<PAGE> 1
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, 1996
[ ] 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
- - --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
36 BRENNAN STREET, WATSONVILLE, CALIFORNIA 95076
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 722-3885
- - --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
- - --------------------------------------------------------------------------------
(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 9, 1996.
<PAGE> 2
MONTEREY BAY BANCORP, INC.
INDEX
PART I. FINANCIAL INFORMATION Page
--------------------- ------
Item 1. Consolidated Statements of Financial
Condition as of March 31, 1996 and
December 31, 1995..................................... 1
Consolidated Statements of Operations
for the Three Months Ended March 31,
1996 and 1995......................................... 2
Consolidated Statement of Stockholders'
Equity for the Three Months Ended
March 31, 1996........................................ 3
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995............ 4
Notes to Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations......... 7
PART II. OTHER INFORMATION
-----------------
Item 1. Legal Proceedings..................................... 17
Item 2. Changes in Securities................................. 17
Item 3. Defaults Upon Senior Securities....................... 17
Item 4. Submission of Matters to a Vote of
Security Holders...................................... 17
Item 5. Other Information..................................... 17
Item 6. Exhibits and Reports on Form 8-K...................... 17
SIGNATURES................................................................ 18
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS.
- - -----------------------------
<TABLE>
<CAPTION>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MARCH 31, 1996 AND DECEMBER 31, 1995 (Dollars in thousands)
- - ------------------------------------------------------------------------------------------------------------
MARCH 31, DECEMBER 31,
1996 1995
------------- --------------
<S> <C> <C>
ASSETS
Cash and due from depository institutions $ 5,273 $ 4,217
------------ -------------
Total cash and cash equivalents 5,273 4,217
Certificates of deposit 781 782
Loans held for sale, at market 0 92
Securities available for sale:
Mortgage backed securities (cost of $39,698 at March 31, 1996 and
$52,004 at December 31, 1995) 39,893 52,417
Investment securities (cost of $34,129 at March 31, 1996 and
$31,110 at December 31, 1995) 33,838 30,990
Securities held to maturity:
Mortgage backed securities (market value of $189 at March 31, 1996 and
$199 at December 31, 1995) 198 205
Investment securities (market value of $796 at March 31, 1996 and
$797 at December 31, 1995) 795 790
Loans receivable held for investment (net of allowance for loan losses
at March 31, 1996, $1,357; and at December 31, 1995, $1,362 225,984 228,387
Federal Home Loan Bank stock, at cost 2,716 2,542
Premises and equipment, net 3,980 4,030
Accrued interest receivable 2,255 2,109
Core deposit premiums, net 575 651
Other assets 2,591 2,556
----------- -----------
TOTAL ASSETS $ 318,879 $ 329,768
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Savings deposits $ 222,697 $ 215,284
Federal Home Loan Bank advances 29,532 46,520
Securities sold under agreements to repurchase 16,648 17,361
Accounts payable and other liabilities 2,231 2,999
----------- -----------
Total liabilities 271,108 282,164
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares authorized and unissued 0 0
Common stock, $.01 par value, 15,000,000 shares authorized;
3,593,750 shares issued and outstanding at March 31, 1996 36 36
Additional paid-in capital 27,053 27,037
Unearned shares held by employee stock ownership plan (2,013) (2,070)
Treasury stock, 179,687 shares (2,201) (2,201)
Retained earnings, substantially restricted 24,953 24,633
Unrealized gain (loss) on securities available for sale, net of taxes (57) 169
----------- -----------
Total stockholders' equity 47,771 47,604
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 318,879 $ 329,768
=========== ===========
See notes to consolidated financial statements.
</TABLE>
1
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<TABLE>
<CAPTION>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 1996 AND 1995
(Dollars in thousands except per share amounts)
- - ----------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
<S> <C> <C>
INTEREST INCOME:
Loans receivable $ 4,428 $ 4,588
Mortgage backed securities 772 282
Other investment securities 593 591
------- -------
Total interest income 5,793 5,461
------- -------
INTEREST EXPENSE:
Savings deposits 2,739 2,543
FHLB advances and other borrowings 838 828
------- -------
Total interest expense 3,577 3,371
------- -------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 2,216 2,090
PROVISION FOR LOAN LOSSES 22 40
------- -------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,194 2,050
------- -------
NONINTEREST INCOME:
Gain on sale of mortgage backed and investment securities, net 70 0
Commissions from annuity sales (1) 186
Customer service charges 81 72
Other income, net 10 16
------- -------
Total 160 274
------- -------
GENERAL AND ADMINISTRATIVE EXPENSE:
Compensation and employee benefits 783 823
Occupancy and equipment 223 226
Deposit insurance premiums 137 137
Data processing fees 128 108
Stationery, telephone and office expenses 101 83
Advertising and promotion 31 48
Amortization of core deposit premiums 76 76
Other 350 212
------- -------
Total 1,829 1,713
------- -------
INCOME BEFORE INCOME TAX EXPENSE 525 611
INCOME TAX EXPENSE 206 241
------- -------
NET INCOME $ 319 $ 370
======== ========
NET INCOME PER SHARE $ .10 $ .07 (1)
======== ========
- - ------------------------------------
(1) The Company's common stock was issued February 14, 1995 in connection with the Conversion
of Watsonville Federal Savings and Loan Association from mutual to stock form. Net income
and common shares outstanding for the period from February 15, 1995 to March 31, 1995
were used to compute net income per share for the three months ended March 31, 1995.
See notes to consolidated financial statements.
</TABLE>
2
<PAGE> 5
<TABLE>
<CAPTION>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1996 (Amounts in thousands)
- - ---------------------------------------------------------------------------------------------------------
Unrealized
Gain (Loss)
on Securities
Common Available
Common Stock (1) Additional Stock for Sale
---------------- Paid-In Acquired Treasury Retained (Net of
Shares Amount Capital by ESOP Stock(2) Earnings Taxes) Total
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 3,594 $ 36 $ 27,037 $ (2,070) $(2,201) $24,633 $ 169 $ 47,604
Earned ESOP shares - 16 57 - - - 73
Change in
unrealized gain
(loss) on securities
available for sale,
net of taxes - - - - - (226) (226)
Net income - - - - 319 - 319
------------------------------------------------------------------------------------
Balance at
March 31, 1996 3,594 $ 36 $ 27,053 $ (2,013) $(2,201) $24,953 $ (57) $ 47,771
====================================================================================
- - ------------------------------------
(1) Number of shares of common stock includes 287,500 shares which are
pledged as security for a loan to the Association's ESOP, of which 28,750
were earned at December 31, 1995 and 35,938 were earned at March 31,
1996.
(2) During 1995, the Company repurchased 179,687 shares of Company common stock.
See notes to consolidated financial statements.
</TABLE>
3
<PAGE> 6
<TABLE>
<CAPTION>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (Dollars in thousands)
- - -------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
----------- ----------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 319 $ 370
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization on premises and equipment 91 91
Amortization of core deposit premium 76 76
Net amortization of (discounts) premiums 200 28
Loan origination fees deferred, net 53 64
Amortization of deferred loan fees (56) (231)
Provision for loan losses 22 40
Compensation expense related to ESOP shares released 73 -
(Gain) on sale of mortgage backed securities and investment
securities (70) -
Charge-off on sale of real estate owned (27) (31)
Loss on sale of fixed assets 1 -
Originations of loans held for sale (542) (8,692)
Proceeds from sale of loans originated for sale 634 14,087
Increase (decrease) in income taxes payable and deferred income tax 217 (421)
(Increase) decrease in other assets (89) 544
(Increase) in interest receivable (146) (151)
(Decrease) increase in accounts payable and other liabilities (767) 570
------ -------
Net cash provided by (used in) operating activities (11) 6,344
------ -------
INVESTING ACTIVITIES:
Loans originated for portfolio (8,443) (6,439)
Principal payments on loans receivable 10,778 4,265
Purchases of mortgage backed securities held to maturity - (69)
Purchases of mortgage backed securities available for sale - (5,891)
Proceeds from sales of mortgage backed securities available for sale 8,427 -
Paydowns on mortgage backed securities 3,839 367
Purchases of investment securities held to maturity - (512)
Purchase of investment securities available for sale (7,031) (6,134)
Proceeds from maturities of investment securities 4,000 -
Purchases of premises and equipment, net (42) (84)
Decrease in certificates of deposit - (4)
(Purchases) redemptions of FHLB stock (173) 705
------- --------
Net cash provided by (used in) investing activities 11,355 (13,796)
------- --------
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (Dollars in thousands)
- - ----------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED
MARCH 31,
----------------------
1996 1995
---------- ---------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in savings deposits $ 7,413 $ (1,085)
(Repayments) proceeds on Federal Home Loan Bank advances, net (16,988) (20,500)
Proceeds from (repayments of) reverse repurchase agreements, net (713) 987
Proceeds from the sale of common stock - 24,726
------- -------
Net cash provided by (used in) financing activities (10,288) 4,128
------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,056 (3,324)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,217 7,452
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,273 $ 4,128
======= =======
CASH PAID DURING THE PERIOD FOR:
Interest on savings deposits and advances $ 3,700 $ 3,445
Income taxes - 365
NONCASH INVESTING ACTIVITIES:
Loans transferred to held for investment, at market value - 7,385
Transfer of loans to real estate owned 117 297
See notes to consolidated financial statements.
</TABLE>
5
<PAGE> 8
MONTEREY BAY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q. 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 December 31, 1995 Annual Report to Stockholders
which includes consolidated financial statements and notes thereto for the year
ended December 31, 1995, together with Management's Discussion and Analysis of
Financial Condition and Results of Operations at December 31, 1995. Therefore,
only material changes in financial condition and results of operations are
discussed in the remainder of Part I of this Quarterly Report.
In the opinion of management, the accompanying interim Consolidated
Financial Statements reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the Company's consolidated
financial condition at March 31, 1996, and the results of operations and cash
flows for the three months ended March 31, 1996. 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 May 1993, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 114 ("SFAS 114"), Accounting by Creditors
for Impairment of a Loan. Under SFAS 114, a loan is impaired when it is
"probable" that a creditor will be unable to collect all amounts due (i.e., both
principal and interest) according to the contractual terms of the loan
agreement. SFAS 114 excludes, among other items, large groups of smaller balance
homogenous loans that are collectively evaluated for impairment. In October
1994, Statement of Financial Accounting Standards No. 118 ("SFAS 118"),
Accounting by Creditors for Impairment of a Loan - Income Recognition and
Disclosures, was issued as an amendment of SFAS 114. SFAS 118 eliminates the
income recognition provisions included in SFAS 114, thereby permitting the use
of existing methods for recognizing interest income on impaired loans.
SFAS 114 and SFAS 118 were required to be adopted prospectively in
financial statements for fiscal years beginning after December 15, 1994. The
Association adopted the provisions of SFAS 114 and SFAS 118 effective January 1,
1995. All loans designated by the Association as "impaired" are either placed on
nonaccrual or are designated as restructured loans. The adoption of SFAS 114 and
SFAS 118 did not have a significant impact on the financial position or the
earnings of the Association.
Effective December 1995, the Company adopted Statement of Financial
Accounting Standards No. 122 ("SFAS 122"), Accounting for Mortgage Servicing
Rights. SFAS 122 allows financial institutions that originate mortgages and sell
them into the secondary market to recognize the retained right to service the
loans. This rule amends SFAS 65, which permitted only purchased mortgage
servicing rights to be recognized as an asset. SFAS 122 makes no distinction
between purchased and originated mortgage servicing rights.
6
<PAGE> 9
In October 1995, the FASB issued Statement of Financial Standards No.
123 ("SFAS 123"), Accounting for Stock Based Compensation which establishes
accounting and disclosure requirements using a fair value based method of
accounting for stock based employee compensation plans. Under SFAS 123,
beginning in 1996 the Company may either adopt the new fair value based
accounting method or continue the intrinsic value based method and provide pro
forma net income and earnings per share as if the accounting provisions of SFAS
123 had been adopted. The Company has adopted only the disclosure requirements
of SFAS 123; therefore, such adoption will have no effect on the Company's
consolidated net earnings or cash flows.
7
<PAGE> 10
Item 2. Management's Discussion and Analysis of Results of Operations
-------------------------------------------------------------
and Financial Condition.
-----------------------
On February 14, 1995, Watsonville Federal Savings and Loan Association
(the "Association") converted from a federally chartered mutual savings and loan
to a federally chartered capital stock savings association. Upon conversion,
Monterey Bay Bancorp, Inc. (the "Company") was formed for the purpose of
becoming a savings association holding company and acquiring all the capital
stock of the Association. On February 15, 1995, the Company began trading on the
Nasdaq National Market under the symbol "MBBC."
The Company engages only in limited business operations primarily
involving investments and mortgage backed securities. Unless otherwise specified
herein, references to the business and operations of the Association refer to
the business and operations of the Company. The Company's revenues are derived
from interest on its investments. All amounts prior to the completion of the
Conversion relate to the Association.
The Association is a community-oriented savings institution which
attracts deposits from the general public in the areas in which its branches are
located and invests such deposits and other available funds primarily in
mortgage loans secured by one-to-four family residences. To a lesser extent, the
Association invests in commercial real estate, construction, land and other
loans. At March 31, 1996 the Association operated six branch offices located in
Santa Cruz, Monterey, and Santa Clara counties, and one real estate loan office.
This Management's Discussion and Analysis should be read in conjunction
with the Management's Discussion and Analysis contained in the Company's Annual
Report to Stockholders, which focuses upon relevant matters occurring during the
year commencing January 1, 1995 and ending December 31, 1995. Accordingly, the
ensuing discussion focuses upon material matters at and for the three months
ended March 31, 1996.
RESULTS OF OPERATIONS.
- - ----------------------
The Company's results of operations are dependent, to a large extent, on
the Association's net interest income, which is the difference between the
interest and dividend income it receives on its interest earning assets
(principally loans and investment securities) and the interest expense, or cost
of funds, of its interest bearing liabilities (principally deposits and, to a
lesser extent, Federal Home Loan Bank (FHLB) advances and reverse repurchase
agreements). The Association's service charges and other income, and the level
of general and administrative expenses (noninterest expenses) also have
significant effects on the Company's results of operations.
Net income achieved by the Company for the three months ended March 31,
1996 amounted to $319,000, a decrease of 13.8% from $370,000 for the same period
in 1995. The decrease in earnings was principally due to reduced noninterest
income and increased general and administrative expenses during 1996. Fully
diluted earnings per share were $.10 for the three months ended March 31, 1996,
compared to $.07 for the similar period in 1995. The 1995 first quarter earnings
per share computation is based on earnings from February 14,
8
<PAGE> 11
1995, the Company's Conversion date. All amounts prior to the Conversion relate
to the Association.
Net Interest Income
- - -------------------
Net interest income before provision for loan losses increased 6.0% to
$2.2 million for the three months ended March 31, 1996, from $2.1 million for
the three months ended March 31, 1995.
For the three months ended March 31, 1996, the Company recorded $5.8
million in total interest income, an increase of $330,000, or 6.1%, from $5.5
million recorded in the corresponding three month period in 1995. The increase
in total interest income was primarily attributable to a $28 million increase in
the average balance of mortgage backed securities and a 20 basis point increase
on the average yields on mortgage backed securities in 1996.
Total interest expense increased to $3.6 million for the three months
ended March 31, 1996, from $3.4 million for the corresponding three months in
1995. A higher average balance of deposits, coupled with a higher cost of
deposits, were responsible for this increase. The cost of deposits rose to 5.01%
for the first quarter of 1996 compared to 4.92% a year ago. This increase was
partially offset by a reduction in the Company's average cost of borrowings,
which declined to 5.80% for the first three months in 1996 compared to 6.10% for
the similar period in 1995.
The changes in net interest income for the quarter ended March 31, 1996
compared with the corresponding period in 1995 are analyzed in the following
table. The table shows the changes by major component, setting forth changes
attributable to changes in volume, changes attributable to changes in interest
rates and the net effect of both (in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1996 Compared with 1995
Increase (Decrease)
--------------------------------------------
Volume Rate Net
------ ---- ---
<S> <C> <C> <C>
Interest income:
From loans $ (342) 188 (154)
From mortgage backed securities 459 23 482
From investment securities (42) 47 5
-------- ------- --------
75 258 333
-------- ------- --------
Interest expense:
On customer deposits 99 97 196
On borrowings (95) 105 10
-------- ------- --------
4 202 206
-------- ------- --------
Change in net interest income $ 71 56 127
======== ======= ========
</TABLE>
9
<PAGE> 12
Average assets and liabilities together with average interest rates
earned and paid for the three months ended March 31, 1996 and 1995 are
summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
---- ----
Average Yield/ Average Yield/
Balance Rate Balance Rate
------- ----- ------- -----
<S> <C> <C> <C> <C>
Interest earning assets:
Loans $ 229 7.73% $ 249 7.36%
Mortgage backed securities 46 6.64 18 6.44
Investment securities 40 5.92 38 6.19
------- -------
Total interests earning assets 315 7.35 305 7.17
Noninterest earning assets 11 11
------- -------
Total average assets $ 326 $ 316
======= =======
Interest bearing liabilities:
Deposits $ 218 5.01% $ 210 4.92%
Borrowings 58 5.80 55 6.10
------- -------
Total interest bearing liabilities 276 5.18 265 5.17
Noninterest bearing liabilities 2 15
Stockholders' equity 48 36
------- -------
Total average liabilities and equity $ 326 $ 316
======= =======
Net interest rate spread 2.17% 2.00%
Net interest margin 2.81% 2.74%
Ratio of interest bearing assets to
interest bearing liabilities 114% 115%
</TABLE>
The Company's interest margin increased to 2.81% for the first quarter
of 1996 compared with 2.74% for the first quarter of 1995. For the three months
ended March 31, 1996, the Company's net interest rate spread increased to 2.17%
from 2.00% for the comparable period ended March 31, 1995. For the three months
ended March 31, 1996, the Company's yield on interest earning assets was 7.35%,
up from 7.17% obtained in the three months ended March 31, 1995. The increase in
the interest rate spread during the first quarter of 1996 was the result of
higher effective yields on adjustable rate loans and mortgage backed securities
and higher average balances of mortgage backed securities.
For the three months ended March 31, 1996, the Company's net cost of
interest bearing liabilities was 5.18%, approximately equal to the 5.17% paid on
interest bearing liabilities during the three months ended March 31, 1995. As
market interest rates declined during the fourth quarter of 1995, management
generally lowered interest rates on new deposit accounts with the intent to
reduce the Association's cost of funds. In the second and third quarters of
1996, a high percentage of the Association's certificate of deposit (CD)
accounts will mature, and, based on current and anticipated trends in market
interest rates, are expected to renew at lower rates. During the quarter ended
March 31, 1996, the Association's cost of $175 million of CD accounts declined
by 10 basis points from 5.84% to 5.74% due to maturing and renewing CDs.
10
<PAGE> 13
The Company's cost of borrowings decreased to 5.80% for the three months
ended March 31, 1996, from 6.10% for the quarter ended March 31, 1995. The cost
of borrowings trended down during the fourth quarter of 1995 and the first
quarter of 1996 in response to declines in market interest rates.
Interest Rate Risk and Sensitivity
- - ----------------------------------
The sensitivity of earnings to interest rate changes is often measured
by the difference, or gap, between the amount of assets and liabilities
scheduled to reprice within the same time period expressed as a percentage of
assets. Generally, the lower the amount of this gap, the less sensitive are an
institution's earnings to interest rate changes. A positive gap means an excess
of assets over liabilities repricing during the same period. The Company's gap
position at March 31, 1996 is summarized as follows:
<TABLE>
<CAPTION>
Maturity/Rate Sensitivity
(Dollars in millions) 0-6 Months 7-12 Months 1-3 Years Over 3 Years
---------- ----------- --------- ------------
<S> <C> <C> <C> <C>
Cumulative gap,
interest earning assets
over interest bearing
liabilities $ 17 $ (19) $ (35) $ 45
Cumulative gap, as a
percent of total assets 5.49% (6.00%) (11.06%) 13.97%
</TABLE>
Provision for Loan Losses
- - -------------------------
The provision for loan losses for the three months ending March 31, 1996
was $22,000 compared to $40,000 for the corresponding period during 1995. The
provision resulted in a total allowance for loan losses of $1,357,000 or .60% of
total loans at March 31, 1996 compared to an allowance for loan losses of
$1,362,000, or .59% of total loans, at December 31, 1995. Nonperforming assets,
consisting of nonaccrual loans and real estate owned, declined to $2.8 million,
or 1.24% of total loans at March 31, 1996, compared to $3.2 million, or 1.40% of
total loans at December 31, 1995.
(See "-Financial Condition.") The Association acquired a real estate property
through foreclosure with an outstanding loan balance of $117,000 during the
first quarter of 1996.
Noninterest Income
- - ------------------
Noninterest income recorded by the Association decreased from $274,000
for the three months ended March 31, 1995 to $160,000 for the three months ended
March 31, 1996, primarily due to a significant decline in annuity sales and
several write-offs of customer receivables recorded by Portola Investment
Corporation. Portola, a California corporation wholly owned by the Association,
is currently engaged on an agency basis in the sale of insurance, mutual funds
and annuity products primarily to the Association's customers and members of the
local community. Management is pursuing an active marketing campaign to increase
sales during the second quarter of 1996.
11
<PAGE> 14
The decline in commission revenues during the first three months of 1996 was
partially offset by gains from the sale of mortgage backed securities of
$70,000. For the quarter ended March 31, 1996, customer service charges amounted
to $81,000, compared to $72,000 for the corresponding period a year earlier.
This reflects an increase in customer service fees, primarily overdraft charges,
enacted during the third quarter of 1995.
General and Administrative Expenses
- - -----------------------------------
General and administrative expenses incurred by the Company increased
6.8% to $1.8 million for the three month period ended March 31, 1996, from $1.7
million for the same period in 1995. The increases in 1996 were primarily
attributable to increased professional fees as well as costs associated with
becoming a publicly held entity, which was partially offset by a $40,000
decrease in compensation and benefit expense.
FINANCIAL CONDITION.
- - --------------------
Total assets of the Company were $318.9 million at March 31, 1996,
compared to $329.8 million at December 31, 1995, a decrease of $10.9 million or
3.3%, primarily due to the sale of mortgage backed securities. During 1995, the
Company pooled and securitized $15.0 million of its one- to four-family loans
and received mortgage backed securities in exchange. In February 1996, in an
effort to reduce interest rate risk and position the Company for improved future
earnings, $8.5 million of the lowest yielding securitized loan pools were sold.
Proceeds from the sale were used to reduce borrowings. The Company recognized a
net gain of $70,000 on the sale.
Loans receivable were $226.0 million, or 70.9% of the Company's total
assets, at March 31, 1996. Substantially all of the Company's loans are secured
by real estate. At March 31, 1996, the loan portfolio was composed of 63%
adjustable rate and 37% fixed rate loans, unchanged from December 31, 1995. At
March 31, 1996, $130.5 million, or 58% of loans receivable, were adjustable
within one year. The Company's loan growth continues to be primarily in one- to
four-family mortgage loans, which represented 88% of the loan portfolio at March
31, 1996. The Association originated $8.4 million in loans during the three
months ended March 31, 1996, as compared to $6.4 million for the three months
ended March 31, 1995.
At March 31, 1996, nonperforming assets were $2.8 million, or .89% of
total assets, compared to $3.2 million, or .97% of assets at December 31, 1995.
Nonaccrual loans totaled $2.7 million, or 1.19% of loans receivable. Nonaccruing
loans consisted of $1.8 million of loans delinquent 90 days or more and $900,000
of loans less than 90 days delinquent but identified as having risk
characteristics indicating that the collection of interest and/or principal may
not occur under the contractual terms of the loan agreements. At March 31, 1996,
the Company had one foreclosed property representing real estate owned totaling
$117,000, and no restructured loans. The Association's nonperforming loans are
secured primarily by one-to four-family residences located in the Association's
primary market area.
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
12
<PAGE> 15
or general valuation allowances when necessary and appropriate. (Assets that do
not warrant classification but deserve special attention are designated as
"special mention" or "watch" and require no valuation allowances.) Management
monitors the Association's assets regularly and classifies any problem assets.
The Association's classified assets consist of foreclosed residential
properties, nonperforming assets, and assets that are performing in accordance
with their contractual terms but are classified as substandard because they
exhibit one or more well-defined weaknesses. The following schedule presents the
Association's classified assets at March 31, 1996 and December 31, 1995 (in
thousands):
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Assets classified as:
Substandard $ 5,017 $ 5,998
Doubtful 22 0
Loss 0
-------
Total classified assets $ 5,039 $ 5,998
======= =======
Classified assets as a
percentage of total assets 1.58% 1.82%
</TABLE>
The Association's investment in FHLB stock increased slightly during the
three months ended March 31, 1996 to $2.7 million from $2.5 million at December
31, 1995. The increase was due to the purchase of stock pursuant to a statutory
provision requiring the Association, as a member of the FHLB System, to invest
in stock of the FHLB of San Francisco, in an amount equal to 1% of its net
outstanding home loans or 5% of its outstanding advances from the FHLB,
whichever is higher.
During the three months ended March 31, 1996, the Company's liabilities
decreased to $271.1 million at March 31, 1996 from $282.2 million at December
31, 1995. The decrease in liabilities was attributable to decreases in
borrowings, from $63.9 million at December 31, 1995 to $46.1 million at December
31, 1995. The Company repaid $17.0 million of FHLB advances and $713,000 of
reverse repurchase agreements during the first three months of 1996, primarily
due to substantial cash inflows into savings deposits accounts. In addition, the
Association utilized proceeds from the sale of mortgage backed securities to pay
down borrowings. The Company utilizes FHLB advances and reverse repurchase
agreements as part of its asset and liability management objectives.
During the three months ended March 31, 1996, savings deposits grew to
$222.7 million, a $7.4 million or 3.4% increase from December 31, 1995. The
increase included $2.3 million of low-cost checking and money market accounts,
with the remaining $5.1 million of the growth primarily in CD 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.
Deposits of the Association are presently insured by the Savings
Association Insurance Fund ("SAIF"). Both the SAIF and Banking Insurance Fund
("BIF") are statutorily required to be recapitalized to 1.25% of insured reserve
deposits ratio. Until recently, members of the SAIF and Banking Insurance Fund
("BIF") were paying average deposit
13
<PAGE>16
insurance premiums of between 24 and 25 basis points. During the second half of
1995, the BIF met the required reserve ratio, and the FDIC adopted a new BIF
assessment rate which, beginning in 1996, will allow most BIF members to pay a
statutory minimum semiannual assessment of $1,000. The existing assessment rate
schedule applicable to SAIF member institutions is 23 to 31 basis points.
Legislative initiatives regarding the recapitalization of the SAIF of
the Federal Deposit Insurance Corporation ("FDIC"), deposit insurance premiums,
FICO bond interest payments, the merger of SAIF and BIF, financial industry
regulatory structure, bad debt recapture and revision of thrift and bank
charters are still pending before Congress. Management cannot predict the
ultimate impact any final legislation or regulatory actions may have on the
operations of the Company. Without passage of legislation addressing the FDIC
insurance premium disparity, the Association, like other thrifts, will continue
to pay deposit insurance premiums significantly higher than banks. As long as
such premium differential continues, it may have adverse consequences on the
Company's earnings and the Company may be placed at a substantial competitive
disadvantage to commercial banking organizations insured by the BIF.
The Association paid SAIF deposit insurance premiums of $137,000 during
the quarter ended March 31, 1996, unchanged from the amount paid during the
first quarter of 1995. A significant special assessment to recapitalize the SAIF
would likely have an adverse effect on the operating expenses and results of
operations of the Association. Based on the Association's estimated deposit
insurance assessment base at December 31, 1995 and an assumed 85 to 90 basis
point fee to recapitalize the SAIF, the special assessment would result in a
$1.0 million to $1.1 million payment on an after-tax basis.
At March 31, 1996, shareholders' equity was $47.8 million, compared to
$47.6 million at December 31, 1995. The increase was primarily due to first
quarter net income which was partially offset by a $226,000 reduction in equity
due to net unrealized losses on securities available for sale at March 31, 1996.
Tangible book value per share of Monterey Bay Bancorp, Inc. common stock was
$14.92 at March 31, 1996, compared to $14.88 at December 31, 1995.
14
<PAGE> 17
Capital and Regulatory Standards
- - --------------------------------
The following schedule presents the prescribed minimum capital
requirements for the Association at March 31, 1996, the actual amount of
capital, and the amount of excess (dollars in thousands):
<TABLE>
<CAPTION>
Minimum Actual
Requirement Amount Excess
----------- ------ ------
<S> <C> <C> <C>
Risk-based capital $12,889 $39,384 $26,495
% of risk-weighted assets 8.00% 24.45% 16.45%
Core capital $ 9,280 $38,050 $28,770
% of risk-weighted assets 3.00% 12.30% 9.30%
Tangible capital $ 4,631 $37,475 $32,844
% of risk-weighted assets 1.50% 12.14% 10.64%
</TABLE>
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 the
interest rate risk component to its risk-based capital standard. Implementation
of the final regulation has been delayed. The delay provides an opportunity to
assess any further guidance from other federal banking agencies regarding their
planned implementation of a capital deduction.
The regulation will require a savings institution to maintain capital in
an amount equal to one-half the difference between the institution's measured
interest rate risk and 2% of the market value of the institution's assets.
Interest rate risk is to be measured on the market value of its assets, based on
a hypothetical 200 basis point change in interest rates. The credit risk
component of the risk-based capital standard will remain unchanged at 8% of
risk-weighted assets. Institutions with measured interest rate risk less than or
equal to 2% will not be required to maintain additional capital. If the
Association were subject to adding an interest rate risk component to its
risk-based capital standard, management believes that based on the Association's
interest rate risk profile, the Association would continue to substantially
exceed minimum risk-based capital requirements.
15
<PAGE> 18
OTS prompt corrective action ("PCA") regulations include five capital
tiers ranging from well-capitalized to critically undercapitalized.
Well-capitalized institutions are not subject to any PCA-related constraints
under these regulations. As the following table shows, under these regulations,
the Association met the definition of a well capitalized institution at March
31, 1996 and December 31, 1995.
<TABLE>
<CAPTION>
Total Tier One Leverage
Risk-Based Risk-Based (Core Capital)
Capital Ratio Capital Ratio Ratio
------------- ------------- ------------
<S> <C> <C> <C>
Minimum requirements:
Well capitalized 10.00% 6.00% 5.00%
Association actual:
December 31, 1995 24.42% 23.57% 11.83%
March 31, 1996 24.45% 23.62% 12.30%
</TABLE>
Liquidity
- - ---------
The Association's primary sources of cash flows are savings deposits,
loan repayments and borrowings. The cash needs of the Association are
principally related to loan disbursements, savings withdrawals and noninterest
expenses. The Association's liquidity position refers to the extent to which the
Association's cash flows are sufficient to meet its current and long-term cash
requirements.
The Association, like other savings associations, is required under
applicable federal regulations to maintain specified levels of "liquid"
investments in qualifying types of United States Treasury and federal agency
securities and other investments, generally having maturities of five years or
less. The OTS has the authority to raise or lower the required liquidity level
in order to promote a stable supply of mortgage credit. Currently, the
regulatory requirement for liquid assets each month is 5% of an institution's
average daily balance of net withdrawable accounts and certain short-term
borrowings during the preceding calendar quarter. At March 31, 1996, the
Association's liquidity ratio was 5.86%, compared to 5.63% at December 31, 1995.
16
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Association is involved as plaintiff or defendant in various
legal actions incident to its business, none of which is believed by management
to be material to the financial condition of the Association.
Item 2. Changes in Securities.
----------------------
None.
Item 3. Defaults Upon Senior Securities.
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None.
Item 5. Other Information.
------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibit 3(i) - Certificate of Incorporation of Monterey Bay
Bancorp, Inc., incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
Exhibit 3(ii) - Bylaws of Monterey Bay Bancorp, Inc.,
incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1995.
Exhibit 11.0 - Computation of per share earnings (filed herewith).
Exhibit 27.0 - Financial data schedule.
(b) Reports on Form 8-K - No reports on Form 8-K were
filed by the Company during the quarter ended September 30,
1995.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MONTEREY BAY BANCORP
Date May 9, 1996 By /s/ Marshall G. Delk
---------------------------- --------------------
Marshall G. Delk, President and
Chief Operating Officer
Date May 9, 1996 By /s/ Deborah R. Chandler
---------------------------- -----------------------
Deborah R. Chandler,
Senior Vice President, Treasurer
and Chief Financial Officer
18
<PAGE> 1
Exhibit No. 11. Statement re: Computation of Per Share Earnings for the three
months ended March 31, 1996 and 1995.(1)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------
1996 1995
------------------------
(IN THOUSANDS EXCEPT
PER SHARE DATA)
<S> <C> <C>
Net income $319 $370
==== ====
Weighted average shares outstanding 3,157 3,306
Common stock equivalents due to dilutive
effect of stock options - -
Total weighted average common shares
and equivalents outstanding 3,157 3,306
===== =====
Primary earnings per share $0.10 $0.07
===== =====
Total weighted average common shares
and equivalents outstanding 3,157 3,306
Additional dilutive shares using the end
of period market value versus the
average market value when applying
the treasury stock method(2) N/A N/A
--- ---
Total weighted average common shares
and equivalents outstanding for fully
diluted computation 3,157 3,306
===== =====
Fully diluted earnings per share $0.10 $0.07
===== =====
(1)The Company's common stock was issued February 14, 1995 in connection with
the Conversion of Watsonville Federal Savings and Loan Association from
mutual to stock form. Net income and common shares outstanding for the period
from February 15, 1995 to March 31, 1995 were used to compute net income per
share for the three months ended March 31, 1995.
(2)Fully dilutive earnings per share do not result in dilution of three percent
or more or are anti-dilutive and are, therefore, not separately presented in
the consolidated statements of operations.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary information extracted from the Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000930429
<NAME> MONTEREY BAY BANCORP, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 4,092
<INT-BEARING-DEPOSITS> 1,962
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 73,731
<INVESTMENTS-CARRYING> 993
<INVESTMENTS-MARKET> 985
<LOANS> 227,341
<ALLOWANCE> (1,357)
<TOTAL-ASSETS> 318,879
<DEPOSITS> 222,697
<SHORT-TERM> 30,398
<LIABILITIES-OTHER> 2,231
<LONG-TERM> 15,782
0
0
<COMMON> 36
<OTHER-SE> 47,735
<TOTAL-LIABILITIES-AND-EQUITY> 318,879
<INTEREST-LOAN> 4,428
<INTEREST-INVEST> 1,365
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 5,793
<INTEREST-DEPOSIT> 2,739
<INTEREST-EXPENSE> 3,577
<INTEREST-INCOME-NET> 2,216
<LOAN-LOSSES> 22
<SECURITIES-GAINS> 70
<EXPENSE-OTHER> 1,829
<INCOME-PRETAX> 525
<INCOME-PRE-EXTRAORDINARY> 525
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 319
<EPS-PRIMARY> .10
<EPS-DILUTED> .10
<YIELD-ACTUAL> 7.35
<LOANS-NON> 2,729
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 828
<ALLOWANCE-OPEN> 1,362
<CHARGE-OFFS> (33)
<RECOVERIES> 6
<ALLOWANCE-CLOSE> 1,357
<ALLOWANCE-DOMESTIC> 1,357
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
<F1> This information is not contained in the Form 10-Q.
</FN>
</TABLE>
