UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 (I.R.S. Employer
or organization) 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: 3,242,408 shares of common
stock, par value $.01 per share, were outstanding as of August 12, 1997.
<PAGE>
MONTEREY BAY BANCORP, INC.
Index
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
--------------------- ----
<S> <C>
Item 1. Consolidated Statements of Financial Condition as of
June 30, 1997 and December 31, 1996.................................................. 1
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1997 and 1996.................................... 2
Consolidated Statement of Stockholders' Equity for the
Six Months Ended June 30, 1997....................................................... 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 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.................................................................... 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.................................................................... 18
Item 6. Exhibits and Reports on Form 8-K..................................................... 18
SIGNATURES.............................................................................................. 19
</TABLE>
<PAGE>
Item 1. Financial Statements.
- ------------------------------
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1997 AND DECEMBER 31, 1996 (Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
---------------- ----------------
<S> <C>
ASSETS
Cash and due from depository institutions $ 5,908 $ 4,447
Overnight deposits 3,475 531
-------- --------
Total cash and cash equivalents 9,383 4,978
Certificates of deposit 199 199
Loans held for sale, at market 236 130
Securities available for sale:
Mortgage backed securities (amortized cost of $84,293 at June 30, 1997
and $117,094 at December 31, 1996) 83,929 116,610
Investment securities (amortized cost of $47,309 at June 30, 1997
and $50,322 at December 31, 1996) 47,112 49,955
Securities held to maturity:
Mortgage backed securities (market value of $153 at June 30, 1997
and $169 at December 31, 1996) 159 173
Investment securities (market value of $295 at June 30, 1997
and $404 at December 31, 1996) 296 404
Loans receivable held for investment (net of allowance for loan losses
at June 30, 1997, $1,526; and at December 31, 1996, $1,311) 253,403 233,208
Federal Home Loan Bank stock, at cost 3,277 5,040
Premises and equipment, net 4,915 4,887
Accrued interest receivable 2,491 2,556
Core deposit premiums and other intangibles, net 3,652 3,979
Real estate owned 395 --
Other assets 3,363 3,643
-------- --------
TOTAL ASSETS $412,810 $425,762
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Savings deposits $318,522 $318,145
Federal Home Loan Bank advances 31,782 46,807
Securities sold under agreements to repurchase 13,000 13,000
Accounts payable and other liabilities 2,724 2,051
-------- --------
Total liabilities 366,028 380,003
-------- --------
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 3,242,408 shares outstanding at June 30, 1997;
and 9,000,000 shares authorized, 3,593,750 shares issued, and 36 36
3,243,363 shares outstanding at June 30, 1997
Additional paid-in capital 27,184 27,114
Unearned shares held by employee stock ownership plan (1,725) (1,840)
Treasury stock, at cost (351,342 shares at June 30, 1997; and 350,387
shares at December 31, 1996) (4,395) (4,374)
Retained earnings, substantially restricted 26,002 25,320
Unrealized loss on securities available for sale, net of taxes (320) (497)
-------- --------
Total stockholders' equity 46,782 45,759
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $412,810 $425,762
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(Dollars in thousands, except per share amounts)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------------
1997 1996 1997 1996
<S> <C>
INTEREST INCOME:
Loans receivable $ 4,739 $ 4,420 $ 9,420 $ 8,848
Mortgage backed securities 1,790 636 3,874 1,408
Other investment securities 896 625 1,767 1,218
-------- -------- -------- --------
Total interest income 7,425 5,681 15,061 11,474
-------- -------- -------- --------
INTEREST EXPENSE:
Savings deposits 3,860 2,672 7,722 5,411
FHLB advances and other borrowings 764 703 1,594 1,542
-------- -------- -------- --------
Total interest expense 4,624 3,375 9,316 6,953
-------- -------- -------- --------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 2,801 2,306 5,745 4,521
PROVISION FOR LOAN LOSSES 102 -- 225 22
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 2,699 2,306 5,520 4,499
-------- -------- -------- --------
NONINTEREST INCOME:
Gain on sale of mortgage backed securities and
investment securities, net 2 - 2 70
Commissions from sales of noninsured products 94 85 182 83
Customer service charges 133 94 259 176
Income from loan servicing 60 35 119 26
Other income 44 20 83 39
-------- -------- -------- --------
Total 333 234 645 394
-------- -------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSE:
Compensation and employee benefits 1,095 843 2,154 1,626
Occupancy and equipment 269 212 527 435
Deposit insurance premiums 63 139 113 276
Data processing fees 173 118 341 246
Stationery, telephone and office expenses 138 85 268 186
Advertising and promotion 70 39 136 69
Amortization of core deposit premiums 209 76 416 152
Other expenses 384 247 783 597
-------- -------- -------- --------
Total 2,401 1,759 4,738 3,587
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 631 781 1,427 1,306
INCOME TAX EXPENSE 256 332 581 538
-------- -------- -------- --------
NET INCOME $ 375 $ 449 $ 846 $ 768
======== ======== ======== ========
NET INCOME PER SHARE $ .12 $ .14 $ .27 $ .24
======== ======== ======== ========
DIVIDENDS DECLARED PER SHARE $ -- $ -- $ .05 $ --
======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1997 (Amounts in thousands)
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<TABLE>
<CAPTION>
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
------ ------ ------- ------- -------- -------- ------ -----
<S> <C>
Balance at
December 31, 1996: 3,594 $ 36 $27,114 $(1,840) $(4,374) $25,320 $(497) $45,759
Purchase of
treasury stock (40) (40)
Options exercised
using treasury stock 19 19
Dividends paid (164) (164)
Earned ESOP shares 70 115 185
Change in unrealized
gain (loss) on
securities available 177 177
for sale, net of taxes
Net income
846 846
========================================================================================
Balance at
June 30, 1997: 3,594 $ 36 $27,184 $(1,725) $(4,395) $26,002 $(320) $46,782
========================================================================================
</TABLE>
(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 June 30, 1997
and December 31, 1996 were 71,875 and 57,500, respectively.
(2) The Company had repurchased a total of 351,342 shares of Company common
stock as of June 30, 1997 and 350,387 as of December 31, 1996.
See notes to consolidated financial statements.
3
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1997 1996
------------- --------------
<S> <C>
OPERATING ACTIVITIES:
Net income $ 846 $ 768
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization of premises and equipment 212 175
Amortization of core deposit premiums 416 152
Amortization of premiums, net of discounts 238 372
Loan origination fees deferred, net 182 88
Amortization of deferred loan fees (88) (108)
Provision for loan losses 225 22
Compensation expense related to ESOP shares released 185 148
Gain on sale of mortgage backed securities and
investment securities (2) (70)
Charge-off on loans transferred to real estate owned (10) (36)
Originations of loans held for sale (897) (1,464)
Proceeds from sales of loans originated for sale 791 1,466
Change in income taxes payable and deferred income taxes (110) 238
Change in other assets (115) (213)
Change in interest receivable 65 32
Change in accounts payable and other liabilities 667 (842)
Net cash provided by operating activities 2,608 727
-------- --------
INVESTING ACTIVITIES:
Loans originated for portfolio (19,760) (17,686)
Principal payments on loans receivable 13,871 17,402
Purchase of loans receivable (14,661) -
Proceeds from sales of mortgage backed securities available for sale 24,722 8,428
Principal paydowns on mortgage backed securities 7,916 7,503
Purchases of investment securities available for sale - (9,522)
Proceeds from maturities of investment securities 3,109 6,000
Purchases of premises and equipment, net (241) (56)
Decrease in certificates of deposit - 486
Redemptions (purchases) of FHLB stock 1,763 (209)
-------- --------
Net cash provided by investing activities 16,719 12,346
-------- --------
</TABLE>
- continued -
4
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (Dollars in thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------------
1997 1996
-------------- ---------------
<S> <C>
FINANCING ACTIVITIES:
Net increase in savings deposits $ 377 $ 3,767
Purchase of investment company assets (86) -
Repayments of Federal Home Loan Bank advances, net (15,025) (10,888)
Repayments of reverse repurchase agreements, net - (3,392)
Dividends paid to stockholders (162) -
Purchase of treasury stock (22) (1,287)
-------- --------
Net cash (used in) financing activities (14,921) (11,800)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 4,405 1,273
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,978 4,217
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,383 $ 5,490
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest on savings deposits and advances $ 9,245 $ 7,051
Income taxes 740 324
NONCASH INVESTING ACTIVITIES:
Transfer of loans to real estate owned 395 126
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
MONTEREY BAY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 Annual Report on Form 10-K
of Monterey Bay Bancorp, Inc. (the "Company") 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 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 June 30, 1997 and December 31, 1996, the results of its
operations for the three and six months ended June 30, 1997 and 1996, and its
cash flows for the six months ended June 30, 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 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 per share on the face of the income
statement. SFAS 128 is effective for financial statements issued for periods
ending after December 15, 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
June 30, 1997, basic earnings per common share and diluted earnings per common
share would have been $0.12.
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
6
<PAGE>
the balance sheets and revenues and expenses for the periods covered. Actual
results could differ significantly from those estimates and assumptions.
7
<PAGE>
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 1994 under the laws of the State of
Delaware. The Company was organized as the holding company for Monterey Bay Bank
("the Bank") in connection with the Bank's conversion from the mutual to stock
form of ownership. On February 14, 1995, the Company issued and sold 3,593,750
shares of its common stock at an issuance price of $8.00 per share to complete
the conversion. Net proceeds to the Company, including shares purchased by the
employee stock ownership plan, were $27.1 million, after deduction of conversion
expenses and underwriting fees of $1.6 million. The Company used $13.5 million
of the net proceeds to acquire all of the stock of the Bank. The Bank owns a
subsidiary, Portola Investment Corporation ("Portola"), which sells insurance
and brokerage services.
The Company's primary business is providing conveniently located
deposit facilities to attract checking, money market, savings and certificate of
deposit accounts, and investing such deposits and other available funds in
mortgage loans secured by one- to four-family residences and, to a lesser
extent, construction, commercial real estate, and business loans. The Bank's
deposit gathering and lending markets are primarily concentrated in the
communities surrounding its full service offices located in Santa Cruz,
Monterey, and Santa Clara counties, in California. At June 30, 1997, the Bank
had seven full service offices and one real estate loan office.
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
1997 AND 1996
General
- -------
The Company recorded net income of $375,000, or $.12 per share, for
the three months ended June 30, 1997, compared to $449,000, or $.14 per share,
for the quarter ended June 30, 1996. The reduction in net income was due to an
increase in general and administrative expenses and a higher provision for loan
losses, partially offset by higher net interest income and increased noninterest
income, for the quarter ended June 30, 1997 compared to the similar period in
1996.
Net income for the six months ended June 30, 1997 was $846,000, or
$.27 per share, compared to $768,000, or $.24 per share, for the similar period
a year ago. The improvement in earnings for the six months ended June 30, 1997,
compared to the same period last year, reflects higher net interest income and
increased noninterest income, partially offset by higher general and
administrative expenses and an increased provision for loan losses in 1997.
A primary component of the Company's ongoing profitability is net
interest income, which represents the difference between interest income on
interest earning assets (principally loans and investment securities) and the
interest expense on interest bearing liabilities (principally deposits and, to a
lesser extent, borrowings). 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 its asset growth and quality, its asset and
liability composition, and the general interest rate environment.
In addition, the Company's earnings are affected by the level of its
noninterest income, including customer service charges, loan servicing, gains
and losses on sales of investments and loans, and commissions from the sales of
insurance and brokerage products, as well as by its level of general and
administrative expenses, including employee compensation and benefits, occupancy
and equipment costs, federal deposit insurance premiums and other expenses. The
Company's results of
8
<PAGE>
operations may also be significantly affected by general economic and
competitive conditions, changes in government policies, and the actions of
regulatory authorities.
Financial results for the three and six months ended June 30, 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 invested in various mortgage backed securities
and other investments, resulting in higher net interest income for the three and
six months ended June 30, 1997, compared to the similar periods in 1996. Net
interest income before provision for loan losses increased by $495,000, or
21.5%, to $2.8 million for the three months ended June 30, 1997, compared to
$2.3 million for the quarter ended June 30, 1996, primarily as a result of the
Deposit Assumption. The Company recorded net interest income before provision
for loan losses of $5.7 million for the six months ended June 30, 1997, a $1.2
million or 27.1% increase over $4.5 million recorded for the similar period a
year ago.
The Company's net interest margin was 2.81% and 2.85%, respectively,
for the quarter and six months ended June 30, 1997, compared to 3.02% and 2.91%,
respectively, for the similar periods in 1996.
Also impacting financial results for the three and six months ended
June 30, 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 1997.
Interest Income
For the quarter ended June 30, 1997, total interest income increased
by 30.7% to $7.4 million, compared to $5.7 million for the second quarter of
1996. For the six months ended June 30, 1997, total interest income was $15.1
million, an increase of $3.6 million, or 31.3%, over the amount recorded for the
first six months of 1996. The primary reason for these significant increases was
the growth in outstanding balances of mortgage backed securities and other
securities due to the investment of cash proceeds from the Deposit Assumption in
December, 1996.
The weighted average yield on interest earning assets increased to
7.44% and 7.48%, respectively, for the quarter and six months ended June 30,
1997, compared to 7.43% and 7.39%, respectively, for the similar periods a year
ago. The average yield on loans receivable increased to 7.93% for the three and
six months ended June 30, 1997, compared to 7.73% for the same periods a year
ago, primarily due to the origination of higher yielding mortgage loans during
the first six months of 1997. In addition, interest income on loans receivable
was positively impacted by reduced levels of nonaccrual loans in 1997 compared
to 1996. The average yield earned on mortgage backed securities increased in
1997 primarily due to lower prepayments and a corresponding decrease in premium
amortization.
Interest expense was $4.6 million and $9.3 million, respectively for
the quarter and six months ended June 30, 1997, compared to $3.4 million and
$7.0 million, respectively, for the similar periods a year ago. The increases in
interest expense were the result of a substantially higher average balance of
savings deposits in 1997 resulting from the Deposit Assumption and the opening
of the Capitola branch. The Company's weighted average cost of interest bearing
liabilities declined to 5.02% and 5.04%, respectively, for the three and six
months ended June 30, 1997, from 5.03% and 5.11%, respectively, for the
corresponding periods a year ago, due to a reduced cost of deposit liabilities.
9
<PAGE>
The changes in net interest income for the three and six months ended
June 30, 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):
<TABLE>
<CAPTION>
Three Months Ended June 30,
1997 Compared with 1996
Increase (Decrease)
---------------------------------------------
Volume Rate Net
------ ---- ---
<S> <C>
Interest income:
Loans $ 199 $ 121 $ 320
Mortgage backed securities 1,079 75 1,154
Investment securities 344 (74) 270
------- ------- -------
1,622 122 1,744
------- ------- -------
Interest expense:
On customer deposits 1,209 (21) 1,188
On borrowings 40 21 61
------- ------- -------
1,249 - 1,249
------- -------- -------
Change in net interest income $ 373 $ 122 $ 495
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
1997 Compared with 1996
Increase (Decrease)
---------------------------------------------
Volume Rate Net
------ ---- ---
<S> <C>
Interest income:
Loans $ 334 $ 238 $ 572
Mortgage backed securities 2,224 242 2,466
Investment securities 531 18 549
------- ------- -------
3,089 498 3,587
------- ------- -------
Interest expense:
On customer deposits 2,441 (130) 2,311
On borrowings 25 27 52
------- ------- -------
2,466 (103) 2,363
------- ------- -------
Change in net interest income $ 623 $ 601 $ 1,224
======= ======= =======
</TABLE>
10
<PAGE>
Average assets and liabilities together with average interest rates
earned and paid for the three months and six months ended June 30, 1997 and 1996
are summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------------------
1997 1996
------------------- ------------------
Average Yield/ Average Yield/
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C>
Interest earning assets:
Loans $ 239 7.93% $ 229 7.73%
Mortgage backed securities 102 7.03 38 6.72
Investment securities 58 6.12 39 6.37
------- -------
Total interest earning assets 399 7.44 306 7.43
Noninterest earning assets 18 10
------- -------
Total assets $ 417 $ 316
======= =======
Interest bearing liabilities:
Deposits $ 317 4.88% $ 219 4.87%
Borrowings 52 5.90 49 5.75
------- -------
Total interest bearing liabilities 369 5.02 268 5.03
Noninterest bearing liabilities 3 1
Stockholders' equity 45 47
------- -------
Total liabilities and stockholders' equity $ 417 $ 316
======= =======
Net interest rate spread 2.42% 2.40%
Net interest margin 2.81% 3.02%
Ratio of interest bearing assets to
interest bearing liabilities 108% 114%
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------
1997 1996
------------------- --------------------
Average Yield/ Average Yield/
Balance Rate Balance Rate
------- ------ ------- ------
<S> <C>
Interest earning assets:
Loans $ 237 7.93% $ 229 7.73%
Mortgage backed securities 108 7.15 42 6.68
Investment securities 58 6.23 39 6.18
------- -------
Total interest earning assets 403 7.48 310 7.39
Noninterest earning assets 17 11
------- -------
Total assets $ 420 $ 321
======= =======
Interest bearing liabilities:
Deposits $ 318 4.90% $ 219 4.94%
Borrowings 54 5.87 53 5.78
------- -------
Total interest bearing liabilities 372 5.04 272 5.11
Noninterest bearing liabilities 3 2
Stockholders' equity 45 47
------- -------
Total liabilities and stockholders' equity $ 420 $ 321
======= =======
Net interest rate spread 2.44% 2.28%
Net interest margin 2.85% 2.91%
Ratio of interest bearing assets to
interest bearing liabilities 108% 114%
</TABLE>
11
<PAGE>
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 and six months ended June 30, 1997, the
provision for loan losses was $102,000 and $225,000, respectively. The Company
did not record a provision for loan losses for the quarter ended June 30, 1996,
and recorded a provision of $22,000 for the six months ended June 30, 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 $1,526,000, or .60% of total
loans, at June 30, 1997, compared to an allowance for loan losses of $1,311,000,
or .56% of total loans, at December 31, 1996. Nonperforming loans declined to
$974,000, or .24% of total assets at June 30, 1997, compared to $1.4 million, or
.33% of total assets at December 31, 1996. (See "-Asset Quality.")
Noninterest Income
- ------------------
Noninterest income increased to $333,000 and $645,000, respectively,
for the quarter and six months ended June 30, 1997, from $234,000 and $394,000,
respectively, for the similar periods in 1996. Included in noninterest income
for the six months ended June 30, 1996 was a $70,000 gain from the sale of
mortgage backed securities.
The Company recorded commission income of $94,000 and $182,000,
respectively, from the sale of insurance and investment products for the three
and six months ended June 30, 1997, compared $85,000 and $83,000, respectively,
for the comparable periods in 1996. The increase in commission income reflects
the implementation by management of a strategic business plan to increase sales
of these products, which included the purchase of the assets of an investment
firm during the second quarter of 1997. For the three and six months ended June
30, 1997, customer service charges amounted to $133,000 and $259,000,
respectively, compared to $94,000 and $176,000 for the corresponding periods a
year earlier. The increase in customer service fee income reflects continuing
growth in the number of customer checking accounts resulting primarily from an
active marketing campaign to increase the number and outstanding balances of
transaction-related customer deposit accounts.
At June 30, 1997, the Company was servicing loans for others with a
total unpaid principal balance of $57.9 million, compared to $61.3 million at
December 31, 1996. Income from loan servicing increased to $60,000 and $119,000,
respectively, for the three and six months ended June 30, 1997, compared to
$35,000 and $26,000, respectively, for the similar periods a year ago.
General and Administrative Expenses
- -----------------------------------
General and administrative expenses were $2.4 million and $4.7
million, respectively, for the three and six months ended June 30, 1997,
compared to $1.8 million and $3.6 million, respectively, for the similar periods
in 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 recently
assumed deposit liabilities, and to support the Company's new product lines and
services. In addition, general and administrative expenses for the first six
months of 1997 included higher data processing costs, increased advertising
12
<PAGE>
expenses, higher stationery, telephone, and office expenses, and increased core
deposit intangible amortization. The increases in general and administrative
expenses for the three and six months ended June 30, 1997 were partially offset
by reduced deposit insurance premiums compared to the same periods a year
earlier. Deposit insurance premiums were $63,000 and $113,000, respectively, for
the quarter and six months ended June 30, 1997, compared to $139,000 and
$276,000, respectively, for the similar periods in 1996.
COMPARISON OF CHANGES IN FINANCIAL CONDITION
Total consolidated assets of the Company were $412.8 million at June
30, 1997, compared to $425.8 million at December 31, 1996, a decline of $13.0
million, or 3.0%.
Mortgage backed securities and investment securities decreased by
$35.6 million, or 21.1%, during the six months ended June 30, 1997. These
decreases were partially offset by an increase of $20.3 million, or 8.7%, in
loans receivable during the same period. During the second quarter of 1997, the
Bank sold $24.7 million of 30-year fixed rate mortgage backed securities and
collateralized mortgage obligations carrying certain interest rate risk
characteristics, and utilized a portion of the proceeds to purchase $14.7
million of current-index adjustable rate whole loans secured by properties
within the Company's market area. The remainder of the proceeds from the sale of
securities, and principal payments received on mortgage backed securities and
loans receivable, were used to fund the growth of the Company's mortgage loan
portfolio and to pay down short term FHLB advances.
The Company funded $20.7 million and $19.2 million, respectively, of
loans of during the six month periods ended June 30, 1997 and 1996. Loans held
for investment comprised $19.8 million, or 95.7%, of total loans funded in 1997,
compared to $17.7 million, or 92.2%, of loans funded in 1996. Portfolio loan
originations for the first six months of 1997 consisted of $11.7 million, or
56.5%, of one- to four-family mortgage loans and $9.0 million, or 43.5 %, of
multifamily, commercial real estate, construction, and business loans. During
the second quarter of 1997, the Company entered into a participation agreement
with another financial institution to originate a construction loan, of which
the Company's share was $475,000.
During the six months ended June 30, 1997, the Company's liabilities
decreased by $14.0 million to $366.0 million, from $380.0 million at December
31, 1996. The decrease in liabilities was attributable to a decrease in
borrowings, from $59.8 million at December 31, 1996 to $44.8 million at June 30,
1997. The Company utilized cash proceeds from the sale of mortgage backed
securities to pay down FHLB advances during the second quarter of 1997 as part
of its asset and liability management objectives. Savings deposits were $318.5
million at June 30, 1997, relatively unchanged from $318.1 million at December
31, 1996.
At June 30, 1997, shareholders' equity was $46.8 million, compared to
$45.8 million at December 31, 1996. The increase in equity during the first six
months of 1997 was primarily due to net income of $846,000, an increase in
earned ESOP shares, and a net reduction in unrealized losses on securities
available for sale. Equity was reduced by the first quarter payment of a cash
dividend of $.05 per share on the Company's outstanding common stock. Tangible
book value per share of Monterey Bay Bancorp, Inc. common stock was $14.25 at
June 30, 1997, compared to $13.87 at December 31, 1996.
13
<PAGE>
Interest Rate Sensitivity
- -------------------------
Although interest rate risk is influenced by market forces, it 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. The
Company's ability to maintain or increase its net yield on interest earning
assets in a cyclical interest rate environment depends on how well it matches
rates and repricing periods of interest earning assets and interest bearing
liabilities.
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 from 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 -4.00% and -3.85%, respectively, at March 31, 1997 and December 31,
1996, indicating that the Company is vulnerable to increases in interest rates.
The Company implemented measures to further control its exposure to
interest rate risk during the three months ended June 30, 1997. This was
accomplished primarily by shortening asset maturities and lengthening maturities
of interest bearing liabilities, when possible, and by the purchase and
continued origination of adjustable rate mortgage ("ARM") loans. The Bank has
been a longtime originator of ARM loans and originates fixed rate conforming
30-year mortgage loans only if the loans qualify for resale in the secondary
mortgage market. 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 the possibility for consistent long-term
profitability.
Asset Quality
- -------------
At June 30, 1997, nonaccrual loans totaled $644,000, or .38% 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 June 30, 1997, impaired
loans totaled $1.2 million, unchanged from December 31, 1996. Impaired loans at
June 30, 1997 included one multifamily loan in the amount of $817,000 and three
restructured loans totaling $350,000. Management does not expect any material
loss in the collection of these loans.
At June 30, 1997 the Company had $395,000 of real estate owned
consisting of two residential properties acquired through foreclosure during the
second quarter of 1997.
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,
14
<PAGE>
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
June 30, 1997 and December 31, 1996 (in thousands):
June 30, December 31,
1997 1996
-------- ------------
Assets classified as:
Substandard $ 2,821 $ 4,944
Doubtful - -
Loss - 1
-------- ---------
Total classified assets $ 2,821 $ 4,945
======== =========
Classified assets as a
percentage of total assets .68% 1.16%
At June 30, 1997, assets classified as substandard included $644,000
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 $359,000 of performing loans on residential
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 residential property with delinquent real estate taxes.
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.
Capital and Regulatory Standards
- --------------------------------
The following schedule presents the prescribed minimum capital
requirements for the Bank at June 30, 1997, the actual amount of capital, and
the amount of excess (dollars in thousands):
Minimum Actual
Requirement Amount Excess
----------- ------ ------
Risk-based capital $ 15,797 $ 37,297 $ 21,500
% of risk-weighted assets 8.00% 18.89% 10.89%
Core capital $ 12,085 $ 35,775 $ 23,690
% of risk-weighted assets 3.00% 8.88% 5.88%
Tangible capital $ 6,040 $ 35,580 $ 29,541
% of risk-weighted assets 1.50% 8.84% 7.34%
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.
15
<PAGE>
The regulation requires 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 June 30, 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 June 30, 1997
and December 31, 1996.
Total Tier One Leverage
Risk-Based Risk-Based (Core Capital)
Capital Ratio Capital Ratio Ratio
------------- ------------- -----
Minimum requirements:
Well capitalized 10.00% 6.00% 5.00%
Bank capital ratios:
December 31, 1996 19.22% 18.52% 8.36%
June 30, 1997 18.89% 18.12% 8.88%
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 June 30, 1997, the
Company's liquidity ratio was 6.93%, compared to 7.74% at December 31, 1996.
16
<PAGE>
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.
----------------------------------------------------
The Company held its Annual Meeting of Shareholders on May 2,
1997. At the Annual Meeting, the Shareholders elected directors Eugene R.
Friend, Donald K. Henrichsen, and McKenzie Moss to three year terms. The
following directors continued in office (their remaining terms follow their
names): Directors William J. Meidl (six years), Steven Franich (six years), Gary
L. Manfre (six years), P.W. Bachan (three years), Edward K. Banks (three years),
Donald K. Henrichsen (three years), and Louis Resetar, Jr. (three years). The
shareholders also ratified the appointment of Deloitte & Touche, LLP as
independent auditors of the Company for the year ending December 31, 1997.
The vote on each matter was as follows.
1. For Directors
BROKER
FOR WITHHELD NON-VOTES
Eugene R. Friend 2,686,607 7,612 -
Donald K. Henrichsen 2,686,420 7,799 -
McKenzie Moss 2,661,994 32,225 -
2. Other Matters
<TABLE>
<CAPTION>
BROKER
FOR AGAINST ABSTAIN NON-VOTES
<S> <C>
Ratification of the appointment of
Deloitte & Touche, LLP as
independent auditors for the
Company 2,669,957 13,878 10,384 -
</TABLE>
17
<PAGE>
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:
None.
18
<PAGE>
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 August 12, 1997 By /s/ Marshall G. Delk
---------------------- -----------------------
Marshall G. Delk, President and
Chief Operating Officer
Date August 12, 1997 By /s/ Deborah R. Chandler
---------------------- -----------------------
Deborah R. Chandler,
Senior Vice President, Treasurer
and Chief Financial Officer
19
Exhibit No. 11. Statement re: Computation of Per Share Earnings for the six and
three months ended June 30, 1997 and 1996 (in thousands except
per share data).
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------------- --------------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C>
Net income $ 846 $ 768 $ 375 $ 449
===== ===== ===== =====
Weighted average shares outstanding 3,021 3,138 3,023 3,119
Common stock equivalents due to dilutive
effect of stock options 96 17 99 15
----- ----- ----- -----
Total weighted average common shares
and equivalents outstanding 3,117 3,155 3,122 3,134
===== ===== ===== =====
Primary earnings per share $ 0.27 $ 0.24 $ 0.12 $ 0.14
====== ====== ====== ======
Total weighted average common shares
and equivalents outstanding 3,117 3,155 3,122 3,134
Additional dilutive shares using the
end of period market value versus the
average market value when applying
the treasury stock method(1) N/A N/A N/A N/A
----- ----- ----- -----
Total weighted average common shares
and equivalents outstanding for fully
diluted computation 3,117 3,155 3,122 3,134
===== ===== ===== =====
Fully diluted earnings per share $ 0.27 $ 0.24 $ 0.12 $ 0.14
====== ====== ====== ======
</TABLE>
- ----------
(1) Fully dilutive earnings per share are not anti-dilutive or did not result
in dilution of three percent or more; therefore they are not separately
presented in the consolidated statements of operations.
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This legend contains summary information extracted from
the Form 10-Q and is qualifed in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 5,586
<INT-BEARING-DEPOSITS> 3,996
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 131,041
<INVESTMENTS-CARRYING> 455
<INVESTMENTS-MARKET> 448
<LOANS> 254,929
<ALLOWANCE> (1,526)
<TOTAL-ASSETS> 412,810
<DEPOSITS> 318,522
<SHORT-TERM> 35,600
<LIABILITIES-OTHER> 2,724
<LONG-TERM> 9,182
<COMMON> 36
0
0
<OTHER-SE> 46,746
<TOTAL-LIABILITIES-AND-EQUITY> 412,810
<INTEREST-LOAN> 9,420
<INTEREST-INVEST> 5,641
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 15,061
<INTEREST-DEPOSIT> 7,722
<INTEREST-EXPENSE> 9,316
<INTEREST-INCOME-NET> 5,745
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 2
<EXPENSE-OTHER> 4,738
<INCOME-PRETAX> 1,427
<INCOME-PRE-EXTRAORDINARY> 1,427
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 846
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 7.48
<LOANS-NON> 974
<LOANS-PAST> 0
<LOANS-TROUBLED> 350
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,311
<CHARGE-OFFS> (1)
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 1,526
<ALLOWANCE-DOMESTIC> 1,526
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
