UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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: 0-24802
MONTEREY BAY BANCORP, INC.
(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 77-0381362
(State Or Other Jurisdiction Of (I.R.S. Employer Identification Number)
Incorporation Or Organization)
567 Auto Center Drive, Watsonville, California 95076
(Address Of Principal Executive Offices)(Zip Code)
(831) 768 - 4800
(Registrant's Telephone Number, Including Area Code)
WWW.MONTEREYBAYBANK.COM
(Registrant's Internet Site)
INFO@MONTEREYBAYBANK.COM
(Registrant's Electronic Mail Address)
Indicate by check mark whether the registrant (1) has filed all the 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: 3,308,523 share of common
stock, par value $0.01 per share, were outstanding as of May 3, 2000.
1
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements Of Financial Condition As Of
March 31, 2000 (unaudited) And December 31, 1999 3 - 4
Consolidated Statements Of Operations (unaudited) For The Three
Months Ended March 31, 2000 And March 31, 1999 5 - 6
Consolidated Statement Of Stockholders' Equity (unaudited) For The
Three Months Ended March 31, 2000 7
Consolidated Statements Of Cash Flows (unaudited) For The Three
Months Ended March 31, 2000 And March 31, 1999 8 - 9
Notes To Consolidated Financial Statements (unaudited) 10 - 14
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations 15 - 32
Item 3. Quantitative And Qualitative Disclosure About Market Risk 32
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Changes In Securities 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission Of Matters To A Vote Of Security Holders 33
Item 5. Other Information 33
Item 6. Exhibits And Reports On Form 8-K 33
(a) Exhibits
(10.15) Employment Agreement Between Monterey Bay Bancorp, Inc.
And C. Edward Holden
(27) Financial Data Schedule
(b) Reports On Form 8-K
Signature Page 34
2
Item 1. Financial Statements
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(Dollars In Thousands, Except Per Share Amounts)
- -------------------------------------------------------------------------------------------------------------------
March 31, December 31,
2000 1999
-------- --------
ASSETS
Cash and cash equivalents $ 16,707 $ 12,833
Securities available for sale, at estimated fair value:
Investment securities (amortized cost of $11,461 and $11,456 at
March 31, 2000 and December 31, 1999, respectively) 11,140 11,463
Mortgage backed securities (amortized cost of $60,501 and $59,710
at March 31, 2000 and December 31, 1999, respectively) 58,667 57,716
Securities held to maturity, at amortized cost:
Mortgage backed securities (estimated fair value of $46 and $60
at March 31, 2000 and December 31, 1999, respectively) 46 60
Loans held for sale 344 --
Loans receivable held for investment (net of allowances for loan losses of
$3,752 at March 31, 2000 and $3,502 at December 31, 1999) 368,733 360,686
Investment in capital stock of the Federal Home Loan Bank, at cost 3,258 3,213
Accrued interest receivable 2,765 2,688
Premises and equipment, net 6,979 7,042
Core deposit premiums and other intangible assets, net 2,743 2,918
Real estate acquired via foreclosure, net 96 96
Other assets 3,841 4,112
-------- --------
TOTAL ASSETS $475,319 $462,827
======== ========
<FN>
See Notes to Consolidated Financial Statements
</FN>
3
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
MARCH 31, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(Dollars In Thousands, Except Per Share Amounts)
- ---------------------------------------------------------------------------------------------------------------
March 31, December 31,
2000 1999
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Demand deposits $ 16,179 $ 17,316
NOW accounts 34,878 31,385
Savings deposits 16,109 15,312
Money market deposits 89,839 81,245
Certificates of deposit 224,992 222,144
--------- ---------
Total deposits 381,997 367,402
--------- ---------
Advances from the Federal Home Loan Bank 49,582 49,582
Securities sold under agreements to repurchase -- 2,410
Accounts payable and other liabilities 3,370 2,630
--------- ---------
Total liabilities 434,949 422,024
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued) -- --
Common stock, $0.01 par value, 9,000,000 shares authorized;
4,492,085 issued at March 31, 2000 and December 31, 1999;
3,308,523 outstanding at March 31, 2000 and
3,422,637 outstanding at December 31, 1999 45 45
Additional paid-in capital 28,290 28,237
Retained earnings, substantially restricted 30,998 30,473
Unallocated ESOP shares (1,093) (1,150)
Treasury shares designated for compensation plans, at cost (104,238 shares
at March 31, 2000 and 126,330 shares at December 31, 1999) (1,152) (1,376)
Treasury stock, at cost (1,183,562 shares at March 31, 2000 and
1,069,448 shares at December 31, 1999) (15,450) (14,257)
Accumulated other comprehensive income, net of taxes (1,268) (1,169)
--------- ---------
Total stockholders' equity 40,370 40,803
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 475,319 $ 462,827
========= =========
<FN>
See Notes to Consolidated Financial Statements
</FN>
4
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(Dollars In Thousands, Except Per Share Amounts)
- ---------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
2000 1999
------- -------
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 7,736 $ 6,296
Mortgage backed securities 959 1,528
Investment securities and cash equivalents 355 401
------- -------
Total interest income 9,050 8,225
------- -------
INTEREST EXPENSE:
Deposit accounts 3,839 3,914
FHLB advances and other borrowings 718 537
------- -------
Total interest expense 4,557 4,451
------- -------
NET INTEREST INCOME BEFORE PROVISION
FOR ESTIMATED LOAN LOSSES 4,493 3,774
PROVISION FOR ESTIMATED LOAN LOSSES 250 220
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR ESTIMATED LOAN LOSSES 4,243 3,554
------- -------
NON-INTEREST INCOME:
(Loss) gain on sale of mortgage backed securities
and investment securities, net (79) 217
Commissions from sales of noninsured products 207 132
Customer service charges 280 233
Income from loan servicing 37 17
Other income 56 85
------- -------
Total non-interest income 501 684
------- -------
<FN>
See Notes to Consolidated Financial Statements
</FN>
5
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Continued)
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(Dollars In Thousands, Except Per Share Amounts)
- --------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
-----------------
2000 1999
------ ------
GENERAL AND ADMINISTRATIVE EXPENSE:
Compensation and employee benefits 1,460 1,360
Occupancy and equipment 312 285
Deposit insurance premiums 47 42
Data processing fees 289 243
Legal and accounting expenses 209 106
Supplies, postage, telephone, and office expenses 189 141
Advertising and promotion 101 57
Amortization of intangible assets 175 174
Other expense 555 414
------ ------
Total general & administrative expense 3,337 2,822
------ ------
INCOME BEFORE INCOME TAX EXPENSE 1,407 1,416
INCOME TAX EXPENSE 608 612
------ ------
NET INCOME $ 799 $ 804
====== ======
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE $ 0.25 $ 0.25
====== ======
DILUTED EARNINGS PER SHARE $ 0.25 $ 0.24
====== ======
See Notes to Consolidated Financial Statements
6
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000
(Dollars And Shares In Thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
Shares
Desig-
nated
For
Addi- Unal- Com-
Common Stock tional Re- located pen-
----------------------- Paid-In tained ESOP sation
Shares Amount Capital Earnings Shares Plans
-------- -------- -------- -------- -------- --------
Balance At December 31, 1999 3,423 $ 45 $ 28,237 $ 30,473 $ (1,150) $ (1,376)
Purchase of treasury stock (120) -- -- -- -- --
Director fees paid using
treasury stock 6 -- 21 -- -- --
Dividends paid ($0.08 per share) -- -- -- (274) -- --
Amortization of stock
compensation -- -- 32 -- 57 224
Comprehensive income:
Net income -- -- -- 799 -- --
Other comprehensive income:
Change in net unrealized
loss on securities
available for sale, net
of taxes of $(101) -- -- -- -- -- --
Reclassification adjustment
for losses on securities
available for sale included
in income, net of taxes
of $33 -- -- -- -- -- --
Other comprehensive
income, net -- -- -- -- -- --
Total comprehensive income -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Balance at March 31, 2000 3,309 $ 45 $ 28,290 $ 30,998 $ (1,093) $ (1,152)
======== ======== ======== ======== ======== ========
Accum-
ulated
Other
Compre-
Treasury hensive
Stock Income Total
-------- -------- --------
Balance At December 31, 1999 $(14,257) $ (1,169) $ 40,803
Purchase of treasury stock (1,251) -- (1,251)
Director fees paid using
treasury stock 58 -- 79
Dividends paid ($0.08 per share) -- -- (274)
Amortization of stock
compensation -- -- 313
Comprehensive income:
Net income -- -- 799
Other comprehensive income:
Change in net unrealized
loss on securities
available for sale, net
of taxes of $(101) -- (145) (145)
Reclassification adjustment
for losses on securities
available for sale included
in income, net of taxes
of $33 -- 46 46
--------
Other comprehensive
income, net -- -- (99)
--------
Total comprehensive income -- -- 700
-------- -------- --------
Balance at March 31, 2000 $(15,450) $ (1,268) $ 40,370
======== ======== ========
================================================================================
See Notes to Consolidated Financial Statements
7
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(Dollars In Thousands)
- -----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 799 $ 804
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization of premises and equipment 111 119
Amortization of intangible assets 175 174
Amortization of purchase premiums, net of accretion of discounts 13 86
Amortization of deferred loans fees (76) (33)
Provision for loan losses 250 220
Federal Home Loan Bank stock dividends (44) (50)
Gross ESOP expense before dividends received on unallocated shares 86 122
Compensation expense associated with stock compensation plans 47 72
Loss (gain) on sale of investment and mortgage-backed securities 79 (217)
Gain on sale of real estate acquired via foreclosure -- (10)
Origination of loans held for sale (864) (2,455)
Proceeds from sales of loans held for sale 521 4,195
Increase in accrued interest receivable (77) (59)
Decrease in other assets 270 1,314
Increase (decrease) in accounts payable and other liabilities 742 (454)
Other, net (151) (289)
-------- --------
Net cash provided by operating activities 1,881 3,539
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans held for investment (8,047) (18,938)
Purchases of investment securities available for sale -- 3,807
Proceeds from sales of investment securities available for sale -- 251
Purchases of mortgage backed securities available for sale (6,032) --
Principal repayments on mortgage backed securities 1,463 8,023
Proceeds from sales of mortgage backed securities available for sale 3,702 --
Purchases of premises and equipment (48) (36)
-------- --------
Net cash used in investing activities (8,962) (6,893)
-------- --------
<FN>
See Notes to Consolidated Financial Statements
</FN>
8
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
THREE MONTHS ENDED MARCH 31, 2000 AND MARCH 31, 1999
(Dollars In Thousands)
- ------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------------
2000 1999
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 14,595 (1,978)
Proceeds (repayments) of FHLB advances, net -- (1,600)
Repayments of securities sold under agreements to repurchase, net (2,410) (320)
Cash dividends paid to stockholders (274) (246)
Purchases of treasury stock (1,251) --
Sales of treasury stock 79 278
Sales of stock for stock compensation plans 216 --
-------- --------
Net cash provided by (used in) financing activities 10,955 (3,866)
-------- --------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 3,874 (7,220)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,833 16,951
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $ 16,707 $ 9,731
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for:
Interest on deposits and borrowings $ 4,381 $ 4,465
Income taxes 550 411
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES
Real estate acquired in settlement of loans -- 280
<FN>
See Notes to Consolidated Financial Statements
</FN>
9
NOTE 1: Basis Of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all necessary adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation have
been included. The results of operations for the three month period ended March
31, 2000 are not necessarily indicative of the results that may be expected for
the entire fiscal year or any other interim period.
Monterey Bay Bancorp, Inc. ("MBBC") is the holding company for Monterey
Bay Bank ("Bank"). The Bank maintains a subsidiary, Portola Investment
Corporation ("Portola"). These three companies are referred to herein on a
consolidated basis as the "Company". The Company's headquarters are in
Watsonville, California. The Company offers a broad range of financial services
to both consumers and small businesses. All significant intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to prior year's consolidated financial statements to conform to the
current presentation.
These unaudited consolidated financial statements and the information
under the heading "Item 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations" and the information under the heading "Item
3. Quantitative And Qualitative Disclosure About Market Risk" have been prepared
with presumption that users of this interim financial information have read, or
have access to, the most recent audited consolidated financial statements and
notes thereto of Monterey Bay Bancorp, Inc. for the fiscal year ended December
31, 1999 included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
The preparation of the consolidated financial statements of Monterey
Bay Bancorp, Inc. and subsidiary requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported revenues and expenses for the periods covered. These estimates are
based on information available as of the date of the financial statements.
Therefore, actual results could significantly differ from those estimates.
10
NOTE 2. Computation Of Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with
Statement Of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". All of the Company's net income has been available to common
stockholders during the periods covered in this Form 10-Q. The following table
reconciles the calculation of the Company's Basic and Diluted EPS for the
periods indicated.
For The Three Months
Ended March 31,
----------------------------------
(In Whole Dollars And Whole Shares) 2000 1999
----------- -----------
Net income $ 799,000 $ 804,000
=========== ===========
Average shares issued 4,492,085 4,492,085
Less weighted average:
Uncommitted ESOP shares (175,195) (211,133)
Non-vested stock award shares (72,007) (98,729)
Treasury shares (1,106,459) (968,282)
----------- -----------
Sub-total (1,353,661) (1,278,144)
----------- -----------
Weighted average BASIC shares outstanding 3,138,424 3,213,941
Add dilutive effect of:
Stock options 11,912 88,421
Stock awards 489 6,461
----------- -----------
Sub-total 12,401 94,882
----------- -----------
Weighted average DILUTED shares outstanding 3,150,825 3,308,823
=========== ===========
Earnings per share:
BASIC EPS $ 0.25 $ 0.25
=========== ===========
DILUTED EPS $ 0.25 $ 0.24
=========== ===========
11
NOTE 3: Other Comprehensive Income
Reclassification adjustments, as defined by SFAS No. 130, for realized
net gains (losses) included in other comprehensive income for investment and
mortgage backed securities classified as available for sale for the three months
ended March 31, 2000 and 1999 are summarized as follows:
Three Months Ended
March 31,
------------------
2000 1999
----- -----
(Dollars In Thousands)
Gross reclassification adjustment $ (79) $ 217
Tax benefit (expense) 33 (90)
----- -----
Reclassification adjustment, net of tax $ (46) $ 127
===== =====
A reconciliation of the net unrealized gain or loss on available for
sale securities recognized in other comprehensive income is as follows:
Three Months Ended
March 31,
------------------
2000 1999
----- -----
(Dollars In Thousands)
Holding loss arising during the period, net of tax $(145) $ (97)
Reclassification adjustment, net of tax 46 (127)
----- -----
Net unrealized loss recognized in other
comprehensive income $ (99) $(224)
===== =====
NOTE 4: Cash & Cash Equivalents
For the purposes of reporting cash flows and the statement of financial
condition, cash & cash equivalents includes cash on hand, amounts due from
banks, federal funds sold, securities purchased under agreements to resell with
original maturities of 90 days or less, certificates of deposit with original
maturities of 90 days or less, investments in money market mutual funds, and US
Treasury securities with original maturities of 90 days or less.
12
NOTE 5: Stock Option Plans
The Company maintains the 1995 Incentive Stock Option Plan and the 1995
Stock Option Plan For Outside Directors. All outstanding stock options under
both of these plans vest upon a change in control of the Company. The following
tables summarize the combined status of these Plans:
Stock Stock Average
Options Stock Options Exercise
Stock Stock Cumulatively Options Available Price Of
Options Options Vested And Cumulatively For Future Vested
Date Authorized Outstanding Outstanding Exercised Grants Options
---- ---------- ----------- ----------- --------- ------ -------
12/31/99 512,036 362,597 239,853 80,150 69,289 $9.51
3/31/00 512,036 419,236 231,100 80,150 12,650 $9.51
Activity during the three months ended March 31, 2000 included:
Granted 66,865
Canceled 10,226
Exercised 0
Vested 1,473
The exercise price of individual vested stock options ranged from a low
of $9.10 per share to a high of $16.60 per share as of March 31, 2000.
At the April 27, 2000 meeting of the Board of Directors, an additional
33,085 shares were authorized for the 1995 Incentive Stock Option Plan.
The Company's Annual Meeting of Stockholders is scheduled for May 25,
2000. As set forth in the Company's Proxy Statement, a proposal to amend the
1995 Incentive Stock Option Plan has been submitted to stockholders. The
Company's Board of Directors recommends the approval of this proposal. This
proposal contains, among other factors, an increase in the number of shares
reserved for issuance to 660,000 shares (exclusive of 97,929 shares reserved
under the 1995 Stock Option Plan For Outside Directors) and a change in the
minimum exercise price of all new option grants to 110% of the fair market value
of the Company's common stock on the date of grant.
13
NOTE 6: Stock Award Plans
The Company maintains two stock award plans: a Performance Equity
Program ("PEP") for Officers and a Recognition and Retention Plan ("RRP") for
Outside Directors. Awards under these plans typically vest over a five year time
period. Awards under the RRP are time-based, while awards under the PEP are both
time-based and performance-based. All outstanding stock awards under the plans
vest in the event of a change in control of the Company. The following tables
summarize the status of these plans:
PEP: Stock
Stock Awards
Stock Stock Awards Available
Awards Awards Cumulatively For Future
Date Authorized Outstanding Vested Grants
---- ---------- ----------- ------ ------
12/31/99 141,677 30,864 79,038 31,775
3/31/00 141,677 59,212 79,038 3,427
Activity during the three months ended March 31, 2000 included:
Granted 28,994
Canceled 646
Vested 0
RRP: Stock
Stock Awards
Stock Stock Awards Available
Awards Awards Cumulatively For Future
Date Authorized Outstanding Vested Grants
---- ---------- ----------- ------ ------
12/31/99 38,010 9,541 28,469 0
3/31/00 38,010 8,713 29,297 0
Activity during the three months ended March 31, 2000 included:
Granted 0
Canceled 0
Vested 828
NOTE 7: Commitments And Contingencies
At March 31, 2000, the Company maintained commitments to sell $344
thousand in residential fixed rate mortgage loans on a servicing released basis
and to originate $10.1 million in various types of loans. The Company maintained
no commitments to purchase loans or securities, to assume borrowings, or to sell
securities at March 31, 2000.
NOTE 8: Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The
Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
securities or contracts, and hedging activities. As originally issued, SFAS No.
133 is effective for all fiscal quarters of fiscal years beginning after June
15, 1999. In July, 1999, the FASB issued SFAS No. 137, Accounting For Derivative
Instruments And Hedging Activities - Deferral Of The Effective Date Of FASB
Statement No. 133. In general, SFAS No. 137 delays for one year the effective
date of SFAS No. 133. The Company anticipates adopting SFAS No. 133 effective
January 1, 2001. Because the Company did not maintain any derivatives at March
31, 2000, the impact of the adoption of SFAS No. 133 is not expected to be
material.
14
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Forward-looking Statements
Discussions of certain matters in this Report on Form 10-Q may
constitute forward-looking statements within the meaning of the Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve
risks and uncertainties. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations, are
generally identifiable by the use of words such as "believe", "expect",
"intend", "anticipate", "estimate", "project", or similar expressions. These
forward-looking statements relate to, among other things, expectations of the
business environment in which Monterey Bay Bancorp, Inc. operates, projections
of future performance, potential future credit experience, perceived
opportunities in the market, and statements regarding the Company's mission and
vision. The Company's actual results, performance, and achievements may differ
materially from the results, performance, and achievements expressed or implied
in such forward-looking statements due to a wide range of factors. These factors
include, but are not limited to, changes in interest rates, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the US Government, real estate valuations, competition in the financial services
industry ,and other risks detailed in the Company's reports filed with the
Securities and Exchange Commission ("SEC") from time to time, including the
Annual Report on Form 10-K for the fiscal year ended December 31, 1999. The
Company does not undertake, and specifically disclaims any obligation, to update
any forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
General
Monterey Bay Bancorp, Inc. (referred to herein on an unconsolidated
basis as "MBBC" and on a consolidated basis as the "Company") is a unitary
savings and loan holding company incorporated in 1994 under the laws of the
state of Delaware. MBBC currently maintains a single subsidiary company,
Monterey Bay Bank (the "Bank"), formerly Watsonville Federal Savings and Loan
Association. MBBC was organized as the holding company for the Bank in
connection with the Bank's conversion from the mutual to stock form of ownership
in 1995.
At March 31, 2000, the Company had $475.3 million in total assets,
$369.1 million in net loans receivable, and $382.0 million in total deposits.
The Company is subject to regulation by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"). The principal executive
offices of the Company and the Bank are located at 567 Auto Center Drive,
Watsonville, California, 95076, telephone number (831) 768 - 4800, facsimile
number (831) 722 - 6794. The Company may also be contacted via electronic mail
at: INFO@MONTEREYBAYBANK.COM. The Bank is a member of the Federal Home Loan Bank
of San Francisco ("FHLB") and its deposits are insured by the FDIC to the
maximum extent permitted by law.
The Company conducts business from eight branch offices and its
administrative facilities. In addition, the Company supports its customers
through 24 hour telephone banking and ATM access through an array of networks
including STAR, CIRRUS, and PLUS. Through its network of banking offices, the
Bank emphasizes personalized service focused upon two primary markets:
households and small businesses. The Bank offers a wide complement of lending
and deposit products. The Bank also supports its customers by functioning as a
federal tax depository, selling and purchasing foreign banknotes, issuing debit
cards, providing domestic and international collection services, and supplying
various forms of electronic funds transfer. Through its wholly-owned subsidiary,
Portola Investment Corporation ("Portola"), the Bank provides, on an agency
basis, mortgage life insurance, fire insurance, and a large selection of
non-FDIC insured investment products including annuities, mutual funds, and
individual securities.
The Company's revenues are primarily derived from interest on its loan
and mortgage backed securities portfolios, interest and dividends on its
investment securities, and fee income associated with the provision of various
customer services. Interest paid on deposits and borrowings constitutes the
Company's largest type of expense. The Company's primary sources of funds are
deposits, principal and interest payments on its asset portfolios, and various
sources of wholesale borrowings including FHLB advances and securities sold
under agreements to repurchase. The Company's most significant operating
expenditures are its staffing expenses and the costs associated with maintaining
its branch network.
15
Recent Developments
Congress and the Federal Administration continue to consider a series
of issues that may impact the financial services industry, including the
Company. These issues include the potential reform of bankruptcy legislation,
the possible privatization of or reduced government support for certain
government sponsored enterprises, most notably the Federal Home Loan Mortgage
Corporation ("FHLMC") and the Federal National Mortgage Association ("FNMA"),
new capital rules for the FHLB System, and new federal regulations involving the
privacy of customer information. The FDIC recently held hearings to discuss the
potential merger of the bank and thrift federal deposit insurance funds, with
some parties requesting the consideration of an increase in federal deposit
insurance limits. In addition, legislators and regulators continue to develop
new laws and rules as a result of implementing the landmark Gramm-Leach-Bliley
Act, which modified laws that had governed and controlled the financial services
industry for more than 50 years. The Company is unable to predict what, if any,
legislation or regulation might be enacted and the potential impact of such
legislation or regulation upon the Company's financial condition or results of
operations.
Since mid-1999, the Federal Reserve has implemented five 25 basis point
increases in the target federal funds rate in response to various US economic
trends, including low unemployment, strong expansion in gross domestic product,
and increases in the consumer price index. While the Company, through its
strategic plan and asset / liability management program, has been able to
continue increasing its net interest income during this time period, additional
future increases in interest rates could unfavorably impact the Company due to a
number of factors, including the potential negative impacts upon the demand for
loans and upon delinquencies. With further increases in general market interest
rates, delinquencies might rise due to larger demands on customer cash flows
associated with variable rate loans and due to reduced customer income should
the higher general market interest rates slow the economy. Future actions by the
Federal Reserve and the impacts from such actions are beyond the Company's
ability to predict and control.
On May 1, 2000. C. Edward Holden assumed the position of Chief
Executive Officer of both Monterey Bay Bancorp, Inc. and Monterey Bay Bank,
succeeding Eugene R. Friend. Mr. Friend will continue as Chairman of the Board
of Monterey Bay Bancorp, Inc. and Monterey Bay Bank until the annual
stockholders' meeting in 2001, after which he will retire. Mr. Holden, 52 years
of age, has worked in the commercial banking industry for over 25 years, most
recently as Executive Vice President and Senior Lending Officer for The Pacific
Bank in San Francisco. Mr. Holden has a BS degree in mechanical engineering from
the University Of California at Santa Barbara and an MBA from the University Of
California at Los Angeles.
The pending acquisitions of two local competing insured depository
institutions appear to be moving closer to consummation. Coast Bancorp, Inc. and
San Benito Bank are in the process of being purchased by Greater Bay Bancorp,
Inc. and Pacific Capital Bancorp, Inc., respectively. These transactions
continue the consolidation trend that has occurred in the Company's primary
marketplaces over the past several years. The Company is currently evaluating
the potential impacts of these acquisitions, with management considering various
alternatives to acquire business currently served by the impacted institutions.
Overview Of Business Activity
During the most recent quarter, the Company continued in its business
strategy of evolving away from its traditional savings and loan roots toward
more of a community banking orientation. Progress was realized during the
quarter in loan mix, deposit composition, and fee income generation,
particularly resulting from the sale of non-FDIC insured investment products
through Portola. In addition, the Company continued to grow its customer base,
with deposit accounts surpassing 28,000 for the first time in the Company's
history. The Company regularly encourages and supports its employees'
contributions to community organizations targeted at improving the quality of
life in the Greater Monterey Bay Area and helping those individuals and groups
in need of assistance.
The Company's hiring of a Chief Executive Officer with extensive
commercial banking experience constituted another step in progressing along its
strategic plan. The new Chief Executive Officer materially augments the
management team's knowledge of designing, implementing, and profitably
delivering a broader range of financial products and services to small
businesses.
16
Thus far in 2000, the Company's primary market areas continued to see
high demand for housing, strong real estate price appreciation, population
increases, and economic expansion. The Company's primary market areas have also
benefited from the ongoing growth in employment, geography, and financial
capacity of the adjacent, technology oriented Silicon Valley area of the San
Francisco Bay Area.
During the first quarter of 2000, the Company also continued in its
program of working to enhance shareholder value through capital management. The
Company repurchased 120,000 shares of its common stock on the open market during
the quarter and paid an $0.08 per share cash dividend, in addition to expanding
total assets.
The Company intends to continue pursuing this business strategy,
explained in greater detail in the Company's Annual Report on Form 10-K for
1999, while seeking avenues for further growth in market share and product
diversification. In that regard, the Company intends to launch its Internet
Banking service later this year. Management believes that the continued
consolidation occurring in the financial services industry will present
opportunities to acquire personnel, branches, and customers from institutions
being sold.
Changes In Financial Condition From December 31, 1999 To March 31, 2000
Total assets increased $12.5 million, or 2.7%, from $462.8 million at
December 31, 1999 to $475.3 million at March 31, 2000. This rise in assets was
primarily fueled by a strong deposit performance.
Cash & cash equivalents rose from $12.8 million at December 31, 1999 to
$16.7 million at March 31, 2000. This increase was associated with management's
plan to build short term funds in preparation for the maturity of a $4.0 million
FHLB advance during April, 2000 and in order to cover customer deposit
withdrawals which typically occur in April in conjunction with property and
income tax payments. In addition, during the first quarter of 2000, the Bank
invested in two certificates of deposit placed with minority controlled
financial institutions as part of its ongoing commitment to community investment
and assisting individuals in its market areas with low to moderate incomes.
Investment and mortgage backed securities available for sale increased
slightly from $69.2 million at December 31, 1999 to $69.8 million at March 31,
2000. While the balance was relatively constant, the mix in securities continued
to shift toward shorter term collateralized mortgage obligations and away from
longer term, fixed rate, traditional Agency pass-through mortgage backed
securities. Management has targeted the lower duration instruments as better
suited to the Company's strategic plan, providing greater periodic cash flow for
reinvestment into loans and reducing the Company's exposure to increases in
general market interest rates.
Net loans receivable held for investment rose from $360.7 million at
December 31, 1999 to $368.7 million at March 31, 2000 on the strength of $29.3
million in credit commitments during the quarter. The increase in loans was
concentrated in the commercial & industrial real estate and multifamily loan
portfolios, as the Company continued the diversification of its balance sheet
away from the historical concentration in residential mortgage related assets.
Residential loans as a percentage of gross loans declined from 43.4% to 42.5%
during the first quarter of 2000. The Company also continued to market its
"Business Express" line of credit product aimed at small businesses operating in
the Company's local communities during the most recent three months,
contributing to a rise in business line of credit loans outstanding.
The Company's increasing volume of commercial & industrial real estate
loans has reduced the Bank's qualified thrift lender test results, with the
qualified thrift lender ratio declining from 70.4% at December 31, 1999 to 69.5%
at March 31, 2000. Because the regulatory limit for the qualified thrift lender
ratio is 65.0%, management is considering a number of alternatives, from
restructuring certain portions of the balance sheet to applying for a commercial
bank charter.
17
Additional information regarding the composition of the Company's loan
portfolio is presented in the following table:
March 31, December 31,
2000 1999
--------- ---------
(Dollars In Thousands)
Held for investment:
Loans secured by real estate:
Residential one to four unit $ 167,970 $ 168,465
Multifamily five or more units 45,030 42,173
Commercial and industrial 82,652 72,344
Construction 71,630 79,034
Land 15,051 13,930
--------- ---------
Sub-total loans secured by real estate 382,333 375,946
Other loans:
Home equity lines of credit 4,128 3,968
Loans secured by deposits 348 385
Consumer lines of credit, unsecured 153 202
Business term loans 6,584 6,670
Business lines of credit 1,489 1,027
--------- ---------
Sub-total other loans 12,702 12,252
Sub-total gross loans held for investment 395,035 388,198
(Less) / Plus:
Undisbursed construction loan funds (22,411) (23,863)
Unamortized purchase premiums, net of purchase discounts 137 134
Deferred loan fees and costs, net (276) (281)
Allowance for estimated loan losses (3,752) (3,502)
--------- ---------
Loans receivable held for investment, net $ 368,733 $ 360,686
========= =========
Held for sale:
Residential one to four unit $ 344 $ --
========= =========
Net loans available for sale increased from none at December 31, 1999
to $344 thousand at March 31, 2000. The Company continues to originate fixed
rate residential loans for sale into the secondary market on a servicing
released basis. This practice allows the Company to provide a full range of
residential loan products to its customers without adding to the Company's
sensitivity to rising interest rates.
Intangible assets declined by $175,000 during the quarter in
conjunction with periodic amortization. Under OTS regulations, intangible assets
net of associated deferred tax liabilities reduce regulatory capital, resulting
in lower capital ratios than would otherwise be the case.
18
Total deposits increased from $367.4 million at December 31, 1999 to a
record $382.0 million at March 31, 2000. Key trends within the deposit portfolio
included:
o Checking account balances rose $2.4 million during the quarter. The Company
continues to target increases in checking account balances as a source of
low cost funds and non-interest income. During 2000, management plans to
accelerate growth in this area through the introduction of a new, highly
tiered SuperNOW product, the installation of an additional off-site ATM,
advertising targeted at competitor branch locations being closed due to
acquisitions, an internal employee incentive campaign, and the planned
launch of Internet Banking.
o Customers reacted positively to the Bank's new "Money Market Plus" deposit
account, which provides competitive, highly tiered rates for liquid funds.
In conjunction with this product, total money market deposits rose from
$81.2 million at December 31, 1999 to $89.8 million three months later.
o Certificate of deposit balances rose $2.8 million during the first quarter
of 2000, as the Company continued two key sales efforts for this product
line. Premium CD rates are made available to customers for whom the Bank is
their primary financial services provider. The Company also promotes "CD
Specials" of various terms and with various minimum balance requirements in
response to competitive actions and in order to attract funds consistent
with its asset / liability management program.
o Transaction accounts constituted 41.1% of total deposits at March 31, 2000,
up from 39.5% three months earlier. This change in deposit mix is integral
to the Company's strategic plan, as transaction accounts provide for a
lower cost of funds versus most other funding sources, furnish
opportunities for cross-selling other products and services to customers,
are less interest rate sensitive than many other funding sources, and
generate fee income.
The Company's ratio of loans to deposits declined from 98.2% at
December 31, 1999 to 96.6% at March 31, 2000, as the strong deposit growth
during the quarter eclipsed the expansion in loans. If the recent favorable
demand for loans continues, the Company expects this ratio to remain in excess
of approximately 95.0%. Moreover, the Company is exploring various strategic
alternatives for increasing its funding base, including new sites for
traditional stand-alone branches and sites for branches domiciled within larger
retail outlets. No assurance can, however, be provided that the Company will be
successful in obtaining additional distribution and sales locations.
Borrowings declined from $52.0 million at December 31, 1999 to $49.6
million at March 31, 2000, all of which was then comprised of FHLB advances.
During the first quarter, MBBC repaid all of its securities sold under
agreements to repurchase in conjunction with the sale of the associated
securities. FHLB advances which matured in early 2000 were renewed and
distributed throughout the year in order to lock in funding costs for a period
of time in light of continued increases in interest rates implemented by the
Federal Reserve.
Total stockholders' equity declined from $40.8 million at December 31,
1999 to $40.4 million at March 31, 2000. Factors contributing to the decline
included:
o the repurchase of 120,000 of the Company's common shares on the open market
for $1.25 million
o the payment of $274 thousand in cash dividends (equivalent to $0.08 per
share)
o a reduction in the fair market value of the portfolios of investments
designated as available for sale
The above factors more than offset:
o $799 thousand in net income for quarter
o continued amortization of the Company's deferred stock compensation
o the election by certain Directors to have their Directors fees paid with
common stock
The Company's tangible book value per share was $11.37 at March 31, 2000.
19
Interest Rate Risk Management And Exposure
In an effort to limit the Company's exposure to interest rate changes,
management monitors and evaluates interest rate risk on a regular basis,
including participation in the OTS Net Portfolio Value Model and associated
regulatory reporting. Management acknowledges that interest rate risk and credit
risk compose the two greatest financial exposures faced by the Company in the
normal course of its business. The Company is not directly exposed to risks
associated with commodity prices or fluctuations in foreign currency values.
In recent quarters, the Company has maintained a net liability
sensitivity in regards to net portfolio value, also referred to as market value
of portfolio equity. This means that the fair value of the Company's assets is
more volatile than that of its liabilities. This net liability sensitivity
primarily arises from the longer term, fixed rate real estate loans and mortgage
related securities maintained on the Company's balance sheet, for which the
Company's only current match funding sources are demand deposit accounts, non
interest bearing liabilities, a segment of core deposit transaction accounts,
certain borrowings, and capital. A net liability sensitive position typically
translates to improved net portfolio value during periods of falling general
market interest rates. Conversely, this position presents the likelihood of
reductions in net portfolio value during increasing rate environments. However,
in addition to the overall direction of general market interest rates, changes
in relative rates (i.e. the slope of the term structure of interest rates) and
relative credit spreads also impact net portfolio value and the Company's
profitability.
Factors impacting the Company's net liability sensitivity during the
first quarter of 2000 and forecast to affect the Company's interest rate
exposure throughout 2000 include:
Factors reducing net liability sensitivity:
o The $11.7 million rise in transaction account balances during
the first quarter of 2000, as transaction deposit accounts are
typically less interest rate sensitive than many other sources
of funding. The Company intends to continue pursuing growth in
transaction deposits throughout 2000 as an integral part of its
business strategy.
o The sale of $3.7 million in high duration mortgage backed
securities during the first quarter of 2000. The Company plans
to make further such sales later in 2000 depending upon market
conditions and cash needs.
o The continued amortization and prepayment of long term, fixed
rate loans and mortgage backed securities combined with the
sale of new, long term, fixed rates loans into the secondary
market and the focus of new security purchases in lower
duration instruments.
o The pending conversion during the last three quarters of 2000
of approximately $32.0 million in previously purchased "hybrid"
residential loans from fixed rate to floating rate.
o The Company's pricing for new loan originations has been skewed
to encourage adjustable rate lending and hybrid lending with
shorter initial fixed rate periods.
Factors increasing net liability sensitivity:
o Slowing prepayment speeds on certain fixed rate whole loan and
mortgage related security positions in conjunction with reduced
consumer refinance activity. The slower prepayment speeds
increase the average lives of these assets and provide less
periodic cash flow for reinvestment into alternative assets
that would likely be more interest rate sensitive.
20
Liquidity
Liquidity is actively managed to ensure sufficient funds are available
to meet ongoing needs of both the Company in general and the Bank in particular.
Liquidity management includes projections of future sources and uses of funds to
ensure the availability of sufficient liquid reserves to provide for
unanticipated circumstances. The Company's primary sources of funds are customer
deposits, principal and interest payments on loans and securities, FHLB advances
and other borrowings, and, to a lesser extent, proceeds from sales of loans and
securities. While maturities and scheduled amortization of loans and securities
are predictable sources of funds, deposit flows and prepayments on mortgage
related assets are significantly influenced by general market interest rates,
economic conditions, and competition.
At March 31, 2000, the Company maintained $16.7 million in cash and
cash equivalents, untapped borrowing capacity of $108.7 million at the FHLB-SF,
and significant excess collateral in both loans and securities; collateral which
is available for either liquidation or secured borrowings in order to meet
future liquidity requirements. In addition, during the first quarter of 2000,
the Bank was granted a $10.0 million federal funds line of credit from a
correspondent financial institution. However, there can be no assurance that
funds from this new line of credit will be available at all times, or that the
line will be maintained in future periods.
The Bank is working to further enhance its liquidity by seeking
additional federal funds lines of credit from correspondent banks and by
pledging certain multifamily loans to the FHLB-SF in order to bolster its
borrowing capacity. However, there can be no assurance that the Bank will be
successful in obtaining additional federal funds lines of credit. In addition,
during the first quarter of 2000, MBBC and the Bank each entered into several
Master Repurchase Agreements to permit securities sold under agreements to
repurchase transactions with a greater number of counterparties.
Federal regulations currently require thrift institutions to maintain
an average daily balance of liquid assets (including cash, certain cash
equivalents, certain mortgage-related securities, certain mortgage loans with
the security of a first lien on residential property, and specified US
Government, state, and federal agency obligations) equal to at least 4.0% of
either (i) the average daily balance of its net withdrawable accounts plus short
term borrowings (the "liquidity base") during the preceding calendar quarter, or
(ii) the amount of the liquidity base at the end of the preceding calendar
quarter. This liquidity requirement may be changed from time to time by the OTS
to an amount within a range of 4.0% to 10.0% of such accounts and borrowings
depending upon economic conditions and the deposit flows of thrift institutions.
In addition, the Bank must comply with a general non-quantitative requirement to
maintain a safe and sound level of liquidity.
Throughout the first three months of 2000, the regulatory liquidity
ratio of the Bank exceeded regulatory requirements, with the average ratio for
the quarter equaling 6.67%. The Company's strategy generally is to maintain its
regulatory liquidity ratio near the required minimum in order to maximize
borrowing capacity by pledging loans and securities and in order to maximize its
yield through alternative investments.
At March 31, 2000, MBBC had cash & cash equivalents of $528 thousand.
Following the sale of its security portfolio during the first quarter of 2000
and the use of those proceeds largely to repurchase shares, MBBC's primary
sources of funds are annual (December) payments from the Bank in conjunction
with the ESOP, the sale of Treasury shares in conjunction with stock
compensation plans, and payments on the $5.0 million commercial business term
loan primarily secured by stock in an insured depository institution and
maintained on non-accrual status at March 31, 2000. Due to additional capital
requirements implemented by the OTS for the Bank, the Bank is currently limited
in its ability to pay dividends to MBBC. As a result of the foregoing, MBBC may
be constrained in its ability to pay stockholder cash dividends and / or
repurchase additional shares of common stock in future periods.
21
Capital Resources And Regulatory Capital Compliance
The Federal Deposit Insurance Act of 1991 ("FDICIA") required the OTS
to implement a system providing for regulatory sanctions against institutions
that are not adequately capitalized. The severity of these sanctions increases
to the extent that an institution's capital falls further below the adequately
capitalized thresholds. Under FDICIA, the OTS issued the Prompt Corrective
Action ("PCA") regulations which established specific capital ratios for five
separate capital categories as set forth below:
Core Capital Core Capital Total Capital
To Adjusted To To
Total Assets Risk-weighted Risk-weighted
(Leverage Ratio) Assets Assets
---------------- ------ ------
Well capitalized 5% or above 6% or above 10% or above
Adequately capitalized 4% or above 4% or above 8% or above
Undercapitalized Under 4% Under 4% Under 8%
Significantly undercapitalized Under 3% Under 3% Under 6%
Critically undercapitalized Ratio of tangible equity to adjusted total assets of 2% or less
The following table summarizes the capital ratios required by FDICIA
for an institution to be considered well capitalized and the Bank's regulatory
capital at March 31, 2000 as compared to such ratios.
Core Capital Core Capital To Total Capital To
To Adjusted Risk-weighted Risk-weighted
Total Assets Assets Assets
----------------------- ----------------------- -----------------------
Balance Percent Balance Percent Balance Percent
------- ------- ------- ------- ------- -------
(Dollars In Thousands)
Bank regulatory capital $ 33,512 7.14% $ 33,512 10.03% $ 37,064 11.09%
Well capitalized requirement 23,468 5.00% 20,047 6.00% 33,411 10.00%
-------- ----- -------- ------ -------- ------
Excess $ 10,044 2.14% $ 13,465 4.03% $ 3,653 1.09%
======== ===== ======== ====== ======== =====
Adjusted assets (1) $469,356 $334,109 $334,109
======== ======== ========
<FN>
- -----
(1) The above line for "adjusted assets" refers to the term "adjusted total
assets" as defined in 12 C.F.R. Section 567.1(a) for purposes of core capital
requirements, and refers to the term "risk-weighted assets" as defined in C.F.R.
Section 567.1(bb) for purposes of risk-based capital requirements.
</FN>
The Bank has been informed by the OTS that it is to maintain its
regulatory capital ratios at levels no less than those in effect at December 31,
1999 until further notice (see "Special Residential Loan Pool"). The following
table demonstrates the Bank's compliance with this institution-specific
regulatory capital requirement.
March 31, 2000 December 31, 1999
-------------- -----------------
Core capital to adjusted total assets 7.14% 7.11%
Core capital to risk-weighted assets 10.03% 9.58%
Total capital to risk-weighted assets 11.09% 10.56%
22
The Bank is also subject to OTS capital regulations under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") and
amendments thereto. These regulations require the Bank to maintain: (a) tangible
capital of at least 1.5% of adjusted total assets (as defined in the
regulations), (b) core capital of at least 4.0% of adjusted total assets (as
defined in the regulations), and (c) total capital of at least 8.0% of
risk-weighted assets (as defined in the regulations).
The following table summarizes the regulatory capital requirements
under FIRREA for the Bank. As indicated in the table, the Bank's capital levels
at March 31, 2000 exceeded all three of the currently applicable minimum FIRREA
capital requirements.
Percent Of
Adjusted
(Dollars In Thousands) Total
Amount Assets
------ ------
Tangible Capital
Regulatory capital $33,512 7.14%
Minimum required 7,040 1.50%
------- -----
Excess $26,472 5.64%
======= =====
Core Capital
Regulatory capital $33,512 7.14%
Minimum required 18,774 4.00%
------- -----
Excess $14,738 3.14%
======= =====
Percent Of
Risk-
Weighted
Amount Assets
------- ------
Risk-based Capital
Regulatory capital $37,064 11.09%
Minimum required 26,729 8.00%
------- ------
Excess $10,335 3.09%
======= ======
At March 31, 2000, the Bank's regulatory capital levels exceeded the
thresholds required to be classified as a "well capitalized" institution. The
Bank's regulatory capital ratios detailed above do not reflect the additional
capital (and assets) maintained by MBBC. Management believes that, under current
regulations and institution-specific requirements, the Bank will continue to
meet its minimum capital requirements. However, events beyond the control of the
Bank, such as changing interest rates or a downturn in the economy or real
estate markets in the areas where the Bank has most of its loans, could
adversely affect future earnings and, consequently, the ability of the Bank to
meet its future minimum regulatory capital requirements.
23
Asset Quality / Credit Profile
Non-performing Assets
The following table sets forth information regarding non-performing
assets at the dates indicated.
(Dollars In Thousands) March 31, December 31,
2000 1999
------ ------
Outstanding Balances Before Valuation Reserves
Non-accrual loans $5,198 $6,888
Loans 90 or more days delinquent and accruing interest -- --
Restructured loans in compliance with modified terms 1,277 1,294
------ ------
Total gross non-performing loans 6,475 8,182
Investment in foreclosed real estate before valuation reserves 96 96
Repossessed consumer assets -- --
------ ------
Total gross non-performing assets $6,571 $8,278
====== ======
Gross non-accrual loans to total loans 1.39% 1.89%
Gross non-performing loans to total loans 1.74% 2.25%
Gross non-performing assets to total assets 1.38% 1.79%
Allowance for loan losses $3,752 $3,502
Valuation allowances for foreclosed real estate $ -- $ --
Non-accrual loans at March 31, 2000 consisted of a three residential
mortgages and a $5.0 million term business loan primarily secured by the common
stock of a depository institution. The borrower for this loan is current in its
payments. However, the loan has been maintained on non-accrual status due to
concern regarding the borrower's potential sources of funds to repay the loan at
maturity. The Company has established a $200 thousand specific reserve for this
loan. Real estate acquired via foreclosure at March 31, 2000 consisted of one
residential property.
Criticized And Classified Assets
The following table presents information concerning the Company's
inventory of criticized ("OAEM") and classified ("substandard" and lower)
assets. The category "OAEM" refers to "Other Assets Especially Mentioned", or
those assets which present indications of potential future credit deterioration.
(Dollars In Thousands) OAEM Substandard Doubtful Loss Total
---- ----------- -------- ---- -----
December 31, 1999 $7,940 $8,574 $ -- $ 200 $16,714
March 31, 2000 $5,116 $7,815 $ -- $ 200 $13,131
Classified assets as a percent of stockholders' equity declined from
21.5% at December 31, 1999 to 19.9% at March 31, 2000. Real estate markets in
the Company's primary business areas were generally vibrant during the first
quarter of 2000, with strong demand for most types of property leading to price
appreciation, low loan delinquencies, and limited foreclosures.
24
Impaired Loans
At March 31, 2000, the Company maintained total gross impaired loans,
before specific reserves, of $6.5 million, constituting 11 credits. This
compares to gross impaired loans of $8.2 million at December 31, 1999. Of the
total impaired loans at March 31, 2000, $1.3 million were either fully current
or exhibited only minor delinquency and were therefore maintained on accrual
status. Interest is accrued on impaired loans on a monthly basis except for
those loans that are 90 or more days delinquent or those loans which are less
than 90 days delinquent but where management has identified concerns regarding
the collection of the credit. For the three months ended March 31, 2000, accrued
interest on impaired loans was $7 thousand and interest of $148 thousand was
received in cash. If all non-accrual loans has been performing in accordance
with their original loan terms, the Company would have recorded interest income
of $133 thousand during the three months ended March 31, 2000, instead of
interest income actually recognized on cash payments of $121 thousand.
Special Residential Loan Pool
During 1998, the Bank purchased a $40.0 million residential mortgage
pool comprised of loans that presented a borrower credit profile and / or a loan
to value ratio outside of (less favorable than) the Bank's normal underwriting
criteria. To mitigate its credit risk for this portfolio, the Bank obtained a
scheduled principal / scheduled interest loan servicing agreement from the
seller. Further, this agreement also contained a warranty by the seller to
absorb any principal losses on the portfolio in exchange for the seller's
retention of a portion of the loans' yield through loan servicing fees. In
obtaining these favorable loan servicing terms, the Bank functionally aggregated
the credit risk for this loan pool into a single borrower credit risk to the
seller / servicer of the loans. The Bank was subsequently informed by the OTS
that structuring the purchase in this manner made the transaction an "extension
of credit" by the Bank to the seller / servicer, which, by virtue of its size,
violated the OTS' "Loans To One Borrower" regulation.
At March 31, 2000, the outstanding balance of this mortgage loan pool
was $32.8 million, with $0.8 million receivable during April, 2000 based upon
prepayments and scheduled principal for March, 2000. At December 31, 1999, the
outstanding principal balance of this mortgage loan pool was $35.0 million, with
$1.2 million in principal receivable during January, 2000. Because the
residential loans contain a substantial upward rate reset feature in the year
2000, the Bank anticipates that the pool will continue experiencing significant
prepayments. The Bank continues to report to the OTS in this regard on a monthly
basis.
Through March 31, 2000, the seller / servicer performed per the loan
servicing agreement, making scheduled principal and interest payments to the
Bank while also absorbing all credit losses on the loan portfolio. Management
believes that the seller / servicer has both the capacity and intent to continue
performing per the terms of the loan servicing agreement and therefore does not
anticipate realizing credit losses on this residential mortgage pool.
During the first quarter of 2000, the Bank was informed by the OTS
that:
1. all loans associated with this loan pool would be required to be assigned
to the 100% risk based capital category in calculating regulatory capital
ratios that incorporate risk weighted assets
2. the Bank's regulatory capital position at December 31, 1999 and thereafter
was mandated to reflect the above requirement
3. until further notice, the Bank's regulatory capital ratios were required to
be maintained at levels no lower than the levels at December 31, 1999
Because remaining a "well capitalized" financial institution is
integral to the Bank's business strategy and due to the planned generation of
additional regulatory capital in 2000 through a combination of net income,
amortization of deferred stock compensation, and amortization of intangible
assets, management does not foresee that the aforementioned requirements will
have a material adverse impact upon the Company in 2000. However, depending upon
the tenure of and any potential modification of the additional requirements, as
determined by the OTS, such requirements could present an unfavorable impact
upon MBBC's liquidity and ability to pay cash dividends to stockholders and
conduct share repurchases, as a result of potential restrictions upon the Bank's
ability to pay dividends to MBBC.
25
Allowance For Loan Losses
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in the loan
portfolio. In determining levels of risk, management considers a variety of
factors, including, but not limited to, asset classifications, economic trends,
industry experience and trends, geographic concentrations, estimated collateral
values, historical loan loss experience, and the Company's underwriting
policies. The allowance for loan losses is maintained at an amount management
considers adequate to cover losses in loans receivable which are deemed probable
and estimable. While management uses the best information available to make
these estimates, future adjustments to allowances may be necessary due to
economic, operating, regulatory, and other conditions that may be beyond the
Company's control. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgements different from those of management.
The following table presents activity in the Company's allowance for
loan losses during the three months ended March 31, 2000 and March 31, 1999:
Three Months Ended March 31,
--------------------------
2000 1999
------- -------
Allowance For Loan Losses (Dollars In Thousands)
- -------------------------
Balance at beginning of year $ 3,502 $ 2,780
Charge-offs: Residential one to four unit real estate loans -- (113)
Recoveries -- --
Provision for loan losses 250 220
------- -------
Balance at March 31 $ 3,752 $ 2,887
======= =======
Ratio of net charge-offs during the period to average gross loans
outstanding during the period net of undisbursed loan funds 0.00% 0.14%
Additional ratios applicable to the allowance for loan losses include:
March 31, 2000 December 31, 1999
-------------- -----------------
Allowance for loan losses as a percent of non-performing loans 57.94% 42.80%
Allowance for loan losses as a percent of gross loans receivable
net of undisbursed loan funds 1.01% 0.96%
Allowance for loan losses as a percent of classified assets 46.81% 39.91%
The provision for loan losses recorded during the first quarter of 2000
primarily resulted from growth in the size of the loan portfolio and from the
portfolio's continuing diversification away from its historic concentration in
residential real estate. Management anticipates that further growth in loans
receivable and ongoing emphasis on the origination of construction and
commercial real estate loans will result in future provisions and in an increase
in the ratio of the allowance for loan losses to loans outstanding. Experience
across the financial services industry indicates that construction and
commercial real estate loans present greater risks than residential real estate
loans, and therefore should be accompanied by suitably higher levels of
reserves.
26
Comparison Of Operating Results For The Three Months Ended March 31, 2000 and
March 31, 1999
General
For the quarter ended March 31, 2000, the Company reported net income
of $799 thousand, equivalent to $0.25 basic and diluted earnings per share. This
compares to net income of $804 thousand, or $0.25 basic earnings per share and
$0.24 diluted earnings per share during the first quarter of 1999. Net income
during the fourth quarter of 1999 (the immediately preceding quarter) was $645
thousand, equivalent to $0.20 basic and diluted earnings per share.
Interest Rate Environment
The table below presents an overview of the interest rate environment
during the most recent five quarters. Market interest rates generally trended
upward during this time period, with an acceleration starting in mid 1999, as
the Federal Reserve commenced what has become five separate 25 basis point
increases in its target federal funds rate. The Treasury yield curve became
steeper during 1999, after starting the year with just a 63 basis point yield
differential between a three month Treasury bill and a 30 year Treasury bond.
Then, in 2000, the Treasury curve inverted at the longer end, with the 30 year
Treasury bond often presenting a lower yield to maturity than the 2 year
Treasury note. This inversion stemmed from a number of factors, including the US
Government's repurchasing of longer dated Treasury securities in conjunction
with the growing federal budget surplus. Note that the 11th District Cost Of
Funds Index ("COFI") is by nature a lagging index that trails changes in more
responsive interest rate indices such as those associated with the Treasury or
LIBOR markets.
Index 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99 3/31/00
- ----- -------- ------- ------- ------- -------- -------
3 month Treasury bill 4.46% 4.47% 4.76% 4.85% 5.31% 5.89%
6 month Treasury bill 4.54% 4.52% 5.03% 4.96% 5.73% 6.14%
1 year Treasury bill 4.52% 4.71% 5.05% 5.18% 5.96% 6.24%
2 year Treasury note 4.53% 4.98% 5.52% 5.60% 6.24% 6.48%
5 year Treasury note 4.54% 5.10% 5.65% 5.76% 6.34% 6.32%
30 year Treasury bond 5.09% 5.62% 5.97% 6.05% 6.48% 5.84%
Prime rate 7.75% 7.75% 7.75% 8.25% 8.50% 9.00%
COFI 4.66% 4.52% 4.50% 4.61% 4.85% 5.00%
Net Interest Income
Net interest income rose $719 thousand (19.1%) from $3.8 million during
the quarter ended March 31, 1999 to $4.5 million during the most recent three
months. This increase stemmed from a larger average balance sheet and improved
spreads. For example, the Company's average spread on total assets expanded from
3.33% during the quarter ended March 31, 1999 to 3.88% during the most recent
three months. The following factors contributed toward the improvement in
spreads:
o Average loans as a percentage of average total assets increased from
69.1% during the first quarter of 1999 to 79.2% during the first
quarter of 2000. This change in assets mix was particularly beneficial
to the Company's spreads because loans are, by a significant margin,
the Company's highest yielding asset category.
o Transaction deposit accounts comprised a greater percentage of average
total deposits during the most recent quarter (39.3%) than during the
same quarter a year earlier (32.9%). This change in deposit mix was
also particularly beneficial to the Company's spreads, as transaction
deposit accounts present a significantly lower cost of funds than do
certificates of deposit.
o The average rate on interest earning assets was 8.18% during the first
quarter of 2000, up 61 basis points from a year earlier. In contrast,
the Company's average cost of interest bearing liabilities was just 3
basis points higher during the first quarter of 2000 than during the
first three months of 1999. The Company was able to constrain the
average cost of its funding in a rising general market interest rate
environment by the shift in the deposit mix and by having a portion of
its wholesale borrowings locked in at a fixed rate for an extended
period of time.
27
The following table presents the average annualized rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing liabilities, and the resulting net
interest spread, net interest margin, and average interest margin on total
assets for the periods indicated. Annualized rates were calculated by using the
day counts (e.g. 30/360, actual/365) applicable to each major category of
financial instruments.
Three Months Ended March 31,2000 Three Months Ended March 31, 1999
------------------------------------ -----------------------------------
(Dollars In Thousands) Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets
Interest earning assets:
Cash equivalents (1) $ 6,959 $ 99 5.75% $ 6,005 $ 70 4.64%
Investment securities (2) 11,465 210 7.31% 18,799 294 6.26%
Mortgage backed securities (3) 54,358 959 7.06% 94,097 1,528 6.50%
Loans receivable, net (4) 366,511 7,736 8.44% 312,815 6,296 8.05%
FHLB stock 3,248 46 5.70% 3,076 37 4.76%
-------- -------- -------- --------
Total interest earning assets 442,541 9,050 8.18% 434,792 8,225 7.57%
-------- --------
Non-interest earnings assets 20,150 18,102
-------- --------
Total assets $462,691 $452,894
======== ========
Liabilities & Equity
Interest bearing liabilities:
NOW accounts $ 31,377 121 1.55% $ 20,657 75 1.44%
Savings accounts 15,205 68 1.80% 15,301 68 1.76%
Money market accounts 82,220 873 4.27% 68,309 692 4.02%
Certificates of deposit 224,585 2,777 4.97% 248,239 3,079 4.92%
-------- -------- -------- --------
Total interest-bearing deposits 353,387 3,839 4.37% 352,506 3,914 4.41%
FHLB advances 49,614 708 5.74% 35,050 478 5.41%
Other borrowings(5) 622 10 6.47% 4,310 59 5.46%
-------- -------- -------- --------
Total interest-bearing liabilities 403,623 4,557 4.54% 391,866 4,451 4.51%
Demand deposit accounts 16,304 17,457
Other non-interest bearing 3,090 2,256
-------- --------
liabilities
Total liabilities 423,017 411,579
Stockholders' equity 39,674 41,315
-------- --------
Total liabilities & equity $462,691 $452,894
======== ========
Net interest income $ 4,493 $ 3,774
======== ========
Interest rate spread (6) 3.64% 3.06%
Net interest earning assets 38,917 42,928
Net interest margin (7) 4.06% 3.47%
Net interest income /
average total assets 3.88% 3.33%
Interest earnings assets /
interest bearing liabilities 1.10 1.11
<FN>
Average balances in the above table were calculated using average daily figures.
- -----------------------------
(1) Includes federal funds sold, money market fund investments, banker's
acceptances, commercial paper, interest earning deposit accounts, and
securities purchased under agreements to resell.
(2) Includes investment securities both available for sale and held to
maturity.
(3) Includes mortgage backed securities, including CMO's, both available for
sale and held to maturity.
(4) In computing the average balance of loans receivable, non-accrual loans and
loans held for sale have been included. Amount is net of deferred loan
fees, premiums and discounts, and undisbursed loan funds. Interest income
on loans includes amortized loan fees of $76,000 and $33,000 in 2000 and
1999, respectively.
(5) Includes federal funds purchased and securities sold under agreements to
repurchase.
(6) Interest rate spread represents the difference between the average rate on
interest earning assets and the average rate on interest bearing
liabilities.
(7) Net interest margin equals net interest income before provision for
estimated loan losses divided by average interest earning assets.
</FN>
28
Rate / Volume Analysis
The following table utilizes the figures from the preceding table to
present a comparison of interest income and interest expense resulting from
changes in volumes and the rates on average interest earning assets and average
interest bearing liabilities for the periods indicated. Changes in interest
income or interest expense attributable to volume changes are calculated by
multiplying the change in volume by the prior period average interest rate. The
changes in interest income or interest expense attributable to interest rate
changes are calculated by multiplying the change in interest rate by the prior
year period volume. The changes in interest income or interest expense
attributable to the combined impact of changes in volume and changes in interest
rate are calculated by multiplying the change in rate by the change in volume.
Three Months Ended March 31, 2000
Compared To
Three Months Ended March 31, 1999
------------------------------------------------------
Volume
Volume Rate /Rate Net
------- ------- ------- -------
(Dollars In Thousands)
Interest-earning assets
- -----------------------
Cash equivalents $ 11 $ 17 $ 1 $ 29
Investment securities (115) 49 (18) (84)
Mortgage backed securities (646) 132 (55) (569)
Loans receivable, net 1,081 305 54 1,440
FHLB Stock 2 7 -- 9
------- ------- ------- -------
Total interest-earning assets 333 510 (18) 825
------- ------- ------- -------
Interest-bearing liabilities
- ----------------------------
NOW Accounts 39 6 1 46
Savings accounts (1) 1 -- --
Money market accounts 140 43 (2) 181
Certificates of deposit (291) 31 (42) (302)
------- ------- ------- -------
Total interest-bearing deposits (113) 81 (43) (75)
FHLB advances 197 29 4 230
Other borrowings (50) 11 (10) (49)
------- ------- ------- -------
Total interest-bearing liabilities 34 121 (49) 106
------- ------- ------- -------
Increase (decrease) in net interest income $ 299 $ 389 $ 31 $ 719
======= ======= ======= =======
29
Interest Income
Interest income increased from $8.2 million during the quarter ended
March 31, 1999 to $9.1 million during the three months ended March 31, 2000
primarily due to significantly higher interest income on loans.
Interest income on loans rose from $6.3 million during the first three
months of 1999 to $7.7 million during the most recent quarter due to a
combination of greater volumes and higher rates. The greater volume stemmed from
the Company's continuing to experience strong loan demand combined with a
reduction in prepayment rates during 2000 as higher general market interest
rates slowed customer refinance activity. The higher rates on loans resulted
from two factors:
o a loan mix which has become less concentrated in lower yielding
residential mortgages, in favor of higher yielding income property and
construction loans
o the upward repricing of adjustable rate loans within the Company's loan
portfolio in conjunction with higher general market interest rates
Interest income on cash equivalents and FHLB stock increased from $70
thousand to $99 thousand and from $37 thousand to $46 thousand, respectively,
from the first quarter of 1999 to the first quarter of 2000 due to both greater
average balances and higher yields. The higher yields primarily stemmed from the
increase in general market interest rates, particularly the federal funds rate.
In addition, yields on cash equivalents were bolstered during the most recent
quarter by the Company's improving the sophistication of its cash management
function, conducting a broader range of business (e.g. securities purchased
under agreements to resell) with an expanded number of counterparties.
Interest income on investment securities decreased from $294 thousand
during the first quarter of 1999 to $210 thousand during the first three months
of 2000. This decline was caused by the impact of a smaller portfolio more than
offsetting higher yields stemming from adjustable rate investments. Over the
past year, the Company has sold investment securities in order to fund a portion
of the growth in its net loans receivable.
Interest income on mortgage backed securities declined from $1.5
million during the first quarter of 1999 to $959 thousand during the first
quarter of 2000, as the effect of lower average balances more than offset the
impact of higher yields. Similar to investment securities, the Company has been
using amortization and sales of mortgage backed securities over the past year to
fund loan originations. Yields on mortgage backed securities were higher in the
most recent quarter versus one year earlier due to a combination of the sale of
lower coupon instruments in prior periods and due to reduced premium
amortization in 2000 stemming from slower prepayment speeds.
Interest Expense
Interest expense on deposits declined slightly from $3.9 million during
the first quarter of 1999 to $3.8 million during the first quarter of 2000
despite a small increase in average interest bearing deposits and higher average
effective rates across all deposit product lines stemming from the higher level
of general market interest rates. This reduction in interest expense was
achieved through a shift in deposit composition away from certificates of
deposit toward lower cost transaction accounts.
During the first quarter of 2000, the Company was particularly
successful in promoting its highly tiered Money Market Plus account and its
"40+" NOW account. These products present attractive benefits to consumers. For
example, customers earn progressively higher interest rates on their Money
Market Plus accounts as their balances increase through the product's tiers.
Customers utilizing a "40+" NOW account obtain free Bank image checks and other
free services from the Bank.
Interest expense on borrowings increased from $537 thousand during the
first three months of 1999 to $718 thousand during the first quarter of 2000 due
to both higher average balances and greater average rates. Balances increased to
partially fund the growth in the loan portfolio, while interest rates on
maturing / rollover and new borrowings increased over the past year in
conjunction with higher rates in the Treasury and LIBOR markets.
30
Interest expense levels may be more volatile later in 2000, as the
Company has a particularly large volume of certificates of deposit repricing
during the summer months.
Provision For Loan Losses
Provision for loan losses totaled $250 thousand during the three months
ended March 31, 2000, up from $220 thousand during the first quarter of 1999 and
$150 thousand during the fourth quarter of 1999. The first quarter 2000
provision level resulted from multiple factors, the primary of which were:
o the increasing size of the loan portfolio
o the continued diversification of the loan portfolio away from
residential mortgages toward other types of real estate lending,
particularly commercial & industrial real estate loans
o the increasing concentration of the portfolio in relatively less
seasoned credits, because of the
Company's growth rate in recent periods
o higher concentrations of credit exposure as a result of increased
income property lending, as these loans generally are larger than
residential mortgages
Commercial & industrial real estate loans typically present greater
credit risk than mortgages secured by homes, thereby requiring proportionately
greater reserve levels. Newer loans typically present more credit exposure than
seasoned loans with many years of prompt payment experience and amortized
principal balances. Factors which moderated the Company's reserve requirement
during the most recent quarter were a decline in non-accrual loans and a
reduction in classified assets. The Company's ratio of loan loss reserves to
loans outstanding increased from 0.96% at December 31, 1999 to 1.01% at March
31, 2000. The Company anticipates that this ratio will continue climbing
throughout 2000 to the extent that the Company is successful in its strategic
plan of increasing total assets while expanding construction, income property,
and small business lending.
Non-interest Income
Non-interest income declined from $684 thousand during the first
quarter of 1999 to $501 thousand during the most recent three months. This
reduction was primarily caused by differing results on the sale of securities.
During the first quarter of 1999, a pre-tax gain of $217 thousand was realized
on the sale of securities, versus a $79 thousand pre-tax loss during the most
recent quarter. In contrast, non-interest income from the Company's core
operations showed strong improvement over the past year. Commissions from the
sale of non-FDIC insured products increased from $132 thousand during the first
quarter of 1999 to $207 thousand during the most recent three months, with the
Company experiencing a record sales month in March, 2000. Fee income from
customer service charges expanded 20.2% from $233 thousand during the first
quarter of 1999 to $280 thousand during the first quarter of 2000. The Company's
growing base of transaction accounts continues to bolster non-interest income.
The Company recently surveyed competitor pricing and reviewed its
operations to better align its customer service charges with its costs. The
Company intends to implement a new fee and service charge schedule effective
July 1, 2000 as a means of further increasing the percentage of its income
derived from fees.
31
General & Administrative Expense
General & administrative expenses rose from $2.8 million during the
first quarter of 1999 to $3.3 million during the most recent three months.
Increased expense levels were realized in most areas of the Company's
operations, spurred by increased business volumes. Compensation and employee
benefits expense was $100 thousand higher during the first quarter of 2000 than
during the first quarter of 1999. Factors leading to this increase included a
larger employee base, expenses for performance based incentive and commission
plans, the need to increase selected compensation levels in order to attract and
retain qualified staff in a very competitive environment for labor, and the
initial accrual for the new Director Emeritus Program. As detailed in the
Company's Proxy Statement for the Annual Meeting of Stockholders to be held on
May 25, 2000, the Director Emeritus Program allows individual Directors meeting
certain service requirements to retire between the ages of 65 and 72; receiving
upon retirement certain benefits and recognition including a cash payment equal
to the then current annual Director retainer fee. Two current Directors will
leave the Board following the May, 2000 shareholders meeting.
Data processing costs increased in conjunction with a larger number of
customer accounts, as the Company incurs certain expenses on a per account
basis. Due to the expiration of the Company's primary data processing contract
during the second quarter of 2000, the Company anticipates continuing to incur
greater data processing costs throughout 2000. The Company intends to convert to
a more technologically robust core processing platform sometime during 2001.
Legal and accounting costs were $103 thousand greater in the most
recent quarter than they were during the first quarter of 1999. During 2000, the
Company has incurred higher costs for its co-sourced internal audit program and
in conjunction with several legal topics, including the pool of residential
loans guaranteed by a seller / servicer (see "Special Residential Loan Pool")
and a now settled employment related matter.
Advertising and promotion was $44 thousand higher during the first
quarter of 2000 than during the first quarter of 1999. During the first quarter
of 2000, the Company conducted a number of promotional campaigns aimed at
increasing demand for its products and services for small businesses and
targeted toward attracting deposit inflows to fund the growing loan portfolio.
During the quarter ended March 31, 2000, a range of other operating
costs, including supplies, postage, check printing, and correspondent bank
service charges all rose from their levels of one year earlier in conjunction
with the Company's maintaining a larger volume of customer accounts. The Company
is currently in the process of re-evaluating its correspondent banking and
branch support operations, with the intent to seek alternatives providing better
customer service combined with lower costs to the Bank.
Income Taxes
Income tax expense was almost constant between the first quarter of
1999 and the first quarter of 2000, as pre-tax income during those periods was
also similar. The Company's effective book tax rate during the first three
months of 1999 and 2000 was substantially the same.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
For a current discussion of the nature of market risk exposures, see
"Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations - Interest Rate Risk Management And Exposure". Readers should also
refer to the quantitative and qualitative disclosures (consisting primarily of
interest rate risk) in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999. There has been no significant change in these
disclosures since the filing of that document.
32
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending legal proceedings
other than routine legal proceedings occurring in the ordinary course
of business. Such other routine legal proceedings in the aggregate are
believed by management to be immaterial to the Company's financial
condition or results of operations.
Item 2. Changes In Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission Of Matters To A Vote Of Security Holders
None.
Item 5. Other Information
On May 1, 2000. C. Edward Holden assumed the position of Chief
Executive Officer of both Monterey Bay Bancorp, Inc. and Monterey Bay
Bank, succeeding Eugene R. Friend. Mr. Friend will continue as Chairman
Of The Board of Monterey Bay Bancorp, Inc. and Monterey Bay Bank until
the annual stockholders' meeting in 2001, after which he will retire.
Mr. Holden, 52 years of age, has worked in the commercial banking
industry for over 25 years, most recently as Executive Vice President
and Senior Lending Officer for The Pacific Bank in San Francisco. Mr.
Holden has a BS degree in mechanical engineering from the University Of
California at Santa Barbara and an MBA from the University Of
California at Los Angeles. In connection with Mr. Holden's Employment
Agreement, the Company agreed to grant Mr. Holden options to purchase
55,000 shares of common stock. These options vest ratably over five
years and in the event of a change in control of the Company.
At the April 27, 2000 meeting of the Board of Directors, an additional
33,085 shares were authorized for the 1995 Incentive Stock Option Plan.
Item 6. Exhibits And Reports On Form 8-K
A. Exhibits
10.15 Employment Agreement Between Monterey Bay Bancorp, Inc.
And C. Edward Holden
27 Financial Data Schedule
B. Reports On Form 8-K
The Company filed no reports on Form 8-K during the quarter
ended March 31, 2000.
33
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, INC.
(Registrant)
Date: May 10, 2000 By: /s/ C. Edward Holden
-------------------------
C. Edward Holden
Chief Executive Officer
Date: May 10, 2000 By: /s/ Marshall G. Delk
-------------------------
Marshall G. Delk
President
Chief Operating Officer
Date: May 10, 2000 By: /s/ Mark R. Andino
-------------------------
Mark R. Andino
Senior Vice President
Chief Financial Officer
(Principal Financial &
Accounting Officer)