENT.......................................... 36
7.1 Conditions to Each Party's Obligation To Effect the Merger...... 36
7.2 Conditions to Obligations of Webster............................ 37
7.3 Conditions to Obligations of MECH............................... 38
ARTICLE VIII TERMINATION AND AMENDMENT.................................... 39
8.1 Termination..................................................... 39
8.2 Effect of Termination........................................... 41
8.3 Amendment....................................................... 42
8.4 Extension; Waiver............................................... 42
ARTICLE IX GENERAL PROVISIONS............................................. 42
9.1 Closing......................................................... 42
9.2 Nonsurvival of Representations, Warranties and Agreements....... 42
9.3 Expenses; Breakup Fee........................................... 42
9.4 Notices......................................................... 43
9.5 Interpretation.................................................. 44
9.6 Counterparts.................................................... 44
9.7 Entire Agreement................................................ 44
9.8 Governing Law................................................... 44
</TABLE>
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<TABLE>
<S> <C>
9.9 Enforcement of Agreement........................................ 45
9.10 Severability.................................................... 45
9.11 Publicity....................................................... 45
9.12 Assignment; Limitation of Benefits.............................. 45
9.13 Additional Definitions.......................................... 45
</TABLE>
EXHIBITS
A Articles of Combination and Bank Merger Agreement
B Option Agreement
C Certificate of Merger
D MECH Stockholder Agreement
E MECH Counsel's Legal Opinions
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AGREEMENT AND PLAN OF MERGER
This AGREEMENT AND PLAN OF MERGER, dated as of December 1, 1999 (this
"Agreement"), is entered into by and between Webster Financial Corporation, a
Delaware corporation ("Webster") and MECH Financial, Inc., a Connecticut
corporation ("MECH").
WHEREAS, the Boards of Directors of Webster and MECH have determined that
it is advisable and in the best interests of their respective companies and
shareholders to consummate the business combination transaction provided for
herein in which MECH will, subject to the terms and conditions set forth herein,
merge with and into Webster, with Webster being the Surviving Corporation (as
hereinafter defined) (the "Merger");
WHEREAS, prior to the consummation of the Merger, Webster and MECH will
respectively cause Webster Bank ("Webster Bank"), a federally chartered savings
bank and wholly owned subsidiary of Webster, and Mechanics Savings Bank, a
Connecticut-chartered savings bank and wholly-owned subsidiary of MECH ("MS
Bank"), to enter into a merger agreement, in the form attached hereto as Exhibit
A (the "Bank Merger Agreement"), providing for the merger (the "Bank Merger") of
MS Bank with and into Webster Bank, with Webster Bank being the "Surviving Bank"
of the Bank Merger, and the Bank Merger to be consummated immediately after
consummation of the Merger;
WHEREAS, as an inducement to Webster to enter into this Agreement, MECH
will enter into an option agreement, in the form attached hereto as Exhibit B
(the "Option Agreement"), with Webster immediately following the execution of
this Agreement pursuant to which MECH will grant Webster an option to purchase,
under certain circumstances, an aggregate of 994,150 newly issued shares of
common stock, par value $.01 per share, of MECH ("MECH Common Stock") upon the
terms and conditions therein contained; and
WHEREAS, the parties desire to make certain representations, warranties and
agreements in connection with the Merger and also to prescribe certain
conditions to the Merger;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein, and intending to be legally bound
hereby, the parties agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger.
Subject to the terms and conditions of this Agreement, in accordance with
the Delaware General Corporation Law (the "DGCL") and the State of Connecticut
Business Corporations Act, as amended (the "Connecticut Corporation Law"), at
the Effective Time (as defined in Section 1.2 hereof), MECH shall merge into
Webster, with Webster being the surviving corporation (hereinafter sometimes
called the "Surviving Corporation") in the Merger. Upon consummation of the
Merger, the corporate existence of MECH shall cease, and the Surviving
Corporation shall continue to exist as a Delaware corporation.
1.2 Effective Time.
The Merger shall become effective on the date and at the time set forth in
the certificate of merger (the "Certificate of Merger"), substantially in the
form attached as Exhibit C hereto, which shall be filed with the Secretaries of
State of the States of Connecticut and Delaware on or before
<PAGE>
the Closing Date. The term "Effective Time" shall be the date and time when the
Merger becomes effective, as set forth in the Certificate of Merger.
1.3 Effects of the Merger.
At and after the Effective Time, the Merger shall have the effects set
forth in Sections 259 and 261 of the DGCL and Sections 33-820 and 33-821 of the
Connecticut Corporation Law.
1.4 Conversion of MECH Common Stock.
(a) At the Effective Time, subject to Sections 1.4(b), 1.4(c), 1.4(d)
and 8.1(h) hereof, each share of MECH Common Stock issued and outstanding prior
to the Effective Time shall, by virtue of this Agreement and without any action
on the part of the holder thereof, be converted into and exchangeable for 1.52
shares of Webster common stock, par value $.01 per share ("Webster Common
Stock"). The number of shares of Webster Common Stock to be exchanged for each
share of MECH Common Stock issued and outstanding is hereinafter referred to as
the "Exchange Ratio."
(b) All of the shares of MECH Common Stock converted into Webster
Common Stock pursuant to this Article I shall no longer be outstanding and shall
automatically be canceled and shall cease to exist, and each certificate (each a
"Certificate") previously representing any such shares of MECH Common Stock
shall thereafter represent the right to receive (i) the number of whole shares
of Webster Common Stock and (ii) cash in lieu of fractional shares into which
the shares of MECH Common Stock represented by such Certificate have been
converted pursuant to Section 1.4(a) and Section 1.4(d) hereof. Certificates
previously representing shares of MECH Common Stock shall be exchanged for
certificates representing whole shares of Webster Common Stock and cash in lieu
of fractional shares issued in consideration therefor upon the surrender of such
Certificates in accordance with Section 2.2 hereof, without any interest
thereon. If, prior to the Effective Time, Webster should split or combine the
Webster Common Stock, or pay a dividend or other distribution in such common
stock, then the Exchange Ratio shall be appropriately adjusted to reflect such
split, combination, dividend or distribution.
(c) At the Effective Time, all shares of MECH Common Stock that are
owned by MECH as treasury stock and all shares of MECH Common Stock that are
owned directly or indirectly by Webster or MECH or any of their respective
Subsidiaries (other than shares of MECH Common Stock held directly or indirectly
in trust accounts, managed accounts and the like or otherwise held in a
fiduciary capacity that are beneficially owned by third parties (any such
shares, and shares of Webster Common Stock which are similarly held, whether
held directly or indirectly by Webster or MECH, as the case may be, being
referred to herein as "Trust Account Shares") and other than any shares of MECH
Common Stock held by Webster or MECH or any of their respective Subsidiaries in
respect of a debt previously contracted (any such shares of MECH Common Stock,
and shares of Webster Common Stock which are similarly held, whether held
directly or indirectly by Webster or MECH, being referred to herein as "DPC
Shares")) shall be canceled and shall cease to exist and no stock of Webster or
other consideration shall be delivered in exchange therefor. All shares of
Webster Common Stock that are owned by MECH or MS Bank (other than Trust Account
Shares and DPC Shares) shall become treasury stock of Webster.
(d) Certificates for fractions of shares of Webster Common Stock will
not be issued. In lieu of a fraction of a share of Webster Common Stock, each
holder of MECH Common Stock otherwise entitled to a fraction of a share of
Webster Common Stock shall be entitled to receive an amount of cash equal to (i)
the fraction of a share of the Webster Common Stock to which such holder would
otherwise be entitled, multiplied by (ii) the actual market value of the Webster
Common Stock, which shall be deemed to be the average of the daily closing
prices per share for Webster Common Stock for the fifteen consecutive trading
days on which shares of Webster Common Stock are actually traded (as reported on
the Nasdaq Stock
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Market National Market System) ending on the third trading day preceding the
Closing Date. Following consummation of the Merger, no holder of MECH Common
Stock shall be entitled to dividends or any other rights in respect of any such
fraction.
(e) Notwithstanding anything in this Agreement to the contrary and
unless otherwise provided by applicable law, shares of MECH Common Stock that
are issued and outstanding immediately prior to the Effective Time and that are
owned by shareholders who have properly objected within the meaning of Sections
33-855 through 33-872 of the Connecticut Corporation Law (the "Objecting
Shares"), shall not be converted into the right to receive shares of Webster
Common Stock, unless and until such shareholders shall have failed to perfect or
shall have effectively withdrawn or lost their right of payment under applicable
law. If any such shareholder shall have failed to perfect or shall have
effectively withdrawn or lost such right of payment, each share of MECH Common
Stock held by such shareholder shall thereupon be deemed to have been converted
into the right to receive and become exchangeable for, at the Effective Time,
shares of Webster Common Stock pursuant to Section 1.4(a) hereof.
(f) MECH shall give Webster (i) prompt notice of any objections filed
pursuant to Section 33-861 of the Connecticut Corporation Law received by MECH,
withdrawals of such objections and any other instruments served in connection
with such objections pursuant to the Connecticut Corporation Law and received by
MECH and (ii) the opportunity to direct all negotiations and proceedings with
respect to objections under the Connecticut Corporation Law consistent with the
obligations of MECH thereunder. MECH shall not, except with the prior written
consent of Webster, (x) make any payment with respect to any such objection, (y)
offer to settle or settle any such objections or (z) waive any failure to timely
deliver a written objection in accordance with the Connecticut Corporation Law,
subject to MECH's legal duties and obligations thereunder.
(g) For purposes of this Agreement, references to Webster Common
Stock shall be deemed to include, where appropriate, references to the right to
receive shares of Webster's Series C Participating Preferred Stock pursuant to
the Rights Agreement, dated as of February 5, 1996, as amended, between Webster
and American Stock Transfer & Trust Company.
1.5 Options.
At the Effective Time, each option granted by MECH to purchase shares of
MECH Common Stock which is outstanding and unexercised immediately prior thereto
shall be converted automatically into an option to purchase shares of Webster
Common Stock in an amount and at an exercise price determined as provided below
and otherwise subject to the terms of the Employee Stock Ownership Plan, the
1996 Mechanics Savings Bank Officer Stock Option Plan and the 1996 Mechanics
Savings Bank Director Stock Option Plan (the "MECH Stock Plans");
(1) The number of shares of Webster Common Stock to be subject to the
option immediately after the Effective Time shall be equal to the
product of the number of shares of MECH Common Stock subject to the
option immediately before the Effective Time, multiplied by the
Exchange Ratio, provided that any fractional shares of Webster Common
Stock resulting from such multiplication shall be rounded down to the
nearest whole share; and
(2) The exercise price per share of Webster Common Stock under the
option immediately after the Effective Time shall be equal to the
exercise price per share of MECH Common Stock under the option
immediately before the Effective Time divided by the Exchange Ratio,
provided that such exercise price shall be rounded up to the nearest
cent.
3
<PAGE>
The adjustment provided herein shall be and is intended to be effected in a
manner which is consistent with Section 424(a) of the Internal Revenue Code of
1986, as amended (the "Code"). The duration and other terms of the option
immediately after the Effective Time shall be the same as the corresponding
terms in effect immediately before the Effective Time, except that all
references to MECH or MS Bank in the MECH Stock Plans (and the corresponding
references in the option agreement documenting such option) shall be deemed to
be references to Webster or Webster Bank, as applicable. Nothing herein shall
be construed as preventing option holders from exercising the same before the
Effective Time in accordance with the terms thereof.
1.6 Certificate of Incorporation.
At the Effective Time, the Certificate of Incorporation of Webster, as in
effect at the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation.
1.7 Bylaws.
At the Effective Time, the Bylaws of Webster, as in effect immediately
prior to the Effective Time, shall be the Bylaws of the Surviving Corporation.
1.8 Directors and Officers.
At the Effective Time, the directors and officers of Webster immediately
prior to the Effective Time shall be the directors and officers of the Surviving
Corporation. As of the Effective Time, Webster shall cause Webster Bank to
amend its bylaws to increase the size of its Board of Directors by one member,
and thereupon Webster shall invite Edgar C. Gerwig to serve as an additional
member (the "New Member") of the Board of Directors of Webster Bank for a period
to terminate no earlier than the annual meeting of Webster stockholders next
following the third anniversary of the Effective Time; provided, however, that
Webster Bank shall have no obligation to invite Mr. Gerwig to serve on Webster
Bank's Board of Directors if Mr. Gerwig is not both President of MECH and a
member in good standing of MECH's Board of Directors immediately prior to the
Effective Time. Additionally, as of the Effective Time, Webster shall, if
necessary, amend its bylaws to increase the size of its Board of Directors by
one member. Webster shall appoint Mr. Gerwig to the Board of Directors of the
Surviving Corporation to serve as a director for a period to terminate no
earlier than at the annual meeting next following the first anniversary of the
Effective Time; provided, however, that Webster shall have no obligation to
invite Mr. Gerwig to serve on Webster's Board of Directors if Mr. Gerwig is not
both President of MECH and a member in good standing of MECH's Board of
Directors immediately prior to the Effective Time.
1.9 Tax Consequences.
It is intended that the Merger shall constitute a reorganization within the
meaning of Section 368(a) of the Code, and that this Agreement shall constitute
a "plan of reorganization" for the purposes of the Code.
1.10 Accounting Treatment.
It is intended that the Merger shall be accounted for as a "pooling of
interests" under generally accepted accounting principles ("GAAP").
4
<PAGE>
ARTICLE II
EXCHANGE OF SHARES
2.1 Webster to Make Shares Available.
At or prior to the Effective Time, Webster shall deposit, or shall cause to
be deposited, with Webster's transfer agent, American Stock Transfer & Trust
Company, or such other bank, trust company or transfer agent as Webster may
select (the "Exchange Agent"), for the benefit of the holders of Certificates,
for exchange in accordance with this Article II, certificates representing the
shares of Webster Common Stock and the cash in lieu of fractional shares (such
cash and certificates for shares of Webster Common Stock, being hereinafter
referred to as the "Exchange Fund") to be issued pursuant to Section 1.4 and
paid pursuant to Section 2.2(a) hereof (collectively, sometimes referred to
herein as the "Shares") in exchange for outstanding shares of MECH Common Stock.
2.2 Exchange of Shares.
(a) As soon as practicable after the Effective Time, the Exchange
Agent shall mail to each holder of record of a Certificate or Certificates a
form letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon delivery of
the Certificates to the Exchange Agent) and instructions for use in effecting
the surrender of the Certificates in exchange for certificates representing the
shares of Webster Common Stock and the cash in lieu of fractional shares into
which the shares of MECH Common Stock represented by such Certificate or
Certificates shall have been converted pursuant to this Agreement. MECH shall
have the right to review both the letter of transmittal and the instructions
prior to such documents being finalized. Upon surrender of a Certificate for
exchange and cancellation to the Exchange Agent, together with such letter of
transmittal, duly executed, the holder of such Certificate shall be entitled to
receive promptly in exchange therefor (x) a certificate representing that number
of whole shares of Webster Common Stock to which such holder of MECH Common
Stock shall have become entitled pursuant to the provisions of Article I hereof
and (y) a check representing the amount of cash in lieu of fractional shares, if
any, which such holder has the right to receive in respect of the Certificate
surrendered pursuant to the provisions of Article I, and the Certificate so
surrendered shall forthwith be canceled. No interest will be paid or accrued on
the cash in lieu of fractional shares and unpaid dividends and distributions, if
any, payable to holders of Certificates.
(b) No dividends or other distributions declared after the Effective
Time with respect to Webster Common Stock and payable to the holders of record
thereof shall be paid to the holder of any unsurrendered Certificate until the
holder thereof shall surrender such Certificate in accordance with this Article
II. After the surrender of a Certificate in accordance with this Article II,
the record holder thereof shall be entitled to receive any such dividends or
other distributions, without any interest thereon, which theretofore had become
payable with respect to shares of Webster Common Stock represented by such
Certificate. No holder of an unsurrendered Certificate shall be entitled, until
the surrender of such Certificate, to vote the shares of Webster Common Stock
into which his MECH Common Stock shall have been converted.
(c) If any certificate representing shares of Webster Common Stock is
to be issued in a name other than that in which the Certificate surrendered in
exchange therefor is registered, it shall be a condition of the issuance thereof
that the Certificate so surrendered shall be properly endorsed (or accompanied
by an appropriate instrument of transfer) and otherwise in proper form for
transfer, and that the person requesting such exchange shall pay to the Exchange
Agent in advance any transfer or other taxes required by reason of the issuance
of a certificate representing shares of Webster Common Stock in any name other
than that of the registered
5
<PAGE>
holder of the Certificate surrendered, or shall establish to the satisfaction of
the Exchange Agent that such tax has been paid or is not payable.
(d) As of the close of business on the day immediately prior to the
Effective Time, there shall be no transfers on the stock transfer books of MECH
of the shares of MECH Common Stock which were issued and outstanding immediately
prior to the Effective Time. If, after the Effective Time, Certificates
representing such shares are presented for transfer to the Exchange Agent, they
shall be canceled and exchanged for certificates representing shares of Webster
Common Stock as provided in this Article II.
(e) Any portion of the Exchange Fund that remains unclaimed by the
shareholders of MECH for six months after the Effective Time may be returned to
Webster. After such funds have been returned to Webster, any shareholders of
MECH who have not theretofore complied with this Article II shall thereafter
look only to Webster for payment of their shares of Webster Common Stock, cash
in lieu of fractional shares and unpaid dividends and distributions on Webster
Common Stock deliverable in respect of each share of MECH Common Stock such
shareholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon. Notwithstanding the foregoing, none of Webster,
MECH, the Exchange Agent or any other person shall be liable to any former
holder of shares of MECH Common Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
(f) In the event any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Webster,
the posting by such person of a bond in such amount as Webster may reasonably
direct as indemnity against any claim that may be made against it with respect
to such Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the shares of Webster Common Stock and cash in
lieu of fractional shares deliverable in respect thereof pursuant to this
Agreement.
2.3 Disclosure Schedule.
Prior to the execution and delivery hereof, MECH has delivered to Webster a
schedule (the "MECH Disclosure Schedule"), and Webster has delivered to MECH a
schedule (the "Webster Disclosure Schedule"), in each case setting forth, among
other things, items the disclosure of which is necessary or appropriate either
in response to an express disclosure requirement contained in a provision hereof
or as an exception to one or more of such party's representations or warranties
contained in Articles III or IV, as applicable, or to one or more of its
covenants contained in Article V; provided, however, that the mere inclusion of
-------- -------
an item in a Disclosure Schedule as an exception to a representation or warranty
shall not be deemed an admission by a party that such item represents a material
exception or fact, event or circumstance or that such item has had or would have
a Material Adverse Effect (as defined in Section 9.13) with respect to such
party.
2.4 Standards.
No representation or warranty of MECH contained in Article III or of
Webster contained in Article IV shall be deemed untrue or incorrect for any
purpose under this Agreement, and no party hereto shall be deemed to have
breached a representation or warranty for any purpose under this Agreement, as a
consequence of the existence or absence of any fact, circumstance or event
unless such fact, circumstance or event, individually or when taken together
with all other facts, circumstances or events inconsistent with any
representations or warranties contained in Article III, in the case of MECH, or
Article IV, in the case of Webster, has had or would be reasonably certain to
have a Material Adverse Effect with respect to MECH or Webster, respectively.
6
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF MECH
MECH hereby makes the following representations and warranties to Webster
as set forth in this Article III, each of which is being relied upon by Webster
as a material inducement to enter into and perform this Agreement. All of the
disclosure schedules of MECH referenced below and thereby required of MECH
pursuant to this Agreement, which disclosure schedules shall be cross-referenced
to the specific sections and subsections of this Agreement and delivered
herewith, are referred to herein as the "MECH Disclosure Schedule."
3.1 Corporate Organization.
(a) MECH is a corporation duly organized, validly existing and in
good standing under the laws of the State of Connecticut. MECH has the corporate
power and authority to own or lease all of its properties and assets and to
carry on its business as it is now being conducted, and is duly licensed or
qualified to do business in each jurisdiction in which the nature of its
business conducted by it or the character or location of any properties or
assets owned or leased by it makes such licensing or qualification necessary.
MECH is duly registered as a bank holding company with the Board of Governors of
the Federal Reserve System ("FRB") under the Banking Holding Company Act of
1956, as amended ("BHCA"). The Certificate of Incorporation and Bylaws of MECH,
copies of which are included in Section 3.1(a) of the MECH Disclosure Schedule,
are true, correct and complete copies of such documents as in effect as of the
date of this Agreement.
(b) MS Bank is a Connecticut-chartered savings bank duly organized
and validly existing and in good standing under the laws of the state of
Connecticut. The deposit accounts of MS Bank are insured by the Federal Deposit
Insurance Corporation (the "FDIC") through the Bank Insurance Fund (the "BIF")
to the fullest extent permitted by law, and all premiums and assessments
required in connection therewith have been paid by MS Bank. MS Bank, Mechanics
Investment Services, Inc. ("MIS") and Mechanics Mortgage Company ("MMC") are the
only Subsidiaries of MECH that qualify as a "Significant Subsidiary" as such
term is defined in Regulation S-X promulgated by the Securities and Exchange
Commission (the "SEC"). MS Bank has the corporate power and authority to own or
lease all of its properties and assets and to carry on its business as it is now
being conducted and is duly licensed or qualified to do business in each
jurisdiction in which the nature of its business conducted by it or the
character or the location of any properties or assets owned or leased by it
makes such licensing or qualification necessary. The Certificate of
Incorporation and Bylaws of each of MS Bank, MIS and MMC, copies of which have
previously been delivered to Webster, are true, correct and complete copies of
such documents as in effect as of the date of this Agreement.
3.2 Capitalization.
(a) The authorized capital stock of MECH consists of 15,000,000
shares of MECH Common Stock and 1,000,000 shares of serial preferred stock, par
value $.01 per share (the "MECH Preferred Stock"). As of the date hereof, there
are (x) 4,995,731 shares of MECH Common Stock issued and outstanding and 251,500
shares of MECH Common Stock are held in MECH's treasury, (y) 460,702 shares of
MECH Common Stock reserved for issuance upon exercise of outstanding stock
options under the MECH Stock Plans and (z) 994,150 shares of MECH Common Stock
reserved for issuance upon exercise of the option to be issued to Webster
pursuant to the Option Agreement. As of the date hereof, no shares of MECH
Preferred Stock are outstanding. All of the issued and outstanding shares of
MECH Common Stock have been duly authorized and validly issued and are fully
paid, nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. Except for the Option Agreement and
outstanding options under the MECH Stock Plans, MECH does not have and is not
bound by any outstanding subscriptions, options, warrants, calls, commitments or
agreements of any
7
<PAGE>
character calling for the purchase or issuance of any shares of MECH Common
Stock or MECH Preferred Stock or any other equity security of MECH or any
securities representing the right to purchase or otherwise receive any shares of
MECH Common Stock or any other equity security of MECH. The names of the
optionees, the date of each option to purchase MECH Common Stock granted, the
number of shares subject to each such option, the expiration date of each such
option, and the price at which each such option may be exercised under the MECH
Stock Plans are set forth in Section 3.2(a) of the MECH Disclosure Schedule.
Except as set forth at Section 3.2(a) of the MECH Disclosure Schedule, since
December 31, 1998 MECH has not issued any shares of its capital stock or any
securities convertible into or exercisable for any shares of its capital stock,
other than pursuant to the exercise of director or employee stock options
granted under the MECH Stock Plans.
(b) Section 3.2(b) of the MECH Disclosure Schedule sets forth a true,
correct and complete list of all direct or indirect Subsidiaries of MECH as of
the date of this Agreement. Except as set forth at Section 3.2(b) of the MECH
Disclosure Schedule, MECH owns, directly or indirectly, all of the issued and
outstanding shares of capital stock of each of its Subsidiaries, free and clear
of all liens, charges, encumbrances and security interests whatsoever, and all
of such shares are duly authorized and validly issued and are fully paid,
nonassessable and free of preemptive rights, with no personal liability
attaching to the ownership thereof. No MECH Subsidiary has or is bound by any
outstanding subscriptions, options, warrants, calls, commitments or agreements
of any character calling for the purchase or issuance of any shares of capital
stock or any other equity security of such Subsidiary or any securities
representing the right to purchase or otherwise receive any shares of capital
stock or any other equity security of such Subsidiary.
3.3 Authority; No Violation.
(a) MECH has full corporate power and authority to execute and
deliver this Agreement and the Option Agreement and to consummate the
transactions contemplated hereby and thereby. The execution and delivery of this
Agreement and the Option Agreement and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by the Board
of Directors of MECH The Board of Directors of MECH has directed that this
Agreement and the transactions contemplated hereby be submitted to MECH's
shareholders for approval at a meeting of such shareholders and, except for the
adoption of this Agreement by the requisite vote of MECH's shareholders, no
other corporate proceedings on the part of MECH (except for matters related to
setting the date, time, place and record date for the meeting) are necessary to
approve this Agreement or the Option Agreement or to consummate the transactions
contemplated hereby or thereby. This Agreement has been, and the Option
Agreement will be, duly and validly executed and delivered by MECH and (assuming
due authorization, execution and delivery by Webster of this Agreement and by
Webster of the Option Agreement) will constitute valid and binding obligations
of MECH, enforceable against MECH in accordance with their terms, except as
enforcement may be limited by general principles of equity whether applied in a
court of law or a court of equity and by bankruptcy, insolvency and similar laws
affecting creditors' rights and remedies generally.
(b) MS Bank has full corporate power and authority to execute and
deliver the Bank Merger Agreement and to consummate the transactions
contemplated thereby. The execution and delivery of the Bank Merger Agreement
and the consummation of the transactions contemplated thereby have been duly and
validly approved by the Board of Directors of MS Bank and by MECH as the sole
shareholder of MS Bank. No other corporate proceedings on the part of MS Bank
will be necessary to consummate the transactions contemplated thereby. The Bank
Merger Agreement, upon execution and delivery by MS Bank, will be duly and
validly executed and delivered by MS Bank and will (assuming due authorization,
execution and delivery by Webster Bank) constitute a valid and binding
obligation of MS Bank, enforceable against MS Bank in accordance with its terms,
except as enforcement may be limited by general principles of
8
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equity whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
(c) Neither the execution and delivery of this Agreement and the
Option Agreement by MECH or the Bank Merger Agreement by MS Bank, nor the
consummation by MECH or MS Bank, as the case may be, of the transactions
contemplated hereby or thereby, nor compliance by MECH or MS Bank with any of
the terms or provisions hereof or thereof, will (i) violate any provision of the
Certificate of Incorporation or Bylaws of MECH or the Certificate of
Incorporation or Bylaws of MS Bank, or (ii) assuming that the consents and
approvals referred to in Section 3.4 hereof are duly obtained, (x) violate any
Laws (as defined in Section 9.13) applicable to MECH or MS Bank, or any of their
respective properties or assets, or (y) violate, conflict with, result in a
breach of any provision of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of MECH or MS Bank
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease, agreement or other instrument or
obligation to which MECH or MS Bank is a party, or by which they or any of their
respective properties or assets may be bound or affected.
3.4 Consents and Approvals.
(a) Except for (i) the filing of applications and notices, as
applicable, as to the Merger with the FRB under the BHCA and with the Office of
Thrift Supervision ("OTS") under the Home Owners' Loan Act of 1933 ("HOLA") and
the Bank Merger Act, as to the Bank Merger with the OTS, (ii) the filing of
applications and notices with the Banking Commissioner of the State of
Connecticut (the "Connecticut Commissioner"), as well as any other applications
and notices to state officials related to the Merger and the Bank Merger (the
"State Banking Approvals"), (iii) the filing with the Connecticut Commissioner
of an acquisition statement pursuant to Section 36a-184 of the Banking Law of
the State of Connecticut prior to the acquisition of more than 10% of MECH
Common Stock pursuant to the Option Agreement, if not exempt, (iv) the filing of
any required applications or notices with the FDIC and OTS as to any subsidiary
activities of MS Bank which becomes a service corporation or operating
subsidiary of Webster Bank and approval of such applications and notices, (v)
the filing with the SEC of a registration statement on Form S-4 to register the
shares of Webster Common Stock to be issued in connection with the Merger
(including the shares of Webster Common Stock that may be issued upon the
exercise of the options referred to in Section 1.5 hereof), which will include
the proxy statement/prospectus to be used in soliciting the approval of MECH's
shareholders at a meeting to be held in connection with this Agreement and the
transactions contemplated hereby (the "Proxy Statement/Prospectus"), (vi) the
filing of the Certificate of Merger with the Secretary of State of Connecticut
pursuant to the Connecticut Corporation Law; (vii) the filing of the Certificate
of Merger with the Secretary of State of Delaware pursuant to the DGCL, (viii)
the filing of the Bank Merger Agreement with the OTS and the Secretary of State
of Connecticut, (ix) such filings and approval as may be required to be made or
obtained under the securities or "Blue Sky" laws of various states or with
Nasdaq (or such other exchange as may be applicable), (x) the filing of the
required application and notices to National Association of Securities Dealers,
Inc. ("NASD") regarding the change of control of MIS and (x) such filings,
authorizations or approvals as may be set forth in Section 3.4(a) of the MECH
Disclosure Schedule, no consents or approvals of or filings or registrations
with any court, administrative agency or commission or other governmental
authority or instrumentality (each a "Governmental Entity"), or with any third
party are necessary in connection with (1) the execution and delivery by MECH of
this Agreement and the Option Agreement, (2) the consummation by MECH of the
Merger and the other transactions contemplated hereby, (3) the execution and
delivery by MS Bank of the Bank Merger Agreement, (4) the consummation by MECH
of the Option Agreement; and (5) the consummation by MS Bank of the Bank Merger
and the transactions contemplated thereby, except, in each case, for such
consents, approvals or filings,
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the failure of which to obtain will not have a material adverse effect on the
ability of Webster to consummate the transactions contemplated hereby.
(b) MECH hereby represents to Webster that it has no knowledge of any
reason why approval or effectiveness of any of the applications, notices or
filings referred to in Section 3.4(a) cannot be obtained or granted on a timely
basis.
3.5 Loan Portfolio; Reports.
(a) Except as set forth at Section 3.5 of the MECH Disclosure
Schedule, as of December 31, 1998 and thereafter through and including the date
of this Agreement, MECH, MS Bank nor any of their Subsidiaries is a party to any
written or oral loan agreement, note or borrowing arrangement (including,
without limitation, leases, credit enhancements, commitments, guarantees and
interest-bearing assets) (collectively, "Loans"), with any director, officer or
five percent or greater shareholder of MECH or MS Bank, or any Affiliated Person
(as defined in Section 9.13) of the foregoing.
(b) MECH, MS Bank and each of their Subsidiaries have timely filed
all reports, registrations and statements, together with any amendments required
to be made with respect thereto, that they were required to file with (i) the
FRB, (ii) the FDIC, (iii) the Connecticut Commissioner and any other state
banking commissions or any other state regulatory authority (each a "State
Regulator"), (iv) the SEC and (v) any other self-regulatory organization
("SRO"). Except for normal examinations conducted by a regulatory agency in the
regular course of the business of MECH and any Subsidiary, no Governmental
Entity is conducting, or has conducted at any time subsequent to December 31,
1997, any proceeding or investigation into the business or operations of MECH or
any Subsidiary.
3.6 Financial Statements; Exchange Act Filings; Books and Records.
MECH has previously delivered to Webster true, correct and complete copies
of the consolidated statements of position of MECH and its Subsidiaries as of
December 31 for the fiscal years 1996, 1997 and 1998 and the related
consolidated statements of earnings, shareholders' equity and cash flows for the
fiscal years 1996, 1997 and 1998, inclusive, as reported in MECH's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998 filed with the SEC
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
each case accompanied by the audit report of MECH's independent public
accountants, and the interim financial statements of MECH as of and for the nine
months ended September 30, 1999, as included in the quarterly report on Form 10-
Q for the period ended September 30, 1999 as filed with the SEC. The financial
statements referred to in this Section 3.6 (including the related notes, where
applicable) fairly present, and the financial statements referred to in Section
6.8 hereof will fairly present (subject, in the case of the unaudited
statements, to recurring audit adjustments normal in nature and amount), the
results of the consolidated operations and consolidated financial condition of
MECH and its Subsidiaries for the respective fiscal periods or as of the
respective dates therein set forth; each of such statements (including the
related notes, where applicable) comply, and the financial statements referred
to in Section 6.8 hereof will comply, with applicable accounting requirements
and with the published rules and regulations of the SEC with respect thereto and
each of such statements (including the related notes, where applicable) has
been, and the financial statements referred to in Section 6.8 hereof will be
prepared in accordance with generally accepted accounting principles
consistently applied during the periods involved ("GAAP"), except in each case
as indicated in such statements or in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q. MECH's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 and all reports filed under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act since January 1, 1998
comply in all material respects with the appropriate requirements for such
reports under the Exchange Act, and MECH has previously delivered or made
available to Webster true, correct and complete copies of such
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reports. The books and records of MECH and each of its Subsidiaries have been,
and are being, maintained in all material respects in accordance with GAAP and
any other applicable legal and accounting requirements.
3.7 Broker's Fees.
Neither MECH, MS Bank, any of their Subsidiaries nor any of their
respective officers or directors has employed any broker or finder or incurred
any liability for any broker's fees, commissions or finder's fees in connection
with any of the transactions contemplated by this Agreement, the Bank Merger
Agreement or the Option Agreement, except that MECH has engaged, and will pay a
financial advisor's fee to Keefe, Bruyette & Woods, Inc.. ("KBW") in accordance
with the terms of a letter agreement between KBW and MECH, dated July 6, 1999 a
true, complete and correct copy of which is attached at Section 3.7 of the MECH
Disclosure Schedule. Such fee to KBW is the only fee, commission or other
expense to be incurred by or on behalf of MECH, MS Bank or any Subsidiary with
respect to any financial advisor, broker or finder in connection with the Merger
and the transactions contemplated thereby.
3.8 Absence of Certain Changes or Events.
(a) Except as set forth at Section 3.8(a) of the MECH Disclosure
Schedule, or as disclosed in MECH's Annual Report on Form 10-K for the fiscal
year ended December 31, 1998, since December 31, 1998 (i) neither MECH nor any
Subsidiary has incurred any material liability, except as contemplated by the
Agreement or in the ordinary course of their business consistent with their past
practices, and (ii) no event has occurred which has had, or is likely to have,
individually or in the aggregate, a Material Adverse Effect (as defined in
Section 9.13) on MECH.
(b) Since December 31, 1998 MECH and each of its Subsidiaries have
carried on their respective businesses in the ordinary and usual course
consistent with their past practices.
3.9 Legal Proceedings.
(a) Except as set forth at Section 3.9(a) of the MECH Disclosure
Schedule, neither MECH, MS Bank nor any of their Subsidiaries is a party to any,
and there are no pending or to the knowledge of MECH, threatened, legal,
administrative, arbitration or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against MECH, MS Bank or
any Subsidiary in which, to the knowledge of MECH or any Subsidiary, there is a
reasonable probability of any material recovery against or other material effect
upon MECH or any Subsidiary or which challenge the validity or propriety of the
transactions contemplated by this Agreement, the Bank Merger Agreement or the
Option Agreement and as to which there is a reasonable probability of success.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction imposed upon MECH, MS Bank or any of their Subsidiaries, or the
assets of MECH, MS Bank or any of their Subsidiaries.
3.10 Taxes and Tax Returns.
(a) Each of MECH, MS Bank and their Subsidiaries have duly filed all
Tax Returns, as hereinafter defined, required to be filed by it on or prior to
the date hereof (all such returns being accurate and complete in all material
respects) and has duly paid or made provision (or will make provision) on the
financial statements referred to in Sections 3.6 and 6.8 hereof in accordance
with GAAP for the payment of all material Taxes, as hereinafter
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defined, which have been incurred or are due or claimed to be due from it by
Taxing Authorities, as hereinafter defined, on or prior to the date hereof other
than Taxes (a) which (x) are not yet delinquent or (y) are being contested in
good faith and set forth in Section 3.10(a) of the MECH Disclosure Schedule and
(b) which have not been finally determined. All liability with respect to the
Tax Returns of MECH and any Subsidiary has been satisfied for all years to and
including 1998. The Internal Revenue Service ("IRS") has not notified MECH of,
or otherwise asserted, that there are any material deficiencies with respect to
the federal income Tax Returns of MECH subsequent to 1993. There are no material
disputes pending, or claims asserted for, Taxes or assessments upon MECH or any
Subsidiary, nor has MECH or any Subsidiary been requested to give any currently
effective waivers extending the statutory period of limitation applicable to any
federal or state income Tax Return for any period. In addition, Tax Returns
which are accurate and complete in all material respects have been filed by MECH
and each Subsidiary for all periods for which returns were due with respect to
income tax withholding, Social Security and unemployment taxes and the amounts
shown on such Tax Returns to be due and payable have been paid in full or
adequate provision therefor in accordance with GAAP has been (or will be)
included by MECH in the financial statements referred to in Sections 3.6 and 6.8
hereto. All MECH Tax Returns have been examined by the relevant Taxing
Authorities, or closed without audit by applicable statutes of limitations, and
all deficiencies proposed as a result of such examinations have been paid or
settled, for all periods before and including the taxable year ended 1993.
Neither MECH nor any Subsidiary has consented to any waiver or extension of any
statute of limitations with respect to any Tax. Neither MECH nor any Subsidiary
has made an election under Section 341(f) of the IRC. MECH has provided or made
available to Webster complete and correct copies of its and its Subsidiaries'
Tax Returns and all material correspondence and documents, if any, relating
directly or indirectly to taxes for each taxable year or other relevant period
as to which the applicable statute of limitations has not run on the date
hereof. For this purpose, "correspondence and documents" include, without
limitation, amended Tax Returns, claims for refunds, notices from Taxing
Authorities of proposed changes or adjustments to Taxes or Tax Returns, consents
to assessment or collection of Taxes, acceptances of proposed adjustments,
closing agreements, rulings and determination letters and requests therefor, and
all other written communications to or from Taxing Authorities relating to any
material Tax liability of MECH or MS Bank. MECH will not be a "foreign person"
as that term is used in (S) 1.1445-2 of the Treasury Regulations promulgated
under the IRC. MS Bank is not a "United States real property holding
corporation" within the meaning of (S) 897 of the IRC and was not a "United
States real property holding corporation" on any "determination date" (as
defined in (S) 1.897-2(c) of such Regulations) that occurred during any relevant
period.
(b) For purposes of this Agreement:
"Tax" means any tax (including any income tax, capital gains tax,
value-added tax, sales tax, property tax, gift tax, or estate tax), levy,
assessment, tariff, duty (including any customs duty), deficiency, or other fee,
and any related charge or amount (including any fine, penalty, interest, or
addition to tax), imposed, assessed, or collected by or under the authority of
any Taxing Authority or payable pursuant to any tax-sharing agreement or any
other contract relating to the sharing or payment of any such tax, levy,
assessment, tariff, duty, deficiency, or fee.
"Tax Return" means any return (including any information return),
report, statement, schedule, notice, form, or other document or information
filed with or submitted to, or required to be filed with or submitted to, any
Taxing Authority in connection with the determination, assessment, collection,
or payment of any Tax or in connection with the administration, implementation,
or enforcement of or compliance with any law, regulation or other legal
requirement relating to any Tax.
"Taxing Authority" means any:
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(i) nation, state, county, city, town, village, district, or
other jurisdiction of any nature;
(ii) federal, state, local, municipal, foreign, or other
government;
(iii) governmental or quasi-governmental authority of any nature
(including any governmental agency, branch, department, official, or entity and
any court or other tribunal);
(iv) multi-national organization or body; or
(v) body exercising, or entitled to exercise, any
administrative, executive, judicial, legislative, police, regulatory, or taxing
authority or power of any nature.
3.11 Employee Plans.
(a) Section 3.11(a) of the MECH Disclosure Schedule sets forth a true
and complete list of each employee benefit plan (within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), arrangement or agreement that is maintained or contributed to as of
the date of this Agreement, or that has within the last six years been
maintained or contributed to, by MECH or any Subsidiary or any other entity
which together with MECH would be deemed a "single employer" within the meaning
of Section 4001 of ERISA or Code Sections 414(b), (c) or (m) or under which MECH
or any Subsidiary has any liability (collectively, the "Plans").
(b) MECH has heretofore delivered or made available to Webster true,
correct and complete copies of each of the Plans and all related documents,
including but not limited to (i) the actuarial report for such Plan (if
applicable) for each of the last five years, (ii) the most recent determination
letter from the IRS (if applicable) for such Plan, (iii) the current summary
plan description and any summaries of material modification, (iv) all annual
reports (Form 5500 series) for each Plan filed for the preceding five plan
years, (v) all agreements with fiduciaries and service providers relating to the
Plan, and (vi) all substantive correspondence relating to any such Plan
addressed to or received from the Internal Revenue Service, the Department of
Labor, the Pension Benefit Guaranty Corporation or any other governmental
agency.
(c) Except as set forth at Section 3.11 (c) of the MECH Disclosure
Schedule, (i) each of the Plans has been operated and administered in all
material respects in compliance with applicable Laws, including but not limited
to ERISA and the Code, (ii) each of the Plans intended to be "qualified" within
the meaning of Section 401(a) of the Code is so qualified, (iii) no such Plan is
subject to Title IV of ERISA, (iv) no Plan provides benefits, including, without
limitation, death or medical benefits (whether or not insured), with respect to
current or former employees of MECH or any Subsidiary beyond their retirement or
other termination of service, other than (w) coverage mandated by applicable
Law, (x) benefits under a Plan that is a "qualified plan," for purposes of
Section 401(a) of the Code, (y) deferred compensation benefits under a Plan that
are accrued as liabilities on the books of MECH or any Subsidiary, or (z)
benefits the full cost of which is borne by the current or former employee (or
his beneficiary), (v) no liability under Title IV of ERISA has been incurred by
MECH or any Subsidiary that has not been satisfied in full, and no condition
exists that presents a material risk of MECH or any Subsidiary incurring a
material liability thereunder, (vi) no Plan is a "multiemployer pension plan,"
as such term is defined in Section 3(37) of ERISA, (vii) all contributions or
other amounts payable by MECH or any Subsidiary as of the Effective Time with
respect to each Plan and all other liabilities of each such entity with respect
to each Plan, in respect of current or prior plan years have been paid or
accrued in accordance with generally accepted accounting practices and Section
412 of the Code, (viii) neither MECH nor any Subsidiary has engaged in a
transaction in connection with which MECH or any Subsidiary could be subject to
either a civil penalty assessed pursuant to Section
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409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975 or 4976 of the
Code, (ix) to the knowledge of MECH, there are no pending, threatened or
anticipated claims (other than routine claims for benefits) by, on behalf of or
against any of the Plans or any trusts related thereto, and (x) all Plans could
be terminated as of the Effective Time without any liability materially in
excess of the amounts accrued with respect to such Plans on the financial
statements referenced in Section 3.2 hereof and, for the purposes of Section
7.2(a) hereof, on the financial statements referred to in Section 6.8 hereof,
(xi) no Plan, program, agreement or other arrangement, either individually or
collectively, provides for any payment by MECH or any Subsidiary that would not
be deductible under Code Sections 162(a)(1), 162(m) or 404 or that would
constitute a "parachute payment" within the meaning of Code Section 280G, (xii)
no Plan is subject to the minimum funding requirements of Section 302 of ERISA
or Section 412 of the Code.
3.12 Certain Contracts.
(a) Except as set forth at Section 3.12 of the MECH Disclosure
Schedule, neither MECH nor any Subsidiary is a party to or bound by any
contract, arrangement or commitment (i) with respect to the employment of any
directors, officers, employees or consultants, (ii) which, upon the consummation
of the transactions contemplated by this Agreement or the Bank Merger Agreement,
will (either alone or upon the occurrence of any additional acts or events)
result in any payment (whether of severance pay or otherwise) becoming due from
Webster, MECH, MS Bank, Webster Bank or any of their respective Subsidiaries to
any director, officer or employee of MECH or any Subsidiary, (iii) which
materially restricts the conduct of any line of business by MECH or any
Subsidiary, (iv) with or to a labor union or guild (including any collective
bargaining agreement) or (v) any of the benefits of which will be increased, or
the vesting of the benefits of which will be accelerated by the occurrence of
any of the transactions contemplated by this Agreement or the Bank Merger
Agreement, or the value of any of the benefits of which will be calculated on
the basis of any of the transactions contemplated by this Agreement or the Bank
Merger Agreement (including as to this clause (v), any stock option plan, stock
appreciation rights plan, restricted stock plan or stock purchase plan). Except
as set forth at Section 3.12 of the MECH Disclosure Schedule, there are no
employment, consulting and deferred compensation agreements to which MECH or any
of its Subsidiaries is a party. Section 3.12 of the MECH Disclosure Schedule
sets forth a list of all material contracts (as defined in Item 601(b)(10) of
Regulation S-K) of MECH and each of its Subsidiaries. Each contract,
arrangement or commitment of the type described in this Section 3.12(a), whether
or not set forth in Section 3.12 of the MECH Disclosure Schedule, is referred to
herein as a "MECH Contract," and neither MECH nor any Subsidiary has received
notice of, any violation of any MECH Contract by MECH.
(b) (i) Each MECH Contract is valid and binding and in full force
and effect, (ii) MECH and its Subsidiaries has in all material respects
performed all obligations required to be performed by it to date under each MECH
Contract, and (iii) no event or condition exists which constitutes or, after
notice or lapse of time or both, would constitute, a material default on the
part of MECH or any Subsidiary under any such MECH Contract.
3.13 Agreements with Governmental Agencies.
Neither of MECH nor any Subsidiary is subject to any cease-and-desist or
other order issued by, or is a party to any written agreement, consent agreement
or memorandum of understanding with, or has adopted any board resolutions at the
request of (each, whether or not set forth on Section 3.13 of the MECH
Disclosure Schedule, a "Regulatory Agreement"), any Governmental Entity that
restricts the conduct of its business or that in any manner relates to its
capital adequacy, its credit policies, its management or its business, nor has
MECH or any Subsidiary been advised by any Governmental Entity that it is
considering issuing or requesting any Regulatory Agreement.
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3.14 State Takeover Laws; Certificate of Incorporation.
The Board of Directors of MECH has approved the offer of Webster to enter
into this Agreement, the Bank Merger Agreement and the Option Agreement, and has
approved MECH entering into this Agreement, the Bank Merger Agreement and the
Option Agreement, and the transactions contemplated thereby, such that under
applicable law and MECH's Certificate of Incorporation the only vote of MECH
shareholders necessary to consummate the transactions contemplated hereby
(including the Bank Merger and issuance under the Option Agreement) is the
approval of a majority of all votes entitled to be cast by the holders of the
outstanding shares of MECH Common Stock.
3.15 Environmental Matters.
(a) Each of MECH and each of its Subsidiaries is in compliance in all
respects with all applicable federal and state laws and regulations relating to
pollution or protection of the environment (including without limitation, laws
and regulations relating to emissions, discharges, releases and threatened
releases of Hazardous Material (as hereinafter defined), or otherwise relating
to the manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials, except for such matters as would
not individually or in the aggregate, be reasonably expected to have a Material
Adverse Effect on MECH or any of its Subsidiaries or materially impair their
ability to consummate the transactions contemplated by this Agreement.
(b) There is no suit, claim, action, proceeding, investigation or
notice pending, or to the knowledge of MECH or any of its Subsidiaries,
threatened, in which MECH or any of its Subsidiaries has been or, with respect
to threatened suits, claims, actions, proceedings, investigations or notices, is
threatened to be, named as a defendant or, to the knowledge of MECH or any of
its Subsidiaries, threatened with respect to past or present actions or events
that could form the basis of any such suit, claim, action, proceeding,
investigation or notice (x) for alleged noncompliance (including by any
predecessor), with any environmental law, rule or regulation or (y) relating to
any release or threatened release into the environment of any Hazardous
Material, whether or not occurring at or on a site owned, leased or operated by
MECH or any Subsidiary, except for such matters as would not individually or in
the aggregate, be reasonably expected to have a Material Adverse Effect on MECH
or any Subsidiary or materially impair their ability to consummate the
transactions contemplated by this Agreement;
(c) To the knowledge of MECH or any Subsidiary, during the period of
MECH's or any Subsidiary's ownership or operation of any of its properties,
there has not been any release of Hazardous Material in, on, under or affecting
any such property.
(d) To the knowledge of MECH and any of its Subsidiaries, neither
MECH nor any of its Subsidiaries has made or participated in any loan to any
person who is subject to any suit, claim, action, proceeding, investigation or
notice, pending or threatened, with respect to (i) any alleged noncompliance as
to any property securing such loan with any environmental law, rule or
regulation, or (ii) the release or the threatened release into the environment
of any Hazardous Material at a site owned, leased or operated by such person on
any property securing such loan.
(e) For purposes of this Section 3.15, the term "Hazardous Material"
means any hazardous waste, petroleum product, polychlorinated biphenyl,
chemical, pollutant, contaminant, pesticide, radioactive substance, or other
toxic material, or other material or substance (in each such case, other than
small quantities of such substances in retail containers) regulated under any
applicable environmental or public health statute, law, ordinance, rule or
regulation.
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(f) Except as set forth at Section 3.15 of the MECH Disclosure
Schedule, no real property owned or leased by MECH or any of its Subsidiaries as
other real estate owned ("OREO") or otherwise, or owned or controlled by MECH or
any Subsidiary as a trustee or fiduciary meets the statutory criteria of an
"Establishment" as that term is defined pursuant to Section 22a-134(3) of the
General Statutes of Connecticut.
3.16 Reserves for Losses.
All reserves or other allowances for possible losses reflected in MECH's
most recent financial statements referred to in Section 3.6 complied with all
Laws and are adequate under GAAP. Neither of MECH or MS Bank has been notified
by the FRB, the FDIC, the Connecticut Commissioner or MECH's independent
auditor, in writing or otherwise, that such reserves are inadequate or that the
practices and policies of MECH or MS Bank in establishing such reserves and in
accounting for delinquent and classified assets generally fail to comply with
applicable accounting or regulatory requirements, or that the FRB, the FDIC, the
Connecticut Commissioner or MECH's independent auditor believes such reserves to
be inadequate or inconsistent with the historical loss experience of MECH or MS
Bank. MECH has previously furnished Webster with a complete list of all
extensions of credit and OREO that have been classified by any bank or trust
examiner (regulatory or internal) as other loans specially mentioned, special
mention, substandard, doubtful, loss, classified or criticized, credit risk
assets, concerned loans or words of similar import. MECH agrees to update such
list no less frequently than monthly after the date of this Agreement until the
earlier of the Closing Date or the date that this Agreement is terminated in
accordance with Section 8.1. All OREO held by MECH or MS Bank is being carried
net of reserves at the lower of cost or net realizable value.
3.17 Properties and Assets.
Section 3.17 of the MECH Disclosure Schedule lists as of the date of this
Agreement (i) all real property owned by MECH and any Subsidiary; (ii) each real
property lease, sublease or installment purchase arrangement to which MECH or
any Subsidiary is a party; (iii) a description of each contract for the
purchase, sale, or development of real estate to which MECH or any Subsidiary is
a party; and (iv) all items of MECH's or any Subsidiary's tangible personal
property and equipment with a book value of $50,000 or more or having any annual
lease payment of $25,000 or more. Except for (a) items reflected in MECH's
consolidated financial statements as of December 31, 1998 referred to in Section
3.6 hereof, (b) exceptions to title that do not interfere materially with MECH's
or any Subsidiary's use and enjoyment of owned or leased real property (other
than OREO), (c) liens for current real estate taxes not yet delinquent, or being
contested in good faith, properly reserved against (and reflected on the
financial statements referred to in Section 3.6 above), (d) properties and
assets sold or transferred in the ordinary course of business consistent with
past practices since December 31, 1998, and (e) items listed in Section 3.17 of
the MECH Disclosure Schedule, MECH and its Subsidiaries have good and, as to
owned real property, marketable and insurable, title to all their properties and
assets, free and clear of all liens, claims, charges and other encumbrances.
MECH and its Subsidiaries, as lessees, have the right under valid and subsisting
leases to occupy, use and possess all property leased by them, and neither MECH
nor any Subsidiary has experienced any material uninsured damage or destruction
with respect to such properties since December 31, 1998. All properties and
assets used by MECH and any of its Subsidiaries are in good operating condition
and repair suitable for the purposes for which they are currently utilized and
comply in all material respects with all Laws relating thereto now in effect or
scheduled to come into effect. MECH and its Subsidiaries enjoy peaceful and
undisturbed possession under all leases for the use of all property under which
they are the lessees, and all leases to which MECH or its Subsidiaries are a
party are valid and binding obligations in accordance with the terms thereof.
Neither MECH nor any Subsidiary is in default with respect to any such lease,
and there has occurred no default by MECH or any Subsidiary or event which with
the lapse of time or the giving of notice, or both, would constitute a material
default under any such lease. There are no Laws, conditions of record, or other
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impediments which interfere with the intended use by MECH or any Subsidiary of
any of the property owned, leased, or occupied by them.
3.18 Insurance.
Section 3.18 of the MECH Disclosure Schedule contains a true, correct and
complete list of all insurance policies and bonds maintained by MECH and its
Subsidiaries, including the name of the insurer, the policy number, the type of
policy and any applicable deductibles, and all such insurance policies and bonds
(or other insurance policies and bonds that have, from time to time, in respect
of the nature of the risks insured against and amount of coverage provided, been
substantially similar in kind and amount to that customarily carried by parties
similarly situated who own properties and engage in businesses substantially
similar to that of MECH and its Subsidiaries, as the case may be) are in full
force and effect and have been in full force and effect. As of the date hereof,
neither MECH nor any Subsidiary has received any notice of cancellation or
amendment of any such policy or bond or is in default under any such policy or
bond, no coverage thereunder is being disputed and all material claims
thereunder have been filed in a timely fashion. The existing insurance carried
by MECH and it Subsidiaries is and will continue to be, in respect of the nature
of the risks insured against and the amount of coverage provided, substantially
similar in kind and amount to that customarily carried by parties similarly
situated who own properties and engage in businesses substantially similar to
that of MECH and its Subsidiaries, as the case may be, and is sufficient for
compliance by MECH and its Subsidiaries with all requirements of Law and
agreements to which MECH or its Subsidiaries is subject or is party. True,
correct and complete copies of all such policies and bonds reflected at Section
3.18 of the MECH Disclosure Schedule, as in effect on the date hereof, have been
delivered to Webster.
3.19 Mechanics Investment Services, Inc.
MIS is a wholly owned subsidiary of MS Bank, and is a corporation duly
organized and validly existing under the laws of the State of Connecticut. MIS
has the full corporate power and authority to own and operate its properties and
assets, and to carry on its business as currently conducted and is duly licensed
or qualified to do business in each jurisdiction in which the nature of its
business conducted by it or the character or location of any properties or
assets owned or leased by it makes such licensing or qualification necessary.
MIS is a licensed broker/dealer with the NASD and in all states where the nature
of its operations requires it to be so licensed, and is registered with the SEC
as an investment advisor under the Investment Advisors Act of 1940, as amended.
MIS has complied in all material respects with all applicable federal, state,
local, self-regulatory and foreign laws, statutes, ordinances, rules and
regulations, and is not in violation in any material respect of, and has not
received any notices of violation with respect to, its respective certificate or
articles of incorporation or bylaws or other charter or organizational
documents, or any federal, state, local, self-regulatory or foreign statute,
law, ordinance, rule or regulation applicable to the conduct of its business or
the ownership or operation of its business.
3.20 Compliance with Applicable Laws.
Each of MECH, MS Bank and their Subsidiaries has complied with all laws
applicable to it or to the operation of its business. Neither MECH nor any
Subsidiary has received any notice of any material alleged or threatened claim,
violation, or liability under any such Laws that has not heretofore been cured
and for which there is no remaining liability.
3.21 Loans.
As of the date hereof:
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(a) All loans owned by MECH, MS Bank or MMC, or in which MECH, MS
Bank or MMC has an interest, comply with all Laws, including, but not limited
to, applicable usury statutes, underwriting and recordkeeping requirements and
the Truth in Lending Act, the Equal Credit Opportunity Act, and the Real Estate
Procedures Act, and other applicable consumer protection statutes and the
regulations thereunder.
(b) All loans owned by MECH, MS Bank or MMC , or in which MECH, MS
Bank or MMC has an interest, have been made or acquired in accordance with board
of director-approved loan policies and all of such loans are collectible, except
to the extent reserves have been made against such loans in MECH's consolidated
financial statements at September 30, 1999 referred to in Section 3.6 hereof.
Each of MECH, MS Bank and MMC holds mortgages contained in its loan portfolio
for its own benefit to the extent of its interest shown therein; such mortgages
evidence liens having the priority indicated by their terms, subject, as of the
date of recordation or filing of applicable security instruments, only to such
exceptions as are discussed in attorneys' opinions regarding title or in title
insurance policies in the mortgage files relating to the loans secured by real
property or are not material as to the collectability of such loans; and all
loans owned by MECH, MS Bank and MMC are with full recourse to the borrowers
(except as set forth at Section 3.21 of the MECH Disclosure Schedule), and each
of MECH, MS Bank and MMC has taken no action which would result in a waiver or
negation of any rights or remedies available against the borrower or guarantor,
if any, on any loan. All applicable remedies against all borrowers and
guarantors are enforceable except as may be limited by bankruptcy, insolvency,
moratorium or other similar laws affecting creditors' rights and except as may
be limited by the exercise of judicial discretion in applying principles of
equity. Except as set forth at Section 3.21 of the MECH Disclosure Schedule,
all loans purchased or originated by MECH, MS Bank or MMC and subsequently sold
by MECH, MS Bank or MMC have been sold without recourse to MECH, MS Bank or MMC
and without any liability under any yield maintenance or similar obligation.
True, correct and complete copies of loan delinquency reports as of each of
October 31 and November 30, 1999 prepared by MECH, MS Bank and MMC which reports
include all loans delinquent or otherwise in default, have been furnished to
Webster. True, correct and complete copies of the currently effective lending
policies and practices of MECH, MS Bank and MMC also have been furnished to
Webster.
(c) Except as set forth at Section 3.21(c) of the MECH Disclosure
Schedule each outstanding loan participation sold by MECH, MS Bank or MMC was
sold with the risk of non-payment of all or any portion of that underlying loan
to be shared by each participant (including MECH, MS Bank or MMC)
proportionately to the share of such loan represented by such participation
without any recourse of such other lender or participant to MECH, MS Bank or MMC
for payment or repurchase of the amount of such loan represented by the
participation or liability under any yield maintenance or similar obligation.
MECH, MS Bank and MMC have properly fulfilled in all material respects its
contractual responsibilities and duties in any loan in which it acts as the lead
lender or servicer and has complied in all material respects with its duties as
required under applicable regulatory requirements.
(d) MECH, MS Bank and MMC have properly perfected or caused to be
properly perfected all security interests, liens, or other interests in any
collateral securing any loans made by it.
(e) Section 3.21(e) of the MECH Disclosure Schedule sets forth a list
of all loans or other extensions of credit to all directors, officers and
employees, or any other person covered by Regulation O of the FRB.
3.22 Affiliates.
Each director, executive officer and other person who is an "affiliate"
(for purposes of Rule 145 under the Securities Act of 1933, as amended (the
"Securities Act"), and for purposes of
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qualifying the Merger for "pooling-of-interests" accounting treatment) of MECH
is listed at Section 3.22 of the MECH Disclosure Schedule, and each such person
has delivered to Webster, concurrently with the execution of this Agreement, a
stockholder agreement in the form of Exhibit D hereto (the "MECH Stockholder
Agreement"). The MECH Stockholder Agreement has been duly and validly executed
and delivered by each person that is a party thereto and, assuming due
authorization, execution and delivery by Webster, constitutes the valid and
binding obligation of such person, enforceable against such person in accordance
with their terms, except as enforcement may be limited by general principles of
equity whether applied in a court of law or a court of equity and by bankruptcy,
insolvency and similar laws affecting creditors' rights and remedies generally.
3.23 Ownership of Webster Common Stock.
Except as set forth at Section 3.23 of the MECH Disclosure Schedule,
neither MECH nor any of its directors, officers, 5% or greater shareholders or
affiliates (as used above in Section 3.22) (i) beneficially own, directly or
indirectly, or (ii) is a party to any agreement, arrangement or understanding
for the purpose of acquiring, holding, voting or disposing of, in each case, any
shares of outstanding capital stock of Webster (other than those agreements,
arrangements or understandings specifically contemplated hereby).
3.24 Year 2000 Compliance.
MECH, MS Bank and MIS have taken all reasonable steps necessary to address
the software, accounting and record keeping issues raised in order to be
substantially Year 2000 compliant on or before the end of 1999, and MECH does
not expect the future cost of addressing such issues to be material. None of
MECH, MS Bank or MIS has received a rating of less than satisfactory from any
bank regulatory agency with respect to Year 2000 compliance. MECH, MS Bank and
MIS are in compliance with all guidelines provided by the FDIC and the Federal
Financial Institution's Examination Council regarding Year 2000 issues, except
for such noncompliance as would not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect on MECH, MS Bank or MIS,
or materially impair their ability to consummate the transactions contemplated
by this Agreement.
3.25 Intellectual Property.
Neither MECH nor any Subsidiary has any material undisclosed liability with
respect to (i) patents, trademarks, trade names, service marks, copyrights and
any applications therefor, net lists, schematics, technology, know-how, trade
secrets, inventory, ideas, algorithms, processes, computer software programs and
applications (in both source code and object code form), and tangible or
intangible proprietary information or material that are used in the business of
MECH or any Subsidiary or (ii) licenses, sublicenses and other agreements as to
which MECH or any Subsidiary is a party and pursuant to which MECH or any
Subsidiary is authorized to use any third party patents, trademarks or
copyrights, including software which are incorporated in, or form a part of any
MECH or any Subsidiary product.
3.26 MECH Information.
The information relating to MECH and its Subsidiaries to be provided by
MECH to be contained in the Proxy Statement/Prospectus (defined below) and the
Registration Statement (defined below) will not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements therein, in light of the circumstances in which they are made, not
misleading. The Proxy Statement/Prospectus (except for the portions thereof
relating solely to Webster or any of its Subsidiaries, as to which MECH makes no
representation or warranty) will comply in all material respects with the
provisions of the Exchange Act and the rules and regulations thereunder.
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3.27 Fairness Opinion.
MECH has received an oral opinion from KBW to be confirmed in writing to
the effect that, in its opinion, the consideration to be paid by Webster to
stockholders of MECH pursuant to this Agreement is fair to such holders of MECH
Common Stock from a financial point of view ("Fairness Opinion") and KBW has
consented to the inclusion of the written Fairness Opinion in the Registration
Statement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF WEBSTER
Webster hereby makes the following representations and warranties to MECH
as set forth in this Article IV, each of which is being relied upon by MECH as a
material inducement to enter into and perform this Agreement.
4.1 Corporate Organization.
(a) Webster is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware. Webster has the
corporate power and authority to own or lease all of its properties and assets
and to carry on its business as it is now being conducted, and is duly licensed
or qualified to do business in each jurisdiction in which the nature of the
business conducted by it or the character or location of the properties or
assets owned or leased by it makes such licensing or qualification necessary.
Webster is duly registered as a savings and loan holding company with the OTS
under the HOLA. The Certificate of Incorporation and Bylaws of Webster, copies
of which have previously been made available to MECH, are true, correct and
complete copies of such documents as in effect as of the date of this Agreement.
(b) Webster Bank is a federal savings bank chartered by the OTS under
the laws of the United States with its main office in the State of Connecticut.
Webster Bank has the corporate power and authority to own or lease all of its
properties and assets and to carry on its business as it is now being conducted,
and is duly licensed or qualified to do business in each jurisdiction in which
the nature of the business conducted by it or the character or location of the
properties or assets owned or leased by it makes such licensing or qualification
necessary. The Charter and Bylaws of Webster Bank, copies of which have
previously been made available to MECH, are true, correct and complete copies of
such documents as in effect as of the date of this Agreement.
4.2 Capitalization.
(a) The authorized capital stock of Webster consists of 200 million
shares of Webster Common Stock, of which 37,944,859 shares were issued (net of
408,565 shares held in the treasury) at November 30, 1999 and 3,000,000 shares
of serial preferred stock, par value $.01 per share ("Webster Preferred Stock"),
14,000 of which are designated as Series C Preferred Stock, none of which were
outstanding at November 30, 1999. At such date, there were options outstanding
to purchase 2,222,909 shares of Webster Common Stock. All of the issued and
outstanding shares of Webster Common Stock have been duly authorized and validly
issued and are fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to the ownership thereof, and upon issuance in
accordance with the terms hereof, the Shares will be duly authorized and validly
issued, and fully paid, nonassessable and free of preemptive rights. As of the
date of this Agreement, except as set forth above, Webster does not have and is
not bound by any outstanding subscriptions, options, warrants, calls,
commitments or agreements of any character calling for the purchase or issuance
of any shares of Webster Common Stock or Webster Preferred Stock or any other
equity of Webster or any securities representing the right to
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purchase or otherwise receive any shares of Webster Common Stock or Webster
Preferred Stock, other than pursuant to the Webster Rights Agreement.
(b) All of the outstanding shares of Webster Bank Common Stock are
owned by Webster free and clear of all liens, charges, encumbrances and security
interests whatsoever, and all of such shares are duly authorized and validly
issued and fully paid, nonassessable and free of preemptive rights, with no
personal liability attaching to ownership thereof.
4.3 Authority; No Violation.
(a) Webster has full corporate power and corporate authority to
execute and deliver this Agreement and the Option Agreement and to consummate
the transactions contemplated hereby and thereby. The execution and delivery of
this Agreement and the Option Agreement and the consummation of the transactions
contemplated hereby and thereby have been duly and validly approved by the Board
of Directors of Webster. No other corporate proceedings on the part of Webster
are necessary to approve this Agreement or the Option Agreement or to consummate
the transactions contemplated hereby or thereby. This Agreement has been, and
the Option Agreement will be, duly and validly executed and delivered by Webster
and (assuming due authorization, execution and delivery by MECH) will constitute
valid and binding obligations of Webster, enforceable against Webster in
accordance with their terms, except as enforcement may be limited by general
principles of equity whether applied in a court of law or a court of equity and
by bankruptcy, insolvency and similar law affecting creditors' rights and
remedies generally.
(b) Webster Bank has full corporate power and corporate authority to
execute and deliver the Bank Merger Agreement and to consummate the transactions
contemplated thereby. The execution and delivery of the Bank Merger Agreement
and the consummation of the transactions contemplated thereby have been duly and
validly approved by the Board of Directors of Webster Bank and by Webster as the
sole shareholder of Webster Bank. All corporate proceedings on the part of
Webster Bank necessary to consummate the transactions contemplated thereby will
have been taken prior to the Effective Time. The Bank Merger Agreement, upon
execution and delivery by Webster Bank, will be duly and validly executed and
delivered by Webster Bank and (assuming due authorization, execution and
delivery by MS Bank) will constitute a valid and binding obligation of Webster
Bank, enforceable against Webster Bank in accordance with its terms, except as
enforcement may be limited by general principles of equity whether applied in a
court of law or a court of equity and by bankruptcy, insolvency and similar laws
affecting creditors' rights and remedies generally.
(c) Neither the execution and delivery of this Agreement or the
Option Agreement by Webster or the Bank Merger Agreement by Webster Bank, nor
the consummation by Webster or Webster Bank, as the case may be, of the
transactions contemplated hereby or thereby, nor compliance by Webster or
Webster Bank with any of the terms or provisions hereof or thereof, will (i)
violate any provision of the Certificate of Incorporation or Bylaws of Webster
or the Charter or Bylaws of Webster Bank, as the case may be, or (ii) assuming
that the consents and approvals referred to in Section 4.4(a) hereof are duly
obtained, (x) violate any Laws applicable to Webster, Webster Bank or any of
their respective properties or assets, or (y) violate, conflict with, result in
a breach of any provision of or the loss of any benefit under, constitute a
default (or an event which, with notice or lapse of time, or both, would
constitute a default) under, result in the termination of or a right of
termination or cancellation under, accelerate the performance required by, or
result in the creation of any lien, pledge, security interest, charge or other
encumbrance upon any of the respective properties or assets of Webster or
Webster Bank under any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, deed of trust, license, lease, agreement or other
instrument or obligation to which Webster or Webster Bank is a party, or by
which they or any of their respective properties or assets may be bound or
affected, except in the case of clause (ii) for such matters as would not,
individually or in the
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aggregate, be reasonably expected to have a Material Adverse Effect on Webster
or Webster Bank or materially impair their ability to consummate the
transactions contemplated by the Agreement.
4.4 Regulatory Approvals.
(a) Except for (i) the filing of applications and notices, as
applicable, as to the Merger and the Bank Merger with the FRB and the OTS and
approval of such applications and notices, (ii) the filing of any required
applications or notices with the FDIC and the OTS as to any subsidiary
activities of MS Bank which becomes a service corporation or operating
subsidiary of Webster Bank and approval of such applications and notices, (iii)
the State Banking Approvals, (iv) the filing with the Connecticut Commissioner
of an acquisition statement pursuant to Section 36a-184 of the Connecticut
Banking Law prior to the acquisition of more than 10% of the MECH Common Stock
pursuant to the Option Agreement, if not exempt, (v) the filing with the SEC of
a registration statement on Form S-4 to register the shares of Webster Common
Stock to be issued in connection with the Merger (including the shares of
Webster Common Stock that may be issued upon the exercise of the options
referred to in Section 1.5 hereof), which will include the Proxy
Statement/Prospectus, (vi) the filing of the Certificate of Merger with the
Secretary of State of Connecticut pursuant to the Connecticut Corporation Law,
(vii) the filing of the Certificate of Merger with the Secretary of State of
Delaware pursuant to the DGCL, (viii) the filing of the Bank Merger Agreement
with the OTS and the Secretary of State of Connecticut, and (ix) the filings of
the required applications and notices to the NASD, Inc. regarding the change of
control of MIS, (x) such filings and approvals as are required to be made or
obtained under the securities or "Blue Sky" laws of various states or with
Nasdaq (or such other exchange as may be applicable) in connection with the
issuance of the shares of Webster Common Stock pursuant to this Agreement, or
(xi) any necessary filing, authorization, approvals or consents of third
parties, no consents or approvals of or filings or registrations with any
Governmental Entity or with any third party are necessary in connection with (1)
the execution and delivery by Webster of this Agreement and the Option
Agreement, (2) the consummation by Webster of the Merger and the other
transactions contemplated hereby, (3) the execution and delivery by Webster Bank
of the Bank Merger Agreement, and (4) the consummation by Webster Bank of the
transactions contemplated by the Bank Merger Agreement except for such consents,
approvals or filings the failure of which to obtain will not have a material
adverse effect on the ability of MECH to consummate the transactions
contemplated thereby.
(b) Webster hereby represents to MECH that it has no knowledge of any
reason why approval or effectiveness of any of the applications, notices or
filings referred to in Section 4.4(a) cannot be obtained or granted on a timely
basis.
4.5 Financial Statements; Exchange Act Filings; Books and Records.
Webster has previously delivered to MECH true, correct and complete copies
of the consolidated balance sheets of Webster and its Subsidiaries as of
December 31 for the fiscal years 1997 and 1998 and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
fiscal years 1996 through 1998, inclusive, as reported in Webster's Annual
Report on Form 10-K for the fiscal year ended December 31, 1998 filed with the
SEC under the Exchange Act, in each case accompanied by the audit report of KPMG
LLP, independent public accountants with respect to Webster, and the interim
financial statements of Webster as of and for the three months ended September
30, 1998 and 1999, as included in Webster's quarterly report on Form 10-Q for
the period ended September 30, 1999, as filed with the SEC. The financial
statements referred to in this Section 4.5 (including the related notes, where
applicable) fairly present, and the financial statements referred to in Section
6.8 hereof will fairly present (subject, in the case of the unaudited
statements, to recurring audit adjustments normal in nature and amount), the
results of the consolidated operations and consolidated financial condition of
Webster and its Subsidiaries for the respective fiscal periods or as of the
respective dates therein set forth; each of such statements (including the
related notes, where
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applicable) comply, and the financial statements referred to in Section 6.8
hereof will comply, in all material respects, with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto; and each of such statements (including the related notes, where
applicable) has been, and the financial statements referred to in Section 6.8
hereof will be, prepared in accordance with GAAP consistently applied during the
periods involved, except as indicated in the notes thereto or, in the case of
unaudited statements, as permitted by Form 10-Q. Webster's Annual Report on Form
10-K for the fiscal year ended December 31, 1998 and all subsequently filed
reports under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act comply in
all material respects with the appropriate requirements for such reports under
the Exchange Act, and Webster has previously delivered or made available to MECH
true, correct and complete copies of such reports. The books and records of
Webster and Webster Bank have been, and are being, maintained in all material
respects in accordance with GAAP and any other applicable legal and accounting
requirements and reflect only actual transactions.
4.6 Agreements with Governmental Agencies.
Neither Webster nor any of its affiliates is subject to any cease-and-
desist or other order issued by, or is a party to any written agreement, consent
agreement or memorandum of understanding with, or has adopted any board
resolutions at the request of any Governmental Entity that restricts the conduct
of its business or that in any manner relates to its capital adequacy, its
credit policies, its management or its business, nor has Webster, nor Webster
Bank been advised by any Governmental Entity that it is considering issuing or
requesting any Regulatory Agreement.
4.7 Legal Proceedings.
(a) Neither Webster nor any of its Subsidiaries is a party to any, and
there are no pending or, to Webster's knowledge, threatened, legal,
administrative, arbitration or other proceedings, claims, actions or
governmental or regulatory investigations of any nature against Webster or any
of its Subsidiaries in which, to Webster's knowledge, there is a reasonable
probability of any material recovery against or other material effect upon
Webster or any of its Subsidiaries or which challenge the validity or propriety
of the transactions contemplated by this Agreement, the Bank Merger Agreement or
the Option Agreement as to which there is a reasonable probability of success.
(b) There is no injunction, order, judgment, decree, or regulatory
restriction imposed upon Webster, any of its Subsidiaries or the assets of
Webster or any of its Subsidiaries.
4.8 Webster Information.
The information relating to Webster and its Subsidiaries to be provided by
Webster to be contained in the Proxy Statement/Prospectus and the Registration
Statement will not contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading. The Proxy
Statement/Prospectus (except for the portions thereof relating solely to MECH or
any Subsidiary of MECH, as to which Webster makes no representation or warranty)
will comply in all material respects with the provisions of the Securities Act,
Exchange Act and the rules and regulations thereunder.
4.9 Absence of Certain Changes or Events.
(a) Except as disclosed in Webster's Annual Report on Form 10-K for
the fiscal year ended December 31, 1998 and all reports subsequently filed by
Webster under Sections 13(a), 13(e), 14 or 15(d) of the Exchange Act, true,
correct and complete copies of which have
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previously been delivered or made available to MECH, since December 31, 1998, no
event has occurred which has had, individually or in the aggregate, a Material
Adverse Effect on Webster.
(b) Since December 31, 1998, Webster and its Subsidiaries have
carried on their respective businesses in the ordinary and usual course
consistent with their past practices.
4.10 Compliance with Applicable Laws.
Webster and each Webster Subsidiary has complied in all material respects
with all Laws applicable to it or to the operation of its business. Neither
Webster nor any Webster Subsidiary has received any notice of any alleged or
threatened claim, violation of or liability or potential responsibility under
any such Laws that has not heretofore been cured and for which there is no
remaining liability.
4.11 Tax and Accounting Treatment of Merger.
As of the date of this Agreement, Webster is not aware of any fact or state
of affairs that could cause the Merger not to be treated as a "reorganization"
under Section 368(a) of the Code or to qualify for "pooling-of-interests"
accounting treatment.
4.12 Year 2000.
None of Webster or any Webster Subsidiary has received, or reasonably
expects to receive, a "Year 2000 Deficiency Notification Letter." Webster has
made available to MECH a complete and accurate copy of Webster's plan, including
an estimate of the anticipated associated costs, for addressing Year 2000
Issues. Between the date of this Agreement and the Effective Time, Webster
shall use reasonably best efforts to implement such plan. Webster and its
Subsidiaries have complied in all material respects with the "Interagency
Guidelines Establishing Year 2000 Standards for Safety and Soundness" issued
pursuant to section 39 of the Federal Deposit Insurance Act and effective
October 15, 1998.
ARTICLE V
COVENANTS RELATING TO CONDUCT OF BUSINESS
5.1 Covenants of MECH
During the period from the date of this Agreement and continuing until the
Effective Time, except as expressly contemplated or permitted by this
Agreement, the Bank Merger Agreement or the Option Agreement or with the prior
written consent of Webster, MECH and MS Bank shall carry on their respective
businesses in the ordinary course consistent with past practices and consistent
with prudent banking practices. MECH will use its reasonable efforts to (x)
preserve its business organization and that of its Subsidiary intact, (y) keep
available to itself and Webster the present services of the employees of MECH
and its Subsidiary and (z) preserve for itself and Webster the goodwill of the
customers of MECH and its Subsidiary and others with whom business relationships
exist. Without limiting the generality of the foregoing, and except as set
forth in the MECH Disclosure Schedule or as otherwise contemplated by this
Agreement or consented to by Webster in writing, MECH shall not, and shall not
permit its Subsidiary to:
(a) declare or pay any dividends on, or make other distributions in
respect of, any of its capital stock (except for the payment of regular
quarterly cash dividends by MECH not to exceed $.20 per share on the MECH Common
Stock with declaration, record and payment dates corresponding to the quarterly
dividends paid by MECH during its fiscal year ended December 31, 1998 and except
that its Subsidiary may declare and pay dividends and distributions to MECH);
provided, however, that under no circumstances shall MECH declare, set
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aside or pay any dividends if it would result in the holders of MECH Common
Stock receiving more than four cash dividend payments in fiscal 1999 and 2000,
when considered with anticipated Webster dividends based on past practice, nor
shall MECH be prohibited from declaring, setting aside or paying dividends
consistent herewith if the Closing Date is such that holders of MECH Common
Stock would receive fewer than four cash dividends in fiscal 1999 and 2000, when
considered with anticipated Webster dividends based on past practice it being
understood that the parties hereto intend for MECH to pay its regular quarterly
cash dividends to shareholders as to any completed fiscal quarter prior to the
Effective Time; and provided that MECH is permitted to increase its regular
quarterly cash dividend proportionate to any increase by Webster in its regular
quarterly cash dividend payment;
(b) (i) split, combine or reclassify any shares of its capital stock
or issue, authorize or propose the issuance of any other securities in respect
of, in lieu of or in substitution for shares of its capital stock except upon
the exercise or fulfillment of rights or options issued or existing pursuant to
the MECH Stock Plans in accordance with their present terms, all to the extent
outstanding and in existence on the date of this Agreement, and except pursuant
to the Option Agreement, or (ii) repurchase, redeem or otherwise acquire (except
for the acquisition of Trust Account Shares and DPC Shares, as such terms are
defined in Section 1.4(c) hereof), any shares of the capital stock of MECH or
its Subsidiary, or any securities convertible into or exercisable for any shares
of the capital stock of MECH or its Subsidiary;
(c) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock or any securities
convertible into or exercisable for, or any rights, warrants or options to
acquire, any such shares, or enter into any agreement with respect to any of the
foregoing, other than (i) the issuance of MECH Common Stock pursuant to stock
options or similar rights to acquire MECH Common Stock granted pursuant to the
MECH Stock Plans and outstanding prior to the date of this Agreement, in each
case in accordance with their present terms and (ii) pursuant to the Option
Agreement;
(d) amend its Certificate of Incorporation, Bylaws or other similar
governing documents;
(e) authorize or permit any of its officers, directors, employees or
agents to, directly or indirectly, (i) solicit, initiate or encourage any
inquiries relating to, or the making of any proposal from, (ii) engage in
substantive discussions or negotiations with or (iii) provide any information
to, any person, entity or group (other than Webster) concerning any Acquisition
Transaction (as defined below). Notwithstanding the foregoing, MECH may provide
information in connection with a possible Acquisition Transaction if the Board
of Directors of MECH, following receipt of advice of counsel, determined that
not to provide such information or participate in such negotiations and
discussions could cause the members of such Board to breach their fiduciary
duties under applicable laws. MECH shall promptly communicate to Webster the
material terms of any proposal, whether written or oral, which it may receive in
respect of any such Acquisition Transaction and whether it is providing
information in connection with, or which may lead to, an Acquisition Transaction
with a third party. MECH will promptly cease and cause to be terminated any
existing activities, discussions or negotiations previously conducted with any
parties other than Webster with respect to any of the foregoing. As used in
this Agreement, Acquisition Transaction shall mean any offer, proposal or
expression of interest relating to (I) any tender or exchange offer, (II)
merger, consolidation or other business combination involving MECH or any
Subsidiary, or (III) the acquisition in any manner of a substantial equity
interest in, or a substantial portion of the assets and/or liabilities, out of
the ordinary course of business, of, MECH or MS Bank other than the transactions
contemplated or permitted by this Agreement, the Bank Merger Agreement and the
Option Agreement;
(f) make capital expenditures aggregating in excess of $100,000;
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(g) enter into any new line of business;
(h) acquire or agree to acquire, by merging or consolidating with, or
by purchasing an equity interest in or the assets of, or by any other manner,
any business or any corporation, partnership, association or other business
organization or division thereof or otherwise acquire any assets, other than in
connection with foreclosures, settlements in lieu of foreclosure or troubled
loan or debt restructurings, or in the ordinary course of business consistent
with prudent banking practices;
(i) take any action that is intended or may reasonably be expected to
result in any of its representations and warranties set forth in this Agreement
being or becoming untrue or in any of the conditions to the Merger set forth in
Article VII not being satisfied, or in a violation of any provision of this
Agreement, the Bank Merger Agreement or the Option Agreement, except, in every
case, as may be required by applicable law;
(j) change its methods of accounting in effect at December 31, 1998
except as required by changes in GAAP or regulatory accounting principles as
concurred to by Webster's independent auditors;
(k) (i) except as required by applicable law or Section 5.5 of this
Agreement or to maintain qualification pursuant to the Code, adopt, amend, renew
or terminate any Plan or any other agreement, arrangement, plan or policy
between MECH or its Subsidiaries and one or more of its current or former
directors, officers, employees or independent contractors; (ii) other than merit
or promotional increases (x) in the ordinary course of business consistent with
past practices, (y) not to exceed 4% of base pay for individuals who are senior
vice presidents or higher and (z) not to exceed 4% of the aggregate MECH payroll
as of the date hereof, increase in any manner the compensation of any employee
or director or pay any benefit not required by any plan or agreement as in
effect as of the date hereof (including, without limitation, the granting of
stock options, stock appreciation rights, restricted stock, restricted stock
units or performance units or shares), (iii) enter into, modify or renew any
contract, agreement, commitment or arrangement providing for the payment to any
director, officer or employee of compensation or benefits, (iv) hire any new
employee at an annual compensation in excess of $35,000, (vi) pay expenses of
any employees or directors for attending conventions or similar meetings which
conventions or meetings are held after the date hereof, (vi) promote to a rank
of vice president or more senior any employee, or (vii) pay any retention
payments to any employees except for retention payments bonuses totaling in the
aggregate no more than $150,000; or (viii) make any nondeductible contribution
to any Plan. Bonus, commission and other incentive payments may continue to be
made in the ordinary course in accordance with past practices to the extent such
payments do not jeopardize the pooling-of-interest accounting treatment for the
Merger;
(l) incur any indebtedness for borrowed money, assume, guarantee,
endorse or otherwise as an accommodation become responsible for the obligations
of any other individual, corporation or other entity, except for Federal Home
Loan Bank borrowings in the ordinary course consistent with past practices or to
provide for cash needed which results from a Year 2000 extraordinary event;
(m) sell, purchase, enter into a lease, relocate, open or close any
banking or other office, or file an application pertaining to such action with
any Governmental Entity;
(n) make any equity investment or commitment to make such an
investment in real estate or in any real estate development project, other than
in connection with foreclosure, settlements in lieu of foreclosure, or troubled
loan or debt restructuring, in the ordinary course of business consistent with
past banking practices;
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(o) make any new loans to, modify the terms of any existing loan to,
or engage in any other transactions (other than routine banking transactions)
with, any Affiliated Person of MECH or its Subsidiary;
(p) make any investment, or incur deposit liabilities, other than in
the ordinary course of business consistent with past practices, including
deposit pricing, and which would not change the risk profile of MS Bank based on
its existing deposit and lending policies or make any equity investments;
(q) purchase any loans, except in the ordinary course in accordance
with past practices, or sell, purchase or lease any real property, except for
the sale of real estate that is the subject of a casualty loss or condemnation
or the sale of OREO on a basis consistent with past practices;
(r) originate (i) any loans except in accordance with existing
lending policies of MS Bank, (ii) residential non-conforming mortgage loans in
excess of $400,000, (iii) unsecured consumer loans in excess of $25,000, (iv)
commercial business loans in excess of $1,000,000 as to any loan or $1,500,000
in the aggregate as to related loans, or loans to related persons, (v)
commercial real estate first mortgage loans in excess of $1,000,000 as to any
loan or $1,500,000 in the aggregate as to related loans, or loans to related
persons, or (vi) land acquisition loans to borrowers who intend to construct a
residence on such land in excess of the lesser of 75% of the appraised value of
such land or $100,000, except in each case for loans for which written
applications have been received by MS Bank as of the date hereof, as set forth
at Section 5.1 of the MECH Disclosure Schedule;
(s) make any investments in any equity or derivative securities, or
any debt securities issued or guaranteed by any municipality or otherwise exempt
to any extent from federal, state or local taxation, or engage in any forward
commitment, futures transaction, financial options transaction, hedging or
arbitrage transaction or covered asset trading activities or make any
investments in any investment security with a maturity of greater than one year;
(t) sell or purchase any mortgage loan servicing rights; or
(u) agree or commit to do any of the actions set forth in (a) - (t)
above.
The consent of Webster to any action by MECH or its Subsidiary that is not
permitted by any of the preceding paragraphs shall be evidenced by a writing
signed by the Chairman or any Executive Vice President of Webster.
5.2 Covenants of Webster.
During the period from the date of this Agreement and continuing until the
Effective Time, except as expressly contemplated or permitted by this Agreement
or with MECH's prior written consent, Webster shall not, and shall not permit
Webster Bank to:
(a) take any action that will result in any of Webster's
representations and warranties set forth in this Agreement being or becoming
untrue or any of the conditions to the Merger set forth in Article VII not being
satisfied or in violation of any provision of this Agreement, except, in every
case, as may be required by applicable Law; or
(b) take any other action that would materially adversely affect or
materially delay the ability of Webster to obtain the Requisite Regulatory
Approvals or otherwise materially adversely affect Webster's and Webster Bank's
ability to consummate the transactions contemplated by this Agreement.
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5.3 Merger Covenants.
Notwithstanding that MECH believes that it has established all reserves and
taken all provisions for possible loan losses required by GAAP and applicable
laws, rules and regulations, MECH recognizes that Webster may have adopted
different loan, accrual and reserve policies (including loan classifications and
levels of reserves for possible loan losses). In that regard, and in general,
from and after the date of this Agreement to the Effective Time, MECH and
Webster shall consult and cooperate with each other in order to formulate the
plan of integration for the Merger, including, among other things, with respect
to conforming, based upon such consultation, MECH's loan, accrual and reserve
policies to those policies of Webster to the extent appropriate and consistent
with the fiduciary duties of MECH's Board of Directors.
5.4 Compliance with Antitrust Laws.
Each of Webster and MECH shall use commercially reasonable efforts to
resolve objections, if any, which may be asserted with respect to the Merger
under antitrust laws. In the event a suit is threatened or instituted
challenging the Merger as violative of antitrust laws, each of Webster and MECH
shall use commercially reasonable best efforts to avoid the filing of, or resist
or resolve such suit. Webster and MECH shall use commercially reasonable
efforts to take such action as may be required: (a) by the OTS, the Connecticut
Commissioner, and the Antitrust Division of the Department of Justice or the
Federal Trade Commission in order to resolve such objections as any of them may
have to the Merger under antitrust laws, or (b) by any federal or state court of
the United States, in any suit brought by a private party or Governmental Entity
challenging the Merger as violative of antitrust laws, in order to avoid the
entry of, or to effect the dissolution of, any injunction, temporary restraining
order, or other order which has the effect of preventing the consummation of the
Merger. Commercially reasonable efforts shall not include, among other things
and only to the extent Webster so desires, the willingness of Webster to accept
an order agreeing to the divestiture, or the holding separate, of any assets of
Webster or MECH.
5.5 Qualified Plans.
MECH and its Subsidiary may terminate any of their respective plans that
are intended to be "qualified" under Code section 401 to the extent that such
termination would not jeopardize the pooling-of-interest accounting treatment in
connection with the Merger or the "qualified" status of the applicable plan. If
any of the plans are not terminated, prorata proportional accruals may be made
to the account of each participant in such plan at the Effective Time, in
accordance with the provisions of the plan and in accordance with past practice
and in the same proportion as the percentage of a year that has passed as of the
Effective Time bears to the full year. For example, if the Effective Time is
July 1, 2000, 183 days will have passed, including the day of the Effective Time
as a day that has passed, representing 50% of the days in the year 2000.
Accordingly, an accrual of 50% of the aggregate annual accrual for the
applicable plan may be made at the Effective Time. Nevertheless, no such
accruals shall be made to the extent any such accrual jeopardizes the pooling-
of-interest accounting treatment of the Merger or the qualified status of the
applicable plan.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1 Regulatory Matters.
(a) Upon the execution and delivery of this Agreement and availability
of Webster financial statements in form required for use on Form S-4, Webster
and MECH (as to information to be included therein pertaining to MECH) shall
promptly cause to be prepared and
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filed with the SEC a registration statement of Webster on Form S-4, including
the Proxy Statement/Prospectus (the "Registration Statement") for the purpose of
registering the Webster Common Stock to be issued in the Merger, and for
soliciting the approval of this Agreement and the Merger by the shareholders of
MECH. Webster and MECH shall use their reasonable best efforts to have the
Registration Statement declared effective by the SEC as soon as possible after
the filing. The parties shall cooperate in responding to and considering any
questions or comments from the SEC staff regarding the information contained in
the Registration Statement. If at any time after the Registration Statement is
filed with the SEC, and prior to the Closing Date, any event relating to MECH is
discovered by MECH which should be set forth in an amendment of, or a supplement
to, the Registration Statement, including the Prospectus/Proxy Statement, MECH
shall promptly inform Webster, and shall furnish Webster with all necessary
information relating to such event whereupon Webster shall promptly cause an
appropriate amendment to the Registration Statement to be filed with the SEC.
Upon the effectiveness of such amendment, each of Webster and MECH (if prior to
the meeting of shareholders pursuant to Section 6.3 hereof) will take all
necessary action as promptly as practicable to permit an appropriate amendment
or supplement to be transmitted to its shareholders entitled to vote at such
meeting. If at any time after the Registration Statement is filed with the SEC,
and prior to the Closing Date, any event relating to Webster is discovered by
Webster which should be set forth in an amendment of, or a supplement to, the
Registration Statement, including the Prospectus/Proxy Statement, Webster shall
promptly inform MECH, and Webster shall promptly cause an appropriate amendment
to the Registration Statement to be filed with the SEC. Upon the effectiveness
of such amendment, each of Webster and MECH (if prior to the meeting of
shareholders pursuant to Section 6.3 hereof) will take all necessary action as
promptly as practicable to permit an appropriate amendment or supplement to be
transmitted to its shareholders entitled to vote at such meeting. Webster shall
also use reasonable efforts to obtain all necessary state securities law or
"Blue Sky" permits and approvals required to carry out the transactions
contemplated by this Agreement and the Bank Merger Agreement and MECH shall
furnish all information concerning MECH and the holders of MECH Common Stock as
may be reasonably requested in connection with any such action.
(b) The parties hereto shall cooperate with each other and use their
best efforts to promptly prepare and file all necessary documentation to effect
all applications, notices, petitions and filings, and to obtain as promptly as
practicable all permits, consents, approvals and authorizations of all third
parties and Governmental Entities which are necessary or advisable to consummate
the transactions contemplated by this Agreement (including without limitation
the Merger and the Bank Merger). MECH and Webster shall have the right to
review in advance, and to the extent practicable each will consult the other on,
in each case subject to applicable laws relating to the exchange of information,
all the information relating to MECH and MS Bank or Webster or Webster Bank, as
the case may be, which appears in any filing made with, or written materials
submitted to, any third party or any Governmental Entity in connection with the
transactions contemplated by this Agreement; provided, however, that nothing
contained herein shall be deemed to provide either party with a right to review
any information provided to any Governmental Entity on a confidential basis in
connection with the transactions contemplated hereby. In exercising the
foregoing right, each of the parties hereto shall act reasonably and as promptly
as practicable. The parties hereto agree that they will consult with each other
with respect to the obtaining of all permits, consents, approvals and
authorizations of all third parties and Governmental Entities necessary or
advisable to consummate the transactions contemplated by this Agreement and each
party will keep the other apprised of the status of matters relating to
contemplation of the transactions contemplated herein.
(c) MECH shall, upon request, furnish Webster with all information
concerning MECH, MS Bank and their directors, officers and shareholders and such
other matters as may be reasonably necessary or advisable in connection with the
Registration Statement or any other statement, filing, notice or application
made by or on behalf of Webster to
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any Governmental Entity in connection with the Merger, the Bank Merger or the
other transactions contemplated by this Agreement.
(d) Webster and MECH shall promptly advise each other upon receiving
any communication from any Governmental Entity whose consent or approval is
required for consummation of the transactions contemplated by this Agreement
which causes such party to believe that there is a reasonable likelihood that
any Requisite Regulatory Approval (defined in Section 7.1(c) hereof) will not be
obtained or that the receipt of any such approval will be materially delayed.
6.2 Access to Information.
(a) Upon reasonable notice and subject to applicable Laws relating to
the exchange of information, MECH shall accord to the officers, employees,
accountants, counsel and other representatives of Webster, access, during normal
business hours during the period prior to the Effective Time, to all its, and MS
Bank's properties, books, contracts, commitments and records and, during such
period, MECH shall make available to Webster (i) a copy of each report,
schedule, registration statement and other document filed or received by it
(including MS Bank) during such period pursuant to the requirements of federal
securities laws or federal or state banking laws and (ii) all other information
concerning its (including MS Bank) business, properties and personnel as Webster
may reasonably request. Webster shall receive notice of the meetings of the
MECH and MS Bank Board of Directors and any committees thereof, and of any
management committees (in all cases, at least as timely as MECH and MS Bank, as
the case may be, representatives to such meetings are required to be provided
notice). Up to two representatives of Webster shall be permitted to attend all
meetings of the Board of Directors (except for the portion of such meetings
which relate to the Merger or an Acquisition Transaction or such other matters
deemed confidential ("Confidential Matters") of MECH or MS Bank, as the case may
be) and one representative of Webster may attend such meetings of committees of
the Board of Directors and management of MECH and MS Bank which Webster desires.
Webster will hold all such information in confidence to the extent required by,
and in accordance with, the provisions of the confidentiality agreement which
Webster entered into with MECH dated November 5, 1999 (the "Confidentiality
Agreement").
(b) Upon reasonable notice and subject to applicable Laws relating to
the exchange of information, Webster shall afford to the officers, employees,
accountants, counsel and other representatives of MECH, access, during normal
business hours during the period prior to the Effective Time, to such
information regarding Webster as shall be reasonably necessary for MECH to
fulfill its obligations pursuant to this Agreement or which may be reasonably
necessary for MECH to confirm that the representations and warranties of Webster
contained herein are true and correct and that the covenants of Webster
contained herein have been performed in all material respects. MECH will hold
all such information in confidence to the extent required by, and in accordance
with, the provisions of the Confidentiality Agreement.
(c) No investigation by either of the parties or their respective
representatives shall affect the representations and warranties of the other set
forth herein.
(d) MECH shall provide Webster with true, correct and complete copies
of all financial and other information provided to directors of MECH and MS Bank
in connection with meetings of their Boards of Directors or committees thereof.
(e) MECH acknowledges that Webster is in or may be in the process of
acquiring other businesses, banks and financial institutions and that in
connection with such acquisitions, information concerning MECH may be required
to be included in the registration statements, if any, for the sale of
securities of Webster or in SEC reports in connection with such acquisitions.
MECH agrees to provide Webster with any information, certificates, documents or
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other materials about MECH as are reasonably necessary to be included in such
other SEC reports or registration statements, including registration statements
which may be filed by Webster prior to the Effective Time. MECH shall use its
reasonable best efforts to cause its attorneys and accountants to provide
Webster and any underwriters for Webster with any consents, comfort letters,
opinion letters, reports or information which are necessary to complete the
registration statements and applications for any such acquisition or issuance of
securities. Webster shall reimburse MECH for reasonable expenses thus incurred
by MECH should the transactions contemplated by this Agreement be terminated for
any reason.
6.3 Shareholder Meetings.
(a) MECH shall take all steps necessary to duly call, give notice of,
convene and hold a meeting of its shareholders within 40 days after the
Registration Statement becomes effective for the purpose of voting upon the
approval of this Agreement and the Merger (the "Meeting"). Management and the
Board of Directors of MECH shall recommend to MECH's shareholders approval of
this Agreement, including the Merger, and the transactions contemplated hereby,
together with any matters incident thereto, and shall oppose any third party
proposal or other action that is inconsistent with this Agreement or the
consummation of the transactions contemplated hereby, unless the Board of
Directors of MECH reasonably determines, based upon the written advice of MECH's
legal counsel, that such recommendation or opposition, as the case may be, would
constitute a breach of the exercise of its fiduciary duty. MECH and Webster
shall coordinate and cooperate with respect to the foregoing matters.
6.4 Legal Conditions to Merger.
Each of Webster and MECH shall use their reasonable best efforts (a) to
take, or cause to be taken, all actions necessary, proper or advisable to comply
promptly with all legal requirements which may be imposed on such party with
respect to the Merger and, subject to the conditions set forth in Article VII
hereof, to consummate the transactions contemplated by this Agreement and (b) to
obtain (and to cooperate with the other party to obtain) any consent,
authorization, order or approval of, or any exemption by, any Governmental
Entity and any other third party which is required to be obtained by MECH or
Webster in connection with the Merger and the other transactions contemplated by
this Agreement.
6.5 Stock Exchange Listing.
Webster shall cause the shares of Webster Common Stock to be issued in the
Merger and pursuant to options referred to herein to be approved for quotation
on the Nasdaq Stock Market National Market System (or such other exchange on
which the Webster Common Stock has become listed, or approved for listing) prior
to or at the Effective Time.
6.6 Employees.
(a) To the extent permissible under the applicable provisions of the
Code and ERISA, for purposes of crediting periods of service for eligibility to
participate and vesting under the 401(k) Plan maintained by Webster or Webster
Bank, as applicable and for purposes of eligibility to participate (but not for
purposes of benefit accrual) under the defined benefit pension plan maintained
by Webster or Webster Bank, as applicable, individuals who are employees of MECH
or MS Bank at the Effective Time will be credited with periods of service with
MECH or MS Bank before the Effective Time as if such service had been with
Webster or Webster Bank, as applicable; provided, however, that if, after the
Effective Time, Webster or Webster Bank continues in effect the money purchase
pension plan previously maintained by MECH or MS Bank, Webster and Webster Bank
shall not be required to cause employees who are covered by such money purchase
pension plan to accrue benefits under such defined benefit pension plan with
respect to any period for which Webster or Webster Bank makes contributions to
such
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money purchase pension plan, and nothing in this Section 6.6 shall be construed
to require any duplication of benefits. Similar service credit shall also be
given by Webster or Webster Bank in determining eligibility to participate in
vacation and welfare plans provided to such employees of MECH or MS Bank after
the Merger. Employees of MECH and MS Bank as of the Effective Time will be
immediately eligible to participate in the comprehensive health and welfare
plans maintained by Webster or Webster Bank on the same basis that they were
eligible to participate in the corresponding plans at MECH or MS Bank
immediately before the Effective Time and restrictions under such plans relating
to preexisting conditions will be waived for such employees and their covered
dependents.
(b) Following the Effective Time and until such time as Webster in its
reasonable discretion and in accordance with applicable law determines that the
employees of MECH as of the Effective Time (the "MECH Employees") shall
participate in the employee benefits plans and programs provided to similarly
situated employees of Webster Bank, the benefits to be provided to the MECH
Employees shall be the benefit plans and programs that were provided by MECH to
such employees immediately before the Effective Time.
(c) Following the Merger, Webster agrees that it shall honor the
existing written deferred compensation, employment, change of control and
severance contracts or plans with directors and employees of MECH and its
Subsidiaries that are specifically listed at Section 6.6 of the MECH Disclosure
Schedule; provided, however, that in making the foregoing agreement, except as
otherwise required by law, Webster will honor such contracts only to the extent
that none of such deferred compensation, employment, change of control and
severance contracts, nor any other Plan, program, agreement or other
arrangement, either individually or collectively, provides for any payment by
MECH or its Subsidiary that would not be deductible under Code Sections
162(a)(1), 162(m) or 404 or that would constitute a "parachute payment" within
the meaning of Code Section 280G that is not disclosed in response to Section
3.11 hereof. Webster will cause Webster Bank to offer employment, with
reasonably comparable positions and compensation, to all non-managerial branch
personnel of MS Bank. Webster will post at MS Bank job openings at Webster or
Webster Bank immediately following the execution of this Agreement and will
"lease" MECH and MS Bank employees where possible prior to the Effective Time.
Webster will cause Webster Bank to offer to employees of MECH and MS Bank who
are not retained after the Effective Time opportunities for employment with
Webster Bank as vacancies occur, subject to the employees' qualifications for
positions that may become available. Webster recognizes that MS Bank's senior
officers have valuable knowledge, experience and familiarity with MS Bank's
operations. In order to take advantage of such value, Webster will attempt, by
December 17, 1999, in good faith to enter into agreements (which may provide for
a period of noncompetition, consulting or employment following the Effective
Time, in Webster's sole discretion) with the eight senior officers of MECH who
currently have change of control agreements. Employees of MECH or MS Bank as of
the Effective Time who are not retained by Webster or Webster Bank for a period
of one year after the Effective Time, and who are not otherwise covered by
employment or change in control agreements, will be eligible to receive
severance benefits provided by MECH, MS Bank, Webster or Webster Bank before the
date hereof whichever provides greater benefits to the employee. A copy of the
MSB Severance Plan is attached hereto as Schedule 6.6(c).
6.7 Indemnification.
(a) In the event of any threatened or actual claim, action, suit,
proceeding or investigation, whether civil, criminal or administrative, in which
any person who is now, or has been at any time prior to the date of this
Agreement, or who becomes prior to the Effective Time, a director or officer or
employee of MECH (the "Indemnified Parties") is, or is threatened to be, made a
party based in whole or in part on, or arising in whole or in part out of, or
pertaining to (i) the fact that he is or was a director, officer or employee of
MECH or any of their respective predecessors or (ii) this Agreement or any of
the transactions contemplated hereby, whether in
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any case asserted or arising before or after the Effective Time, the parties
hereto agree to cooperate and defend against and respond thereto to the extent
permitted by applicable law and the Certificate of Incorporation and Bylaws of
MECH. It is understood and agreed that after the Effective Time, Webster shall
indemnify and hold harmless, as and to the fullest extent permitted by
applicable law and the Certificate of Incorporation and Bylaws of Webster as in
effect on the date hereof (subject to change as required by law), each such
Indemnified Party against any losses, claims, damages, liabilities, costs,
expenses (including reasonable attorney's fees and expenses in advance of the
final disposition of any claim, suit, proceeding or investigation to each
Indemnified Party to the fullest extent permitted by law upon receipt of any
undertaking required by applicable law), judgments, fines and amounts paid in
settlement ("Damages") in connection with any such threatened or actual claim,
action, suit, proceeding or investigation, and in the event of any such
threatened or actual claim, action, suit, proceeding or investigation (whether
asserted or arising before or after the Effective Time), the Indemnified Parties
may retain counsel reasonably satisfactory to Webster; provided, however, that
(1) Webster shall have the right to assume the defense thereof and upon such
assumption Webster shall not be liable to any Indemnified Party for any legal
expenses of other counsel or any other expenses subsequently incurred by any
Indemnified Party in connection with the defense thereof, except that if Webster
elects not to assume such defense or counsel for the Indemnified Parties
reasonably advises the Indemnified Parties that there are issues which raise
conflicts of interest between Webster and the Indemnified Parties, the
Indemnified Parties may retain counsel reasonably satisfactory to Webster, and
Webster shall pay the reasonable fees and expenses of such counsel for the
Indemnified Parties, (2) Webster shall be obligated pursuant to this paragraph
to pay for only one firm of counsel for each Indemnified Party, (3) Webster
shall not be liable for any settlement effected without its prior written
consent (which consent shall not be unreasonably withheld or delayed), and (4)
Webster shall not be obligated pursuant to this paragraph to the extent that a
final judgment determines that any Damages are as a result of the gross
negligence or willful misconduct or result from a decision made by the
Indemnified Party when the Indemnified Party had no good faith belief that he or
she was acting in the best interests of MECH. Webster shall have no obligation
to advance expenses incurred in connection with a threatened or pending action,
suit or preceding in advance of final disposition of such action, suit or
proceeding, unless (i) Webster would be permitted to advance such expenses
pursuant to the DGCL and Webster's Certificate of Incorporation or Bylaws, and
(ii) Webster receives an undertaking by the Indemnified Party to repay such
amount if it is determined that such party is not entitled to be indemnified by
Webster pursuant to the DGCL and Webster's Certificate of Incorporation or
Bylaws. Any Indemnified Party wishing to claim indemnification under this
Section 6.7, upon learning of any such claim, action, suit, proceeding or
investigation, shall notify Webster thereof; provided, however, that the failure
to so notify shall not affect the obligations of Webster under this Section 6.7
except to the extent such failure to notify materially prejudices Webster.
Webster's obligations under this Section 6.7 continue in full force and effect
for a period of six years from the Effective Time; provided, however, that all
rights to indemnification in respect of any claim asserted or made within such
period shall continue until the final disposition of such claim.
(b) Webster shall purchase for the benefit of the persons serving as
executive officers and directors of MECH immediately prior to the Effective
Time, directors' and officers' liability insurance coverage for three years
after the Effective Time, under either MECH's policy in existence on the date
hereof, or under a policy of similar coverage and amounts containing terms and
conditions which are generally not less advantageous than Webster's current
policy, and in either case, with respect to acts or omissions occurring prior to
the Effective Time which were committed by such executive officers and directors
in their capacity as such ("Tail Insurance"), provided, however, that Webster
shall not be required to expend more than 200% of the current amount expended by
MECH to maintain or procure insurance coverage pursuant hereto.
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6.8 Subsequent Interim and Annual Financial Statements.
As soon as reasonably available, but in no event more than 45 days after
the end of each fiscal quarter (other than the fourth fiscal quarter, as to
which the time period shall be 90 days), Webster will deliver to MECH and MECH
will deliver to Webster their respective Quarterly Reports on Form 10-Q and
Annual Reports on Form 10-K, as filed with the SEC under the Exchange Act. Each
party shall deliver to the other any Current Reports on Form 8-K promptly after
filing such reports with the SEC.
6.9 Additional Agreements.
In case at any time after the Effective Time any further action is
necessary or desirable to carry out the purposes of this Agreement, or to vest
the Surviving Corporation or the Surviving Bank with full title to all
properties, assets, rights, approvals, immunities and franchises of any of the
parties to the Merger, or the constituent banks to the Bank Merger, as the case
may be, the proper officers and directors of each party to this Agreement and
Webster's and MECH's Subsidiaries shall take all such necessary action as may be
reasonably requested by Webster.
6.10 Advice of Changes.
Webster and MECH shall promptly advise the other party of any change or
event that, individually or in the aggregate, has or would be reasonably likely
to have a Material Adverse Effect on it or to cause or constitute a material
breach of any of its representations, warranties or covenants contained herein.
From time to time prior to the Effective Time, each party will promptly
supplement or amend its disclosure schedule delivered in connection with the
execution of this Agreement to reflect any matter which, if existing, occurring
or known at the date of this Agreement, would have been required to be set forth
or described in such disclosure schedule or which is necessary to correct any
information in such disclosure schedule which has been rendered inaccurate
thereby. No supplement or amendment to such disclosure schedule shall have any
effect for the purpose of determining satisfaction of the conditions set forth
in Sections 7.2(a) or 7.3(a) hereof, as the case may be, or the compliance by
MECH with the covenants set forth in Section 5.1 hereof.
6.11 Current Information.
During the period from the date of this Agreement to the Effective Time,
MECH will cause one or more of its designated representatives to confer on a
regular and frequent basis (not less than monthly) with representatives of
Webster and to report the general status of the ongoing operations of MECH.
MECH will promptly notify Webster of any material change in the normal course of
business or in the operation of the properties of MECH and of any governmental
complaints, investigations or hearings (or communications indicating that the
same may be contemplated), or the institution or the threat of litigation
involving MECH, and will keep Webster fully informed of such events.
6.12 Execution and Authorization of Bank Merger Agreement.
Prior to the Effective Time, (a) Webster and MECH each shall execute and
deliver the Certificate of Merger substantially in the form at Exhibit C, and
(b) Webster and MECH each shall cause Webster Bank and MS Bank, respectively, to
execute and deliver the Bank Merger Agreement, in substantially the form at
Exhibit A.
6.13 Change in Structure.
Webster may elect to modify the structure of the transactions contemplated
by this Agreement as noted herein so long as (i) there are no material adverse
federal income tax
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consequences to the MECH shareholders as a result of such modification, (ii) the
consideration to be paid to the MECH shareholders under this Agreement is not
thereby changed or reduced in kind or amount, and (iii) such modification will
not be reasonably likely to delay materially or jeopardize receipt of any
required regulatory approvals. In the event that Webster elects to change the
structure of the Merger, the Bank Merger or any other transactions contemplated
hereby, the parties agree to modify this Agreement and the various exhibits
hereto, or enter into any other agreements, to reflect such revised structure.
In such event, Webster shall prepare appropriate amendments to this Agreement
and the exhibits hereto, or other documents, for execution by the parties
hereto. Webster and MECH agree to cooperate fully with each other to effect such
amendments or other documents.
6.14 Transaction Expenses of MECH.
(a) For planning purposes, MECH shall, within 15 days from the date
hereof, provide Webster with its estimated budget of transaction-related
expenses reasonably anticipated to be payable by MECH in connection with this
transaction, including the fees and expenses of counsel, accountants, investment
bankers and other professionals. MECH shall promptly notify Webster if or when
it determines that it will expect to exceed its budget.
(b) Promptly after the execution of this Agreement, MECH shall ask
all of its attorneys and other professionals to render current and correct
invoices for all unbilled time and disbursements. MECH shall accrue and/or pay
all of such amounts which are actually due and owing as soon as possible.
(c) MECH shall advise Webster monthly of all out-of-pocket expenses
which MECH has incurred in connection with this transaction.
(d) Webster, in reasonable consultation with MECH, shall make all
arrangements with respect to the printing and mailing of the Proxy
Statement/Prospectus. MECH shall, if Webster reasonably deems necessary, also
engage a proxy solicitation firm to assist in the solicitation of proxies for
the meeting. MECH agrees to cooperate as to such matters.
6.15 Further Actions of MECH.
Upon the written request of Webster, MECH shall, within 5 business days of
the date of such written request, demand payment of, or cause MS Bank to demand
payment of, any and all loans (to the extent identified by Webster) of MECH or
MS Bank, as the case may be, which loans are (or should have been) set forth at
Sections 3.5(a) or 3.21(e) of the MECH Disclosure Schedule, and which loans are
secured or collateralized in any way by MECH Common Stock.
6.16 Publication of Earnings
Webster shall use its best efforts to publish as promptly as reasonably
practicable, but in no event later than 45 days after the end of the first month
after the Effective Time in which there are at least 30 days of post-Merger
combined operations (which month may be the month in which the Effective Time
occurs), combined sales and net income figures as completed by and in accordance
with the terms of SEC Accounting Series Release No. 135.
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ARTICLE VII
CONDITIONS PRECEDENT
7.1 Conditions to Each Party's Obligation To Effect the Merger.
The respective obligation of each party to effect the Merger shall be
subject to the satisfaction at or prior to the Effective Time of the following
conditions:
(a) Shareholder Approvals.
(i) This Agreement, including the Certificate of Merger, and the
Merger shall have been approved and adopted by the affirmative vote of the
holders of at least majority of the outstanding shares of MECH Common Stock
entitled to vote thereon.
(b) Stock Exchange Listing.
The shares of Webster Common Stock which shall be issued in the Merger
(including the Webster Common Stock that may be issued upon exercise of the
options referred to in Section 1.5 hereof) upon consummation of the Merger shall
have been authorized for quotation on the Nasdaq Stock Market National Market
System (or such other exchange on which the Webster Common Stock may become
listed).
(c) Other Approvals.
All regulatory approvals from Governmental Entities required to
consummate the transactions contemplated hereby shall have been obtained and
shall remain in full force and effect and all statutory waiting periods in
respect thereof shall have expired (all such approvals and the expiration of all
such waiting periods being referred to herein as the "Requisite Regulatory
Approvals"). No Requisite Regulatory Approval shall contain a non-customary
condition that Webster reasonably determines to be burdensome or otherwise alter
the benefits for which it bargained in this Agreement.
(d) Registration Statement.
The Registration Statement shall have become effective under the
Securities Act, and no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been initiated or threatened by the SEC.
(e) No Injunctions or Restraints; Illegality.
No order, injunction or decree issued by any court or agency of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger or any of the other transactions (an "Injunction")
contemplated by this Agreement or the Certificate of Merger shall be in effect.
No statute, rule, regulation, order, injunction or decree shall have been
enacted, entered, promulgated or enforced by any Governmental Entity which
prohibits, restricts or makes illegal consummation of the Merger.
(f) Federal Tax Opinion.
Webster and MECH shall have received from Hogan & Hartson L.L.P.,
Webster's special counsel, an opinion in form and substance reasonably
satisfactory to Webster and MECH, substantially to the effect that on the basis
of facts, representations, and assumptions set forth in such opinion which are
consistent with the state of facts existing at the time of such opinion, the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code. In rendering such opinion,
such counsel may require and, to the
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extent such counsel deems necessary or appropriate, may rely upon
representations made in certificates of officers of MECH, Webster, their
respective affiliates and others. The parties hereby agree that this condition
shall not be subject to waiver following receipt of MECH shareholder approval of
this Agreement.
(g) Pooling of Interests.
Webster shall have received (i) advice of KPMG LLP, independent
accountants, within two weeks of the date hereof, to the effect that the Merger
will be accounted for as a pooling of interests, and (ii) as of the Effective
Time, a written opinion of each of KPMG LLP to the effect that the Merger will
be accounted for as a pooling-of-interests. Webster will inform MECH in writing
within three weeks hereof if KPMG LLP has not provided the advice or indicated
such advice is not favorable for the availability of pooling-of-interests in
connection with the Merger.
7.2 Conditions to Obligations of Webster.
The obligation of Webster to effect the Merger is also subject to the
satisfaction or waiver by Webster at or prior to the Effective Time of the
following conditions:
(a) Representations and Warranties.
The representations and warranties of MECH set forth in this Agreement
shall be true and correct in all material respects as of the date of this
Agreement and (except to the extent such representations and warranties speak as
of an earlier date) as of the Closing Date as though made on and as of the
Closing Date. Such determination shall be made as if there were no materiality
qualifications in such representations and warranties. Webster shall have
received a certificate signed on behalf of MECH by each of the President and
Chief Executive Officer and the Chief Financial Officer of MECH to the foregoing
effect.
(b) Performance of Covenants and Agreements of MECH.
MECH shall have performed in all material respects all covenants and
agreements required to be performed by it under this Agreement at or prior to
the Closing Date. Webster shall have received a certificate signed on behalf of
MECH by each of the President and Chief Executive Officer and the Chief
Financial Officer of MECH to such effect.
(c) Consents under Agreements.
(i) The consent, approval or waiver of each person (other than the
Governmental Entities referred to in Section 7.1(c) hereof) whose consent or
approval shall be required in order to permit the succession by the Surviving
Corporation pursuant to the Merger to any obligation, right or interest of MECH
under any loan or credit agreement, note, mortgage, indenture, lease, license or
other agreement or instrument shall have been obtained, except for those, the
failure of which to obtain, will not result in a Material Adverse Effect on the
Surviving Corporation.
(ii) The consent, approval or waiver of each person (other than the
Governmental Entities referred to in Section 7.1(c) hereof) whose consent or
approval shall be required in order to permit the succession by the Surviving
Bank pursuant to the Bank Merger to any obligation, right or interest of MS Bank
under any loan or credit agreement, note, mortgage, indenture, lease, license or
other agreement or instrument shall have been obtained except for those, the
failure of which to obtain, will not result in a Material Adverse Effect on the
Surviving Bank.
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(d) No Pending Governmental Actions.
No proceeding initiated by any Governmental Entity seeking an
Injunction shall be pending.
(e) No Material Adverse Change.
There shall have been no changes, other than changes contemplated by
this Agreement, in the business, operations, condition (financial or otherwise),
assets or liabilities of MECH or its Subsidiary (regardless of whether or not
such events or changes are inconsistent with the representations and warranties
given herein) that individually or in the aggregate has had or would have a
Material Adverse Effect on MECH
(f) Legal Opinion.
Webster shall have received the opinion of Tyler, Cooper and Alcorn,
counsel to MECH, dated the Closing Date, as to matters set forth at Exhibit E.
As to any matter in such opinion which involves matters of fact, such counsel
may rely upon the certificates of officers and directors of MECH and of public
officials, reasonably acceptable to Webster.
7.3 Conditions to Obligations of MECH.
The obligation of MECH to effect the Merger is also subject to the
satisfaction or waiver by MECH at or prior to the Effective Time of the
following conditions:
(a) Representations and Warranties.
The representations and warranties of Webster set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement and (except to the extent such representations and warranties
speak as of an earlier date) as of the Closing Date as though made on and as of
the Closing Date. Such determination shall be made as if there were no
materiality qualifications in such representations and warranties. MECH shall
have received a certificate signed on behalf of Webster by each of the President
and the Chief Financial Officer of Webster to the foregoing effect.
(b) Performance of Covenants and Agreements of Webster.
Webster shall have performed in all material respects all covenants
and agreements required to be performed by it under this Agreement at or prior
to the Closing Date. MECH shall have received a certificate signed on behalf of
Webster by each of the President and the Chief Financial Officer of Webster to
such effect.
(c) Consents under Agreements.
The consent or approval or waiver of each person (other than the
Governmental Entities referred to in Section 7.1(c)) whose consent or approval
shall be required in connection with the transactions contemplated hereby under
any loan or credit agreement, note, mortgage, indenture, lease, license or other
agreement or instrument to which Webster is a party or is otherwise bound shall
have been obtained.
(d) No Pending Governmental Actions.
No proceeding initiated by any Governmental Entity seeking an
Injunction shall be pending.
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(e) Legal Opinion.
MECH shall have received the opinion of Hogan & Hartson L.L.P.,
special counsel to Webster, dated the Closing Date, as to the authorization,
validity and non-assessibility of the Webster Common Stock to be issued pursuant
to this Agreement. As to any matter in such opinion which involves matters of
fact, such counsel may rely upon the certificates of officers and directors of
Webster and of public officials and opinions of local counsel, reasonably
acceptable to MECH.
(f) No Material Adverse Change.
There shall have been no changes, other than changes contemplated by
this Agreement, in the business, operations, condition (financial or otherwise),
assets or liabilities of Webster or any Webster Subsidiary (regardless of
whether or not such events or changes are inconsistent with the representations
and warranties given herein) that individually or in the aggregate has had or
would have a Material Adverse Effect on Webster.
ARTICLE VIII
TERMINATION AND AMENDMENT
8.1 Termination.
This Agreement may be terminated at any time prior to the Effective Time,
whether before or after approval of the matters presented in connection with the
Merger by the shareholders of MECH or Webster, if applicable:
(a) by mutual consent of Webster and MECH in a written instrument, if
the Board of Directors of each so determines by a vote of a majority of the
members of its entire Board;
(b) by either Webster or MECH upon written notice to the other party
(i) 30 days after the date on which any request or application for a Regulatory
Approval shall have been denied or withdrawn at the request or recommendation of
the Governmental Entity which must grant such Regulatory Approval, unless within
the 30-day period following such denial or withdrawal the parties agree to file,
and have filed with the applicable Governmental Entity, a petition for rehearing
or an amended application, provided, however, that no party shall have the right
to terminate this Agreement pursuant to this Section 8.1(b), if such denial or
request or recommendation for withdrawal shall be due to the failure of the
party seeking to terminate this Agreement to perform or observe the covenants
and agreements of such party set forth herein;
(c) by either Webster or MECH if the Merger shall not have been
consummated on or before August 31, 2000, unless the failure of the Closing to
occur by such date shall be due to the failure of the party seeking to terminate
this Agreement to perform or observe the covenants and agreements of such party
set forth herein;
(d) by either Webster or MECH (provided that the terminating party is
not in breach of its obligations under Section 6.3 hereof) if the approval of
the shareholders of MECH hereto required for the consummation of the Merger
shall not have been obtained by reason of the failure to obtain the required
vote at a duly held meeting of shareholders or at any adjournment or
postponement thereof;
(e) by either Webster or MECH (provided that the terminating party is
not then in breach of any representation, warranty, covenant or other agreement
contained herein that, individually or in the aggregate, would give the other
party the right to terminate this Agreement)
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if there shall have been a breach of any of the representations or warranties
set forth in this Agreement on the part of the other party, if such breach,
individually or in the aggregate, has had or is likely to have a Material
Adverse Effect on the breaching party, and such breach shall not have been cured
within 30 days following receipt by the breaching party of written notice of
such breach from the other party hereto or such breach, by its nature, cannot be
cured prior to the Closing;
(f) by either Webster or MECH (provided that the terminating party is
not then in breach of any representation, warranty, covenant or other agreement
contained herein that, individually or in the aggregate, would give the other
party the right to terminate this Agreement) if there shall have been a material
breach of any of the covenants or agreements set forth in this Agreement on the
part of the other party, and such breach shall not have been cured within 30
days following receipt by the breaching party of written notice of such breach
from the other party hereto or such breach, by its nature, cannot be cured prior
to the Closing;
(g) by Webster, if the management of MECH or its Board of Directors,
for any reason, (i) fails to call and hold within 40 days of the effectiveness
of the Registration Statement a meeting of MECH's shareholders to consider and
approve this Agreement and the transactions contemplated hereby, (ii) fails to
recommend to shareholders the approval of this Agreement and the transactions
contemplated hereby, (iii) fails to oppose any third party proposal that is
inconsistent with the transactions contemplated by this Agreement or (iv)
violates Section 5.1(e) of this Agreement;
(h) by the Board of Directors of MECH, upon written notice to Webster
at any time during the ten-day period commencing two days after the
Determination Date (as defined below), if both of the following conditions are
satisfied:
(i) the Average Closing Price shall be less than the product of
0.80 and the Starting Price; and
(ii) (A) the quotient obtained by dividing the Average Closing
Price by the Starting Price (such number being referred to herein as the
"Webster Ratio") shall be less than (B) the quotient obtained by dividing the
Average Index Price by the Index Price on the Starting Date and subtracting 0.15
from the quotient in this clause (ii)(B) (such number being referred to herein
as the "Index Ratio");
subject, however, to the following provisions. If MECH elects to exercise its
termination right pursuant to the immediately preceding sentence, it shall give
prompt written notice to Webster; provided, however, that such notice of
election to termination may be withdrawn at any time within the aforementioned
ten-day period. During the five-day period commencing with its receipt of such
notice, Webster shall have the option to elect to increase the Exchange Ratio to
equal the lesser of (i) the quotient obtained by dividing (A) the product of
0.80, the Starting Price and the Exchange Ratio (as then in effect) by (B) the
Average Closing Price, and (ii) the quotient obtained by dividing (A) the
product of the Index Ratio and the Exchange Ratio (as then in effect) by (B) the
Webster Ratio. If Webster makes such an election within such five-day period,
it shall give prompt written notice to New England of such election and of the
revised Exchange Ratio, whereupon no termination shall have occurred pursuant to
this Section 8.1(h) and this Agreement shall remain in effect in accordance with
its terms (except as the Exchange Ratio shall have been so modified), and any
references in this Agreement to "Exchange Ratio" shall thereafter be deemed to
refer to the Exchange Ratio as adjusted pursuant to this Section 8.1(h) (and
corresponding a corresponding modification shall be made to the Maximum Share
Amount).
For purposes of this Section 8.1(h), the following terms shall have
the meanings indicated:
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"Average Closing Price" means the average of the daily last sale
prices of Webster Common Stock as reported on Nasdaq (as reported in The Wall
Street Journal or, if not reported therein, in another mutually agreed upon
authoritative source) for the twenty consecutive full trading days in which such
shares are traded on Nasdaq ending at the close of trading on the Determination
Date.
"Average Index Price" means the average of the Index Prices for the
twenty consecutive full trading days ending at the close of trading on the
Determination Date.
"Determination Date" means the date on which the approval of the OTS
required for consummation of the Merger shall be received.
"Index Group" means the bank and savings and loan holding companies to
be mutually agreed upon, the common stocks of all of which shall be publicly
traded and as to which there shall not have been, since the Starting Date and
before the Determination Date, an announcement of a proposal for such company to
be acquired or for such company to acquire another company or companies in
transactions with a value exceeding 25% of the acquiror's market capitalization
as of the Starting Date. In the event that the common stock of any such company
ceases to be publicly traded or any such announcement is made with respect to
any such company, such company shall be removed from the Index Group, and the
weights (which have been determined based on the number of outstanding shares of
common stock) redistributed proportionately for purposes of determining the
Index Price.
"Index Price" on a given date means the weighted average (weighted in
accordance with the factors listed above) of the closing prices on such date of
the companies comprising the Index Group.
"Starting Date" means the last full day on which Nasdaq was open for
trading prior to the execution of this Agreement.
"Starting Price" shall mean the last sale price per share of Webster
Common Stock on the Starting Date, as reported on Nasdaq (as reported in The
---
Wall Street Journal or, if not reported therein, in another mutually agreed upon
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authoritative source).
If Webster or any company belonging to the Index Group declares or
effects a stock dividend, reclassification, recapitalization, split-up,
combination, exchange of shares or similar transaction between the Starting Date
and the Determination Date, the prices for the common stock of such company
shall be appropriately adjusted for the purposes of applying this Section
8.1(h).
(i) by Webster if MECH has complied with Section 5.1(e) above, and
has given written notice to Webster that MECH has agreed to enter into an
Acquisition Transaction other than as contemplated hereby; provided, however,
that such termination under this Section 8.1(i) shall not be effective unless
and until MECH shall have complied with the expense and breakup fee provisions
of Section 9.3 below, and shall have acknowledged in the written notice to be
provided in accordance herewith that the Option granted pursuant to the Option
Agreement shall then be exercisable in accordance with terms thereof.
8.2 Effect of Termination.
In the event of termination of this Agreement by either Webster or MECH as
provided in Section 8.1 hereof, this Agreement shall forthwith become void and
have no effect except (i) the last sentences of Sections 6.2(a) and 6.2(b) and
Sections 8.2, 9.2 and 9.3 hereof shall survive any termination of this
Agreement, and (ii) notwithstanding anything to the contrary contained in this
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Agreement, no party shall be relieved or released from any liabilities or
damages arising out of its willful or intentional breach of any provision of
this Agreement.
8.3 Amendment.
Subject to compliance with applicable law, this Agreement may be amended by
the parties hereto, by action taken or authorized by their respective Board of
Directors, at any time before or after approval of the matters presented in
connection with the Merger by the shareholders of MECH; provided, however, that
after any approval of the transactions contemplated by this Agreement by MECH's
shareholders, there may not be, without further approval of such shareholders,
any amendment of this Agreement which reduces the amount or changes the form of
the consideration to be delivered to MECH shareholders hereunder other than as
contemplated by this Agreement. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
8.4 Extension; Waiver.
At any time prior to the Effective Time, the parties hereto, by action
taken or authorized by their respective Boards of Directors, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto, and (c) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set forth in a
written instrument signed on behalf of such party, but such extension or waiver
or failure to insist on strict compliance with an obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
ARTICLE IX
GENERAL PROVISIONS
9.1 Closing.
Subject to the terms and conditions of this Agreement, the closing of the
Merger (the "Closing") will take place at 10:00 a.m. at the main offices of
Webster on (i) the fifth day after the last Requisite Regulatory Approval and
shareholder approvals are received and all applicable waiting periods have
expired, or (ii) such other date, place and time as the parties may agree (the
"Closing Date").
9.2 Nonsurvival of Representations, Warranties and Agreements.
None of the representations, warranties, covenants and agreements in this
Agreement or in any instrument delivered pursuant to this Agreement (other than
pursuant to the Option Agreement, which shall terminate in accordance with its
terms) shall survive the Effective Time, except for those covenants and
agreements contained herein and therein which by their terms apply in whole or
in part after the Effective Time.
9.3 Expenses; Breakup Fee.
All costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such
expense, except that all filing and other fees paid to the SEC, the Connecticut
Commissioner and the OTS in connection with this Agreement shall be borne by
Webster. Except as set forth in the next sentence, in the event that this
Agreement is terminated by either Webster or MECH by reason of a material breach
pursuant
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to Sections 8.1(e) or (f) hereof or by Webster or MECH pursuant to Section
8.1(g) hereof, the other party shall pay all documented, reasonable costs and
expenses up to $1,500,000 incurred by the terminating party in connection with
this Agreement and the transactions contemplated hereby. In the event that this
Agreement is terminated by Webster under Section 8.1(d) by reason of MECH
shareholders not having given any required approval and there shall have been
prior to the meeting of MECH stockholders a "Third Party Public Event" (as
defined below), MECH shall pay all documented, reasonable costs and expenses up
to $1,500,000 incurred by Webster in connection with this Agreement and the
transactions contemplated hereby, plus a breakup fee of $3,000,000. For purposes
of this Section 9.3, a "Third Party Public Event" shall refer to any of the
following events: (i) any person (as defined at Sections 3(a)(9) and 13(d)(3) of
the Exchange Act and the rules and regulations thereunder), other than Webster
or any Webster Subsidiary, shall have made a bona fide proposal to MECH or, by a
public announcement or written communication that is or becomes the subject of
public disclosure, to MECH's stockholders to engage in an Acquisition
Transaction (including, without limitation, any situation in which any person
other than Webster or any Webster Subsidiary shall have commenced (as such term
is defined in Rule 14d-2 under the Exchange Act), or shall have filed a
registration statement under the Securities Act, with respect to a tender offer
or exchange offer to purchase any shares of MECH Common Stock such that, upon
consummation of such offer, such person would have beneficial ownership of 10.0%
or more of the then outstanding shares of MECH Common Stock); or (ii) any
director, officer, 5% or greater stockholder or affiliate of MECH shall have, by
any means which becomes the subject of public disclosure, communicated
opposition to this Agreement, the Merger or other transactions contemplated
hereby, or otherwise takes action to influence the vote of MECH stockholders
against this Agreement, the Merger and the transactions contemplated hereby. In
the event this Agreement is terminated by Webster by reason of a willful
material breach pursuant to Sections 8.1(e) or (f) hereof, MECH shall pay all
documented, reasonable costs and expenses up to $1,500,000 incurred by Webster
in connection with this Agreement and the transactions contemplated hereby, plus
a breakup fee of $3.0 million. In the event that this Agreement is terminated by
Webster under Section 8.1(i) by reason of MECH having agreed to enter into an
Acquisition Transaction other than as contemplated hereby, MECH shall pay all
documented, reasonable costs and expenses up to $1,500,000 incurred by Webster
in connection with this Agreement and the transactions contemplated hereby, plus
a breakup fee of $3.0 million.
9.4 Notices.
All notices and other communications hereunder shall be in writing and
shall be deemed given if delivered personally, mailed by registered or certified
mail (return receipt requested) or delivered by an express courier (with
confirmation) to the parties at the following addresses (or at such other
address for a party as shall be specified by like notice):
(a) if to Webster, to:
Webster Financial Corporation
Webster Plaza
145 Bank Street
Waterbury, Connecticut 06702
Attn.: Chief Executive Officer
with copies (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
Columbia Square
555 Thirteenth Street, N.W.
Washington, DC 20004-1109
Attn.: Stuart G. Stein, Esq.
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and
Webster Financial Corporation
Webster Plaza
145 Bank Street
Waterbury, Connecticut 06702
Attn.: General Counsel
and
(b) if to MECH, to:
MECH Financial, Inc.
100 Peal Street
Hartford, CT 06103
Attn.: Chief Executive Officer
with a copy (which shall not constitute notice) to:
Tyler Cooper & Alcorn, LLP
City Place, 35th Floor
Hartford, Connecticut 06103-3488
Attn: William W. Bouton, III, Esq.
9.5 Interpretation.
When a reference is made in this Agreement to Sections, Exhibits or
Schedules, such reference shall be to a Section of or an Exhibit or Schedule to
this Agreement unless otherwise indicated. The table of contents and headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. Whenever the words
"include", "includes" or "including" are used in this Agreement, they shall be
deemed to be followed by the words "without limitation".
9.6 Counterparts.
This Agreement may be executed in counterparts, all of which shall be
considered one and the same agreement and shall become effective when
counterparts have been signed by each of the parties and delivered to the other
parties, it being understood that all parties need not sign the same
counterpart.
9.7 Entire Agreement.
This Agreement (including the disclosure schedules, documents and the
instruments referred to herein) constitutes the entire agreement and supersedes
all prior agreements and understandings, both written and oral, among the
parties with respect to the subject matter hereof, other than the
Confidentiality Agreement, the Certificate of Merger, the Option Agreement and
the MECH Stockholder Agreement.
9.8 Governing Law.
This Agreement shall be governed and construed in accordance with the laws
of the State of Delaware, without regard to any applicable conflicts of law
rules.
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9.9 Enforcement of Agreement.
The parties hereto agree that irreparable damage would occur in the event
that the provisions of this Agreement were not performed in accordance with its
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions thereof in
any court of the United States or any state having jurisdiction, this being in
addition to any other remedy to which they are entitled at law or in equity.
9.10 Severability.
Any term or provision of this Agreement which is invalid or unenforceable
in any jurisdiction shall, as to that jurisdiction, be ineffective to the extent
of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement or affecting
the validity or enforceability of any of the terms or provisions of this
Agreement in any other jurisdiction. If any provision of this Agreement is so
broad as to be unenforceable, the provision shall be interpreted to be only so
broad as is enforceable.
9.11 Publicity.
Except as otherwise required by law or the rules of the Nasdaq Stock Market
National Market System (or such other exchange on which the Webster Common Stock
may become listed), so long as this Agreement is in effect, neither Webster nor
MECH shall, or shall permit any of Webster's or MECH's Subsidiaries to, issue or
cause the publication of any press release or other public announcement with
respect to, or otherwise make any public statement concerning, the transactions
contemplated by this Agreement, the Certificate of Merger, the Option Agreement
or the MECH Stockholder Agreement without the consent of the other party, which
consent shall not be unreasonably withheld.
9.12 Assignment; Limitation of Benefits.
Neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto (whether by operation
of law or otherwise) without the prior written consent of the other parties.
Subject to the preceding sentence, this Agreement will be binding upon, inure to
the benefit of and be enforceable by the parties and their respective successors
and assigns. Except as otherwise specifically provided in Section 6.7 hereof,
this Agreement (including the documents and instruments referred to herein) is
not intended to confer upon any person other than the parties hereto any rights
or remedies hereunder, and the covenants, undertakings and agreements set out
herein shall be solely for the benefit of, and shall be enforceable only by, the
parties hereto and their permitted assigns.
9.13 Additional Definitions.
In addition to any other definitions contained in this Agreement, the
following words, terms and phrases shall have the following meanings when used
in this Agreement.
"Affiliated Person": any director, officer or 5% or greater shareholder,
-----------------
spouse or other person living in the same household of such director, officer or
shareholder, or any company, partnership or trust in which any of the foregoing
persons is an officer, 5% or greater shareholder, general partner or 5% or
greater trust beneficiary.
"Knowledge" or "knowledge": with respect to any entity, refers to the
--------- ---------
knowledge of such entity's directors and officers in the ordinary course of
their duties in such positions.
45
<PAGE>
"Laws": any and all statutes, laws, ordinances, rules, regulations,
----
orders, permits, judgments, injunctions, decrees, case law and other rules of
law enacted, promulgated or issued by any Governmental Entity.
"Material Adverse Effect": with respect to Webster or MECH, as the case
-----------------------
may be, means a condition, event, change or occurrence that is reasonably likely
to have a material adverse effect upon (A) the financial condition, results of
operations, business or properties of Webster or MECH (other than as a result of
(i) changes in laws or regulations or accounting rules of general applicability
or interpretations thereof, or (ii) decreases in capital under Financial
Accounting Standards No. 115 attributable to general changes in interest rates),
or (B) the ability of Webster or MECH to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement, the Certificate of
Merger and, in the case of MECH, the Option Agreement.
"Subsidiary" or "Subsidiaries," as applicable: with respect to any party
--------------------------------------------
means any corporation, partnership or other organization, whether incorporated
or unincorporated, which is either directly or indirectly majority owned by such
party, or consolidated with such party for financial reporting purposes.
[SIGNATURES PAGE FOLLOWS]
46
<PAGE>
IN WITNESS WHEREOF, Webster and MECH have caused this Agreement to be
executed and delivered by their respective officers thereunto duly authorized as
of the date first above written.
WEBSTER FINANCIAL CORPORATION
ATTEST:
By: /s/ Harriet Munrett Wolfe By: /s/ James C. Smith
--------------------------------- -------------------------------
Name: Harriet Munrett Wolfe Name: James C. Smith
Title: Senior Vice President, Title: Chairman and Chief
General Counsel and Executive Officer
Secretary
MECH FINANCIAL, INC.
ATTEST:
By: /s/ Thomas M. Wood By: /s/ Edgar C. Gerwig
--------------------------------- -------------------------------
Name: Thomas M. Wood Name: Edgar C. Gerwig
Title: Executive Vice President Title: Chairman, President and
Chief Executive Officer
<PAGE>
Exhibit A
---------
ARTICLES OF COMBINATION
and
BANK MERGER AGREEMENT
These Articles of Combination and Bank Merger Agreement (this "Bank
Merger Agreement") are made and entered into this __ day of _______, 2000 by and
between Webster Bank, a federally chartered savings bank ("Webster Bank"), and
Mechanics Savings Bank, a Connecticut chartered savings bank and a wholly owned
subsidiary of MECH Financial, Inc., a Connecticut corporation ("MECH") (the
"Subsidiary Bank").
WITNESSETH
WHEREAS, Webster Financial Corporation, a Delaware corporation
("Webster") and MECH, have entered into an Agreement and Plan of Merger, dated
as of December 1, 1999 (the "Agreement");
WHEREAS, pursuant to the Agreement, Webster will acquire MECH through
a merger of MECH with and into Webster, and thereafter the Subsidiary Bank will
merge with and into Webster Bank, with Webster Bank the surviving bank;
WHEREAS, Webster Bank has issued and has outstanding 1,000 shares of
common stock, par value $.01 per share ("Webster Bank Common Stock"), and
Subsidiary Bank has issued and outstanding ______ shares of capital stock, par
value $____ per share (the "Subsidiary Bank Capital Stock"); and
WHEREAS, all of the issued and outstanding shares of Webster Bank
Common Stock and all of the issued and outstanding shares of the Subsidiary Bank
Capital Stock, have been voted in favor of the respective merger of the
Subsidiary Bank with and into Webster Bank.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements contained herein and in the Agreement, the parties
hereto do mutually agree, intending to be legally bound, as follows:
ARTICLE 1
DEFINITIONS
Except as otherwise provided herein, the capitalized terms set forth
below shall have the following meanings:
1.1 "Bank Merger" shall refer to the merger of the Subsidiary Bank with
and into Webster Bank as provided in Section 2.1 of this Bank Merger Agreement.
1.2 "Effective Time" shall mean the date and time at which the Bank Merger
contemplated by this Bank Merger Agreement becomes effective as provided in
Section 2.2 hereof.
1.3 "Merging Banks" shall collectively refer to the Subsidiary Bank and
Webster Bank.
<PAGE>
1.4 "OTS" shall mean the Office of Thrift Supervision.
1.5 "Surviving Bank" shall refer to Webster Bank as the surviving bank in
the Bank Merger. The location of the home office and other offices of the
Surviving Bank shall be as set forth at Annex 1 hereto.
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ARTICLE 2
TERMS OF THE BANK MERGER
2.1 The Bank Merger
(a) Subject to the terms and conditions set forth in the Agreement at
the Effective Time, the Subsidiary Bank shall be merged with and into Webster
Bank pursuant to 12 U.S.C. (S)(S) 1467a(s), 1815(d)(3) and 1828(c), Section
552.13 of the rules and regulations of the OTS promulgated thereunder, and
pursuant to Section 36a-126(b) of the Banking Law of Connecticut. Webster Bank
shall be the Surviving Bank in the Bank Merger and shall continue to be
regulated by the OTS.
(b) As a result of the Bank Merger, (i) each share of Subsidiary Bank
Capital Stock issued and outstanding immediately prior to the Effective Time
shall be canceled and (ii) each share of Webster Bank Common Stock issued and
outstanding immediately prior to the Effective Time shall remain issued and
outstanding and shall constitute the only shares of capital stock of the
Surviving Bank issued and outstanding immediately after the Effective Time.
(c) The Bank Merger shall have the effects set forth at 12 C.F.R. (S)
552.13(l) and Section 36a-126(b) of the Banking Law of Connecticut.
2.2 Effective Time
The Bank Merger shall become effective as of the date specified in the
endorsement of this Bank Merger Agreement, as the Articles of Combination, by
the Corporate Secretary of the OTS. The Bank Merger shall not be effective
unless and until approved by the OTS and all other "Governmental Entities" as
contemplated by the Agreement, including the "Connecticut Commissioner."
2.3 Name of the Surviving Bank
The name of the Surviving Bank shall be "Webster Bank."
2.4 Charter
On and after the Effective Time, the federal stock charter, as
amended, of Webster Bank in effect immediately prior to the Effective Time shall
be the federal stock charter of the Surviving Bank, until further amended in
accordance with applicable law.
2.5 By-Laws
On and after the Effective Time, the by-laws, as amended, of Webster
Bank in effect immediately prior to the Effective Time shall be the by-laws of
the Surviving Bank, until further amended in accordance with applicable law.
2.6 Directors and Officers
On and after the Effective Time, until changed in accordance with the
federal stock charter and by-laws of the Surviving Bank, the directors and
officers of the Surviving Bank shall be the directors and officers of Webster
Bank immediately prior to the Effective Time
<PAGE>
plus one additional director, ______________, previously a director of the
Subsidiary Bank. The directors and officers of the Surviving Bank shall hold
office in accordance with the federal stock charter and by-laws of the Surviving
Bank. The number, names and residence addresses, and terms of directors of the
Surviving Bank are as set forth at Annex 2 hereto.
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2.7 Savings Accounts
The savings accounts of the Surviving Bank issued after the Effective
Time shall be issued on the same basis as savings accounts had been issued by
Webster Bank prior to the Bank Merger.
ARTICLE 3
MISCELLANEOUS
3.1 Amendments
To the extent permitted by law, this Bank Merger Agreement may be
amended by a subsequent writing signed by the parties hereto upon the approval
of the board of directors of each of the parties hereto.
3.2 Successors
This Bank Merger Agreement shall be binding on the successors of
Webster Bank and the Subsidiary Bank.
3.3 Counterparts
This Bank Merger Agreement may be executed in counterparts, each of
which shall be considered one and the same agreement and each of which shall be
deemed to be an original, and shall become effective when counterparts have been
signed by each of the parties and delivered to the other party, it being
understood that all parties need not sign the same counterpart.
[Signatures on following pages]
<PAGE>
In accordance with the procedures set forth in the rules and
regulations of the OTS and other applicable law, Webster Bank and the Subsidiary
Bank have caused this Bank Merger Agreement to be executed by their duly
authorized representatives on the date indicated.
WEBSTER BANK
ATTEST:
By:_________________________________ By:______________________________________
Harriet Munrett Wolfe James C. Smith
Senior Vice President, Counsel Chairman, Chief Executive Officer and
and Secretary
<PAGE>
MECHANICS SAVINGS BANK
ATTEST:
By:_________________________________ By:_________________________________
Name:____________________________ Name:____________________________
Title:___________________________ Title:___________________________
The Board of Directors of Mechanics Savings Bank:
____________________________________ ____________________________________
Name:_______________________________ Name:_______________________________
____________________________________ ____________________________________
Name: Name:
____________________________________ ____________________________________
Name: Name:
____________________________________ ____________________________________
Name: Name:
____________________________________ ____________________________________
Name: Name:
____________________________________ ____________________________________
Name: Name:
<PAGE>
The foregoing Articles of Combination have been filed with the
Corporate Secretary of the Office of Thrift Supervision, and endorsed pursuant
to Section 552.13(j) of the Rules and Regulations for Federal Stock Associations
(12 C.F.R. (S) 552.13(j)), to be effective at 4:30 p.m. on _______ __, 2000.
OFFICE OF THRIFT SUPERVISION
Department of the Treasury
By:________________________________
Nadine Y. Washington
Corporate Secretary
<PAGE>
Exhibit B
OPTION AGREEMENT
THE TRANSFER OF THE OPTION GRANTED
BY THIS AGREEMENT IS SUBJECT TO RESALE RESTRICTIONS.
This OPTION AGREEMENT, dated as of December 1, 1999 (this "Agreement"), is
entered into between MECH FINANCIAL, INC., a Connecticut corporation ("Issuer"),
and WEBSTER FINANCIAL CORPORATION, a Delaware corporation ("Grantee").
WITNESSETH:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger, dated as of December 1, 1999 (the "Plan"), which was executed by the
parties thereto prior to the execution of this Agreement; and
WHEREAS, as a condition and inducement to Grantee's entering into the
Plan and in consideration therefor, Issuer has agreed to grant Grantee the
Option (as defined below).
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Plan, the parties hereto
agree as follows:
SECTION 1. Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "Option") to purchase, subject to the terms hereof, up to 994,150
fully paid and nonassessable shares common stock, par value $.01 per share of
Issuer ("Issuer Common Stock") (which number of shares is equal to 19.99% of the
total number of outstanding shares of Issuer Common Stock on the date hereof),
at a price per share equal to $34.50 (the "Initial Price"); provided, however,
that in the event Issuer issues or agrees to issue any additional shares of
Issuer Common Stock (other than shares issued upon the exercise of options
outstanding as of the date of the Plan in accordance with their terms pursuant
to existing stock option plans), or grants one or more options to purchase
additional shares of Issuer Common Stock at a price less than the Initial Price,
as adjusted pursuant to Section 5(b) hereof, such price shall be equal to such
lesser price (such price, as adjusted, is hereinafter referred to as the "Option
Price"). The number of shares of Issuer Common Stock that may be received upon
the exercise of the Option and the Option Price are subject to adjustment as
herein set forth.
SECTION 2. (a) Grantee may exercise the Option, in whole or part, at any
time and from time to time following the occurrence of a Purchase Event (as
defined below); provided, however, that the Option shall terminate and be of no
further force and effect upon the earliest to occur of the following events
(which are collectively referred to as an "Exercise Termination Event"):
(i) The time immediately prior to the Effective Time;
(ii) 12 months after the first occurrence of a Purchase Event;
(iii) 12 months after the termination of the Plan following the
occurrence of a Preliminary Purchase Event (as defined below), unless
clause (vii) of this Section 2(a) is applicable;
<PAGE>
(iv) upon the termination of the Plan, prior to the occurrence of a
Purchase Event or Preliminary Purchase Event, by Issuer pursuant to
Sections 8.1(e) or (f) of the Plan, both parties pursuant to Section 8.1(a)
of the Plan, or by either party pursuant to Section 8.1(b), (c) or (h) of
the Plan;
(v) 18 months after the termination of the Plan, by either party
pursuant to Section 8.1(d) of the Plan based on the required vote of
Issuer's shareholders not being received;
(vi) 18 months after the termination of the Plan, by Grantee
pursuant to Section 8.1(e) or (f) thereof as a result of a breach by
Issuer, unless such breach was willful or intentional; or
(vii) 24 months after the termination of the Plan, by Grantee
pursuant to Section 8.1(e) or (f) thereof as a result of a willful or
intentional breach by Issuer, or by Grantee pursuant to Section 8.1(g) or
(i) of the Plan.
(b) The term "Preliminary Purchase Event" shall mean any of the
following events or transactions occurring on or after the date hereof and prior
to an Exercise Termination Event:
(i) Issuer or any of its subsidiaries without having
received Grantee's prior written consent, shall have entered into any
letter of intent or definitive agreement to engage in an Acquisition
Transaction (as defined below) with any person (as defined below) other
than Grantee or any of its subsidiaries (each a "Grantee Subsidiary") or
the Board of Directors of Issuer shall have recommended that the
shareholders of Issuer approve or accept any Acquisition Transaction with
any Person (as the term "person" is defined in Section 3(a)9 and 13(d)(3)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and
the rules and regulations thereunder) other than Grantee or any Grantee
Subsidiary. For purposes of this Agreement "Acquisition Transaction" shall
mean (x) a merger, acquisition, consolidation or other business combination
involving Issuer or any subsidiary of Issuer, (y) a purchase, lease or
other acquisition of all or substantially all of the assets of Issuer or
any subsidiary of Issuer, (z) a purchase or other acquisition (including by
way of merger, consolidation, share exchange or otherwise) of Beneficial
Ownership (as the term "beneficial ownership" is defined in Regulation 13d-
3(a) of the Exchange Act) of securities representing 10.0% or more of the
voting power of Issuer; provided, however, that "Acquisition Transaction"
shall not include a transaction entered into after the termination of the
Plan in which the Issuer is the surviving entity, if in connection with
such transaction, no person acquires Beneficial Ownership of 10.0% or more
of the total voting power of the Issuer to be outstanding after giving
effect to such transaction and in which the aggregate voting power of
Issuer acquired by all persons is less than 15% of the total voting power
of Issuer;
(ii) Any Person (other than Grantee, any Grantee Subsidiary
or any current affiliate of Issuer) shall have acquired Beneficial
Ownership of 10.0% or more of the outstanding shares of Issuer Common
Stock;
(iii) (a) Any Person (other than Grantee or any Grantee
Subsidiary) shall have made a bona fide proposal to Issuer or, by a public
announcement or written communication that is or becomes the subject of
public disclosure, to Issuer's shareholders to engage in an Acquisition
Transaction (including, without limitation, any situation in which any
Person other than Grantee or any Grantee Subsidiary shall have commenced
(as such term is defined in Rule 14d-2 under the Exchange Act), or shall
have filled a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to a tender offer or exchange
offer to purchase any shares
-2-
<PAGE>
of Issuer Common Stock such that, upon consummation of such offer, such
person would have Beneficial Ownership of 10.0% or more of the then
outstanding shares of Issuer Common Stock (such an offer being referred to
herein as a "Tender Offer" or an "Exchange Offer", respectively)), and (b)
the shareholders of Issuer do not approve the Merger, as defined in the
Plan, at the Special Meeting, as defined in the Plan;
(iv) There shall exist a willful or intentional breach under the
Plan by Issuer and such breach would entitle Grantee to terminate the Plan;
(v) The special meeting of Issuers' shareholders held for the
purpose of voting on the Plan shall not have been held pursuant to the Plan
or shall have been canceled prior to termination of the Plan, or for any
reason whatsoever Issuer's Board of Directors shall have failed to
recommend, or shall have withdrawn or modified in a manner adverse to
Grantee the recommendation of Issuer's Board of Directors, that Issuer's
shareholders approve the Plan, or if Issuer or Issuer's Board of Directors
fails to oppose any proposal by any Person (other than Grantee or any
Grantee Subsidiary); or
(vi) Any Person (other than Grantee or any Grantee Subsidiary)
shall have filed an application or notice with the Board of Governors of
the Federal Reserve System (the "FRB"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Connecticut Banking Commissioner (the
"Connecticut Commissioner") or other regulatory or administrative agency or
commission (each, a "Governmental Authority") for approval to engage in an
Acquisition Transaction.
(c) The term "Purchase Event" shall mean any of the following events
or transactions occurring on or after the date hereof and prior to an Exercise
Termination Event:
(i) The acquisition by any Person (other than Grantee or any
Grantee Subsidiary) of Beneficial Ownership (other than on behalf of the
Issuer) of 25% or more of the then outstanding Issuer Common Stock;
(ii) The occurrence of a Preliminary Purchase Event described in
Section 2(b)(i) except that the percentage referred to in clause (z)
thereof shall be 25%; or
(iii) The termination of the Plan by Grantee pursuant to Section
8.1(e) or (f) thereof as a result of a willful or intentional breach by
Issuer, or by Grantee pursuant to Section 8.1(g) or (i) of the Plan.
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Preliminary Purchase Event or Purchase Event known to Issuer; provided,
however, that the giving of such notice by Issuer shall not be a condition to
the right of Grantee to exercise the Option.
(e) In the event that Grantee is entitled to and wishes to exercise
the Option, it shall send to Issuer a written notice (the "Option Notice," the
date of which being hereinafter referred to as the "Notice Date") specifying (i)
the total number of shares of Issuer Common Stock it will purchase pursuant to
such exercise and (ii) the time (which shall be on a business day that is not
less than three nor more than 10 business days from the Notice Date) on which
the closing of such purchase shall take place (the "Closing Date"); such closing
to take place at the principal office of the Issuer; provided, however, that, if
prior notification to or approval of the OTS, the FDIC, the FRB, the Connecticut
Commissioner or any other Governmental Authority is required in connection with
such purchase (each, a "Notification" or an "Approval," as the case may be), (a)
Grantee shall promptly file the required notice or application for approval
("Notice/Application"), (b) Grantee shall expeditiously process the
Notice/Application and (c) for the purpose of determining the Closing Date
pursuant to clause (ii) of this sentence,
-3-
<PAGE>
the period of time that otherwise would run from the Notice Date shall instead
run from the later of (x) in connection with any Notification, the date on which
any required notification periods have expired or been terminated and (y) in
connection with any Approval, the date on which such approval has been obtained
and any requisite waiting period or periods shall have expired. For purposes of
Section 2(a) hereof, any exercise of the Option shall be deemed to occur on the
Notice Date relating thereto. On or prior to the Closing Date, Grantee shall
have the right to revoke its exercise of the Option by written notice to the
Issuer given not less than three business days prior to the Closing Date.
(f) At the closing referred to in Section 2(e) hereof, Grantee shall
pay to Issuer the aggregate purchase price for the number of shares of Issuer
Common Stock specified in the Option Notice in immediately available funds by
wire transfer to a bank account designated by Issuer; provided, however, that
failure or refusal of Issuer to designate such a bank account shall not preclude
Grantee from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in Section 2(f) hereof, Issuer shall deliver to
Grantee a certificate or certificates representing the number of shares of
Issuer Common Stock specified in the Option Notice and, if the Option should be
exercised in part only, a new Option evidencing the rights of Grantee thereof to
purchase the balance of the shares of Issuer Common Stock purchasable hereunder.
(h) Certificates for Issuer Common Stock delivered at a closing
hereunder shall be endorsed with a restrictive legend substantially as follows:
The transfer of the shares represented by this certificate is
subject to resale restrictions arising under the Securities Act of 1933, as
amended, and applicable state securities laws and to certain provisions of
an agreement between Webster Financial Corporation and MECH Financial,
Inc., dated as of December 1, 1999. A copy of such agreement is on file at
the principal office of Webster Financial Corporation, and will be provided
to the holder hereof without charge upon receipt by Webster Financial
Corporation of a written request therefor.
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act in the above legend shall be removed by delivery of
substitute certificate(s) without such reference if Grantee shall have delivered
to Issuer a copy of a letter from the staff of the Securities and Exchange
Commission (the "SEC") or Governmental Authority responsible for administering
any applicable state securities laws or an opinion of counsel, in form and
substance satisfactory to Issuer's counsel, to the effect that such legend is
not required for purposes of the Securities Act or applicable state securities
laws; (ii) the reference to the provisions of this Agreement in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if the shares have been sold or transferred in compliance with the provisions of
this Agreement and under circumstances that do not require the retention of such
reference; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In addition
such certificates shall bear any other legend as may be required by law.
(i) Upon the giving by Grantee to Issuer of an Option Notice and the
tender of the applicable purchase price in immediately available funds on the
Closing Date, unless prohibited by applicable law, Grantee shall be deemed to be
the holder of record of the number of shares of Issuer Common Stock specified in
the Option Notice, notwithstanding that the stock transfer books of Issuer shall
then be closed or that certificates representing such shares of Issuer Common
Stock shall not then actually be delivered to Grantee. Issuer shall pay all
expenses and other charges that may be payable in connection with the
preparation, issuance and delivery of stock certificates under this Section 2 in
the name of Grantee.
-4-
<PAGE>
SECTION 3. Issuer agrees: (i) that it shall at all times until the
termination of this Agreement have reserved for issuance upon the exercise of
the Option that number of authorized and reserved shares of Issuer Common Stock
equal to the maximum number of shares of Issuer Common Stock at any time and
from time to time issuable hereunder, all of which shares will, upon issuance
pursuant hereto, be duly authorized, validly issued, fully paid, non-assessable,
and delivered free and clear of all claims, liens, encumbrances and security
interests and not subject to any preemptive rights; (ii) that it will not, by
amendment of its certificate of incorporation or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer; (iii) that it will seek any necessary shareholder approval that is
necessary to exercise the Option; (iv) promptly to take all reasonable action as
may from time to time be requested by the Grantee, at Grantee's expense
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. (S) 18a and regulations promulgated
thereunder and (y) in the event prior approval of or notice to the OTS, the
FDIC, the FRB, the Connecticut Commissioner or any other Governmental Authority,
under the Change in Bank Control Act of 1978, as amended, the Bank Holding
Company Act, as amended, or any other applicable federal or state banking law,
is necessary before the Option may be exercised, cooperating with Grantee in
preparing such applications or notices and providing such information to each
such Governmental Authority as it may require in order to permit Grantee to
exercise the Option and Issuer duly and effectively to issue shares of Issuer
Common Stock pursuant hereto; and (v) to take all action provided herein to
protect the rights of Grantee against dilution.
SECTION 4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of Grantee, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Issuer Common Stock purchasable
hereunder. The terms "Agreement" and "Option" as used herein include any
agreements and related options for which this Agreement (and the Option granted
hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date.
SECTION 5. The number of shares of Issuer Common Stock purchasable upon the
exercise of the Option shall be subject to adjustment from time to time as
follows:
(a) In the event of any change in the type or number of shares of
Issuer Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of shares
or other issuances of additional shares (other than pursuant to the exercise of
the Option), the type and number of shares of Issuer Common Stock purchasable
upon exercise hereof shall be appropriately adjusted and proper provision shall
be made so that, in the event that any additional shares of Issuer Common Stock
are to be issued or otherwise become outstanding as a result of any such change
(other than pursuant to an exercise of the Option), the number of shares of
Issuer Common Stock that remain subject to the Option shall be increased or
decreased (as applicable) so that, after such issuance and together with the
shares of Issuer Common Stock previously issued pursuant to the exercise of the
Option (as adjusted on account of any of the foregoing changes in the Issuer
Common Stock), the Option shall equal the sum of 19.9% of the total of the
number of shares of Issuer Common Stock then issued and outstanding.
-5-
<PAGE>
(b) Whenever the number of shares of Issuer Common Stock purchasable
upon exercise hereof is adjusted as provided in this Section 5, the Option Price
shall be adjusted by multiplying the Option Price by a fraction, the numerator
of which shall be equal to the number of shares of Issuer Common Stock
purchasable prior to the adjustment and the denominator of which shall be equal
to the number of shares of Issuer Common Stock purchasable after the adjustment.
SECTION 6. (a) Upon the occurrence of a Purchase Event that occurs
prior to an Exercise Termination Event, Issuer shall, at the request of Grantee
(whether on its own behalf or on behalf of any subsequent holder of the Option
(or part thereof) or of any of the shares of Issuer Common Stock issued pursuant
hereto), promptly prepare, file and keep current a shelf registration statement
with the SEC, under the Securities Act covering any shares issued and issuable
pursuant to the Option and shall use its reasonable best efforts to cause such
registration statement to become effective, and to remain current and effective
for a period not in excess of one year from the day such registration statement
first becomes effective, in order to permit the sale or other disposition of any
shares of Issuer Common Stock issued upon total or partial exercise of the
Option ("Option Shares") in accordance with any plan of disposition requested by
Grantee. Grantee shall have the right to demand four such registrations which
right shall be transferable. Grantee shall provide all information reasonably
requested by Issuer for inclusion in any registration statement to be filed
hereunder. In connection with any such registration statement, Issuer and
Grantee shall provide each other with representations, warranties, indemnities
and other agreements customarily given in connection with such registration. If
requested by Grantee in connection with such registration, Issuer and Grantee
shall become a party to any underwriting agreement relating to the sale of such
shares, but only to the extent of obligating themselves in respect of
representations, warranties, indemnities and other agreements customarily
included in such underwriting agreements. Notwithstanding the foregoing, if
Grantee revokes any exercise notice or fails to exercise any Option with respect
to any exercise notice pursuant to Section 2(e) hereof, Issuer shall not be
obligated to continue any registration process with respect to the sale of
Option Shares issuable upon the exercise of such Option and Grantee shall not be
deemed to have demanded registration of Option Shares.
(b) In the event that Grantee requests Issuer to file a registration
statement following the failure to obtain any approval required to exercise the
Option as described in Section 9 hereof, the closing of the sale or other
disposition of the Issuer Common Stock or other securities pursuant to such
registration statement shall occur substantially simultaneously with the
exercise of the Option.
(c) Concurrently with the preparation and filing of a registration
statement under Section 6(a) hereof, Issuer shall also make all filings required
to comply with state securities laws in such number of states as Grantee may
reasonably request.
SECTION 7. (a) Upon the occurrence of a Purchase Event that occurs prior
to an Exercise Termination Event, (i) at the request (the date of such request
being the "Option Repurchase Request Date") of Grantee, Issuer shall repurchase,
subject to compliance with applicable law and out of funds legally available
therefor, the Option from Grantee at a price (the "Option Repurchase Price")
equal to the amount by which (A) the market/offer price (as defined below)
exceeds (B) the Option Price, multiplied by the number of shares for which the
Option may then be exercised and (ii) at the request (the date of such request
being the "Option Share Repurchase Request Date") of the owner of Option Shares
from time to time (the "Owner"), Issuer shall repurchase such number of the
Option Shares from the Owner as the Owner shall designate at a price (the
"Option Share Repurchase Price") equal to the market/offer price multiplied by
the number of Option Shares so designated. The term "market/offer price" shall
mean the highest of (i) the price per share of Issuer Common Stock at which a
tender offer or exchange offer therefor has been made after the date hereof and
on or
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<PAGE>
prior to the Option Repurchase Request Date or the Option Share Repurchase
Request Date, as the case may be, (ii) the price per share of Issuer Common
Stock paid or to be paid by any third party pursuant to an agreement with Issuer
(whether by way of a merger, consolidation or otherwise), (iii) the average of
the 20 highest last sale prices for shares of Issuer Common Stock as reported
within the 90-day period ending on the Option Repurchase Request Date or the
Option Share Repurchase Request Date, as the case may be, and (iv) in the event
of a sale of all or substantially all of Issuer's assets, the sum of the price
paid in such sale for such assets and the current market value of the remaining
assets of Issuer as determined by an investment banking firm selected by Grantee
or the Owner, as the case may be, and reasonably acceptable to Issuer, divided
by the number of shares of Issuer Common Stock outstanding at the time of such
sale. In determining the market/offer price, the value of consideration other
than cash shall be the value determined by an investment banking firm selected
by Grantee or the Owner, as the case may be, and reasonably acceptable to
Issuer. The investment banking firm's determination shall be conclusive and
binding on all parties.
(b) Grantee or the Owner, as the case may be, may exercise its right
to require Issuer to repurchase the Option and/or any Option Shares pursuant to
this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that Grantee or
the Owner, as the case may be, elects to require Issuer to repurchase the Option
and/or the Option Shares in accordance with the provisions of this Section 7.
As promptly as practicable, and in any event within 30 business days after the
surrender of the Option and/or certificates representing Option Shares and the
receipt of such notice or notices relating thereto, Issuer shall deliver or
cause to be delivered to Grantee the Option Repurchase Price or to the Owner the
Option Share Repurchase Price.
(c) Issuer hereby undertakes to use its reasonable best efforts to
obtain all required regulatory, shareholder and legal approvals and to file any
required notices as promptly as practicable in order to accomplish any
repurchase contemplated by this Section 7. Nonetheless, to the extent that
Issuer is prohibited under applicable law or regulation from repurchasing any
Option and/or any Option Shares in full, Issuer shall promptly so notify Grantee
and/or the Owner and thereafter deliver or cause to be delivered, from time to
time, to Grantee and/or the Owner, as appropriate, the portion of the Option
Repurchase Price and the Option Share Repurchase Price, respectively, that it is
no longer prohibited from delivering, within five business days after the date
on which Issuer is no longer so prohibited; provided, however, that if Issuer at
any time after delivery of a notice of repurchase pursuant to Section 7(b)
hereof is prohibited as referred to above, from delivering to Grantee and/or the
Owner, as appropriate, the Option Repurchase Price or the Option Share
Repurchase Price, respectively, in full, Grantee or the Owner, as appropriate,
may revoke its notice of repurchase of the Option or the Option Shares either in
whole or in part whereupon, in the case of a revocation in part, Issuer shall
promptly (i) deliver to Grantee and/or the Owner, as appropriate, that portion
of the Option Purchase Price or the Option Share Repurchase Price that Issuer is
not prohibited from delivering after taking into account any such revocation and
(ii) deliver, as appropriate, either (A) to Grantee, a new Agreement evidencing
the right of Grantee to purchase that number of shares of Issuer Common Stock
equal to the number of shares of Issuer Common Stock purchasable immediately
prior to the delivery of the notice of repurchase less the number of shares of
Issuer Common Stock covered by the portion of the Option repurchased or, (B) to
the Owner, a certificate for the number of Option Shares covered by the
revocation.
(d) Issuer shall not enter into any agreement with any Person (other
than Grantee or a Grantee Subsidiary) for an Acquisition Transaction unless the
other Person assumes all the obligations of Issuer pursuant to this Section 7 in
the event that Grantee or the Owner elects, in its sole discretion, to require
such other Person to perform such obligations.
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<PAGE>
SECTION 8. (a) In the event that prior to an Exercise Termination Event,
Issuer shall enter into a letter of intent or definitive agreement (i) to
consolidate or merge with any Person (other than Grantee or a Grantee
Subsidiary), and Issuer shall not be the continuing or surviving corporation of
such consolidation or merger, (ii) to permit any Person (other than Grantee or a
Grantee Subsidiary) to merge into Issuer, and Issuer shall be the continuing or
surviving corporation, but, in connection with such merger, the then outstanding
shares of Issuer Common Stock shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other property or the then
outstanding shares of Issuer Common Stock shall after such merger represent less
than 50% of the outstanding shares and share equivalents of the merged company,
or (iii) to sell or otherwise transfer all or substantially all of its assets to
any Person (other than Grantee or a Grantee Subsidiary) then, and in each such
case, such letter of intent or definitive agreement governing such transaction
shall make proper provision so that the Option shall, upon the consummation of
such transaction and upon the terms and conditions set forth herein, be
converted into, or exchanged for, an option (the "Substitute Option"), at the
election of Grantee, of either (x) the Acquiring Corporation (as defined below)
or (y) any person that controls the Acquiring Corporation (the Acquiring
Corporation and any such controlling person being hereinafter referred to as the
"Substitute Option Issuer").
(b) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock (as is hereinafter defined) as is equal to the
market/offer price (as defined in Section 7 hereof) multiplied by the number of
shares of Issuer Common Stock for which the Option was theretofore exercisable,
divided by the Average Price (as hereinafter defined). The exercise price of the
Substitute Option per share of the Substitute Common Stock (the "Substitute
Purchase Price") shall then be equal to the Option Price multiplied by a
fraction in which the numerator is the number of shares of Issuer Common Stock
for which the Option was theretofore exercisable and the denominator is the
number of shares for which the Substitute Option is exercisable.
(c) The Substitute Option shall otherwise have the same terms as the
Option, provided, that if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as possible
and in no event less advantageous to Grantee, provided, further that the terms
of the Substitute Option shall include (by way of example and not limitation)
provisions for the repurchase of the Substitute Option and Substitute Common
Stock by the Substitute Option Issuer on the same terms and conditions as
provided in Section 7 hereof.
(d) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if other
than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving corporation, and (iii) the transferee of all or any substantial
part of Issuer's assets.
(ii) "Substitute Common Stock" shall mean the common stock
issued by the Substitute Option Issuer upon exercise of the Substitute
Option.
(iii) "Average Price" shall mean the average closing price of a
share of Substitute Common Stock for the one-year period immediately
preceding the consolidation, merger or sale in question, but in no event
higher than the closing price of the shares of Substitute Common Stock on
the day preceding such consolidation, merger or sale; provided, that if
Issuer is the issuer of the Substitute Option, the Average Price shall be
computed with respect to a share of Issuer Common Stock issued by Issuer,
the corporation merging into Issuer or by any company which controls or is
controlled by such merging corporation, as Grantee may elect.
-8-
<PAGE>
(e) In no event, pursuant to any of the foregoing paragraphs, shall
the Substitute Option be exercisable for more than 19.99% of the shares of
Substitute Common Stock outstanding immediately prior to the issuance of the
Substitute Option. In the event that the Substitute Option would be exercisable
for more than such number of shares of Substitute Common Stock but for this
clause (e), the Substitute Option Issuer shall make a cash payment to Grantee
equal to the excess of (i) the value of the Substitute Option without giving
effect to the limitation in this clause (e) over (ii) the value of the
Substitute Option after giving effect to the limitation in this clause (e). This
difference in value shall be determined by a nationally recognized investment
banking firm selected by Grantee and the Substitute Option Issuer. In addition,
the provisions of Section 5(a) hereof shall not apply to the issuance of any
Substitute Option and for purposes of applying Section 5(a) hereof thereafter to
any Substitute Option, the percentage referred to in Section 5(a) hereof shall
thereafter equal the percentage that the percentage of the shares of Substitute
Common Stock subject to the Substitute Option bears to the number of shares of
Substitute Common Stock outstanding.
SECTION 9. Notwithstanding Sections 2, 6 and 7 hereof, if Grantee has
given the notice referred to in one or more of such Sections, the exercise of
the rights specified in any such Section shall be extended (a) if the exercise
of such rights requires obtaining regulatory approvals (including any required
waiting periods) to the extent necessary to obtain all regulatory approvals for
the exercise of such rights, and (b) to the extent necessary to avoid liability
under Section 16(b) of the Exchange Act by reason of such exercise; provided,
that in no event shall any closing date occur more than 12 months after the
related notice date, and, if the closing date shall not have occurred within
such period due to the failure to obtain any required approval by the OTS, the
FDIC, the FRB, the Connecticut Commissioner or any other Governmental Authority
despite the best efforts of Issuer or the Substitute Option Issuer, as the case
may be, to obtain such approvals, the exercise of the rights shall be deemed to
have been rescinded as of the related notice date. In the event (a) Grantee
receives official notice that an approval of the OTS, the FDIC, the FRB, the
Connecticut Commissioner or any other Governmental Authority required for the
purchase and sale of the Option Shares will not be issued or granted or (b) a
closing date has not occurred within 12 months after the related notice date due
to the failure to obtain any such required approval, Grantee shall be entitled
to exercise the Option in connection with the concurrent resale of the Option
Shares pursuant to a registration statement as provided in Section 6 hereof.
Nothing contained in this Agreement shall restrict Grantee from specifying
alternative means of exercising rights pursuant to Sections 2, 6 or 7 hereof in
the event that the exercising of any such rights shall not have occurred due to
the failure to obtain any required approval referred to in this Section 9.
SECTION 10. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has the requisite corporate power and authority to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly approved by the Board of
Directors of Issuer and no other corporate proceedings on the part of Issuer are
necessary to authorize this Agreement or to consummate the transactions so
contemplated. This Agreement has been duly executed and delivered by, and
constitutes a valid and binding obligation of, Issuer, enforceable against
Issuer in accordance with its terms, subject to any required Governmental
Approval, and except as enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium and other similar laws
affecting the enforcement of creditors' rights generally and except that the
availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding may
be brought.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this
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<PAGE>
Agreement in accordance with its terms will have reserved for issuance upon the
exercise of the Option, that number of shares of Issuer Common Stock equal to
the maximum number of shares of Issuer Common Stock at any time and from time to
time issuable hereunder, and all such shares, upon issuance pursuant hereto,
will be duly authorized, validly issued, fully paid, non-assessable, and will be
delivered free and clear of all claims, liens, encumbrances and security
interests and not subject to any preemptive rights.
SECTION 11. (a) Neither of the parties hereto may assign any of its
rights or delegate any of its obligations under this Agreement or the Option
created hereunder to any other Person without the express written consent of the
other party, except that Grantee may assign this Agreement to a wholly owned
subsidiary of Grantee and Grantee may assign its rights hereunder in whole or in
part after the occurrence of a Preliminary Purchase Event. The term "Grantee" as
used in this Agreement shall also be deemed to refer to Grantee's permitted
assigns.
(b) Any assignment of rights of Grantee to any permitted assignee
of Grantee hereunder shall bear the restrictive legend at the beginning thereof
substantially as follows:
The transfer of the option represented by this assignment and
the related option agreement is subject to resale restrictions arising
under the Securities Act of 1933, as amended, and applicable state
securities laws and to certain provisions of an agreement between Webster
Financial Corporation and MECH Financial, Inc., dated as of December 1,
1999. A copy of such agreement is on file at the principal office of
Webster Financial Corporation, and will be provided to any permitted
assignee of the Option without charge upon receipt of a written request
therefor.
SECTION 12. Each of Grantee and Issuer will use its reasonable efforts to
make all filings with, and to obtain consents of, all third parties and
Governmental Authorities necessary to the consummation of the transactions
contemplated by this Agreement, including, without limitation, applying to the
OTS, the FDIC, the FRB, the Connecticut Commissioner and any other Governmental
Authority for approval to acquire the shares issuable hereunder.
SECTION 13. parties hereto acknowledge that damages would be an inadequate
remedy for a breach of this Agreement by either party hereto and that the
obligations of the parties hereto shall be enforceable by either party hereto
through injunctive or other equitable relief. Both parties further agree to
waive any requirement for the securing or posting of any bond in connection with
the obtaining of any such equitable relief and that this provision is without
prejudice to any other rights that the parties hereto may have for any failure
to perform this Agreement.
SECTION 14. If any term, provision, covenant or restriction contained in
this Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no way be affected, impaired
or invalidated. If for any reason such court or regulatory agency determines
that Grantee is not permitted to acquire, or Issuer is not permitted to
repurchase pursuant to Section 7 hereof, the full number of shares of Issuer
Common Stock provided in Section 1 hereof (as adjusted pursuant hereto), it is
the express intention of Issuer to allow Grantee to acquire or to require Issuer
to repurchase such lesser number of shares as may be permissible without any
amendment or modification hereof.
SECTION 15. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in the manner
and at the respective addresses of the parties set forth in the Plan.
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<PAGE>
SECTION 16. This Agreement, the rights and obligations of the parties
hereto, and any claims or disputes relating thereto shall be governed by and
construed in accordance with the laws of the State of Delaware (but not
including the choice of law rules thereof).
SECTION 17. This Agreement may be executed in counterparts, each of which
shall be deemed to be an original, but all of which shall constitute one and the
same agreement and shall be effective at the time of execution and delivery.
SECTION 18. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder.
SECTION 19. Except as otherwise expressly provided herein or in the Plan,
this Agreement contains the entire agreement between the parties with respect to
the transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereof, written or oral. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns. Nothing in this
Agreement, expressed or implied, is intended to confer upon any party, other
than the parties hereto, and their respective successors except as assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided herein.
SECTION 20. Capitalized terms used in this Agreement and not defined herein
but defined in the Plan shall have the meanings assigned thereto in the Plan.
SECTION 21. Nothing contained in this Agreement shall be deemed to
authorize or require Issuer or Grantee to breach any provision of the Plan or
any provision of law applicable to the Grantee or Issuer.
SECTION 22. In the event that any selection or determination is to be made
by Grantee or the Owner hereunder and at the time of such selection or
determination there is more than one Grantee or Owner, such selection shall be
made by a majority in interest of such Grantees or Owners .
SECTION 23. In the event of any exercise of the option by Grantee, Issuer
and such Grantee shall execute and deliver all other documents and instruments
and take all other action that may be reasonably necessary in order to
consummate the transactions provided for by such exercise.
SECTION 24. Except to the extent Grantee exercises the Option, Grantee
shall have no rights to vote or receive dividends or have any other rights as a
shareholder with respect to shares of Issuer Common Stock covered hereby.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Option
Agreement to be executed and delivered on its behalf by their respective
officers thereunto duly authorized, all as of the date first above written.
Webster Financial Corporation
By: _____________________________
Name:
Title:
MECH Financial, Inc.
By: _____________________________
Name:
Title:
<PAGE>
Exhibit C
CERTIFICATE OF MERGER
MECH Financial, Inc.
into
Webster Financial Corporation
Pursuant to Title 33, Section 821 of the Connecticut Business
Corporation Act and pursuant to Title 8, Section 252 of the General Corporation
Law of the State of Delaware, Webster Financial Corporation, a corporation
organized and existing under the law of the State of Delaware ("Webster"), and
MECH Financial, Inc., a corporation organized and existing under the law of the
State of Connecticut ("MECH"), do hereby certify to the following facts relating
to the merger (the "Merger") of MECH with and into Webster:
FIRST: The name and state of incorporation of each constituent
corporation that is a party to the merger is as follows:
Name State of Incorporation
---- ----------------------
Webster Financial Corporation Delaware
MECH Financial, Inc. Connecticut
SECOND: An Agreement and Plan of Merger, dated as of December 1,
1999, by and between Webster and MECH (the "Agreement and Plan of Merger"), has
been approved, adopted, certified, executed and acknowledged by each of the
constituent corporations in accordance with the requirements of Section 252 of
the General Corporation Law of the State of Delaware.
THIRD: Pursuant to the Agreement and Plan of Merger, the surviving
corporation in the merger is Webster Financial Corporation, a Delaware
corporation (the "Surviving Corporation"), and the name of the Surviving
Corporation shall continue to be "Webster Financial Corporation." The Surviving
Corporation shall continue its existence under its present name pursuant to the
provisions of the General Corporation Law of the State of Delaware.
<PAGE>
FOURTH: The Certificate of Incorporation, as amended, of the
Surviving Corporation shall be its certificate of incorporation.
FIFTH: Pursuant to Title 33, Section 817(g) of the Connecticut
Business Corporation Act and pursuant to Title 8, Section 252(e) of the General
Corporation Law of the State of Delaware, action by the shareholders of the
Surviving Corporation on the Agreement and Plan of Merger and the Merger is not
required.
SIXTH: As of _____________, MECH had issued and outstanding
________________ shares of MECH Common Stock, each of which such shares is
entitled to one vote on the Agreement and Plan of Merger and the Merger.
SEVENTH: _______ of the issued and outstanding shares of MECH's
Common Stock, which is a majority of the issued and outstanding shares of MECH's
Common Stock and which is sufficient for approval by the MECH's Common Stock
voting as a group, have been voted in favor of the Agreement and Plan of Merger
and the Merger.
EIGHTH: The executed Agreement and Plan of Merger is on file at the
office of the Surviving Corporation at the following address:
Webster Financial Corporation
Webster Plaza
Waterbury, Connecticut 06702
NINTH: A copy of the Agreement and Plan of Merger will be furnished
by the Surviving Corporation, on request and without cost, to any stockholder of
any constituent corporation.
IN WITNESS WHEREOF, Webster Financial Corporation has caused this
Certificate of Merger to be duly executed as of this ___ day of ______, 2000, to
be effective at ______ ___ on __________ ___, 2000.
ATTEST WEBSTER FINANCIAL CORPORATION
By:_________________________________ By:_________________________________
Harriet Munrett Wolfe James C. Smith
Senior Vice President, Counsel Chairman and Chief Executive
and Corporate Secretary Officer
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<PAGE>
Harriet Munrett Wolfe James C. Smith
Senior Vice President, Counsel and Chairman and Chief Executive Officer
Corporate Secretary
-3-
<PAGE>
Exhibit D
MECH Financial, Inc.
MECH STOCKHOLDER AGREEMENT
This STOCKHOLDER AGREEMENT, dated as of December 1, 1999, is entered
into by and among Webster Financial Corporation, a Delaware corporation
("Webster"), and the stockholders of MECH Financial, Inc., a Connecticut
corporation ("MECH"), identified on Schedule I hereto (collectively, the
"Stockholders"), who are directors, executive officers or other affiliates of
MECH (for purposes of Rule 145 under the Securities Act of 1933, as amended, and
for purposes of qualifying the Merger (defined below) for "pooling-of-interests"
accounting treatment).
WHEREAS, Webster and MECH have entered into an Agreement and Plan of
Merger, dated as of December 1, 1999 (the "Agreement"), which is conditioned
upon the execution of this Stockholder Agreement and which provides for, among
other things, the merger of MECH with and into Webster, in a stock-for-stock
transaction (the "Merger"); and
WHEREAS, in order to induce Webster to enter into and consummate the
Agreement, each of the Stockholders agrees to, among other things, vote in favor
of the Agreement, the Merger and the other transactions contemplated by the
Agreement in his or her capacity as a stockholder of MECH.
NOW, THEREFORE in consideration of the premises, the mutual covenants
and agreements set forth herein and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Ownership of MECH Common Stock. Each Stockholder represents and
warrants that the number of shares of MECH common stock, par value $.01 per
share ("MECH Common Stock"), set forth opposite such Stockholder's name on
Schedule I hereto is the total number of shares of MECH Common Stock over which
such person has "beneficial ownership" within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934, as amended, except that the provisions of
Rule 13d-3(d)(1)(i) shall be considered without any limit as to time.
2. Agreements of the Stockholders. Each Stockholder covenants and agrees
that:
(a) Such Stockholder shall, at any meeting of the holders of any or
all classes or series of MECH Common Stock called for the purpose (or in
connection with any action taken by written consent), vote or cause to be voted
all shares of MECH Common Stock with respect to which such Stockholder has
voting power (including the power to vote or to direct the voting of) whether
owned as of the date hereof or hereafter acquired in favor of the Agreement, the
Merger and the other transactions contemplated by the Agreement.
(b) Such Stockholder shall not sell, pledge, transfer or otherwise
dispose of his or her shares of MECH Common Stock unless advised by KPMG that
such sale, pledge, transfer or other disposition will not jeopardize the
pooling-of-interest accounting treatment in the Merger.
(c) Such Stockholder shall not in his or her capacity as a
stockholder of MECH directly or indirectly encourage or solicit, initiate or
hold discussions or negotiations with, or provide any information to, any
person, entity or group (other than Webster or an affiliate thereof) concerning
any merger, sale of all or substantially all of the assets or liabilities
<PAGE>
not in the ordinary course of business, sale of shares of capital stock or
similar transaction involving MECH or otherwise inconsistent with the Agreement
or the transactions contemplated thereby. Nothing herein shall impair such
Stockholder's fiduciary obligations as a director of MECH.
(d) Such Stockholder acting as a Stockholder and not as a director
shall use his or her best efforts to take or cause to be taken all action, and
to do or cause to be done all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective the Merger
contemplated by the Agreement.
(e) Such Stockholder shall not, prior to the public release by
Webster of an earnings report to its stockholders covering at least 30 days of
operations after consummation of the Merger (the "Restricted Period"), sell,
pledge (other than the replacement of a pledge existing on the date hereof of
MECH Common Stock), transfer or otherwise dispose of the shares of Webster
common stock, par value $.01 per share (the "Webster Common Stock"), to be
received by him or her for his or her shares of MECH Common Stock upon
consummation of the Merger.
(f) Such Stockholder shall comply with all applicable federal and
state securities laws in connection with any sale of Webster Common Stock
received in exchange for MECH Common Stock in the Merger, including the trading
and volume limitations as to sales by affiliates contained in Rule 145 under the
Securities Act of 1933, as amended. Such Stockholder acknowledges and agrees
that any shares of Webster Common Stock received in the Merger or otherwise will
include appropriate legends as to the restrictions set forth in this Agreement
and under applicable federal securities laws.
3. Termination. The parties agree and intend that this Stockholder
Agreement be a valid and binding agreement enforceable against the parties
hereto and that damages and other remedies at law for the breach of this
Stockholder Agreement are inadequate. This Stockholder Agreement may be
terminated at any time prior to the consummation of the Merger by the written
consent of the parties hereto and shall be automatically terminated in the event
that the Agreement is terminated in accordance with its terms.
4. Notices. Notices may be provided to Webster and the Stockholders in
the manner specified in the Agreement, with all notices to the Stockholders
being provided to them at the addresses set forth at Schedule I.
5. Governing Law. This Stockholder Agreement shall be governed by the
laws of the State of Delaware, without giving effect to the principles of
conflicts of laws thereof.
6. Counterparts. This Stockholder Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same and each of
which shall be deemed an original.
7. Headings. The Section headings contained herein are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Stockholder Agreement.
8. Regulatory Approval. If any provision of this Stockholder Agreement
requires the approval of any regulatory authority in order to be enforceable,
then such provision shall not be effective until such approval is obtained;
provided, however, that the foregoing shall not affect the enforceability of any
other provision of this Stockholder Agreement.
SIGNATURE PAGE FOLLOWS
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<PAGE>
IN WITNESS WHEREOF, Webster, by a duly authorized officer, and each of
the Stockholders have caused this Stockholder Agreement to be executed and
delivered as of the day and year first above written.
WEBSTER FINANCIAL CORPORATION
By: ______________________________________
James C. Smith
Chairman and Chief Executive Officer
<PAGE>
STOCKHOLDERS:
___________________________________ ___________________________________
___________________________________ ___________________________________
___________________________________ ___________________________________
___________________________________ ___________________________________
___________________________________ ___________________________________
___________________________________ ___________________________________
<PAGE>
SCHEDULE I
Number of Shares of MECH Common
Name and Address of Stockholder Stock Beneficially Owned
- ------------------------------- -------------------------------
<PAGE>
Exhibit E
FORM OF LEGAL OPINION OF COUNSEL
FOR MECH FINANCIAL, INC.
(a) MECH Financial, Inc. ("MECH") was incorporated, and is validly
existing as a Connecticut corporation as of the date of the certificate
specified in Paragraph __ above, under the laws of the State of Connecticut.
MECH has the corporate power and corporate authority under its Certificate of
Incorporation and the Connecticut Business Corporations Act (the "Connecticut
Corporation Law") to own, lease and operate its current properties and to
transact the business in which it is currently engaged as described in the Proxy
Statement/Prospectus. Mechanics Savings Bank ("MS Bank") was incorporated and
is validly existing and in good standing as a Connecticut chartered savings
bank, as of the date of certificate specified in Paragraph __ above, under laws
of the State of Connecticut. MS Bank has the corporate power and corporate
authority under its Certificate of Incorporation and the Banking Law of
Connecticut to own, lease and operate its current properties and to transact the
business in which it is currently engaged as described in the Proxy
Statement/Prospectus.
(b) MECH has the corporate power and corporate authority under its
Certificate of Incorporation and the Connecticut Corporation Law to execute and
deliver the Agreement and Plan of Merger (the "Agreement") and to perform its
obligations thereunder. The execution, delivery and performance as of the date
hereof by MECH of the Agreement has been duly authorized by all necessary
corporate action of MECH. MS Bank has the corporate power and corporate
authority under its Certificate of Incorporation and the Banking Law of
Connecticut to execute and deliver the Articles of Combination and Bank Merger
Agreement ("Bank Merger Agreement") and to perform its obligations thereunder.
The execution, delivery and performance as of the date hereof by MS Bank of the
Bank Merger Agreement has been authorized by all necessary corporate action of
MS Bank.
(c) The Agreement has been duly executed and delivered on behalf of
MECH. The Bank Merger Agreement has been duly executed and delivered on behalf
of MS Bank.
(d) The execution, delivery and performance as of the date hereof by
MECH of the Agreement do not (i) require any approval of its shareholders that
has not been obtained; (ii) violate the Banking Law of Connecticut, the
Connecticut Corporation Law or the Certificate of Incorporation or Bylaws of
MECH; (iii) violate any applicable law, rule, regulation or, to our knowledge,
any order, judgment or decree of the Board of Governors of the Federal Reserve
System (the "Federal Reserve Board"), the State of Connecticut Department of
Banking (the "Department") or the Federal Deposit Insurance Corporation (the
"FDIC"); (iv) to our knowledge, breach or constitute a default under any
material contract of MECH as such term is defined in Regulation S-K (17 C.F.R.
(S)229.610(b)10)); or (v) to our knowledge, result in the creation of any lien
upon any of the properties of MECH pursuant to any such contracts. The
execution, delivery and performance as of the date hereof by MS Bank of the Bank
Merger Agreement do not (i) require any approval of its shareholders that has
not been obtained; (ii) violate the Banking Law of Connecticut, the Connecticut
Corporation Law or the Certificate of Incorporation or Bylaws of MS Bank; (iii)
violate any applicable law, rule, regulation or, to our knowledge, any order,
judgment or decree of the Federal Reserve Board, the Department or the FDIC;
(iv) to our knowledge, breach or constitute a default under any material
contract of MS Bank as such term is defined in Regulation S-K (17 C.F.R.
(S)229.610(b)10)); or (v) to our knowledge, result in the creation of any lien
upon any of the properties of MS Bank pursuant to any such contracts.
<PAGE>
(e) The authorized, issued and outstanding capital stock of MECH, as
of _____________, 2000, is ___________. This is a change of ___________ shares
from that disclosed in the Proxy Statement/Prospectus under the caption
"__________." The shares of common stock shown as issued and outstanding under
said caption are duly authorized and are validly issued, fully paid and
nonassessable. To our knowledge, there are no other shares of capital stock of
MECH outstanding at that date. No holder of outstanding shares of common stock
of MECH has any statutory preemptive right under applicable law or, to our
knowledge, any contractual right to subscribe for any of such shares, except
pursuant to the Option Agreement between MECH and Webster Financial Corporation
("Webster"), the Mechanics Savings Bank 1996 Director Stock Option Plan and the
Mechanics Savings Bank 1996 Officer Stock Option Plan, described in the Proxy
Statement/Prospectus. To our knowledge, MECH has not issued any outstanding
securities convertible into or exchangeable for, or outstanding options,
warrants or other rights to purchase or to subscribe for, any shares of stock or
other securities of MECH, except as described in the Proxy Statement/Prospectus.
(f) No approval or consent of, or registration or filing with, the
Federal Reserve Board, the Department or the FDIC or any third party is required
to be obtained or made by MECH or MS Bank in connection with the execution,
delivery and performance as of the date hereof of the Agreement by MECH or the
Bank Merger Agreement by MS Bank (other than those approvals, consents,
registrations or filings that have been obtained or made). [In rendering the
foregoing opinion, we note that there are certain post-closing filings that must
be made with the Department and the FDIC with respect to the merger contemplated
by the Agreement.]
(g) During the course of the preparation of the Proxy
Statement/Prospectus, we participated in conferences with officers, employees,
and other representatives of MECH, with representatives of the independent
public accountants of MECH, and with Webster and its representatives, at which
conferences the contents of the Proxy Statement/Prospectus and related matters
were discussed. While we have not undertaken to determine independently, and we
do not assume any responsibility for, the accuracy, completeness or fairness of
the statements in the Proxy Statement/Prospectus, we may state on the basis of
these conferences and our activities as counsel to MECH in connection with the
Proxy Statement/Prospectus, that no facts have come to our attention which cause
us to believe that the Proxy Statement/Prospectus (other than the financial
statements and financial and statistical data included therein, as to which no
opinion is rendered), as of its date and as of _______, 2000 [the date of the
MECH shareholder vote], contained an untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein, not misleading, or that the Proxy
Statement/Prospectus, as of the date hereof, contains an untrue statement of a
material fact or omits to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(h) There are no actions, suits or proceedings pending or, to our
knowledge, threatened against MECH or MS Bank, or in which MECH or MS Bank is a
party, before any court or governmental department, commission, board, bureau,
agency or instrumentality that question the validity of the Agreement or any
action taken or to be taken pursuant thereto, or that seek to enjoin or
otherwise prevent the consummation of the transactions contemplated by the
Agreement or to recover in damages or obtain other relief as a result thereof.
-2-
<PAGE>
EXHIBIT 2.1
AMENDMENT NUMBER 1 TO THE
AGREEMENT AND PLAN OF MERGER
This AMENDMENT NUMBER 1 to the AGREEMENT AND PLAN OF MERGER, dated as of
December 21, 1999 (this "Amendment"), is entered into by and between Webster
Financial Corporation, a Delaware corporation ("Webster") and MECH Financial,
Inc., a Connecticut corporation ("MECH"). Unless otherwise defined herein,
capitalized terms in this Amendment are as defined in the Agreement.
WHEREAS, Webster and MECH entered into an Agreement and Plan of Merger,
dated as of December 1, 1999 (the "Agreement") pursuant to which, among other
things, MECH will merge with and into Webster; and
WHEREAS, the Boards of Directors of Webster and MECH have determined that
it is advisable and in the best interests of their respective companies and
shareholders to amend the Agreement to provide that the Merger contemplated by
the Agreement may be accounted for as a purchase transaction;
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements contained herein and in the Agreement, and intending
to be legally bound hereby, the parties agree to amend Agreement as follows:
FIRST
MECH hereby represents and warrants to Webster, which representation and
warranty is being relied upon by Webster as a material inducement to enter into
and perform this Amendment, that MECH has received an oral opinion from KBW, to
be confirmed in writing, to the effect that, in KBW's opinion, the consideration
to be paid by Webster to stockholders of MECH pursuant to the Agreement, as
amended hereby, is fair to such holders of MECH Common Stock from a financial
point of view ("Updated Fairness Opinion") and KBW has consented to the
inclusion of the written Updated Fairness Opinion in the Registration Statement.
SECOND
Section 1.10 of the Agreement is hereby revised and replaced in its entirety by
the following language:
1.10 Accounting Treatment.
<PAGE>
It is intended that the Merger be accounted for as a "purchase"
transaction under generally accepted accounting principles ("GAAP"),
unless otherwise determined by Webster.
THIRD
Section 4.11 of the Agreement is hereby revised and replaced in its entirety by
the following language:
4.11 Tax and Accounting Treatment of Merger.
As of the date of this Agreement, Webster is not aware of any
fact or state of affairs that could cause the Merger not to be treated
as a "reorganization" under Section 368(a) of the Code.
FOURTH
Section 5.1(k) of the Agreement is hereby revised by replacing the last sentence
thereof with the following language:
Bonus, commission and other incentive payments may continue to be made
in the ordinary course in accordance with past practices to the extent
such payments would not jeopardize the pooling-of-interests accounting
treatment for the Merger, whether or not the Merger is accounted for
as a pooling-of-interests.
FIFTH
Section 5.5 of the Agreement is hereby revised and replaced in its entirety by
the following language:
5.5 Qualified Plans.
MECH and its Subsidiary may not terminate any of their respective
plans that are intended to be "qualified" under Code section 401,
except that MECH and its Subsidiary may terminate their employee stock
ownership plan (the "MECH ESOP") and the Mechanics Savings Bank
Pension Plan to the extent that such termination would not jeopardize
the "qualified" status of either such plan. As to any of such plans
that are not terminated, pro-rata proportional accruals may be made to
the account of each participant in such plan at the Effective Time, in
accordance with the provisions of the plan and in accordance with past
practice and in the same proportion as the percentage of a year that
has passed as of the Effective Time bears to the full year. For
example, if the Effective Time is July 1, 2000, 183 days will have
passed, including
<PAGE>
the day of the Effective Time as a day that has passed, representing
50% of the days in the year 2000. Accordingly, an accrual of 50% of
the aggregate annual accrual for the applicable plan may be made at
the Effective Time. Nevertheless, no such accruals shall be made to
the extent any such accrual would jeopardize the pooling-of-interests
accounting treatment of the Merger, (whether or not the Merger is
accounted for as a pooling of interests), or the qualified status of
the applicable plan.
<PAGE>
SIXTH
Section 6.6(b) of the Agreement is hereby amended by adding the following
new sentence at the end thereof:
Notwithstanding the foregoing, if MECH and its Subsidiary terminate
the MECH ESOP before the Effective Time, Webster and Webster Bank
shall not be required to allow the MECH Employees to participate in
any employee stock ownership plan maintained by Webster or Webster
Bank until January 1, 2002.
SEVENTH
Section 7.1(g) of the Agreement is hereby deleted in its entirety.
EIGHTH
The definition of "Index Group" at Section 8.1 of the Agreement is hereby
revised and replaced in its entirety by the following language:
"Index Group" means the bank and savings and loan holding companies
set forth at Annex A hereto, the common stocks of all of which shall
be publicly traded and as to which there shall not have been, since
the Starting Date and before the Determination Date, an announcement
of a proposal for such company to be acquired or for such company to
acquire another company or companies in transactions with a value
exceeding 25% of the acquiror's market capitalization as of the
Starting Date. In the event that the common stock of any such company
ceases to be publicly traded or any such announcement is made with
respect to any such company, such company shall be removed from the
Index Group, and the weights (which have been determined based on the
number of outstanding shares of common stock) redistributed
proportionately for purposes of determining the Index Price.
IN WITNESS WHEREOF, Webster and MECH have caused this Amendment Number 1 to
the Agreement to be executed and delivered by their respective officers
thereunto duly authorized as of the date first above written.
<PAGE>
WEBSTER FINANCIAL CORPORATION
ATTEST:
By:_____________________________________ By:________________________________
Name: Harriet Munrett Wolfe Name: James C. Smith
Title: Senior Vice President, Title: Chairman and Chief Executive
General Counsel and Secretary Officer
MECH FINANCIAL, INC.
ATTEST:
By:_____________________________________ By:________________________________
Name: Thomas M. Wood Name: Edgar C. Gerwig
Title: Executive Vice President Title: Chairman, President and
Chief Executive Officer
<PAGE>
Annex A
-------
Company Symbol Weighing (%)
- ------- ------ ------------
Peoples Heritage Financial Group, Inc. PHBK 11.67%
Astoria Financial Corporation ASFC 11.60%
Valley National Bancorp VLY 10.48%
Roslyn Bancorp, Inc. RSLN 9.58%
People's Bank (MHC) PBCT 9.23%
Fulton Financial Corporation FULT 9.16%
Commerce Bancorp, Inc. CBH 8.53%
Chittenden Corporation CHZ 6.33%
Independence Community Bancorp ICBC 5.70%
Staten Island Bancorp, Inc. SIB 5.17%
Susquehanna Bancshares, Inc. SUSQ 4.33%
Queens County Bancorp, Inc. QCSB 4.22%
Richmond County Financial Corp. RCBK 4.01%
-----
100.0%
<PAGE>
Exhibit 10.19
MECH Financial, Inc.
MECH STOCKHOLDER AGREEMENT
This STOCKHOLDER AGREEMENT, dated as of December 1, 1999, is entered into
by and among Webster Financial Corporation, a Delaware corporation ("Webster"),
and the stockholders of MECH Financial, Inc., a Connecticut corporation
("MECH"), identified on Schedule I hereto (collectively, the "Stockholders"),
who are directors, executive officers or other affiliates of MECH (for purposes
of Rule 145 under the Securities Act of 1933, as amended, and for purposes of
qualifying the Merger (defined below) for "pooling-of-interests" accounting
treatment).
WHEREAS, Webster and MECH have entered into an Agreement and Plan of
Merger, dated as of December 1, 1999 (the "Agreement"), which is conditioned
upon the execution of this Stockholder Agreement and which provides for, among
other things, the merger of MECH with and into Webster, in a stock-for-stock
transaction (the "Merger"); and
WHEREAS, in order to induce Webster to enter into and consummate the
Agreement, each of the Stockholders agrees to, among other things, vote in favor
of the Agreement, the Merger and the other transactions contemplated by the
Agreement in his or her capacity as a stockholder of MECH.
NOW, THEREFORE in consideration of the premises, the mutual covenants and
agreements set forth herein and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Ownership of MECH Common Stock. Each Stockholder represents and warrants
that the number of shares of MECH common stock, par value $.01 per share ("MECH
Common Stock"), set forth opposite such Stockholder's name on Schedule I hereto
is the total number of shares of MECH Common Stock over which such person has
"beneficial ownership" within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended, except that the provisions of Rule
13d-3(d)(1)(i) shall be considered without any limit as to time.
2. Agreements of the Stockholders. Each Stockholder covenants and agrees
that:
(a) Such Stockholder shall, at any meeting of the holders of any or all
classes or series of MECH Common Stock called for the purpose (or in connection
with any action taken by written consent), vote or cause to be voted all shares
of MECH Common Stock with respect to which such Stockholder has voting power
(including the power to vote or to direct the voting of) whether owned as of the
date hereof or hereafter acquired in favor of the Agreement, the Merger and the
other transactions contemplated by the Agreement.
(b) Such Stockholder shall not sell, pledge, transfer or otherwise
dispose of his or her shares of MECH Common Stock unless advised by KPMG that
such sale, pledge, transfer or other disposition will not jeopardize the
pooling-of-interest accounting treatment in the Merger.
(c) Such Stockholder shall not in his or her capacity as a stockholder
of MECH directly or indirectly encourage or solicit, initiate or hold
discussions or negotiations with, or provide any information to, any person,
entity or group (other than Webster or an affiliate thereof) concerning any
merger, sale of all or substantially all of the assets or liabilities
<PAGE>
not in the ordinary course of business, sale of shares of capital stock or
similar transaction involving MECH or otherwise inconsistent with the Agreement
or the transactions contemplated thereby. Nothing herein shall impair such
Stockholder's fiduciary obligations as a director of MECH.
(d) Such Stockholder acting as a Stockholder and not as a director shall
use his or her best efforts to take or cause to be taken all action, and to do
or cause to be done all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the Merger contemplated by
the Agreement.
(e) Such Stockholder shall not, prior to the public release by Webster
of an earnings report to its stockholders covering at least 30 days of
operations after consummation of the Merger (the "Restricted Period"), sell,
pledge (other than the replacement of a pledge existing on the date hereof of
MECH Common Stock), transfer or otherwise dispose of the shares of Webster
common stock, par value $.01 per share (the "Webster Common Stock"), to be
received by him or her for his or her shares of MECH Common Stock upon
consummation of the Merger.
(f) Such Stockholder shall comply with all applicable federal and state
securities laws in connection with any sale of Webster Common Stock received in
exchange for MECH Common Stock in the Merger, including the trading and volume
limitations as to sales by affiliates contained in Rule 145 under the Securities
Act of 1933, as amended. Such Stockholder acknowledges and agrees that any
shares of Webster Common Stock received in the Merger or otherwise will include
appropriate legends as to the restrictions set forth in this Agreement and under
applicable federal securities laws.
3. Termination. The parties agree and intend that this Stockholder
Agreement be a valid and binding agreement enforceable against the parties
hereto and that damages and other remedies at law for the breach of this
Stockholder Agreement are inadequate. This Stockholder Agreement may be
terminated at any time prior to the consummation of the Merger by the written
consent of the parties hereto and shall be automatically terminated in the event
that the Agreement is terminated in accordance with its terms.
4. Notices. Notices may be provided to Webster and the Stockholders in the
manner specified in the Agreement, with all notices to the Stockholders being
provided to them at the addresses set forth at Schedule I.
5. Governing Law. This Stockholder Agreement shall be governed by the laws
of the State of Delaware, without giving effect to the principles of conflicts
of laws thereof.
6. Counterparts. This Stockholder Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same and each of
which shall be deemed an original.
7. Headings. The Section headings contained herein are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Stockholder Agreement.
8. Regulatory Approval. If any provision of this Stockholder Agreement
requires the approval of any regulatory authority in order to be enforceable,
then such provision shall not be effective until such approval is obtained;
provided, however, that the foregoing shall not affect the enforceability of any
other provision of this Stockholder Agreement.
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<PAGE>
SIGNATURE PAGE FOLLOWS
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<PAGE>
IN WITNESS WHEREOF, Webster, by a duly authorized officer, and each of the
Stockholders have caused this Stockholder Agreement to be executed and delivered
as of the day and year first above written.
WEBSTER FINANCIAL CORPORATION
By: /s / James C. Smith
---------------------------------------
Chairman and Chief Executive Officer
<PAGE>
STOCKHOLDERS:
- --------------------------- -------------------------
- --------------------------- -------------------------
- --------------------------- -------------------------
- --------------------------- -------------------------
- --------------------------- -------------------------
- --------------------------- -------------------------
<PAGE>
SCHEDULE I
Number of Shares of MECH Common
Name and Address of Stockholder Stock Beneficially Owned
- ------------------------------- -------------------------------
<PAGE>
Exhibit 10.20
OPTION AGREEMENT
THE TRANSFER OF THE OPTION GRANTED
BY THIS AGREEMENT IS SUBJECT TO RESALE RESTRICTIONS.
This OPTION AGREEMENT, dated as of December 1, 1999 (this "Agreement"), is
entered into between MECH FINANCIAL, INC., a Connecticut corporation ("Issuer"),
and WEBSTER FINANCIAL CORPORATION, a Delaware corporation ("Grantee").
WITNESSETH:
WHEREAS, Grantee and Issuer have entered into an Agreement and Plan of
Merger, dated as of December 1, 1999 (the "Plan"), which was executed by the
parties thereto prior to the execution of this Agreement; and
WHEREAS, as a condition and inducement to Grantee's entering into the
Plan and in consideration therefor, Issuer has agreed to grant Grantee the
Option (as defined below).
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein and in the Plan, the parties hereto
agree as follows:
SECTION 1. Issuer hereby grants to Grantee an unconditional, irrevocable
option (the "Option") to purchase, subject to the terms hereof, up to 994,150
fully paid and nonassessable shares common stock, par value $.01 per share of
Issuer ("Issuer Common Stock") (which number of shares is equal to 19.99% of the
total number of outstanding shares of Issuer Common Stock on the date hereof),
at a price per share equal to $34.50 (the "Initial Price"); provided, however,
that in the event Issuer issues or agrees to issue any additional shares of
Issuer Common Stock (other than shares issued upon the exercise of options
outstanding as of the date of the Plan in accordance with their terms pursuant
to existing stock option plans), or grants one or more options to purchase
additional shares of Issuer Common Stock at a price less than the Initial Price,
as adjusted pursuant to Section 5(b) hereof, such price shall be equal to such
lesser price (such price, as adjusted, is hereinafter referred to as the "Option
Price"). The number of shares of Issuer Common Stock that may be received upon
the exercise of the Option and the Option Price are subject to adjustment as
herein set forth.
SECTION 2. (a) Grantee may exercise the Option, in whole or part, at any
time and from time to time following the occurrence of a Purchase Event (as
defined below); provided, however, that the Option shall terminate and be of no
further force and effect upon the earliest to occur of the following events
(which are collectively referred to as an "Exercise Termination Event"):
(i) The time immediately prior to the Effective Time;
(ii) 12 months after the first occurrence of a Purchase Event;
(iii) 12 months after the termination of the Plan following the
occurrence of a Preliminary Purchase Event (as defined below), unless
clause (vii) of this Section 2(a) is applicable;
<PAGE>
(iv) upon the termination of the Plan, prior to the occurrence of a
Purchase Event or Preliminary Purchase Event, by Issuer pursuant to
Sections 8.1(e) or (f) of the Plan, both parties pursuant to Section 8.1(a)
of the Plan, or by either party pursuant to Section 8.1(b), (c) or (h) of
the Plan;
(v) 18 months after the termination of the Plan, by either party
pursuant to Section 8.1(d) of the Plan based on the required vote of
Issuer's shareholders not being received;
(vi) 18 months after the termination of the Plan, by Grantee pursuant
to Section 8.1(e) or (f) thereof as a result of a breach by Issuer, unless
such breach was willful or intentional; or
(vii) 24 months after the termination of the Plan, by Grantee pursuant
to Section 8.1(e) or (f) thereof as a result of a willful or intentional
breach by Issuer, or by Grantee pursuant to Section 8.1(g) or (i) of the
Plan.
(b) The term "Preliminary Purchase Event" shall mean any of the following
events or transactions occurring on or after the date hereof and prior to an
Exercise Termination Event:
(i) Issuer or any of its subsidiaries without having received
Grantee's prior written consent, shall have entered into any letter of
intent or definitive agreement to engage in an Acquisition Transaction (as
defined below) with any person (as defined below) other than Grantee or any
of its subsidiaries (each a "Grantee Subsidiary") or the Board of Directors
of Issuer shall have recommended that the shareholders of Issuer approve or
accept any Acquisition Transaction with any Person (as the term "person" is
defined in Section 3(a)9 and 13(d)(3) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") and the rules and regulations
thereunder) other than Grantee or any Grantee Subsidiary. For purposes of
this Agreement "Acquisition Transaction" shall mean (x) a merger,
acquisition, consolidation or other business combination involving Issuer
or any subsidiary of Issuer, (y) a purchase, lease or other acquisition of
all or substantially all of the assets of Issuer or any subsidiary of
Issuer, (z) a purchase or other acquisition (including by way of merger,
consolidation, share exchange or otherwise) of Beneficial Ownership (as the
term "beneficial ownership" is defined in Regulation 13d-3(a) of the
Exchange Act) of securities representing 10.0% or more of the voting power
of Issuer; provided, however, that "Acquisition Transaction" shall not
include a transaction entered into after the termination of the Plan in
which the Issuer is the surviving entity, if in connection with such
transaction, no person acquires Beneficial Ownership of 10.0% or more of
the total voting power of the Issuer to be outstanding after giving effect
to such transaction and in which the aggregate voting power of Issuer
acquired by all persons is less than 15% of the total voting power of
Issuer;
(ii) Any Person (other than Grantee, any Grantee Subsidiary or any
current affiliate of Issuer) shall have acquired Beneficial Ownership of
10.0% or more of the outstanding shares of Issuer Common Stock;
(iii) (a) Any Person (other than Grantee or any Grantee Subsidiary)
shall have made a bona fide proposal to Issuer or, by a public announcement
or written communication that is or becomes the subject of public
disclosure, to Issuer's shareholders to engage in an Acquisition
Transaction (including, without limitation, any situation in which any
Person other than Grantee or any Grantee Subsidiary shall have commenced
(as such term is defined in Rule 14d-2 under the Exchange Act), or shall
-2-
<PAGE>
have filled a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to a tender offer or exchange
offer to purchase any shares of Issuer Common Stock such that, upon
consummation of such offer, such person would have Beneficial Ownership of
10.0% or more of the then outstanding shares of Issuer Common Stock (such
an offer being referred to herein as a "Tender Offer" or an "Exchange
Offer", respectively)), and (b) the shareholders of Issuer do not approve
the Merger, as defined in the Plan, at the Special Meeting, as defined in
the Plan;
(iv) There shall exist a willful or intentional breach under the
Plan by Issuer and such breach would entitle Grantee to terminate the Plan;
(v) The special meeting of Issuers' shareholders held for the
purpose of voting on the Plan shall not have been held pursuant to the Plan
or shall have been canceled prior to termination of the Plan, or for any
reason whatsoever Issuer's Board of Directors shall have failed to
recommend, or shall have withdrawn or modified in a manner adverse to
Grantee the recommendation of Issuer's Board of Directors, that Issuer's
shareholders approve the Plan, or if Issuer or Issuer's Board of Directors
fails to oppose any proposal by any Person (other than Grantee or any
Grantee Subsidiary); or
(vi) Any Person (other than Grantee or any Grantee Subsidiary)
shall have filed an application or notice with the Board of Governors of
the Federal Reserve System (the "FRB"), the Federal Deposit Insurance
Corporation (the "FDIC"), the Connecticut Banking Commissioner (the
"Connecticut Commissioner") or other regulatory or administrative agency or
commission (each, a "Governmental Authority") for approval to engage in an
Acquisition Transaction.
(c) The term "Purchase Event" shall mean any of the following events
or transactions occurring on or after the date hereof and prior to an Exercise
Termination Event:
(i) The acquisition by any Person (other than Grantee or any
Grantee Subsidiary) of Beneficial Ownership (other than on behalf of the
Issuer) of 25% or more of the then outstanding Issuer Common Stock;
(ii) The occurrence of a Preliminary Purchase Event described in
Section 2(b)(i) except that the percentage referred to in clause (z)
thereof shall be 25%; or
(iii) The termination of the Plan by Grantee pursuant to Section
8.1(e) or (f) thereof as a result of a willful or intentional breach by
Issuer, or by Grantee pursuant to Section 8.1(g) or (i) of the Plan.
(d) Issuer shall notify Grantee promptly in writing of the occurrence
of any Preliminary Purchase Event or Purchase Event known to Issuer; provided,
however, that the giving of such notice by Issuer shall not be a condition to
the right of Grantee to exercise the Option.
(e) In the event that Grantee is entitled to and wishes to exercise
the Option, it shall send to Issuer a written notice (the "Option Notice," the
date of which being hereinafter referred to as the "Notice Date") specifying (i)
the total number of shares of Issuer Common Stock it will purchase pursuant to
such exercise and (ii) the time (which shall be on a business day that is not
less than three nor more than 10 business days from the Notice Date) on which
the closing of such purchase shall take place (the "Closing Date"); such closing
to take place at the principal office of the Issuer; provided, however, that, if
prior notification to or approval of the OTS, the FDIC, the FRB, the Connecticut
Commissioner or any other Governmental Authority is required in connection with
such purchase (each, a "Notification" or an "Approval,"
-3-
<PAGE>
as the case may be), (a) Grantee shall promptly file the required notice or
application for approval ("Notice/Application"), (b) Grantee shall expeditiously
process the Notice/Application and (c) for the purpose of determining the
Closing Date pursuant to clause (ii) of this sentence, the period of time that
otherwise would run from the Notice Date shall instead run from the later of (x)
in connection with any Notification, the date on which any required notification
periods have expired or been terminated and (y) in connection with any Approval,
the date on which such approval has been obtained and any requisite waiting
period or periods shall have expired. For purposes of Section 2(a) hereof, any
exercise of the Option shall be deemed to occur on the Notice Date relating
thereto. On or prior to the Closing Date, Grantee shall have the right to revoke
its exercise of the Option by written notice to the Issuer given not less than
three business days prior to the Closing Date.
(f) At the closing referred to in Section 2(e) hereof, Grantee shall
pay to Issuer the aggregate purchase price for the number of shares of Issuer
Common Stock specified in the Option Notice in immediately available funds by
wire transfer to a bank account designated by Issuer; provided, however, that
failure or refusal of Issuer to designate such a bank account shall not preclude
Grantee from exercising the Option.
(g) At such closing, simultaneously with the delivery of immediately
available funds as provided in Section 2(f) hereof, Issuer shall deliver to
Grantee a certificate or certificates representing the number of shares of
Issuer Common Stock specified in the Option Notice and, if the Option should be
exercised in part only, a new Option evidencing the rights of Grantee thereof to
purchase the balance of the shares of Issuer Common Stock purchasable hereunder.
(h) Certificates for Issuer Common Stock delivered at a closing
hereunder shall be endorsed with a restrictive legend substantially as follows:
The transfer of the shares represented by this certificate is subject
to resale restrictions arising under the Securities Act of 1933, as
amended, and applicable state securities laws and to certain provisions of
an agreement between Webster Financial Corporation and MECH Financial,
Inc., dated as of December 1, 1999. A copy of such agreement is on file at
the principal office of Webster Financial Corporation, and will be provided
to the holder hereof without charge upon receipt by Webster Financial
Corporation of a written request therefor.
It is understood and agreed that: (i) the reference to the resale restrictions
of the Securities Act in the above legend shall be removed by delivery of
substitute certificate(s) without such reference if Grantee shall have delivered
to Issuer a copy of a letter from the staff of the Securities and Exchange
Commission (the "SEC") or Governmental Authority responsible for administering
any applicable state securities laws or an opinion of counsel, in form and
substance satisfactory to Issuer's counsel, to the effect that such legend is
not required for purposes of the Securities Act or applicable state securities
laws; (ii) the reference to the provisions of this Agreement in the above legend
shall be removed by delivery of substitute certificate(s) without such reference
if the shares have been sold or transferred in compliance with the provisions of
this Agreement and under circumstances that do not require the retention of such
reference; and (iii) the legend shall be removed in its entirety if the
conditions in the preceding clauses (i) and (ii) are both satisfied. In addition
such certificates shall bear any other legend as may be required by law.
(i) Upon the giving by Grantee to Issuer of an Option Notice and the
tender of the applicable purchase price in immediately available funds on the
Closing Date, unless prohibited by applicable law, Grantee shall be deemed to be
the holder of record of the number of shares of Issuer Common Stock specified in
the Option Notice, notwithstanding that the
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<PAGE>
stock transfer books of Issuer shall then be closed or that certificates
representing such shares of Issuer Common Stock shall not then actually be
delivered to Grantee. Issuer shall pay all expenses and other charges that may
be payable in connection with the preparation, issuance and delivery of stock
certificates under this Section 2 in the name of Grantee.
SECTION 3. Issuer agrees: (i) that it shall at all times until the
termination of this Agreement have reserved for issuance upon the exercise of
the Option that number of authorized and reserved shares of Issuer Common Stock
equal to the maximum number of shares of Issuer Common Stock at any time and
from time to time issuable hereunder, all of which shares will, upon issuance
pursuant hereto, be duly authorized, validly issued, fully paid, non-assessable,
and delivered free and clear of all claims, liens, encumbrances and security
interests and not subject to any preemptive rights; (ii) that it will not, by
amendment of its certificate of incorporation or through reorganization,
consolidation, merger, dissolution or sale of assets, or by any other voluntary
act, avoid or seek to avoid the observance or performance of any of the
covenants, stipulations or conditions to be observed or performed hereunder by
Issuer; (iii) that it will seek any necessary shareholder approval that is
necessary to exercise the Option; (iv) promptly to take all reasonable action as
may from time to time be requested by the Grantee, at Grantee's expense
(including (x) complying with all premerger notification, reporting and waiting
period requirements specified in 15 U.S.C. (S) 18a and regulations promulgated
thereunder and (y) in the event prior approval of or notice to the OTS, the
FDIC, the FRB, the Connecticut Commissioner or any other Governmental Authority,
under the Change in Bank Control Act of 1978, as amended, the Bank Holding
Company Act, as amended, or any other applicable federal or state banking law,
is necessary before the Option may be exercised, cooperating with Grantee in
preparing such applications or notices and providing such information to each
such Governmental Authority as it may require in order to permit Grantee to
exercise the Option and Issuer duly and effectively to issue shares of Issuer
Common Stock pursuant hereto; and (v) to take all action provided herein to
protect the rights of Grantee against dilution.
SECTION 4. This Agreement (and the Option granted hereby) are exchangeable,
without expense, at the option of Grantee, upon presentation and surrender of
this Agreement at the principal office of Issuer, for other agreements providing
for Options of different denominations entitling the holder thereof to purchase,
on the same terms and subject to the same conditions as are set forth herein, in
the aggregate the same number of shares of Issuer Common Stock purchasable
hereunder. The terms "Agreement" and "Option" as used herein include any
agreements and related options for which this Agreement (and the Option granted
hereby) may be exchanged. Upon receipt by Issuer of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of this
Agreement, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Agreement, if mutilated, Issuer will execute and deliver a new Agreement of like
tenor and date.
SECTION 5. The number of shares of Issuer Common Stock purchasable upon the
exercise of the Option shall be subject to adjustment from time to time as
follows:
(a) In the event of any change in the type or number of shares of
Issuer Common Stock by reason of stock dividends, split-ups, mergers,
recapitalizations, combinations, subdivisions, conversions, exchanges of shares
or other issuances of additional shares (other than pursuant to the exercise of
the Option), the type and number of shares of Issuer Common Stock purchasable
upon exercise hereof shall be appropriately adjusted and proper provision shall
be made so that, in the event that any additional shares of Issuer Common Stock
are to be issued or otherwise become outstanding as a result of any such change
(other than pursuant to an exercise of the Option), the number of shares of
Issuer Common Stock that remain subject to the Option shall be increased or
decreased (as
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<PAGE>
applicable) so that, after such issuance and together with the shares of Issuer
Common Stock previously issued pursuant to the exercise of the Option (as
adjusted on account of any of the foregoing changes in the Issuer Common Stock),
the Option shall equal the sum of 19.9% of the total of the number of shares of
Issuer Common Stock then issued and outstanding.
(b) Whenever the number of shares of Issuer Common Stock purchasable
upon exercise hereof is adjusted as provided in this Section 5, the Option Price
shall be adjusted by multiplying the Option Price by a fraction, the numerator
of which shall be equal to the number of shares of Issuer Common Stock
purchasable prior to the adjustment and the denominator of which shall be equal
to the number of shares of Issuer Common Stock purchasable after the adjustment.
SECTION 6. (a) Upon the occurrence of a Purchase Event that occurs prior to
an Exercise Termination Event, Issuer shall, at the request of Grantee (whether
on its own behalf or on behalf of any subsequent holder of the Option (or part
thereof) or of any of the shares of Issuer Common Stock issued pursuant hereto),
promptly prepare, file and keep current a shelf registration statement with the
SEC, under the Securities Act covering any shares issued and issuable pursuant
to the Option and shall use its reasonable best efforts to cause such
registration statement to become effective, and to remain current and effective
for a period not in excess of one year from the day such registration statement
first becomes effective, in order to permit the sale or other disposition of any
shares of Issuer Common Stock issued upon total or partial exercise of the
Option ("Option Shares") in accordance with any plan of disposition requested by
Grantee. Grantee shall have the right to demand four such registrations which
right shall be transferable. Grantee shall provide all information reasonably
requested by Issuer for inclusion in any registration statement to be filed
hereunder. In connection with any such registration statement, Issuer and
Grantee shall provide each other with representations, warranties, indemnities
and other agreements customarily given in connection with such registration. If
requested by Grantee in connection with such registration, Issuer and Grantee
shall become a party to any underwriting agreement relating to the sale of such
shares, but only to the extent of obligating themselves in respect of
representations, warranties, indemnities and other agreements customarily
included in such underwriting agreements. Notwithstanding the foregoing, if
Grantee revokes any exercise notice or fails to exercise any Option with respect
to any exercise notice pursuant to Section 2(e) hereof, Issuer shall not be
obligated to continue any registration process with respect to the sale of
Option Shares issuable upon the exercise of such Option and Grantee shall not be
deemed to have demanded registration of Option Shares.
(b) In the event that Grantee requests Issuer to file a registration
statement following the failure to obtain any approval required to exercise the
Option as described in Section 9 hereof, the closing of the sale or other
disposition of the Issuer Common Stock or other securities pursuant to such
registration statement shall occur substantially simultaneously with the
exercise of the Option.
(c) Concurrently with the preparation and filing of a registration
statement under Section 6(a) hereof, Issuer shall also make all filings required
to comply with state securities laws in such number of states as Grantee may
reasonably request.
SECTION 7. (a) Upon the occurrence of a Purchase Event that occurs prior to
an Exercise Termination Event, (i) at the request (the date of such request
being the "Option Repurchase Request Date") of Grantee, Issuer shall repurchase,
subject to compliance with applicable law and out of funds legally available
therefor, the Option from Grantee at a price (the "Option Repurchase Price")
equal to the amount by which (A) the market/offer price (as defined below)
exceeds (B) the Option Price, multiplied by the number of shares for which the
Option may then be exercised and (ii) at the request (the date of such request
being the "Option
-6-
<PAGE>
Share Repurchase Request Date") of the owner of Option Shares from time to time
(the "Owner"), Issuer shall repurchase such number of the Option Shares from the
Owner as the Owner shall designate at a price (the "Option Share Repurchase
Price") equal to the market/offer price multiplied by the number of Option
Shares so designated. The term "market/offer price" shall mean the highest of
(i) the price per share of Issuer Common Stock at which a tender offer or
exchange offer therefor has been made after the date hereof and on or prior to
the Option Repurchase Request Date or the Option Share Repurchase Request Date,
as the case may be, (ii) the price per share of Issuer Common Stock paid or to
be paid by any third party pursuant to an agreement with Issuer (whether by way
of a merger, consolidation or otherwise), (iii) the average of the 20 highest
last sale prices for shares of Issuer Common Stock as reported within the 90-day
period ending on the Option Repurchase Request Date or the Option Share
Repurchase Request Date, as the case may be, and (iv) in the event of a sale of
all or substantially all of Issuer's assets, the sum of the price paid in such
sale for such assets and the current market value of the remaining assets of
Issuer as determined by an investment banking firm selected by Grantee or the
Owner, as the case may be, and reasonably acceptable to Issuer, divided by the
number of shares of Issuer Common Stock outstanding at the time of such sale. In
determining the market/offer price, the value of consideration other than cash
shall be the value determined by an investment banking firm selected by Grantee
or the Owner, as the case may be, and reasonably acceptable to Issuer. The
investment banking firm's determination shall be conclusive and binding on all
parties.
(b) Grantee or the Owner, as the case may be, may exercise its right
to require Issuer to repurchase the Option and/or any Option Shares pursuant to
this Section 7 by surrendering for such purpose to Issuer, at its principal
office, a copy of this Agreement or certificates for Option Shares, as
applicable, accompanied by a written notice or notices stating that Grantee or
the Owner, as the case may be, elects to require Issuer to repurchase the Option
and/or the Option Shares in accordance with the provisions of this Section 7. As
promptly as practicable, and in any event within 30 business days after the
surrender of the Option and/or certificates representing Option Shares and the
receipt of such notice or notices relating thereto, Issuer shall deliver or
cause to be delivered to Grantee the Option Repurchase Price or to the Owner the
Option Share Repurchase Price.
(c) Issuer hereby undertakes to use its reasonable best efforts to
obtain all required regulatory, shareholder and legal approvals and to file any
required notices as promptly as practicable in order to accomplish any
repurchase contemplated by this Section 7. Nonetheless, to the extent that
Issuer is prohibited under applicable law or regulation from repurchasing any
Option and/or any Option Shares in full, Issuer shall promptly so notify Grantee
and/or the Owner and thereafter deliver or cause to be delivered, from time to
time, to Grantee and/or the Owner, as appropriate, the portion of the Option
Repurchase Price and the Option Share Repurchase Price, respectively, that it is
no longer prohibited from delivering, within five business days after the date
on which Issuer is no longer so prohibited; provided, however, that if Issuer at
any time after delivery of a notice of repurchase pursuant to Section 7(b)
hereof is prohibited as referred to above, from delivering to Grantee and/or the
Owner, as appropriate, the Option Repurchase Price or the Option Share
Repurchase Price, respectively, in full, Grantee or the Owner, as appropriate,
may revoke its notice of repurchase of the Option or the Option Shares either in
whole or in part whereupon, in the case of a revocation in part, Issuer shall
promptly (i) deliver to Grantee and/or the Owner, as appropriate, that portion
of the Option Purchase Price or the Option Share Repurchase Price that Issuer is
not prohibited from delivering after taking into account any such revocation and
(ii) deliver, as appropriate, either (A) to Grantee, a new Agreement evidencing
the right of Grantee to purchase that number of shares of Issuer Common Stock
equal to the number of shares of Issuer Common Stock purchasable immediately
prior to the delivery of the notice of repurchase less the number of shares of
Issuer Common Stock covered by the portion of the Option repurchased or, (B) to
the Owner, a certificate for the number of Option Shares covered by the
revocation.
-7-
<PAGE>
(d) Issuer shall not enter into any agreement with any Person (other
than Grantee or a Grantee Subsidiary) for an Acquisition Transaction unless the
other Person assumes all the obligations of Issuer pursuant to this Section 7 in
the event that Grantee or the Owner elects, in its sole discretion, to require
such other Person to perform such obligations.
SECTION 8. (a) In the event that prior to an Exercise Termination Event,
Issuer shall enter into a letter of intent or definitive agreement (i) to
consolidate or merge with any Person (other than Grantee or a Grantee
Subsidiary), and Issuer shall not be the continuing or surviving corporation of
such consolidation or merger, (ii) to permit any Person (other than Grantee or a
Grantee Subsidiary) to merge into Issuer, and Issuer shall be the continuing or
surviving corporation, but, in connection with such merger, the then outstanding
shares of Issuer Common Stock shall be changed into or exchanged for stock or
other securities of any other Person or cash or any other property or the then
outstanding shares of Issuer Common Stock shall after such merger represent less
than 50% of the outstanding shares and share equivalents of the merged company,
or (iii) to sell or otherwise transfer all or substantially all of its assets to
any Person (other than Grantee or a Grantee Subsidiary) then, and in each such
case, such letter of intent or definitive agreement governing such transaction
shall make proper provision so that the Option shall, upon the consummation of
such transaction and upon the terms and conditions set forth herein, be
converted into, or exchanged for, an option (the "Substitute Option"), at the
election of Grantee, of either (x) the Acquiring Corporation (as defined below)
or (y) any person that controls the Acquiring Corporation (the Acquiring
Corporation and any such controlling person being hereinafter referred to as the
"Substitute Option Issuer").
(b) The Substitute Option shall be exercisable for such number of
shares of Substitute Common Stock (as is hereinafter defined) as is equal to the
market/offer price (as defined in Section 7 hereof) multiplied by the number of
shares of Issuer Common Stock for which the Option was theretofore exercisable,
divided by the Average Price (as hereinafter defined). The exercise price of the
Substitute Option per share of the Substitute Common Stock (the "Substitute
Purchase Price") shall then be equal to the Option Price multiplied by a
fraction in which the numerator is the number of shares of Issuer Common Stock
for which the Option was theretofore exercisable and the denominator is the
number of shares for which the Substitute Option is exercisable.
(c) The Substitute Option shall otherwise have the same terms as the
Option, provided, that if the terms of the Substitute Option cannot, for legal
reasons, be the same as the Option, such terms shall be as similar as possible
and in no event less advantageous to Grantee, provided, further that the terms
of the Substitute Option shall include (by way of example and not limitation)
provisions for the repurchase of the Substitute Option and Substitute Common
Stock by the Substitute Option Issuer on the same terms and conditions as
provided in Section 7 hereof.
(d) The following terms have the meanings indicated:
(i) "Acquiring Corporation" shall mean (i) the continuing or
surviving corporation of a consolidation or merger with Issuer (if other
than Issuer), (ii) Issuer in a merger in which Issuer is the continuing or
surviving corporation, and (iii) the transferee of all or any substantial
part of Issuer's assets.
(ii) "Substitute Common Stock" shall mean the common stock
issued by the Substitute Option Issuer upon exercise of the Substitute
Option.
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<PAGE>
(iii) "Average Price" shall mean the average closing price of a
share of Substitute Common Stock for the one-year period immediately
preceding the consolidation, merger or sale in question, but in no event
higher than the closing price of the shares of Substitute Common Stock on
the day preceding such consolidation, merger or sale; provided, that if
Issuer is the issuer of the Substitute Option, the Average Price shall be
computed with respect to a share of Issuer Common Stock issued by Issuer,
the corporation merging into Issuer or by any company which controls or is
controlled by such merging corporation, as Grantee may elect.
(e) In no event, pursuant to any of the foregoing paragraphs, shall
the Substitute Option be exercisable for more than 19.99% of the shares of
Substitute Common Stock outstanding immediately prior to the issuance of the
Substitute Option. In the event that the Substitute Option would be exercisable
for more than such number of shares of Substitute Common Stock but for this
clause (e), the Substitute Option Issuer shall make a cash payment to Grantee
equal to the excess of (i) the value of the Substitute Option without giving
effect to the limitation in this clause (e) over (ii) the value of the
Substitute Option after giving effect to the limitation in this clause (e). This
difference in value shall be determined by a nationally recognized investment
banking firm selected by Grantee and the Substitute Option Issuer. In addition,
the provisions of Section 5(a) hereof shall not apply to the issuance of any
Substitute Option and for purposes of applying Section 5(a) hereof thereafter to
any Substitute Option, the percentage referred to in Section 5(a) hereof shall
thereafter equal the percentage that the percentage of the shares of Substitute
Common Stock subject to the Substitute Option bears to the number of shares of
Substitute Common Stock outstanding.
SECTION 9. Notwithstanding Sections 2, 6 and 7 hereof, if Grantee has given
the notice referred to in one or more of such Sections, the exercise of the
rights specified in any such Section shall be extended (a) if the exercise of
such rights requires obtaining regulatory approvals (including any required
waiting periods) to the extent necessary to obtain all regulatory approvals for
the exercise of such rights, and (b) to the extent necessary to avoid liability
under Section 16(b) of the Exchange Act by reason of such exercise; provided,
that in no event shall any closing date occur more than 12 months after the
related notice date, and, if the closing date shall not have occurred within
such period due to the failure to obtain any required approval by the OTS, the
FDIC, the FRB, the Connecticut Commissioner or any other Governmental Authority
despite the best efforts of Issuer or the Substitute Option Issuer, as the case
may be, to obtain such approvals, the exercise of the rights shall be deemed to
have been rescinded as of the related notice date. In the event (a) Grantee
receives official notice that an approval of the OTS, the FDIC, the FRB, the
Connecticut Commissioner or any other Governmental Authority required for the
purchase and sale of the Option Shares will not be issued or granted or (b) a
closing date has not occurred within 12 months after the related notice date due
to the failure to obtain any such required approval, Grantee shall be entitled
to exercise the Option in connection with the concurrent resale of the Option
Shares pursuant to a registration statement as provided in Section 6 hereof.
Nothing contained in this Agreement shall restrict Grantee from specifying
alternative means of exercising rights pursuant to Sections 2, 6 or 7 hereof in
the event that the exercising of any such rights shall not have occurred due to
the failure to obtain any required approval referred to in this Section 9.
SECTION 10. Issuer hereby represents and warrants to Grantee as follows:
(a) Issuer has the requisite corporate power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly approved by
the Board of Directors of Issuer and no other corporate proceedings on the part
of Issuer are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly executed and
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<PAGE>
delivered by, and constitutes a valid and binding obligation of, Issuer,
enforceable against Issuer in accordance with its terms, subject to any required
Governmental Approval, and except as enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium and other similar
laws affecting the enforcement of creditors' rights generally and except that
the availability of the equitable remedy of specific performance or injunctive
relief is subject to the discretion of the court before which any proceeding may
be brought.
(b) Issuer has taken all necessary corporate action to authorize and
reserve and to permit it to issue, and at all times from the date hereof through
the termination of this Agreement in accordance with its terms will have
reserved for issuance upon the exercise of the Option, that number of shares of
Issuer Common Stock equal to the maximum number of shares of Issuer Common Stock
at any time and from time to time issuable hereunder, and all such shares, upon
issuance pursuant hereto, will be duly authorized, validly issued, fully paid,
non-assessable, and will be delivered free and clear of all claims, liens,
encumbrances and security interests and not subject to any preemptive rights.
SECTION 11. (a) Neither of the parties hereto may assign any of its rights
or delegate any of its obligations under this Agreement or the Option created
hereunder to any other Person without the express written consent of the other
party, except that Grantee may assign this Agreement to a wholly owned
subsidiary of Grantee and Grantee may assign its rights hereunder in whole or in
part after the occurrence of a Preliminary Purchase Event. The term "Grantee" as
used in this Agreement shall also be deemed to refer to Grantee's permitted
assigns.
(b) Any assignment of rights of Grantee to any permitted assignee of
Grantee hereunder shall bear the restrictive legend at the beginning thereof
substantially as follows:
The transfer of the option represented by this assignment and the
related option agreement is subject to resale restrictions arising under
the Securities Act of 1933, as amended, and applicable state securities
laws and to certain provisions of an agreement between Webster Financial
Corporation and MECH Financial, Inc., dated as of December 1, 1999. A copy
of such agreement is on file at the principal office of Webster Financial
Corporation, and will be provided to any permitted assignee of the Option
without charge upon receipt of a written request therefor.
SECTION 12. Each of Grantee and Issuer will use its reasonable efforts to
make all filings with, and to obtain consents of, all third parties and
Governmental Authorities necessary to the consummation of the transactions
contemplated by this Agreement, including, without limitation, applying to the
OTS, the FDIC, the FRB, the Connecticut Commissioner and any other Governmental
Authority for approval to acquire the shares issuable hereunder.
SECTION 13. The parties hereto acknowledge that damages would be an
inadequate remedy for a breach of this Agreement by either party hereto and that
the obligations of the parties hereto shall be enforceable by either party
hereto through injunctive or other equitable relief. Both parties further agree
to waive any requirement for the securing or posting of any bond in connection
with the obtaining of any such equitable relief and that this provision is
without prejudice to any other rights that the parties hereto may have for any
failure to perform this Agreement.
SECTION 14. If any term, provision, covenant or restriction contained in
this Agreement is held by a court or a federal or state regulatory agency of
competent jurisdiction to be invalid, void or unenforceable, the remainder of
the terms, provisions and covenants and restrictions contained in this Agreement
shall remain in full force and effect, and shall in no
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<PAGE>
way be affected, impaired or invalidated. If for any reason such court or
regulatory agency determines that Grantee is not permitted to acquire, or Issuer
is not permitted to repurchase pursuant to Section 7 hereof, the full number of
shares of Issuer Common Stock provided in Section 1 hereof (as adjusted pursuant
hereto), it is the express intention of Issuer to allow Grantee to acquire or to
require Issuer to repurchase such lesser number of shares as may be permissible
without any amendment or modification hereof.
SECTION 15. All notices, requests, claims, demands and other communications
hereunder shall be deemed to have been duly given when delivered in the manner
and at the respective addresses of the parties set forth in the Plan.
SECTION 16. This Agreement, the rights and obligations of the parties
hereto, and any claims or disputes relating thereto shall be governed by and
construed in accordance with the laws of the State of Delaware (but not
including the choice of law rules thereof).
SECTION 17. This Agreement may be executed in counterparts, each of which
shall be deemed to be an original, but all of which shall constitute one and the
same agreement and shall be effective at the time of execution and delivery.
SECTION 18. Except as otherwise expressly provided herein, each of the
parties hereto shall bear and pay all costs and expenses incurred by it or on
its behalf in connection with the transactions contemplated hereunder.
SECTION 19. Except as otherwise expressly provided herein or in the Plan,
this Agreement contains the entire agreement between the parties with respect to
the transactions contemplated hereunder and supersedes all prior arrangements or
understandings with respect thereof, written or oral. The terms and conditions
of this Agreement shall inure to the benefit of and be binding upon the parties
hereto and their respective successors and permitted assigns. Nothing in this
Agreement, expressed or implied, is intended to confer upon any party, other
than the parties hereto, and their respective successors except as assigns, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided herein.
SECTION 20. Capitalized terms used in this Agreement and not defined herein
but defined in the Plan shall have the meanings assigned thereto in the Plan.
SECTION 21. Nothing contained in this Agreement shall be deemed to
authorize or require Issuer or Grantee to breach any provision of the Plan or
any provision of law applicable to the Grantee or Issuer.
SECTION 22. In the event that any selection or determination is to be made
by Grantee or the Owner hereunder and at the time of such selection or
determination there is more than one Grantee or Owner, such selection shall be
made by a majority in interest of such Grantees or Owners.
SECTION 23. In the event of any exercise of the option by Grantee, Issuer
and such Grantee shall execute and deliver all other documents and instruments
and take all other action that may be reasonably necessary in order to
consummate the transactions provided for by such exercise.
SECTION 24. Except to the extent Grantee exercises the Option, Grantee
shall have no rights to vote or receive dividends or have any other rights as a
shareholder with respect to shares of Issuer Common Stock covered hereby.
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<PAGE>
[SIGNATURE PAGE FOLLOWS]
-12-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Option Agreement to
be executed and delivered on its behalf by their respective officers thereunto
duly authorized, all as of the date first above written.
Webster Financial Corporation
By: /s/ James C. Smith
---------------------------------------------
Name: James C. Smith
Title: Chairman and Chief Executive Officer
MECH Financial, Inc.
By: /s/ Edgar C. Gerwig
---------------------------------------------
Name: Edgar C. Gerwig
Title:
<PAGE>
Exhibit 23.1
Consent of Independent Auditors
The Board of Directors of MECH Financial, Inc.:
We consent to the incorporation by reference in the registration statement
(no. 333-49191) on Form S-8 of MECH Financial, Inc. of our report dated
January 25, 2000, relating to the consolidated financial statements of condition
of MECH Financial, Inc. and subsidiaries as of December 31, 1999 and 1998 and
the related consolidated statements of operation, changes in stockholders'
equity and cash flows for the years then ended, which report appears in the
December 31, 1999 Annual Report on Form 10-K of MECH Financial, Inc.
/s/ KPMG LLP
Hartford, Connecticut
March 28, 2000
<PAGE>
Exhibit 23.2
Consent of Independent Accountants
We consent to the incorporation by reference in the registration statement of
MECH Financial, Inc. on Form S-8 of our report dated January 20, 1998, on our
audit of the consolidated financial statements of Mechanics Savings Bank and
subsidiaries for the year ended December 31, 1997, which report is included in
this Annual Report on Form 10-K.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
March 27, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 29,440
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 760
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 226,027
<INVESTMENTS-CARRYING> 68,719
<INVESTMENTS-MARKET> 65,949
<LOANS> 748,980
<ALLOWANCE> (11,035)
<TOTAL-ASSETS> 1,119,693
<DEPOSITS> 641,764
<SHORT-TERM> 194,240
<LIABILITIES-OTHER> 7,013
<LONG-TERM> 182,745
0
0
<COMMON> 53
<OTHER-SE> 93,878
<TOTAL-LIABILITIES-AND-EQUITY> 1,119,693
<INTEREST-LOAN> 52,875
<INTEREST-INVEST> 19,673
<INTEREST-OTHER> 1,203
<INTEREST-TOTAL> 73,751
<INTEREST-DEPOSIT> 21,631
<INTEREST-EXPENSE> 37,800
<INTEREST-INCOME-NET> 35,951
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 5
<EXPENSE-OTHER> 23,964
<INCOME-PRETAX> 21,998
<INCOME-PRE-EXTRAORDINARY> 14,897
<EXTRAORDINARY> (435)
<CHANGES> 0
<NET-INCOME> 14,462
<EPS-BASIC> 2.88
<EPS-DILUTED> 2.78
<YIELD-ACTUAL> 7.16
<LOANS-NON> 1,992
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 13,367
<ALLOWANCE-OPEN> 12,301
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<ALLOWANCE-CLOSE> 11,035
<ALLOWANCE-DOMESTIC> 7,896
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 3,139
</TABLE>
