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 March 31, 1997
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 of incorporation or organization) (I.R.S. Employer Identification No.)
36 BRENNAN STREET, WATSONVILLE, CALIFORNIA 95076
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(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 May 12, 1997.
MONTEREY BAY BANCORP, INC.
Index
PART I. FINANCIAL INFORMATION Page
--------------------- ----
Item 1. Consolidated Statements of Financial Condition as of
March 31, 1997 and December 31, 1996................................................. 1
Consolidated Statements of Operations for the
Three Months Ended March 31, 1997 and 1996........................................... 2
Consolidated Statement of Stockholders' Equity for the
Three Months Ended March 31, 1997.................................................... 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1997 and 1996........................................... 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.................................................................... 16
Item 2. Changes in Securities................................................................ 16
Item 3. Defaults Upon Senior Securities...................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders.................................. 16
Item 5. Other Information.................................................................... 16
Item 6. Exhibits and Reports on Form 8-K..................................................... 16
SIGNATURES.............................................................................................. 17
Item 1. Financial Statements.
- ------------------------------
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1997 AND DECEMBER 31, 1996 (Dollars in thousands)
- --------------------------------------------------------------------------------
March 31, December 31,
1997 1996
---------------- -----------------
ASSETS
Cash and due from depository institutions $ 6,134 $ 4,447
Overnight deposits 900 531
------------ ------------
Total cash and cash equivalents 7,034 4,978
Certificates of deposit 199 199
Loans held for sale, at market - 130
Securities available for sale:
Mortgage backed securities (amortized cost of $113,307 at March 31, 1997 111,685 116,610
and $117,094 at December 31, 1996)
Investment securities (cost of $48,315 at March 31, 1997
and $50,322 at December 31, 1996) 47,702 49,955
Securities held to maturity:
Mortgage backed securities (market value of $159 at March 31, 1997
and $169 at December 31, 1996) 167 173
Investment securities (market value of $403 at March 31, 1997
and $404 at December 31, 1996) 405 404
Loans receivable held for investment (net of allowance for loan losses
at March 31, 1997, $1,434; and at December 31, 1996, $1,311) 234,398 233,208
Federal Home Loan Bank stock, at cost 5,102 5,040
Premises and equipment, net 4,946 4,887
Accrued interest receivable 3,083 2,556
Core deposit premiums, net 3,774 3,979
Other assets 3,885 3,643
----------- -----------
TOTAL ASSETS $ 422,380 $ 425,762
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Savings deposits $ 317,288 $ 318,145
Federal Home Loan Bank advances 44,407 46,807
Securities sold under agreements to repurchase 13,000 13,000
Accounts payable and other liabilities 2,313 2,051
----------- -----------
Total liabilities 377,008 380,003
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares authorized and unissued - -
Common stock, $.01 par value, 9,000,000 shares authorized;
3,593,750 shares issued and outstanding at March 31, 1997 36 36
Additional paid-in capital 27,150 27,114
Unearned shares held by employee stock ownership plan (1,783) (1,840)
Treasury stock (4,355) (4,374)
Retained earnings, substantially restricted 25,627 25,320
Unrealized gain (loss) on securities available for sale, net of taxes (1,303) (497)
----------- -----------
Total stockholders' equity 45,372 45,759
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 422,380 $ 425,762
=========== ===========
See notes to consolidated financial statements.
1
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
---------------------------
1997 1996
INTEREST INCOME:
Loans receivable $ 4,681 $ 4,428
Mortgage backed securities 2,084 772
Other investment securities 871 593
-------- --------
Total interest income 7,636 5,793
-------- --------
INTEREST EXPENSE:
Savings deposits 3,862 2,739
FHLB advances and other borrowings 830 838
-------- --------
Total interest expense 4,692 3,577
-------- --------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 2,944 2,216
PROVISION FOR LOAN LOSSES 123 22
-------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,821 2,194
-------- --------
NONINTEREST INCOME:
Gain on sale of mortgage backed securities and
investment securities, net - 70
Commissions from annuity sales 87 (1)
Customer service charges 126 81
Income (loss) from loan servicing 59 (9)
Other income 39 19
-------- --------
Total 311 160
-------- --------
GENERAL AND ADMINISTRATIVE EXPENSE:
Compensation and employee benefits 1,060 783
Occupancy and equipment 259 223
Deposit insurance premiums 50 137
Data processing fees 168 128
Stationery, telephone and office expenses 130 101
Advertising and promotion 66 31
Amortization of core deposit premiums 207 76
Other expenses 397 350
-------- --------
Total 2,337 1,829
-------- --------
INCOME BEFORE INCOME TAX EXPENSE 795 525
INCOME TAX EXPENSE 324 206
-------- --------
NET INCOME $ 471 $ 319
======== ========
NET INCOME PER SHARE $ .15 $ .10
======== ========
See notes to consolidated financial statements.
2
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1997 (Amounts in thousands)
- --------------------------------------------------------------------------------
Unrealized
Gain
(Loss)
on Securities
Common Stock(1) Available for
---------------- Paid-In Acquired Treasury Retained Sale (Net of
Shares Amount Capital by ESOP Stock(2) Earnings Taxes) Total
------ ------ ------- -------- -------- -------- ------------- -----
Balance at
December 31,1996: 3,594 $ 36 $27,114 $ (1,840) $ (4,374) $ 25,320 $ (497) $ 45,759
Options exercised
using treasury stock 19 19
Dividends paid (164) (164)
Earned ESOP shares 36 57 93
Change in unrealized
gain (loss) on
securities available
for sale, net of taxes (806) (806)
Net income 471 471
------------------------------------------------------------------------------------------
Balance at
March 31, 1997: 3,594 $ 36 $27,150 $ (1,783) $ (4,355) $ 25,627 $ (1,303) $ 45,372
==========================================================================================
(1) Number of shares of common stock includes 287,500 shares which are
pledged as security for a loan to the Bank's ESOP. Shares earned at
March 31, 1997 and December 31, 1996 were 64,688 and 57,500,
respectively.
(2) The Company had repurchased a total of 348,842 shares of Company common
stock as of March 31, 1997.
See notes to consolidated financial statements.
3
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Dollars in thousands)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
-------------------------------
1997 1996
--------------- ---------------
OPERATING ACTIVITIES:
Net income $ 471 $ 319
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization on premises and equipment 105 91
Amortization of core deposit premium 207 76
Amortization of premiums, net of discounts 84 200
Loan origination fees deferred, net 49 53
Amortization of deferred loan fees (47) (56)
Provision for loan losses 123 22
Compensation expense related to ESOP shares released 93 73
Gain on sale of mortgage backed securities and
investment securities - (70)
Charge-off on loans transferred to real estate owned - (27)
Loss on sale of fixed assets - 1
Originations of loans held for sale (294) (542)
Proceeds from sales of loans originated for sale 424 634
Change in income taxes payable and deferred income taxes 352 217
Change in other assets 268 (89)
Change in interest receivable (527) (146)
Change in accounts payable and other liabilities (24) (767)
---------- ----------
Net cash provided by (used in) operating activities 1,284 (11)
---------- ----------
INVESTING ACTIVITIES:
Loans originated for portfolio (6,824) (8,443)
Principal payments on loans receivable 5,493 10,778
Proceeds from sales of mortgage backed securities available for sale - 8,427
Principal paydowns on mortgage backed securities 3,731 3,839
Purchases of investment securities available for sale - (7,031)
Proceeds from maturities of investment securities 2,000 4,000
Purchases of premises and equipment, net (164) (42)
Purchases of FHLB stock (62) (173)
---------- ----------
Net cash provided by investing activities 4,174 11,355
---------- ----------
- continued -
4
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Dollars in thousands)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
-------------------------------
1997 1996
-------------- --------------
FINANCING ACTIVITIES:
Net increase (decrease) in savings deposits $ (857) $ 7,413
Repayments of Federal Home Loan Bank advances, net (2,400) (16,988)
Repayments of reverse repurchase agreements - (713)
Dividends paid (164) -
Options exercised using treasury stock 19 -
--------- --------
Net cash (used in) financing activities (3,402) (10,288)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,056 1,056
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,978 4,217
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,034 $ 5,273
========= ========
CASH PAID DURING THE PERIOD FOR:
Interest on savings deposits and advances $ 4,685 $ 3,700
Income taxes - -
NONCASH INVESTING ACTIVITIES:
Transfer of loans to real estate owned - 117
See notes to consolidated financial statements.
5
MONTEREY BAY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997
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, 1996. 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 the management of Monterey Bay Bancorp, Inc. (the
"Company") and its subsidiary, Monterey Bay Bank (the "Bank"), 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 March 31, 1997 and December 31, 1996, the
results of its operations for the three months ended March 31, 1997 and 1996,
and its cash flows for the three months ended March 31, 1997 and 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.
In October 1995, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Standards No. 123 ("SFAS 123"), Accounting for
Stock Based Compensation, which established 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 had
the option to 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, and
applies Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock
Issued to Employees," in accounting for its stock options.
In June 1996, FASB No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," was issued. This
statement established standards for when transfers of financial assets,
including those with continuing involvement by the transferor, should be
considered a sale. SFAS 125 also established standards for when a liability
should be considered extinguished. In December 1996, the Financial Accounting
Standards Board issued SFAS No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125." SFAS 127 reconsidered certain provisions
of SFAS 125 and deferred for one year the effective date of implementation for
transactions related to repurchase agreements, dollar-roll repurchase
agreements, securities lending, and similar transactions. This statement is
effective for transfers of assets and extinguishments of liabilities occurring
after December 31, 1996, applied prospectively. SFAS Nos. 125 and 127 have not
had a material effect on the Bank's financial statements.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share,"
which supersedes APB No. 15, "Earnings per Share." SFAS 128 establishes
standards for computing and presenting earnings per share and applies to
entities with publicly held common stock or potential common stock (i.e.
securities such as options, warrants, convertible securities, or contingent
stock agreements). The statement replaces the presentation of primary earnings
per share with a presentation of basic earnings per share and requires dual
presentation of basic and diluted earnings
6
per share on the face of the income statement. SFAS 128 is effective for
financial statements issued for periods ending after December 31, 1997.
Earlier application is not permitted; however, restatement of all
prior-period earnings per share data presented will be required. If the
Company had been subject to the requirements of SFAS 128 at March 31, 1997,
basic earnings per common share and diluted earnings per common share would have
been $.16.
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
Monterey Bay Bancorp, Inc. (the "Company") is a savings and loan
association holding company incorporated in 1995 under the laws of the State of
Delaware. The Company's principal business activities consist of the operation
of its wholly owned subsidiary, Monterey Bay Bank ("the Bank"). Unless otherwise
specified herein, references to the business and operations of the Bank refer to
the business and operations of the Company.
The Bank 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 in mortgage loans secured by
one-to-four family residences and, to a lesser extent, in multi family,
commercial real estate, construction, land and other loans. At March 31, 1997,
the Bank operated seven 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 $471,000 for the three months ended
March 31, 1997, compared to $319,000 for the same period last year. Net income
per share for the quarter ended March 31, 1997 was $.15, compared to $.10 for
the similar period in 1996.
The improvement in earnings for the three months ended March 31, 1997,
compared to the same period last year, reflects higher net interest income and
increased noninterest income, partially offset by an increase in general and
administrative expenses compared to the first quarter of 1996. Financial results
for the quarter ended March 31, 1997 were impacted by the cash assumption,
during the fourth quarter of 1996, of $102.1 million of savings deposits (the
"Deposit Assumption"), on which the Company recorded a core deposit intangible
asset of $3.7 million. Cash proceeds from the Deposit Assumption were reinvested
in various mortgage backed securities and other investments, resulting in higher
net interest income for the quarter ended March 31, 1997, compared to the first
quarter of 1996. Also impacting financial results for the three months ended
March 31, 1997 was the Company's purchase of a branch site in Capitola,
California, which began operations as a full service bank branch on January 6,
1997. This expansion activity resulted in an increase in general and
administrative expenses during the first quarter of 1997.
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 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 32.9% to
$2.9 million for the first quarter of 1997 from $2.2 million for the first
quarter of 1996.
For the three months ended March 31, 1997, the Company recorded $7.6
million in total interest income, an increase of $1.8 million, or 31.0%, from
$5.8 million recorded in the first three months of 1996. The increase in total
interest income was primarily attributable to an increase of
8
$69.0 million, or 150%, in the average balance of mortgage backed securities,
and an increase of $15.0 million, or 38%, in the average balance of
investment securities. The higher average balances of mortgage backed
securities and investment securities in the first quarter of 1997, compared
to the similar period a year ago, were the result of securities purchases
resulting from the Deposit Assumption.
The weighted average yield on interest earning assets rose to 7.52%
for the first quarter of 1997, compared to 7.35% for the first quarter in 1996.
The average yield on loans receivable increased to 7.93% for the three months
ended March 31, 1997, from 7.73% for the similar period a year ago, primarily
due to the origination of higher yielding fixed and adjustable rate mortgage
loans during the latter part of 1996 and the first quarter of 1997. Interest
income on loans receivable was positively impacted by the declining level of
nonaccrual loans, from $2.7 million at March 31, 1996 to $1.2 million at March
31, 1997. The average yield on mortgage backed securities increased by 62 basis
points for the three months ended March 31, 1997, compared to the comparable
period in 1996, primarily due to lower prepayments and a corresponding decrease
in premium amortization during the first quarter of 1997.
Interest expense for the quarter ended March 31, 1997 was $4.7
million, compared to $3.6 million for the quarter ended March 31, 1996, a $1.1
million or 30.6% increase. This increase was due to a substantially higher
average balance of savings deposits in 1997 resulting from the Deposit
Assumption and the opening of the Capitola branch, partially offset by lower
rates paid on deposit accounts. As compared to the first quarter of 1996,
interest expense on deposits in the first three months of 1997 increased by $1.2
million due to higher average outstanding balances related to the Deposit
Assumption, and declined $102,000 due to lower rates paid on deposit accounts.
The Company's cost of deposits declined to a weighted average rate of 4.92% for
the first quarter of 1997, from 5.01% for the corresponding period a year ago,
primarily due to a relatively stable market interest rate environment during the
most recent four quarters which has allowed management to retain and renew a
portion of its maturing certificate of deposit funds at lower market interest
rates. The Company's cost of borrowings increased to 5.89% for the three months
ended March 31, 1997, from 5.80% for the similar period in 1996. For the three
months ended March 31, 1997, the Company's cost of total interest bearing
liabilities was 5.07%, compared to 5.18% for the same period a year ago.
The Company's net interest margin increased to 2.90% for the first
quarter of 1997 compared to 2.81% for the first quarter of 1996. For the three
months ended March 31, 1997, the Company's net interest rate spread increased to
2.46%, from 2.17% for the three months ended March 31, 1996.
9
The changes in net interest income for the three months ended March
31, 1997 compared with the corresponding periods in 1996 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):
Three Months Ended March 31,
1997 Compared with 1996
Increase (Decrease)
---------------------------------------------
Volume Rate Net
------ ---- ---
Interest income:
Loans $ 135 $ 118 $ 253
Mortgage backed securities 1,147 165 1,312
Investment securities 230 48 278
------- ------ -------
1,512 331 1,843
------- ------ -------
Interest expense:
On customer deposits 1,225 (102) 1,123
On borrowings (16) 8 (8)
------- ------ -------
1,209 (94) 1,115
------- ------ -------
Change in net interest income $ 303 $ 425 $ 728
======== ====== =======
Average assets and liabilities together with average interest rates
earned and paid for the three months ended March 31, 1997 are summarized as
follows (dollars in millions):
Three Months Ended March 31,
----------------------------
1997 1996
---- ----
Average Yield/ Average Yield/
Balance Rate Balance Rate
------- ------ ------- ------
Interest earning assets:
Loans $ 236 7.93% $ 229 7.73%
Mortgage backed securities 115 7.26 46 6.64
Investment securities 55 6.30 40 5.92
------- -------
Total interest earning assets 406 7.52 315 7.35
Noninterest earning assets 17 11
------- -------
Total assets $ 423 $ 326
======= =======
Interest bearing liabilities:
Deposits $ 318 4.92% $ 218 5.01%
Borrowings 58 5.89 58 5.80
------- -------
Total interest bearing liabilities 376 5.07 276 5.18
Noninterest bearing liabilities 2 2
Stockholders' equity 45 48
------- -------
Total liabilities and stockholders' equity $ 423 $ 326
======= =======
Net interest rate spread 2.46% 2.17%
Net interest margin 2.90% 2.81%
Ratio of interest bearing assets to
interest bearing liabilities 108% 114%
10
Interest Rate Sensitivity
- -------------------------
Interest rate risk is influenced by market forces. However, that risk
may be controlled by monitoring and managing the repricing characteristics of
interest bearing assets and liabilities. The objective of the Company's interest
rate risk management function is to evaluate the interest rate risk included in
certain balance sheet accounts, determine the level of risk appropriate given
the Company's business focus, operating environment, capital and liquidity
requirements and performance objectives, establish prudent asset concentration
guidelines and manage the risk consistent with Board approved guidelines.
Management seeks to reduce the vulnerability of its earnings to changes in
interest rates and to manage the ratio of interest rate sensitive assets to
interest rate sensitive liabilities within specified maturities or repricing
dates. The extent of the movement of interest rates, higher or lower, is an
uncertainty that could have a negative impact on the earnings of the Company.
The primary analytical tool used by management to gauge interest rate
sensitivity is a simulation model which calculates the effects on market value
of equity and future net interest income resulting in changes in market interest
rates that are up to two percent higher or two percent lower than current
levels. Interest rate risk sensitivity estimated by management, as measured by
the change in the market value of equity as a percentage of the present value of
assets from an immediate 200 basis point increase in interest rates, was 3.85%
at December 31, 1996 and approximately unchanged from that level at March 31,
1997, indicating that the Company is vulnerable to increases in interest rates.
During the first quarter of 1997, the Company adopted a program to
reduce its exposure to interest rate risk by emphasizing the origination of
current-index adjustable rate mortgage loans, selling a portion of its portfolio
of fixed rate mortgage backed securities, and seeking to better match the
maturities of assets with deposits and borrowings. Management believes that this
strategy, although possibly sacrificing short-term profits compared to the
yields obtainable through fixed rate investments, reduces the Company's exposure
to the risk of interest rate fluctuations and thereby enhances long-term
profitability.
Provision for Loan Losses
- -------------------------
The Company 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 Company,
industry standards, past due loans, economic conditions in the Company's market
area generally and other factors related to the collectibility of the Company's
loan portfolio. For the quarter ended March 31, 1997, the provision for loan
losses amounted to $123,000 compared to $22,000 for the corresponding period
during 1996. The Company increased its provision for loan losses in anticipation
of implementing its strategy to moderately increase the amount of construction,
commercial real estate, and multifamily lending in its primary market area. The
provision resulted in a total allowance for loan losses of $1,434,000, or .61%
of total loans, at March 31, 1997, compared to an allowance for loan losses of
$1,311,000, or .56% of total loans, at December 31, 1996. Nonperforming assets
declined to $1.2 million, or .28% of total assets at March 31, 1997, compared to
$1.4 million, or .33% of total assets at December 31, 1996. (See "-Financial
Condition.")
11
Noninterest Income
- ------------------
Noninterest income increased to $311,000 for the three months ended
March 31, 1997, compared to $160,000 for the same period a year earlier.
Customer service charges increased by 55.6% to $126,000 during the first quarter
of 1997 from $81,000 for the first quarter of 1996, reflecting a significant
period to period growth in the number of customer checking accounts. This
resulted primarily from an active marketing campaign to increase the number and
outstanding balances of transaction-related customer deposit accounts. The
Company recorded commission income of $87,000 from the sale of insurance, mutual
funds, and annuity products for the three months ended March 31, 1997, compared
to a loss of $1,000 for the similar period a year ago. The increase in
commission income reflects the implementation by management of a strategic
business plan to increase sales of these products. The Company has hired new
management experienced in the brokerage industry to oversee these operations.
At March 31, 1997, the Company was servicing loans for others with an
unpaid principal balance of $60.1 million, compared to $61.3 million at December
31, 1996. Income from loan servicing increased to $59,000 for the three months
ended March 31, 1997, compared to a loss of $9,000 for the similar period a year
ago. The first quarter 1996 loss from loan servicing was due to the negative
impact of a guaranteed yield maintenance agreement on loans serviced for another
financial institution. The agreement expired in 1996.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $2.3 million for the first
quarter of 1997, compared to $1.8 million for the first three months of 1996.
The increases in 1997 were partially attributable to higher compensation and
employee benefits, as new employees were hired to support the Company's
expansion into the Capitola branch location, to support the Deposit Assumption,
and to support its new product lines and services. In addition, general and
administrative expenses for the first quarter of 1997 included higher data
processing costs, increased advertising expenses, higher stationery, telephone,
and office expenses, and increased core deposit intangible amortization,
partially offset by reduced deposit insurance premiums, compared to the same
period a year earlier.
FINANCIAL CONDITION
Total assets of the Company were $422.4 million at March 31, 1997,
compared to $425.8 million at December 31, 1996, a decline of $3.4 million, or
.8%. Mortgage backed securities and investment securities decreased by $7.2
million, or 4%, due to principal paydowns and maturities. Loans receivable
increased by $1.2 million to $234.4 million. During the first three months of
1997, the Company funded $7.3 million of portfolio loans, of which $3.7 million
were single family, owner occupied home loans and $3.6 million were commercial
real estate, construction and land loans. Substantially all of the loans
originated by the Company during the first quarter of 1997 were adjustable rate
loans indexed to current market indices. All of the Company's loans are secured
by real estate located within the state of California. The majority are secured
by real estate in Santa Cruz, Monterey, Santa Clara, and San Benito counties;
therefore, the Company's credit risk is primarily related to the economic
conditions of this region.
At March 31, 1997, nonaccrual loans totaled $1.2 million, or .50% of
loans receivable, compared to $1.4 million, or .59% of loans receivable at
December 31, 1996. The Company's nonaccrual loans are secured by one-to
four-family residences located within its primary market area. At March 31,
1997, the Company had three restructured loans totaling $351,000, all
12
performing in accordance with their revised contractual terms. The Company
had no real estate owned at March 31, 1997 or December 31, 1996.
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" and require no
valuation allowances.) Management monitors the Company's assets regularly and
classifies any problem assets. The Company's classified assets consist of
foreclosed residential properties, nonperforming assets, and assets that are
performing in accordance with their contractual terms but are adversely
classified because they exhibit one or more well-defined weaknesses.
The following schedule presents the Company's classified assets at
March 31, 1997 and December 31, 1996 (in thousands):
March 31, December 31,
1997 1996
--------- ------------
Assets classified as:
Substandard $ 3,566 $ 4,944
Doubtful - -
Loss - 1
--------- ---------
Total classified assets $ 3,566 $ 4,945
========= =========
Classified assets as a
percentage of total assets .84% 1.16%
At March 31, 1997, assets classified as substandard included $1.2
million of loans past due 90 days or more, $1.8 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, and $620,000 of performing loans on property with
delinquent real estate taxes. At December 31, 1996, substandard loans included
$1.4 million of loans past due 90 days or more, $2.9 million of performing loans
with identified risk characteristics, and $622,000 of performing loans on
property with delinquent real estate taxes.
During the three months ended March 31, 1997, the Company's
liabilities decreased by $3.0 million to $377.0 million, from $380.0 million at
December 31, 1996. The decrease in liabilities was primarily attributable to
decreases in borrowings, from $59.8 million at December 31, 1996 to $57.4
million at March 31, 1997. The Company utilizes FHLB advances and reverse
repurchase agreements as part of its asset and liability management objectives.
During the three months ended March 31, 1997, savings deposits
decreased to $317.3 million, a decline of $800,000 from $318.1 million at
December 31, 1996. Certificate of deposit accounts declined by $2.1 million
during the quarter, but were largely offset by increases in customer checking
accounts 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 March 31, 1997, shareholders' equity was $45.4 million, compared
to $45.8 million at December 31, 1996. During the three months ended March 31,
1997, the Company paid a cash dividend of $.05 per share on its outstanding
common stock, reducing stockholders' equity by $164,000. Unrealized losses on
securities available for sale resulted in a decrease of approximately
13
$806,000 in equity. These reductions in stockholders' equity were partially
offset by first quarter net income of $471,000, an increase in earned ESOP
shares, and the exercise of stock options using treasury stock. Tangible book
value per share of Monterey Bay Bancorp, Inc. common stock was $13.76 at March
31, 1997, compared to $13.87 at December 31, 1996.
Recent Legislative Developments
- -------------------------------
On September 30, 1996, the President signed into law the Deposit
Insurance Funds Act of 1996 (the "Funds Act") which among other things, imposed
a special one-time assessment on SAIF member institutions, including the Bank,
to recapitalize the SAIF. The special assessment was recognized as an expense in
the third quarter of 1996 and was tax deductible. The Bank recorded a pre-tax
expense of $1.4 million as a result of the FDIC special assessment.
The Funds Act also spreads the obligations for payment of the
Financing Corporation ("FICO") bonds across all SAIF and BIF members. Beginning
on January 1, 1997, BIF deposits are assessed for FICO payments at a rate of 20%
of the rate assessed on SAIF deposits. Based on current estimates by the FDIC,
BIF deposits will be assessed a FICO payment of 1.3 basis points, while SAIF
deposits will pay an estimated 6.5 basis points on the FICO bonds. Full pro rata
sharing of the FICO payments between BIF and SAIF members will occur on the
earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds
Act specifies that the BIF and SAIF will be merged on January 1, 1999 provided
no savings associations remain as of that time.
As a result of the Funds Act, the FDIC recently proposed to lower SAIF
assessments to 0 to 27 basis points effective January 1, 1997, a range
comparable to that of BIF members. However, SAIF members will continue to make
the higher FICO payments described above. Management cannot predict the level of
FDIC insurance assessments on an on-going basis, whether the savings charter
will be eliminated, or whether the BIF and SAIF will eventually be merged.
The Company paid deposit insurance premiums of $50,000 for the first
quarter of 1997, compared to $137,000 for the first quarter of 1996. The
decrease in 1997 compared to 1996 was primarily due to the federally mandated
reduction in deposit insurance premiums, offset by a higher average balance of
savings deposits in the first quarter of 1997.
Capital and Regulatory Standards
- --------------------------------
The following schedule presents the prescribed minimum capital
requirements for the Bank at March 31, 1997, the actual amount of capital, and
the amount of excess (dollars in thousands):
Minimum Actual
Requirement Amount Excess
----------- ------ ------
Risk-based capital $ 15,011 $ 36,789 $ 21,778
% of risk-weighted assets 8.00% 19.61% 11.61%
Core capital $ 12,417 $ 35,359 $ 22,941
% of risk-weighted assets 3.00% 8.54% 5.54%
Tangible capital $ 6,205 $ 35,088 $ 28,883
% of risk-weighted assets 1.50% 8.48% 6.98%
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 final regulation adding
14
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 Bank had
been subject to adding an interest rate risk component to its risk-based capital
standard at March 31, 1997, the Bank would have continued 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 Bank met the definition of a well capitalized institution at March 31, 1997
and December 31, 1996.
Total Tier One Leverage (Core
Risk-Based Risk-Based Capital)
Capital Ratio Capital Ratio Ratio
------------- ------------- --------------
Minimum requirements:
Well capitalized 10.00% 6.00% 5.00%
Bank capital ratios:
December 31, 1996 19.22% 18.52% 8.36%
March 31, 1997 19.61% 18.84% 8.54%
Liquidity
- ---------
The Company's primary sources of cash flows are savings deposits,
loan repayments and borrowings. The cash needs of the Company are principally
related to loan disbursements, savings withdrawals and noninterest expenses. The
Company's liquidity position refers to the extent to which the Company's cash
flows are sufficient to meet its current and long-term cash requirements.
The Company, 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 balance of net withdrawable accounts and certain short-term
borrowings during the preceding calendar quarter. At March 31, 1997, the
Company's liquidity ratio was 5.56%, compared to 7.74% at December 31, 1996.
15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company 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 Company.
Item 2. Changes in Securities.
----------------------
None.
Item 3. Defaults Upon Senior Securities.
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None.
Item 5. Other Information.
------------------
On March 20, 1997,the Board of Directors of the Company increased
the number of directors to ten and on March 31, 1997 elected
Nicholas C. Brase as a director to a term expiring in 1998.
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:
None.
16
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.
Date May 12, 1997 By /s/ Marshall G. Delk
------------------------- --------------------
Marshall G. Delk, President and
Chief Operating Officer
Date May 12, 1997 By /s/ Deborah R. Chandler
------------------------- -----------------------
Deborah R. Chandler,
Senior Vice President, Treasurer
and Chief Financial Officer
17