UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ___________ TO __________
COMMISSION FILE NUMBER 0-24842
MONTEREY BAY BANCORP, INC.
- - --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0381362
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(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
36 BRENNAN STREET, WATSONVILLE, CALIFORNIA 95076
- - --------------------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(408) 722-3885
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NOT APPLICABLE
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(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED 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 REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO_______.
------
APPLICABLE ONLY TO CORPORATE ISSUERS:
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: 3,593,750 SHARES OF COMMON
STOCK, PAR VALUE $.01 PER SHARE, WERE OUTSTANDING AS OF AUGUST 9, 1996.
MONTEREY BAY BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE
--------------------- ----
Item 1. Consolidated Statements of Financial Condition as of
June 30, 1996 and December 31, 1995...................................................... 1
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1996 and 1995........................................ 2
Consolidated Statement of Stockholders' Equity for the
Six Months Ended June 30, 1996........................................................... 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1996 and 1995.................................................. 4
Notes to Consolidated Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 8
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings........................................................................ 19
Item 2. Changes in Securities.................................................................... 19
Item 3. Defaults Upon Senior Securities.......................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders...................................... 19
Item 5. Other Information........................................................................ 19
Item 6. Exhibits and Reports on Form 8-K......................................................... 19
SIGNATURES................................................................................................... 20
Item 1. FINANCIAL STATEMENTS.
- - -----------------------------
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1996 AND DECEMBER 31, 1995 (dollars in thousands)
- - --------------------------------------------------------------------------------
June 30, December 31,
1996 1995
------------- -------------
ASSETS
Cash and due from depository institutions $ 5,490 $ 4,217
------- --------
Total cash and cash equivalents 5,490 4,217
Certificates of deposit 295 782
Loans held for sale, at market 90 92
Securities available for sale:
Mortgage backed securities (cost of
$35,936 at June 30, 1996 and
$52,004 at December 31, 1995) 35,881 52,417
Investment securities (cost of
$34,614 at June 30, 1996 and
$31,110 at December 31, 1995) 34,217 30,990
Securities held to maturity:
Mortgage backed securities (market
value of $178 at June 30, 1996 and
$199 at December 31, 1995) 189 205
Investment securities (market value
of $797 at June 30, 1996 and
$797 at December 31, 1995) 799 790
Loans receivable held for investment
(net of allowance for loan losses
at June 30, 1996, $1,348; and at
December 31, 1995, $1,362) 228,567 228,387
Federal Home Loan Bank stock, at cost 2,751 2,542
Premises and equipment, net 3,909 4,030
Accrued interest receivable 2,078 2,109
Core deposit premiums, net 499 651
Real estate owned 126 0
Other assets 2,456 2,556
-------- --------
TOTAL ASSETS $317,347 $329,768
======== ========
LIABILITIES AND STOCKHOLDERS EQUITY
LIABILITIES:
Savings deposits $219,051 $215,284
Federal Home Loan Bank advances 35,632 46,520
Securities sold under agreements to
repurchase 13,969 17,361
Accounts payable and other 1,896 2,999
liabilities ------- --------
Total liabilities 270,548 282,164
------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
2,000,000 shares authorized and
unissued 0 0
Common stock, $.01 par value,
9,000,000 shares authorized;
3,593,750 shares issued and
outstanding at June 30, 1996 36 36
Additional paid-in capital 27,069 27,037
Unearned shares held by employee
Stock ownership plan (1,955) (2,070)
Treasury stock (3,488) (2,201)
Retained earnings, substantially
restricted 25,401 24,633
Unrealized gain (loss) on securities
available for sale, net of taxes (264) 169
------- --------
Total stockholders' equity 46,799 47,604
------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' $317,347 $329,768
EQUITY ======== ========
See notes to consolidated financial statements.
1
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(Dollars in thousands except per share amounts)
- - -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1996 1995 1996 1995
INTEREST INCOME:
Loans receivable $ 4,420 $ 4,407 $ 8,848 $ 8,996
Mortgage backed
securities 636 381 1,408 663
Other investment
securities 625 784 1,218 1,375
------ ------ ------- -------
Total interest income 5,681 5,572 11,474 11,034
------ ------ ------- -------
INTEREST EXPENSE:
Savings deposits 2,672 2,619 5,411 5,163
FHLB advances and other
borrowings 703 913 1,542 1,741
------ ------ ------- -------
Total interest expense 3,375 3,532 6,953 6,904
------ ------ ------- -------
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES 2,306 2,040 4,521 4,130
PROVISION FOR LOAN LOSSES 0 65 22 105
------ ------ ------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,306 1,975 4,499 4,025
------ ------ ------- -------
NONINTEREST INCOME:
Gain (loss) on sale of
mortgage backed and
investment securities,
net 0 (259) 70 (259)
Commissions from annuity
sales 85 35 83 221
Customer service charges 94 75 176 146
Other income, net 55 30 65 47
------ ------ ------- -------
Total 234 (119) 394 155
------ ------ ------- -------
GENERAL AND ADMINISTRATIVE
EXPENSE:
Compensation and
employee benefits 843 778 1,626 1,600
Occupancy and equipment 212 230 435 457
Deposit insurance
premiums 139 124 276 280
Data processing fees 118 129 246 237
Stationery, Telephone
and office expenses 85 76 186 159
Advertising and promotion 39 45 69 93
Amortization of core
deposit premiums 76 76 152 152
Other 247 334 597 527
------ ------ ------- -------
Total 1,759 1,792 3,587 3,505
------ ------ ------- -------
INCOME BEFORE INCOME TAX
EXPENSE 781 64 1,306 675
INCOME TAX EXPENSE 332 30 538 271
------ ------ ------- -------
NET INCOME $ 449 $ 34 $ 768 $ 404
====== ====== ======= =======
NET INCOME PER SHARE/(1)/ $ .14 $ .01 $ .24 $ .08
====== ====== ======= =======
(1) The Company's common stock was issued February 14, 1995 in connection with
the Conversion of Watsonville Federal Savings and Loan Association from mutual
to stock form. Net income and common shares outstanding for the period from
February 15, 1995 to March 31, 1995 were used to compute net income per share
for the six months ended June 30, 1995. See notes to consolidated financial
statements.
2
MONTEREY BAY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1996 (Amounts in thousands)
- - --------------------------------------------------------------------------------
Unrealized
Gain (Loss)
on Securities
Common Available
Common Stock /(1)/ Additional Stock for Sale
-------------------- Paid-In Acquired Treasury Retained (Net of
Shares Amount Capital by ESOP Stock Earnings Taxes) Total
---------------------------------------------------------------------------------------------
Balance at
December 31, 1995 3,594 $ 36 $27,037 $(2,070) $(2,201) $24,633 $ 169 $47,604
Purchase of
treasury stock /(2)/ (1,287) (1,287)
Earned ESOP shares 32 115 147
Change in
unrealized gain
(loss) on securities
available for sale,
net of taxes (433) (433)
Net income 768 768
---------------------------------------------------------------------------------------------
Balance at
June 30, 1996 3,594 $ 36 $27,069 $(1,955) $(3,488) $25,401 $ (264) $46,799
=============================================================================================
/(1)/ Number of shares of common stock includes 287,500 shares which are
pledged as security for a loan to the Association's ESOP, of which 28,750
were earned at December 31, 1995 and 43,125 were earned at June 30, 1996.
/(2)/ The Company repurchased 179,687 shares of Company common stock in 1995
and an additional 107,000 shares in 1996.
See notes to consolidated financial statements.
3
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (Dollars in thousands)
- - --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
------------ ------------
OPERATING ACTIVITIES $ 768 $ 404
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and Amortization on premises and equipment 175 183
Amortization of core deposit premium 152 152
Amortization of premiums, net of (discounts) 372 134
Loan origination fees deferred, net 88 117
Amortization of deferred loan fees (108) (306)
Provision for loan losses 22 105
Compensation expense related to ESOP shares released 148 -
(Gain) loss on sale of mortgage backed securities and
investment securities (70) 259
Charge-off on loans transferred to real estate owned (36) (81)
Loss on sale of fixed assets 1 -
Originations of loans held for sale (1,464) (8,692)
Proceeds from sale of loans originated for sale 1,466 17,728
Increase (decrease) in income taxes payable and deferred income taxes 238 (361)
(Increase) decrease in other assets (214) 977
Decrease (increase) in interest receivable 32 (475)
(Decrease) increase in accounts payable and other liabilities (843) 750
------- -------
Net cash provided by operating activities 727 10,894
------- -------
INVESTING ACTIVITIES:
Loans originated for portfolio (17,686) (15,154)
Principal payments on loans receivable 17,402 9,940
Purchases of mortgage backed securities held to maturity - (69)
Purchases of mortgage backed securities available for sale - (18,001)
Proceeds from sales of mortgage backed securities available for sale 8,428 13,745
Paydowns on mortgage backed securities 7,503 897
Purchases of investment securities held to maturity - (609)
Purchases of investment securities available for sale (9,522) (27,219)
Proceeds from maturities of investment securities 6,000 2,300
Purchases of premises and equipment, net (56) (115)
Decrease in certificates of deposit 486 292
(Purchases) redemptions of FHLB stock (209) 670
------- -------
Net cash provided by (used in) investing activities 12,346 (33,323)
------- -------
4
MONTEREY BAY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (Dollars in thousands)
- - --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
-----------------------------
1996 1995
------------ ------------
FINANCING ACTIVITIES:
Net increase (decrease) in savings deposit $ 3,767 $ (1,438)
Repayments on federal home loan bank advances, net (10,888) (17,950)
Proceeds from repayments of reverse repurchase agreements, net (3,392) 13,653
Proceeds from the sale of common stock - 24,831
Purchases of treasury stock (1,287) 0
------- -------
Net cash provided by (used in) financing activities (11,800) 19,096
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,273 (3,333)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,217 7,452
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,490 $ 4,119
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest on savings deposits and advances $ 7,051 $ 6,906
Income taxes 324 625
NONCASH INVESTING ACTIVITIES:
Loans transferred to held for investment, at market value - 7,385
Transfer of loans to real estate owned 126 297
See notes to consolidated financial statements.
5
MONTEREY BAY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and with
the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim
financial information. Accordingly, the adequacy of the disclosure contained
herein has been determined with the presumption that the users of these interim
financial statements have read or have access to the Company's Annual Report on
Form 10-K for the year ended December 31, 1995. Only material changes in
financial condition and results of operations are discussed in the remainder of
Part I of this Quarterly Report.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the Company's consolidated
financial condition at June 30, 1996, and the results of operations for the
three and six months ended June 30, 1996, and cash flows for the six months
ended June 30, 1996. All significant intercompany balances and transactions have
been eliminated in consolidation. Results of operations for any interim period
are not necessarily indicative of the operating results that may be expected for
any other interim period or for the entire year.
Effective December 1995, the Company adopted Statement of Financial
Accounting Standards No. 122 ("SFAS 122"), Accounting for Mortgage Servicing
Rights. SFAS 122 allows financial institutions that originate mortgages and sell
them into the secondary market to recognize the retained right to service the
loans. This rule amends SFAS 65, which permitted only purchased mortgage
servicing rights to be recognized as an asset. SFAS 122 makes no distinction
between purchased and originated mortgage servicing rights. The adoption of SFAS
122 has not had a material impact on the Company's operations.
Effective January 1996, the Company adopted Statement of Position ("SOP")
94-6, Disclosure of Certain Significant Risks and Uncertainties, issued by the
American Institute of Certified Public Accountants in December 1994. SOP 94-6
supplements disclosure requirements for risks and uncertainties existing as of
the date of the financial statements in the following areas: (a) nature of
operations, (b) use of estimates in the preparation of financial statements, (c)
certain significant estimates and (d) current vulnerability due to certain
concentrations.
Effective January 1996, the Company adopted Statement of Financial
Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." SFAS 121
requires that long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or circumstances indicate the carrying amount of
an asset may not be recoverable. However, SFAS 121 does not apply to financial
instruments, core deposit intangibles, mortgage and other servicing rights or
deferred tax assets. Adoption of this statement has not had a material impact on
the Company's operations.
6
In October 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Standards No. 123 ("SFAS 123"), Accounting for Stock
Based Compensation which establishes accounting and disclosure requirements
using a fair value based method of accounting for stock based employee
compensation plans. Under SFAS 123, beginning in 1996 the Company may either
adopt the new fair value based accounting method or continue the intrinsic value
based method and provide pro forma net income and earnings per share as if the
accounting provisions of SFAS 123 had been adopted. The Company has adopted only
the disclosure requirements of SFAS 123; therefore, such adoption will have no
effect on the Company's consolidated net earnings or cash flows.
In preparing the consolidated financial statements, management is required
to make estimates and assumptions that affect the reported amounts of assets and
liabilities as of the dates of the balance sheets and revenues and expenses for
the periods covered. Actual results could differ significantly from those
estimates and assumptions.
7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
-------------------------------------------------------------
AND FINANCIAL CONDITION.
-----------------------
On February 14, 1995, Watsonville Federal Savings and Loan Association
(the "Association") converted from a federally chartered mutual savings and loan
association to a federally chartered stock savings and loan association.
Monterey Bay Bancorp, Inc. (the "Company") was formed for the purpose of
becoming a savings association holding company and acquiring all of the capital
stock of the Association. On February 15, 1995, the Company began trading on the
Nasdaq National Market under the symbol "MBBC." All amounts prior to the
completion of the conversion relate to the Association.
The Association is a community-oriented savings institution which
attracts deposits from the general public in the areas in which its branches are
located and invests such deposits and other available funds primarily in
mortgage loans secured by one-to-four family residences. To a lesser extent, the
Association invests in commercial real estate, construction, land and other
loans. At June 30, 1996 the Association operated six branch offices located in
Santa Cruz, Monterey, and Santa Clara counties, and one real estate loan office.
RESULTS OF OPERATIONS
The Company recorded net income of $768,000 for the six months ended
June 30, 1996, compared to $404,000 for the same period last year. Net income
for the three months ended June 30, 1996 was $449,000, compared to $34,000 for
the quarter ended June 30, 1995. Included in net income for the six months and
quarter ended June 30, 1995 is a loss of $149,000 (net of income taxes of
$110,000) resulting from the sale of mortgage backed securities.
Fully diluted earnings per share were $.24 for the six months ended
June 30, 1996, compared to $.08 for the similar period in 1995. For the quarter
ended June 30, 1996, fully diluted earnings per share were $.14, compared to
$.01 for the quarter ended June 30, 1995. The earnings per share computation for
the six months ended June 30, 1995 is based on earnings from February 14, 1995,
the date of the completion of the conversion of the association.
The improvement in earnings, exclusive of the non-recurring item noted
above, in the three and six months ended June 30, 1996, compared to the same
periods last year, reflects higher net interest income and increased revenue
from customer service charges and mortgage loan servicing income in 1996.
Net Interest Income
A primary component of the Company's ongoing profitability is net
interest income, which represents the difference between interest and dividend
income on interest earning assets (principally loans and investment securities)
and the interest expense, or cost of funds, on interest bearing liabilities
(principally deposits and, to a lesser extent, federal home loan bank (FHLB)
advances and reverse repurchase agreements). The Company's net interest
8
income and net interest margin, which is defined as net interest income divided
by average interest earning assets, are affected by the general interest rate
environment, asset growth, asset and liability composition, and nonaccrual
loans.
Net interest income before provision for loan losses rose 9.5% from
$4.1 million for the first six months of 1995 to $4.5 million for the six months
ended June 30, 1996. For the quarter ended June 30, 1996, net interest income
before provision for loan losses was $2.3 million, an increase of 13.0% from
$2.0 million recorded in the second quarter of 1995. The increases were
primarily due to higher yields on mortgage loans, and reduced deposit rates and
borrowing costs reflective of a more favorable interest rate environment.
Total interest income increased 4.5% to $11.5 million for the six
months ended June 30, 1996 from $11.0 million for the first six months of 1995.
For the quarter ended June 30, 1996, total interest income was $5.7 million,
compared to $5.5 million for the second quarter of 1995. The upward repricing of
a portion of the Association's portfolio of adjustable rate mortgage loans was
partially responsible for this increase. In addition, interest income from
mortgage backed securities increased substantially in 1996 due to management's
decision, in 1995, to leverage the balance sheet through the purchase of
mortgage backed securities funded by borrowings. This strategy resulted in a
volume-related increase of $745,000 in interest income for the first six months
of 1996 compared to the similar period a year ago.
Increases and decreases to nonaccrual loan levels did not
significantly affect interest income during the six months and three months
ended June 30, 1996 and 1995 because the ratio of average nonaccrual loans to
average loans remained relatively stable during the related periods.
The Company recorded total interest expense of $7.0 million for the
six months ended June 30, 1996, slightly higher than $6.9 million recorded for
the similar period in 1995. Total interest expense declined 4.5% to $3.4 million
for the quarter ended June 30, 1996, from $3.5 million for the quarter ended
June 30, 1995. This reduction was primarily due to a relatively stable market
interest rate environment which allowed management to lower interest rates paid
to its customers while retaining and rolling over a majority of the maturing
funds. During the second quarter of 1996, $51.1 million of the Association's
high-cost certificate of deposit accounts matured, representing approximately
19% of the Company's total interest bearing liabilities. The subsequent renewal
of the majority of these deposits at lower current market interest rates
resulted in reduced interest expense and a decline in the Company's cost of
funds for the second quarter of 1996.
9
The changes in net interest income for the six months and quarter
ended June 30, 1996 compared with the corresponding period in 1995 are analyzed
in the following table. The table shows the changes by major component, setting
forth changes attributable to changes in volume, changes attributable to changes
in interest rates and the net effect of both (in thousands):
Six Months Ended June 30,
1996 Compared with 1995
Increase (Decrease)
---------------------------------------
Volume Rate Net
------ ---- ---
Interest income:
Loans $ (522) 374 (148)
Mortgage backed securities 753 (8) 745
Investment Securities (84) (73) (157)
------ ---- -----
147 293 440
------ ---- -----
Interest expense:
On customer deposits 186 62 248
On borrowings (112) (87) (199)
------ ---- -----
74 (25) 49
------ ---- -----
Change in net interest income $ 73 318 391
====== ==== =====
Three Months Ended June 30,
1996 Compared with 1995
Increase (Decrease)
---------------------------------------
Volume Rate Net
------ ---- ---
Interest income: $ (229) 242 13
Loans 239 16 255
Mortgage backed securities (144) (15) (159)
Investment Securities ------ ---- -----
(134) 243 109
------ ---- -----
Interest expense: 77 (24) 53
On customer deposits (169) (41) (210)
On borrowings ------ ---- -----
(92) (65) (157)
------ ---- -----
$ (42) 308 266
Change in net interest income ===== ==== =====
10
Average assets and liabilities together with average interest rates
earned and paid for the six months and three months ended June 30, 1996 and 1995
are summarized as follows (dollars in millions):
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
---- ----
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE RATE
------- ------ ------- ------
Interest earning assets:
Loans $229 7.73% $245 7.33%
Mortgage backed securities 42 6.68 20 6.72
Investment securities 39 6.18 43 6.66
---- ----
Total interest earning assets 310 7.39 308 7.17
Noninterest earning assets 11 9
---- ----
Total assets $321 $317
==== ====
Interest bearing liabilities:
Deposits $219 4.94% $209 4.98%
Borrowings 53 5.78 58 6.07
---- ----
Total interest bearing liabilities 272 5.11 267 5.22
Noninterest bearing liabilities 2 8
Stockholders' equity 47 42
---- ----
Total liabilities and stockholders' equity $321 $317
==== ====
Net interest rate spread 2.28% 1.95%
Net interest margin 2.91% 2.68%
Ratio of interest bearing assets to
interest bearing liabilities 114% 115%
THREE MONTHS ENDED JUNE 30,
---------------------------
1996 1995
---- ----
AVERAGE YIELD/ AVERAGE YIELD/
BALANCE RATE BALANCE RATE
------- ------ ------- ------
Interest earning assets:
Loans $229 7.73% $242 7.30%
Mortgage backed securities 38 6.72 23 6.55
Investment securities 39 6.37 49 6.45
---- ----
Total interest earning assets 306 7.43 314 7.11
Noninterest earning assets 10 8
---- ----
Total assets $316 $322
==== ====
Interest bearing liabilities:
Deposits $219 4.87% $209 5.02%
Borrowings 49 5.75 60 6.06
---- ----
Total interest bearing liabilities 268 5.03 269 5.25
Noninterest bearing liabilities 1 4
Stockholders' equity 47 49
---- ----
Total liabilities and stockholders' equity $316 $322
==== ====
Net interest rate spread 2.40% 1.86%
Net interest margin 3.02% 2.68%
Ratio of interest bearing assets to
interest bearing liabilities 114% 117%
11
The Company's net interest margin increased to 3.02% for the second
quarter of 1996 compared with 2.68% for the second quarter of 1995. For the six
months and quarter ended June 30, 1996, the Company's net interest rate spread
increased to 2.28% and 2.40%, respectively, from 1.95% and 1.86% for the
comparable periods ended June 30, 1995. The Company's net interest margin
improved during the first half of 1996 due to a decline in the Company's cost of
funds and an increase in the yield on interest earning assets.
For the six months ended June 30, 1996, Company's yield on interest
earning assets was 7.39%, up from 7.17% obtained in the six months ended June
30, 1995, primarily due to increased yields on loans receivable.
For the six months ended June 30, 1996, the Company's net cost of
interest bearing liabilities was 5.11%, compared to 5.22% for the same period a
year ago, due to decreases in the cost of deposits and borrowings. In the third
quarter of 1996, a high percentage of the Association's remaining higher-costing
certificate of deposit accounts will mature, and, based on current and
anticipated trends in market interest rates, are expected to renew at lower
rates. During the quarter ended June 30, 1996, the Association's cost of
certificate of deposit accounts due to maturing and renewing certificates of
deposit.
The Company's cost of borrowings decreased to 5.78% and 5.75%,
respectively, for the six months and quarter ended June 30, 1996, from 6.07% and
6.06%, respectively, for the similar periods in 1995. The cost of borrowings
trended down for the third consecutive quarter in response to declines in market
interest rates.
Interest Rate Risk And Sensitivity
The sensitivity of earnings to interest rate changes is often measured
by the difference, or gap, between the amount of assets and liabilities
scheduled to reprice within the same time period expressed as a percentage of
assets. Generally, the lower the amount of this gap, the less sensitive are an
institution's earnings to interest rate changes. A positive gap means an excess
of assets over liabilities repricing during the same period. The Company's gap
position at June 30, 1996 is summarized as follows:
MATURITY/RATE SENSITIVITY
(DOLLARS IN MILLIONS) 0-6 MONTHS 7-12 MONTHS 1-3 YEARS OVER 3 YEARS
---------- ----------- --------- ------------
Cumulative gap,
interest earning assets
over (less than) interest
bearing liabilities $ 5 $ (22) $ (37) $ 45
Cumulative gap, as a
percent of total assets 1.72% (6.91%) (11.65%) 13.92%
12
Provision for Loan Losses
The Association establishes provisions for loan losses, which are charged
to operations, in order to maintain the allowance for loan losses at a level
which is deemed to be appropriate based upon an assessment of prior loss
experience, the volume and type of lending presently conducted by the
Association, industry standards, past due loans, economic conditions in the
Association's market area generally and other factors related to the
collectibility of the Association's loan portfolio. The provision for loan
losses for the six months ended June 30, 1996 was $22,000 compared to $105,000
for the corresponding period during 1995. The provision for loan losses for the
quarter ended June 30, 1995 was $65,000; the Company did not record a provision
for loan losses for the quarter ended June 30, 1996. The provision resulted in a
total allowance for loan losses of $1,348,000 or .59% of total loans at June 30,
1996, compared to an allowance for loan losses of $1,362,000, or .59% of total
loans, at December 31, 1995. Nonperforming assets, consisting of nonaccrual
loans and real estate owned, declined to $1.6 million, or .68% of total loans at
June 30, 1996, compared to $3.2 million, or 1.40% of total loans at December 31,
1995. (see "-Financial Condition.") At June 30, the Association had $125,000 of
real estate owned consisting of one property acquired through foreclosure during
the first quarter of 1996.
Noninterest Income
Noninterest income increased to $394,000 and $234,000, respectively, for
the six months and quarter ended June 30, 1996, from $155,000 and a negative
$119,000 for the similar periods in 1995. Included in noninterest income for the
six months and quarter ended June 30, 1995 is a loss of $259,000 resulting from
the sale of mortgage backed securities in the second quarter of 1995. The
Company recorded a $70,000 gain on the sale of mortgage backed securities during
the six months ended June 30, 1996.
Commissions from annuity sales declined from $221,000 for the first six
months of 1995 to $83,000 for the same period in 1996 due to a significant
decline in annuity sales and several write-offs of customer receivables recorded
by Portola Investment Corporation. Portola, a California corporation wholly
owned by the Association, is currently engaged on an agency basis in the sale of
insurance, mutual funds and annuity products primarily to the Association's
customers and members of the local community. Management plans to pursue an
active marketing campaign to increase sales during the remainder of 1996.
For the six months and quarter ended June 30, 1996, customer service
charges amounted to $176,000 and $94,000, respectively, compared to $146,000 and
$75,000 for the corresponding periods a year earlier. This reflects an increase
in customer service fees, primarily overdraft charges, enacted during the third
quarter of 1995, and a significant increase in the number of transaction-related
customer deposit accounts during 1996.
General and Administrative Expenses
General and administrative expenses were $3.6 million and $1.8 million,
respectively, for the six months and quarter ended June 30, 1996, approximately
unchanged from $3.5 million and $1.8 million recorded for the six months and
quarter ended June 30, 1995.
13
FINANCIAL CONDITION
Total assets of the Company were $317.3 million at June 30, 1996, compared
to $329.8 million at December 31, 1995, a decrease of $12.4 million or 3.8%. The
decline in total assets was primarily due to principal repayments on mortgage
backed securities and the sale of $8.5 million of mortgage backed securities
during the first quarter of 1996.
Loans receivable were $228.7 million, or 72.1% of the Company's total
assets, at June 30, 1996. Substantially all of the Company's loans are secured
by real estate. At June 30, 1996, the loan portfolio was composed of 62%
adjustable rate and 38% fixed rate loans, approximately unchanged from December
31, 1995. The Company's loan growth continues to be primarily in one- to four-
family mortgage loans, which represented 82% of the loan portfolio at June 30,
1996. The Company originated $18.0 million of loans during the six months ended
June 30, 1996, primarily adjustable rate loans to be held for investment.
At June 30, 1996, nonperforming assets were $1.6 million, or 49% of total
assets, compared to $3.2 million, or .97% of assets at December 31, 1995.
Nonaccrual loans, consisting of all loans delinquent 90 days or more, totaled
$1.4 million, or .62% of total loans receivable. At June 30, 1996, the Company
had one foreclosed property representing real estate owned totaling $125,000.
The Association's nonperforming loans are secured primarily by one-to four-
family residences located in the Association's primary market area. At June 30,
1996, the Company had four restructured loans totaling $379,000, all performing
in accordance with their contractual terms.
The Office of Thrift Supervision regulations require all institutions to
classify their problem assets in one of three categories, substandard, doubtful,
and loss, and provide specific or general valuation allowances when necessary
and appropriate. (Assets that do not warrant classification but deserve special
attention are designated as "special mention" or "watch" and require no
valuation allowances.) Management monitors the Association's assets regularly
and classifies any problem assets. The Association's classified assets consist
of foreclosed residential properties, nonperforming assets, and assets that are
performing in accordance with their contractual terms but are classified as
substandard because they exhibit one or more well-defined weaknesses. The
following schedule presents the Association's classified assets at June 30, 1996
and December 31, 1995 (in thousands):
JUNE 30, 1996 DECEMBER 31, 1995
------------- -----------------
Assets classified as:
Substandard $ 4,099 $ 5,998
Doubtful 92 0
Loss 0 0
----- -----
Total classifies assets $ 5,191 $ 5,998
===== =====
Classified assets as a
percentage of total assets 1.64% 1.82%
14
At June 30, assets classified as substandard included $1.4 million of loans
past due 90 days or more, $1.4 million of performing loans on property with
delinquent real estate taxes, and $1.3 million of loans less than 90 days
delinquent but identified as having risk characteristics indicating that the
collection of interest and/or principal may not occur under the contractual
terms of the loan agreements. At December 31, 1995, substandard loans included
$1.5 million of loans past due 90 days or more, $2.8 million of performing loans
on property with delinquent real estate taxes, and $1.6 million of performing
loans with identified risk characteristics.
The Association's investment in FHLB stock increased slightly during the
three months ended June 30, 1996 to $2.8 million from $2.5 million at December
31, 1995. The increase was due to the purchase of stock pursuant to a statutory
provision requiring the Association, as a member of the FHLB system, to invest
in stock of the FHLB of San Francisco, in an amount equal to 1% of its net
outstanding home loans or 5% of its outstanding advances from the FHLB,
whichever is higher.
During the six months ended June 30, 1996, the Company's liabilities
decreased to $270.5 million at June 30, 1996 from $282.2 million at December 31,
1995. The decrease in liabilities was attributable to decreases in borrowings,
from $63.9 million at December 31, 1995 to $49.6 million at June 30, 1996. The
Company repaid $10.9 million of FHLB advances and $3.4 million of reverse
repurchase agreements during the first six months of 1996, partially due to cash
inflows into savings deposit accounts. In addition, the Association used
proceeds from the sale of mortgage backed securities to pay down borrowings. The
Company utilizes FHLB advances and reverse repurchase agreements as part of its
asset and liability management objectives.
During the six months ended June 30, 1996, savings deposits grew to $219.1
million, a $3.8 million or 1.8% increase from December 31, 1995. The deposit
growth consisted primarily of increases in low-cost checking and money market
accounts. The Company's management continues to pursue its strategy of
increasing low cost transaction accounts (consisting of checking, passbook, and
money market accounts) by actively marketing those accounts.
At June 30, 1996, shareholders' equity was $46.8 million, compared to $47.6
million at December 31, 1995. Equity was reduced by $1.3 million due to
repurchases of the Company's outstanding common stock pursuant to a previously
announced stock repurchase program. Unrealized losses on securities available
for sale at June 30, 1996, compared to unrealized gains at December 31, 1995,
resulted in a decrease of $433,000 in equity. Tangible book value per share of
Monterey Bay Bancorp, Inc. common stock was $15.12 at June 30, 1996, compared to
$14.88 at December 31, 1995.
Deposits of the Association are presently insured by the Savings
Association Insurance Fund ("SAIF"). Both the SAIF and Banking Insurance Fund
("BIF") are statutorily required to be recapitalized to 1.25% of insured reserve
deposits ratio. Until recently, members of the SAIF and Banking Insurance Fund
("BIF") were paying average deposit insurance premiums of between 24 and 25
basis points. During the second half of 1995, the BIF met the required reserve
ratio, and the FDIC adopted a new BIF assessment rate which,
15
beginning in 1996, allowed most BIF members to pay a statutory minimum
semiannual assessment of $1,000. The existing assessment rate schedule
applicable to SAIF member institutions is 23 to 31 basis points.
Legislative initiatives regarding the recapitalization of the Federal
Deposit Insurance Corporation ("FDIC"), deposit insurance premiums, FICO bond
interest payments, the merger of SAIF and BIF, financial industry regulatory
structure, and revision of thrift and bank charters are still
pending before Congress. Management cannot predict the ultimate impact any final
legislation or regulatory actions may have on the operations of the Company.
Without passage of legislation addressing the FDIC insurance premium disparity,
the Association, like other thrifts, will continue to pay deposit insurance
premiums significantly higher than banks. As long as such premium differential
continues, it may have adverse consequences on the Company's earnings and the
Company may be placed at a substantial competitive disadvantage to commercial
banking organizations insured by the BIF.
The Association paid SAIF deposit insurance premiums of $276,000 and
$139,000, respectively, during the six months and quarter ended June 30, 1996,
compared to $280,000 and $124,000, respectively, paid during the similar periods
in 1995. The increase in the second quarter, 1996 compared to the second
quarter, 1995 was primarily due to a higher average balance of savings deposits
in 1996. A significant special assessment to recapitalize the SAIF would likely
have an adverse effect on the operating expenses and results of operations of
the Association. Based on the Association's estimated deposit insurance
assessment base at December 31, 1995 and an assumed 85 to 90 basis point fee to
recapitalize the SAIF, the special assessment would result in a $1.0 million to
$1.1 million payment on an after-tax basis.
Legislation regarding bad debt recapture has been passed by Congress and
sent to the President for signature. The legislation requires recapture of
reserves accumulated after 1987. The recapture tax on post 1987 reserves must be
paid over a six year period starting in 1996. The payment of the tax can be
deferred in each of 1996 and 1997 if an institution originates at least the same
average annual principal amount of mortgage loans that it originated in the six
years prior to 1996. Management has not assessed the impact this legislation
will have on the operations of the Company.
Capital and Regulatory Standards
The following schedule presents the prescribed minimum capital
requirements for the Association at June 30, 1996, the actual amount of capital,
and the amount of excess (dollars in thousands):
Minimum Actual
Requirement Amount Excess
----------- ------ ------
Risk-based capital $12,988 $39,692 $26,704
% of risk-weighted assets 8.00% 24.45% 16.45%
Core capital $ 9,294 $38,440 $29,146
% of risk-weighted assets 3.00% 12.41% 9.41%
Tangible capital $ 4,639 $37,941 $33,302
% of risk-weighted assets 1.50% 12.27% 10.77%
The OTS has incorporated an interest rate risk component into its
regulatory capital rule, under which savings associations with "above normal"
interest rate risk exposure would be subject to a deduction from total risk-
based capital. In August 1994, the OTS issued a
16
final regulation adding the interest rate risk component to its risk-based
capital standard. Implementation of the final regulation has been delayed. The
delay provides an opportunity to assess any further guidance from other federal
banking agencies regarding their planned implementation of a capital deduction.
The regulation will require a savings institution to maintain capital in an
amount equal to one-half the difference between the institution's measured
interest rate risk and 2% of the market value of the institution's assets.
Interest rate risk is to be measured on the market value of its assets, based on
a hypothetical 200 basis point change in interest rates. The credit risk
component of the risk-based capital standard will remain unchanged at 8% of
risk-weighted assets. Institutions with measured interest rate risk less than or
equal to 2% will not be required to maintain additional capital. If the
Association were subject to adding an interest rate risk component to its risk-
based capital standard, management believes that based on the Association's
interest rate risk profile, the Association would continue to substantially
exceed minimum risk-based capital requirements.
OTS prompt corrective action ("PCA") regulations include five capital tiers
ranging from well-capitalized to critically undercapitalized. Well-capitalized
institutions are not subject to any PCA-related constraints under these
regulations. As the following table shows, under these regulations, the
Association met the definition of a well capitalized institution at June 30,
1996 and December 31, 1995.
Total Tier One Leverage
Risk-Based Risk-Based (Core Capital)
Capital Ratio Capital Ratio Ratio
------------- ------------- -------------
Minimum requirements:
Well capitalized 10.00% 6.00% 5.00%
Association actual:
December 31, 1995 24.42% 23.57% 11.83%
June 30, 1996 24.45% 23.68% 12.41%
Liquidity
The Association's primary sources of cash flows are savings deposits, loan
repayments and borrowings. The cash needs of the Association are principally
related to loan disbursements, savings withdrawals and noninterest expenses.
The Association's liquidity position refers to the extent to which the
Association's cash flows are sufficient to meet its current and long-term cash
requirements.
The Association, like other savings associations, is required under
applicable federal regulations to maintain specified levels of "liquid"
investments in qualifying types of United States Treasury and federal agency
securities and other investments, generally having maturities of five years or
less. The OTS has the authority to raise or lower the required liquidity level
in order to promote a stable supply of mortgage credit. Currently, the
regulatory requirement for liquid assets each month is 5% of an institution's
average daily
17
balance of net withdrawable accounts and certain short-term borrowings during
the preceding calendar quarter. At June 30, 1996, the Association's liquidity
ratio was 5.68%, compared to 5.63% at December 31, 1995.
18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Association is involved as plaintiff or defendant in various
legal actions incident to its business, none of which is believed by management
to be material to the financial condition of the Association.
Item 2. Changes in Securities.
----------------------
None.
Item 3. Defaults Upon Senior Securities.
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Company held its Annual Meeting of Shareholders on May 23,
1996. At the Annual Meeting, the shareholders elected directors William J.
Meidl, Steven Franich and Gary L. Manfre to three year terms. Directors Eugene
R. Friend, P.W. Bachan, Edward K. Banks, Donald K. Henrichsen and Louis Resetar,
Jr. have terms of office that continued after the Annual Meeting. The
shareholders also approved an amendment to the Certificate of Incorporation of
the Company to decrease the number of shares of stock the Company is authorized
to issue and ratified the appointment of Deloitte & Touche, LLP as independent
auditors of the Company for the year ending December 31, 1996.
The vote on each matter was as follows.
1. For Directors BROKER
FOR WITHHELD NON-VOTES
William J. Meidl 3,120,540 65,995 --
Steven Franich 3,120,540 65,995 --
Gary L. Manfre 3,120,540 65,995 --
2. Other Matters BROKER
FOR AGAINST ABSTAIN NON-VOTES
Approval of an amendment to 2,993,695 23,904 48,936 120,000
the Certificate of
Incorporation of the Company
to decrease the number of
shares of stock the Company
is authorized to issue
Ratification of the 3,126,078 50,204 9,253 --
appointment of Deloitte &
Touche, LLP as independent
auditors for the Company
Item 5. Other Information.
------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibit 3(i) - Certificate of Incorporation of Monterey Bay
Bancorp, Inc., incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1995.
Exhibit 3(ii) - Bylaws of Monterey Bay Bancorp, Inc.,
incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995.
Exhibit 11.0 - Computation of per share earnings (filed
herewith).
Exhibit 27.0 - Financial data schedule.
(b) Reports on Form 8-K - No reports on Form 8-K were filed by the
Company during the quarter ended June 30, 1996.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONTEREY BAY BANCORP
Date August 9, 1996 By /s/ Marshall G.Delk
------------------------------- -------------------
Marshall G. Delk, President and
Chief Operating Officer
Date August 9, 1996 By /s/ Deborah R Chandler
-------------------------------- ----------------------
Deborah R. Chandler,
Senior Vice President, Treasurer
and Chief Financial Officer
20