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, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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 (I.R.S. Employer Identification No.)
incorporation or organization)
567 AUTO CENTER DRIVE, WATSONVILLE, CALIFORNIA 95076
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(Address of principal executive offices) (Zip Code)
(831) 768-4800
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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: 3,535,387 shares of
common stock, par value $.01 per share, were outstanding as of August 6, 1999.
<PAGE>
<TABLE>
MONTEREY BAY BANCORP, INC.
Index
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C> <C>
Item 1. Consolidated Statements of Financial Condition as of
June 30, 1999 and December 31, 1998...................................................... 1
Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1999 and 1998.................................................. 2
Consolidated Statement of Stockholders' Equity for the
Six Months Ended June 30, 1999........................................................... 3
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1999 and 1998.................................................. 4
Notes to Consolidated Financial Statements............................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 7
Item 3. Quantitative and Qualitative Disclosure of Market Risk.................................. 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 19
Item 2. Changes in Securities................................................................... 19
Item 3. Defaults Upon Senior Securities......................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders..................................... 19
Item 5. Other Information....................................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................ 20
SIGNATURES................................................................................................... 21
</TABLE>
<PAGE>
Item 1. Financial Statements.
<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998 (Dollars in thousands)
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
June 30, December 31,
1999 1998
-------------- --------------
<S> <C> <C>
ASSETS
Cash and due from depository institutions $ 8,119 $ 11,626
Overnight deposits 2,475 5,325
--------- ---------
Total cash and cash equivalents 10,594 16,951
Loans held for sale, at market 290 2,177
Securities available for sale:
Mortgage-backed securities (amortized cost of $66,119 at June 30, 1999
and $97,158 at December 31, 1998) 65,359 98,006
Corporate trust preferreds (amortized cost, of $11,446 at June 30, 1999
and $18,658 at December 31, 1998) 11,553 19,154
Investment securities (amortized cost of $252 at December 31, 1998) - 256
Securities held to maturity:
Mortgage-backed securities (market value of $74 at June 30, 1999
and $96 at December 31, 1998) 76 97
Loans receivable held for investment (net of allowance for loan losses
at June 30, 1999, $3,087; and at December 31, 1998, $2,780) 336,522 298,775
Federal Home Loan Bank stock, at cost 3,129 3,039
Premises and equipment, net 7,127 6,316
Accrued interest receivable 2,555 2,537
Core deposit premiums and other intangibles, net 3,281 3,630
Other assets 4,115 3,881
--------- ---------
TOTAL ASSETS $ 444,601 $ 454,819
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Savings deposits $ 363,618 $ 370,677
Federal Home Loan Bank advances 34,082 35,182
Securities sold under agreements to repurchase 2,530 4,490
Accounts payable and other liabilities 1,612 2,581
--------- ---------
Total liabilities 401,842 412,930
--------- ---------
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 and 4,378,289
shares issued (3,535,387 shares outstanding at June 30, 1999;
and 3,505,355 shares outstanding at December 31, 1998) 45 45
Additional paid-in capital 27,713 27,586
Unearned shares held by employee stock ownership plan (197,656 at
June 30, 1999; and 215,623 at December 31, 1998) (1,265) (1,380)
Treasury stock, at cost (956,699 shares at June 30, 1999;
and 986,731 shares at December 31, 1998) (12,625) (12,920)
Retained earnings, substantially restricted 29,275 27,764
Accumulated other comprehensive income - unrealized gain (loss) on
securities (384) 794
--------- ---------
Total stockholders' equity 42,759 41,889
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 444,601 $ 454,819
========= =========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
1
<PAGE>
<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (UNAUDITED)
(Dollars in thousands, except per share amounts)
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- --------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
INTEREST INCOME:
Loans receivable $ 6,596 $ 4,944 $ 12,892 $ 10,360
Mortgage-backed securities 1,229 1,826 2,757 2,974
Other investment securities 348 777 749 1,537
-------- -------- -------- --------
Total interest income 8,173 7,547 16,398 14,871
-------- -------- -------- --------
INTEREST EXPENSE:
Savings deposits 3,758 4,204 7,672 8,068
FHLB advances and other borrowings 510 387 1,047 899
-------- -------- -------- --------
Total interest expense 4,268 4,591 8,719 8,967
-------- -------- -------- --------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 3,905 2,956 7,679 5,904
PROVISION FOR LOAN LOSSES 200 496 420 605
-------- -------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,705 2,460 7,259 5,299
-------- -------- -------- --------
NONINTEREST INCOME:
Gain (loss) on sale of investment securities 285 - 503 (17)
Gain on sale of real estate owned 1 - 11 9
Commissions from sales of noninsured products 139 166 271 289
Customer service charges 243 195 476 366
Income from loan servicing 48 78 65 124
Other income 62 53 136 121
-------- -------- -------- --------
Total noninterest income 778 492 1,462 892
-------- -------- -------- --------
GENERAL AND ADMINISTRATIVE EXPENSE:
Compensation and employee benefits 1,362 1,341 2,721 2,513
Occupancy and equipment 286 291 571 567
Deposit insurance premiums 41 40 83 62
Data processing fees 245 200 488 383
Legal and accounting expenses 121 322 228 418
Stationery, telephone and office expenses 146 143 287 251
Advertising and promotion 108 102 165 162
Amortization of core deposit premiums 174 168 349 346
Other expenses 407 379 821 725
-------- -------- -------- --------
Total general and administrative expense 2,890 2,986 5,713 5,427
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE 1,593 (34) 3,008 764
INCOME TAX EXPENSE
691 31 1,302 391
-------- -------- -------- --------
NET INCOME (LOSS) $ 902 $ (65) $ 1,706 $ 373
======== ======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE $ .27 $ (.02) $ .51 $ .10
======== ========= ======== ========
DILUTED EARNINGS (LOSS) PER SHARE $ .26 $ (.02) $ .50 $ .09
======== ========= ======== ========
CASH DIVIDENDS PER SHARE $ - $ - $ .07 $ .05
======== ========= ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
2
<PAGE>
<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 1999 (Dollar amounts in thousands)
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<CAPTION>
Additional
Common Stock Paid in Acquired Treasury Retained
Shares(1) Amount Capital by ESOP Stock(2) Earnings
------ -------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1998 3,505,355 $ 45 $27,586 $(1,380) $(12,920) $27,764
Options exercised
using treasury stock 30,032 294 52
Dividends paid (246)
Earned ESOP shares 127 115
Net income 1,706
Change in unrealized gains
on securities available for
sale, net of taxes
Reclassification adjustment
for gains on securities
available for sale included in
income, net of taxes
-------------------------------------------------------------------------------
Balance at
June 30, 1999 3,535,387 $ 45 $27,713 $(1,265) $(12,626) $29,276
===============================================================================
Accumulated
Other
Comprehensive
Income (loss),
net of tax Total
---------- -----
Balance at
December 31, 1998 $ 794 $41,889
Options exercised
using treasury stock 346
Dividends paid (246)
Earned ESOP shares 242
Net income 1,706
Change in unrealized gains
on securities available for
sale, net of taxes (884) (884)
Reclassification adjustment
for gains on securities
available for sale included in
income, net of taxes (294) (294)
------------------------
Balance at
June 30, 1999 $(384) $42,759
========================
<FN>
(1) The number of shares of common stock includes 359,375 shares which are pledged as security for a loan to the
Bank's ESOP. Shares earned at June 30, 1999 and December 31, 1998 were 161,719 and 143,750, respectively.
(2) The Company held 956,699 shares of repurchased Company common stock as of June 30, 1999 and 986,731 as of
December 31, 1998.
See notes to consolidated financial statements.
</FN>
</TABLE>
3
<PAGE>
<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited) (Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended
June 30,
-------------------------------
OPERATING ACTIVITIES: 1999 1998
------------- -------------
<S> <C> <C>
Net income $ 1,706 $ 373
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization of premises and equipment 237 227
Amortization of core deposit premiums 349 346
Amortization of purchase premiums, net of discounts 207 543
Loan origination fees deferred, net 120 (86)
Amortization of deferred loan fees (70) (147)
Provision for loan losses 420 605
Compensation expense related to ESOP shares released 242 304
(Gain) loss on sale of mortgage-backed securities and investment securities (503) 17
Gain on sale of real estate owned (11) (9)
Losses on sale of fixed assets - 8
Charge-offs on loans receivable, net of recoveries (113) 3
Originations of loans held for sale (5,390) (5,888)
Proceeds from sales of loans originated for sale 7,277 5,307
Change in income taxes payable and deferred income taxes (434) (403)
Change in other assets 479 (182)
Change in interest receivable (18) (434)
Change in accounts payable and other liabilities (416) 466
--------- ---------
Net cash provided by operating activities 4,082 1,050
--------- ---------
INVESTING ACTIVITIES:
Loans originated for the portfolio, net (85,443) (46,101)
Purchases of loans receivable (551) (32,099)
Principal payments on loans receivable 47,792 46,708
Proceeds from sales of corporate securities available for sale 7,746 -
Principal paydowns on mortgage-backed securities 14,002 10,785
Proceeds from sales of mortgage-backed securities available for sale 16,920 -
Purchases of investment securities available for sale (7) (15,331)
Proceeds from sales of investment securities available for sale 259 4,971
Proceeds from maturities of investment securities - 8,245
Decreases in certificates of deposit - 99
Purchases of FHLB stock (90) (99)
Purchases of premises and equipment, net (1,048) (1,390)
--------- ---------
Net cash used in investing activities (420) (24,212)
--------- ---------
</TABLE>
-continued-
4
<PAGE>
<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited) (Dollars in thousands)
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1999 1998
------------- -------------
<S> <C> <C>
FINANCING ACTIVITIES:
Net increase (decrease) in savings deposits $ (7,059) $ 14,745
Purchase of savings deposits, net of core deposit premiums - 28,554
Repayments of Federal Home Loan Bank advances, net (1,100) (16,100)
Repayments of reverse repurchase agreements, net (1,960) (90)
Purchases of treasury stock, net of exercise of stock options 346 (2,012)
Cash dividends paid to stockholders (246) (226)
--------- ---------
Net cash provided by (used in) financing activities (10,019) 24,871
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS (6,357) 1,709
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,951 13,514
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,594 $ 15,223
========= =========
CASH PAID DURING THE PERIOD FOR:
Interest on savings deposits and advances $ 8,747 $ 9,217
Income taxes 1,664 719
NONCASH INVESTING ACTIVITIES:
Loans transferred to held for investment at market value 171 -
Mortgage-backed securities acquired in exchange for securitized
loans, net of deferred fees - 47,703
Real estate acquired in settlement of loans 280 -
<FN>
See notes to consolidated financial statements.
</FN>
</TABLE>
5
<PAGE>
MONTEREY BAY BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
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,
1998. 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 solely of normal
recurring accruals) necessary for a fair presentation of the Company's
consolidated financial condition at June 30, 1999, and December 31, 1998, the
results of its operations for the three and six months ended June 30, 1999 and
1998, and its cash flows for the six months ended June 30, 1999 and 1998. All
significant inter-company 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.
Note 1.
Recently issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting for
Derivative Instruments and Hedging Activities". The statement establishes
accounting and reporting standards for derivative instruments and hedging
activities. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. The Company is in the process of determining the
impact of SFAS No. 133 on the Company's financial statements.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise". The Company adopted this
statement on January 1, 1999. It allows companies that hold mortgage loans for
sale to classify mortgage-backed securities retained in a securitization of such
loans as either held-to-maturity, available for sale, or trading based on
management's intentions. This guidance is consistent with the treatment
established for investments covered by SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities". The adoption of this statement was
not material to the financial results of the Company.
6
<PAGE>
Note 2.
Comprehensive Income
The following tables disclose comprehensive income for the six months
ended June 30, 1999 and 1998 (dollars in thousands).
Six Months Ended
June 30
-----------------------------
1999 1998
Comprehensive income:
Net income $ 1,706 $ 373
Change in unrealized gains (loss) on
securities available for sale,
net of taxes (884) 568
Reclassification adjustment for net gains
(losses) on securities available for sale
included in income, net of taxes (294) 13
------- ------
Total comprehensive income $ 528 $ 954
======= ======
Note 3.
Use of Estimates in the Preparation of Financial Statements
In preparing the consolidated financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the dates of the balance sheets and revenues and
expenses for the periods covered. Actual results could differ significantly from
those estimates and assumptions.
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
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 4,492,086 shares of
its common stock at an issuance price of $6.40 per share, adjusted for splits,
to complete the conversion. Net proceeds to the Company were $27.1 million,
including shares purchased by the employee stock ownership plan, 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, 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, 1999, the Bank had eight full service offices and one
administrative office.
7
<PAGE>
Safe Harbor Statement for Forward-Looking Statements
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies, and expectations of the Company, are generally identifiable by use
of the words "believe," "expect," "intend," "anticipate," "estimate," "project"
or similar expressions. The Company's ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse affect on the operations and future prospects of
the Company include, but are not limited to, changes in: interest rates, general
economic conditions, legislative/regulatory changes, monetary and fiscal
policies of the U.S. Government, including policies of the U.S. Treasury and the
Board of Governors of the Federal Reserve System, the quality or composition of
the loan or investment portfolios, demand for loan products, deposit flows,
competition, demand for financial services in the Company's market area and
accounting principles, policies and guidelines. These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
RESULTS OF OPERATIONS FOR THE SIX AND THREE MONTHS ENDED JUNE 30, 1999 AND 1998
Overview
The Company reported net income of $902,000, or $.27 per basic share,
for the quarter ended June 30, 1999, compared to a net loss of $65,000, or
$(.02) per basic share, for the same period last year. Diluted earnings per
share were $.26 for the second quarter of 1999, compared to $(.02) a year ago.
Second quarter 1999 earnings were higher than earnings for the similar period a
year ago primarily due to substantial increases in net interest income resulting
from higher levels of loans receivable and decreases in the cost of funds.
Return on average equity was 8.63% and return on average assets was .81% for the
three month period ended June 30, 1999 compared to a loss of .58% and .06%,
respectively a year ago. Net income for the first six months of 1999 was
$1,706,000, or $.51 per basic share, an increase from $373,000, or $.10 per
basic share, recorded for the first six months of 1998. Diluted earnings per
share for the six month period ended June 30, 1999 was $.50 compared to $.09 for
the same period in 1998.
Net interest income before provision for loan losses and recurring
noninterest income rose $949,000 and $1.8 million during the three month and six
month periods ended June 30, 1999, respectively, from the comparable periods in
1998. The increase in net interest income was primarily due to growth in loans
receivable and decreases in the cost of funds. While deposits have not grown
during either the three or six month periods ended June 30, 1999, compared to
the same periods in 1998, the mix of deposits has changed. Transaction accounts
(defined as checking, money market, and passbook accounts) represent $146.5
million or 40.3% of total deposits at June 30, 1999, compared to $113.6 million
or 30.6% at December 31, 1998. During the second quarter of 1998, the Bank
opened its eighth full service branch location.
The most significant component of the Company's revenue is net interest
income, which represents the difference between interest income, primarily from
loans, mortgage-backed securities, and the investment portfolio, and interest
expense, primarily on deposits and 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.
8
<PAGE>
Service charges, mortgage loan servicing fees, and commissions from the
sale of insurance products and investments through Portola also have significant
effects on the Company's results of operations. General and administrative
expenses consist primarily of employee compensation, occupancy expenses, federal
deposit insurance premiums, data processing fees and other operating expenses.
The Company's results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government policies, and actions of regulatory agencies.
Recently, the Company has focused its efforts on becoming more like a
community-based commercial bank by increasing its commercial real estate,
construction, multi-family and business lending activities. As well, the Company
is focusing its deposit gathering efforts on small businesses in its primary
market, which will complement the business lending function. Separately, the
Company will continue to pursue growth in lower cost transaction deposit
accounts (checking, passbook, and money market accounts).
Interest Income
Interest income for the quarter ended June 30, 1999, increased by 8.3%
to $8.2 million, compared to $7.5 million for the second quarter of 1998. For
the six months ended June 30, 1999, total interest income was $16.4 million, a
10.3% increase compared to $14.9 million during the same period in 1998. The
primary reason for the increase in interest income for the three and six month
periods ended June 30, 1999, compared to the same period in 1998, was the
increase in average interest earning assets. The average balance of interest
earning assets was $430.2 million and $432.5 million for the three and six month
periods ended June 30, 1999, respectively. These balances compare favorably to
the $408.7 million and $399.1 million average balance of interest earning assets
for the three and six month periods ended June 30, 1998. The increase in average
interest earning assets for the three month period ended June 30, 1999 compared
to the same period in 1998 was due to an $84.9 million increase in loans
receivable, offset by a $36.6 million decrease in the average balance of
mortgage-backed securities and a $26.7 million decrease in the average balance
of corporate securities.
The weighted average yield on interest earning assets increased to
7.60% and 7.58% for the quarter and six months ended June 30, 1999, compared to
7.39% and 7.45% for the same periods in 1998. The average yield on loans
receivable was slightly lower at 8.00% and 8.02% for the quarter and six months
ended June 30, 1999, compared to 8.07% for comparable periods in 1998. The
weighted average yield on interest earning assets during the three and six
months ended June 30, 1999 increased compared to the same periods in 1998 due to
loans receivable for the quarter ended June 30, 1999 representing a larger
percentage of total interest earning assets. Average loans receivable for the
quarter and six months ended June 30, 1999 represented 76.7% and 74.3%,
respectively, of total interest earning assets compared to 60.0% and 64.3%,
respectively, for the same periods in 1998. The yield on loans receivable is
substantially higher than the yield on mortgage-backed and investment
securities. The Company is continuing to pursue its long-term strategic goal to
increase the net interest margin by replacing lower-yielding securities with
higher-yielding loans.
Interest expense was $4.3 million and $8.7 million, respectively for
the quarter and six months ended June 30, 1999, compared to $4.6 million and
$9.0 million, respectively for the same periods a year ago. The $300,000
decrease for both the quarter and six months ended June 30, 1999 was due to a
decline in both the rate and average balances in certificate of deposits
accounts, partially offset by an increase in the average balance in money market
accounts. Average certificate of deposit account balances declined $41.9 million
and $24.5 million, respectively for the quarter and six month periods ended June
30, 1999 compared to the same periods in 1998. The decreases in average
certificate of deposit accounts was offset by a $43.8 million and $40.3 million
increase in the weighted average
9
<PAGE>
balances in money market accounts for the quarter and six month periods ended
June 30, 1999 compared to the same periods in 1998. Additionally, the weighted
average rate on certificate of deposit accounts decreased to 4.79% and 4.91%,
respectively for the quarter and six months ended June 30, 1999, compared to
5.47% and 5.49%, respectively for the same periods in 1998. The decline in the
weighted average cost of deposits is due to the success the Company has had in
achieving its strategic goal of changing the mix of deposits to increase
transaction accounts (checking, passbook, and money market accounts) as well as
a decline in rates paid on time deposits. At June 30, 1999, the company had
$146.5 million in transaction accounts or 40.3% of total deposits with a
weighted average cost of 3.09% compared to $90.7 million or 24.8% of total
deposits with a weighted average cost of 2.53% at June 30, 1998.
<TABLE>
The changes in net interest income for the three and six months ended
June 30, 1999 compared with the corresponding periods in 1998 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). Changes
attributable to both rate and volume have been attributed to rate:
<CAPTION>
Three Months Ended June 30,
1999 Compared with 1998
Increase (Decrease)
-----------------------------------------------
Volume Rate Net
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Loans $ 1,713 $ (61) $ 1,652
Mortgage-backed securities (600) 3 (597)
Investment securities (405) (24) (429)
------- ------- -------
708 (82) 626
------- ------- -------
Interest expense:
On customer deposits (116) (330) (446)
On borrowings 191 (68) 123
------- ------- -------
75 (398) (323)
------- ------- -------
Change in net interest income $ 633 $ 316 $ 949
======= ======= =======
Six Months Ended June 30,
1999 Compared with 1998
Increase (Decrease)
-----------------------------------------------
Volume Rate Net
----------- ----------- -----------
Interest income:
Loans $ 2,608 $ (76) $ 2,532
Mortgage-backed securities (189) (28) (217)
Investment securities (746) (42) (788)
------- ------- -------
1,673 (146) 1,527
------- ------- -------
Interest expense:
On customer deposits 174 (570) (396)
On borrowings 272 (124) 148
------- ------- -------
446 (694) (248)
------- ------- -------
Change in net interest income $ 1,227 $ 548 $ 1,775
======= ======= =======
</TABLE>
10
<PAGE>
<TABLE>
Average assets and liabilities together with average interest rates
earned and paid for the three and six months ended June 30, 1999 and 1998 are
summarized as follows (dollars in millions):
<CAPTION>
Three Months Ended June 30,
----------------------------------------------------------------
1999 1998
--------------------------- ---------------------------
Average Yield/ Average Yield/
Interest earning assets: Balance Rate Balance Rate
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Loans $ 330 8.00% $ 245 8.07%
Mortgage-backed securities 75 6.58 111 6.56
Investment securities 25 5.44 52 5.93
------ -----
Total interest earning assets 430 7.60 408 7.39
Noninterest earning assets 19 19
------ ------
Total assets $ 449 $ 427
====== ======
Interest bearing liabilities:
Deposits $ 369 4.09% $ 354 4.76%
Borrowings 37 5.52 25 6.22
------ ------
Total interest bearing
liabilities 406 4.22 379 4.86
Noninterest bearing liabilities 1 3
Stockholders' equity 42 45
------ ------
Total liabilities and
stockholders' equity $ 449 $ 427
====== ======
Net interest rate spread 3.38% 2.54%
Net interest margin 3.63% 2.89%
Ratio of interest bearing assets to
interest bearing liabilities 106% 108%
Six Months Ended June 30,
----------------------------------------------------------------
1999 1998
--------------------------- ---------------------------
Average Yield/ Average Yield/
Interest earning assets: Balance Rate Balance Rate
----------- ----------- ----------- -----------
Loans $ 321 8.02% $ 257 8.07%
Mortgage-backed securities 85 6.53 90 6.60
Investment securities 27 5.65 52 5.88
------ ------
Total interest earning assets 433 7.58 399 7.45
Noninterest earning assets 18 17
------ ------
Total assets $ 451 $ 416
====== ======
Interest bearing liabilities:
Deposits $ 369 4.19% $ 338 4.81%
Borrowings 38 5.52 29 6.15
------ ------
Total interest bearing
liabilities 407 4.31 367 4.92
Noninterest bearing liabilities 2 3
Stockholders' equity 42 46
------ ------
Total liabilities and
stockholders' equity $ 451 $ 416
====== ======
Net interest rate spread 3.27% 2.53%
Net interest margin 3.55% 2.96%
Ratio of interest bearing assets to
interest bearing liabilities 106% 108%
</TABLE>
11
<PAGE>
Provision for Loan Losses
The allowance for loan losses is maintained at a level considered
appropriate by management and is based on an ongoing assessment of the risks
inherent in the loan portfolio. The allowance is increased by the provision for
estimated loan losses, which is charged against operations, and is decreased by
the amount of net loans charged off during the period. In evaluating the
adequacy of the allowance for loan losses, management incorporates such factors
as collateral value, portfolio composition and concentration, and trends in
local and national economic conditions and the related impact on the financial
strength of the Company's borrowers. (See "-Asset Quality.")
For the three and six months ended June 30, 1999, the provision for
loan losses was $200,000 and $420,000, respectively, compared to $496,000 and
$605,000 for the same periods in 1998. The Company continued to increase its
provision for loan losses largely due to a net increase in higher risk forms of
lending. At June 30, 1999, the Company's allowance for loan losses totaled $3.1
million or .91% of loans receivable, compared to $2.8 million or .92% of loans
receivable at December 31, 1998. At June 30, 1999, the Company had real estate
owned totaling $159,300, consisting of a single one-to four-family residential
property acquired through foreclosure in 1998. Nonperforming loans totaled
$908,566 or .27% of loans receivable at June 30, 1999 compared to $1.5 million,
or .60% of loans receivable at June 30, 1998 and $1.5 million, or .50% of loans
receivable at December 31, 1998.
Noninterest Income
Noninterest income for the three and six months ended June 30, 1999 was
$778,000 and $1.5 million compared to $492,000 and $892,000 for comparable
periods in 1998, primarily due to increases in gain on the sale of investment
securities. Excluding the increases in gain on the sale of investment securities
for the six month period ended June 30, 1999 compared to the same period in
1998, noninterest income increased $50,000 due primarily to a $110,000 increase
in customer service charges, partially offset by a $59,000 decrease in loan
servicing income. No new loan servicing income sources are planned. The increase
in customer service charges continuing growth in the number of customer checking
accounts resulting primarily from the continued consolidation of financial
institutions in the Company's market.
General and Administrative Expenses
General and administrative expenses were $2.9 million and $5.7 million
for the three and six months ended June 30, 1999, compared to $3.0 million and
$5.4 million for similar periods in 1998. The slight decrease in general and
administrative expenses for the three months ended June 30, 1999 compared to the
same period in 1998 was primarily attributable to approximately $210,000 in
charges during the 1998 period, including legal costs, resulting from the
settlement of two outstanding legal matters. The increase in general and
administrative expenses for the six months ended June 30, 1999 compared to the
same period in 1998 was primarily due to higher compensation and benefits and
data processing fees, as new employees were hired to support the Company's
deposit growth and the expansion of its branch locations and new product lines
and services.
General and administrative expense as a percentage of average assets
for the three and six months ended June 30, 1999 were 2.58% and 2.53%, compared
to 2.80% and 2.61% for comparable periods in 1998. More importantly, the
efficiency ratio, which is general and administrative expense divided by net
interest income before provision for loan losses plus noninterest revenue,
improved during the three and six months ended June 30, 1999 compared to similar
periods in 1998. The efficiency ratio for the quarter and six months ended June
30, 1999 was 62% and 63% respectively, compared to 87% and 80%, respectively for
comparable periods in 1998. The improvement in the
12
<PAGE>
efficiency ratio in 1999 was primarily due to improvements in net interest
income and securities gains, and to a lesser extent efforts to contain growth in
general and administrative expenses.
COMPARISON OF CHANGES IN FINANCIAL CONDITION
Total assets of the Company were $444.6 million at June 30, 1999,
compared to $454.8 million at December 31, 1998, a decrease of $10.2 million.
The slight decrease in assets during the first half of 1999 was primarily due to
the sale of mortgage-backed securities and corporate securities and prepayments
on mortgage-backed securities, with the utilization of a majority of the
proceeds to fund net loan growth and to pay down short-term borrowings.
Mortgage-backed securities and investment securities decreased $40.5
million, or 34.4%, to $76.9 million, during the six months ended June 30, 1999.
These decreases were partially offset by an increase of $37.7 million, or 12.6%,
in loans receivable during the same period.
Loans receivable held for investment were $336.5 million at June 30,
1999, compared to $298.8 million at December 31, 1998. Residential real estate
loans continue to represent the largest category in the loan portfolio. At June
30, 1999, total one-to-four family residential real estate loans were $171.4
million, or 51.0% of loans receivable, compared to $183.9 million, or 61.0% of
total loans, at December 31, 1998. The Company successfully continued to focus
its efforts on changing its mix of interest earning assets by emphasizing
construction, commercial real estate, and business lending activities, resulting
in increased loan yields. Loans other than one-to-four family residential real
estate loans comprise 49% or $165.1 million of loans receivable at June 30, 1999
compared to 39% or $119.8 million at December 31, 1998 and 38% or $95.6 million
at June 30, 1998. During the quarter ended June 30, 1999, the Company originated
$54.1 million in loans. Loans originated and funded during the second quarter
were earning a weighted average yield of 8.39%. The Company originated $19.7,
$26.4, $22.3, and $36.4 million, respectively of portfolio loans during the
first, second, third, and fourth quarters of 1998, respectively and $41.7
million during the first three months of 1999. The growth in portfolio loan
fundings was due to a low interest rate environment, which promotes loan
production, additions to sales staff, and the expansion of the Company's
portfolio lending into construction, commercial, multi-family, and business
lending.
At June 30, 1999, the Company's permanent commercial real estate loan
portfolio was $51.3 million, or 15.3% of total loans receivable, up from $37.9
million, or 12.7% of total loans receivable at December 31, 1998. At June 30,
1999, the Company had $46.9 million or 13.9% of net construction loans compared
to $27.5 million, or 9.2%, at December 31, 1998. Construction loans are made
primarily to residential builders and to commercial property developers. At June
30, 1999, the Company had $40.0 million of multi-family residential loans, or
11.9% of total loans receivable, up from $35.4 million, or 11.9%, at December
31, 1998. The remainder of the loans receivable was comprised primarily of
business loans totaling $26.9 million, or 8.0%, of total loans receivable, at
June 30, 1999, compared to $19.0 million, or 6.4%, at December 31, 1998.
During the six months ended June 30, 1999, the Company's liabilities
decreased by $11.1 million to $401.8 million, from $412.9 million at December
31, 1998. The decrease in liabilities was primarily attributable to a decline in
deposits of $7.1 million and a $2.0 million decline in securities sold under
agreements to repurchase. Total savings deposits decreased during the six month
period ended June 30, 1999 to $363.6 million, or by 1.9%, from $370.7 million at
December 31, 1998. Continued emphasis has been placed on growth of low-cost
transaction deposit accounts. Transaction deposit accounts are made up of
passbook savings, checking, and money market accounts. Transaction accounts
increased from $113.6 million, or 30.6%, of total deposits at December 31, 1998
to $146.5 million, or 40.3%, of total deposits at June 30, 1999. Time deposits
declined from $257.1 million at
13
<PAGE>
December 31, 1998 to $217.0 million at June 30, 1999. Average transaction
deposits at June 30, 1999, bore a weighted average interest rate of 3.09%.
At June 30, 1999, shareholders' equity was $42.8 million, compared to
$41.9 million at December 31, 1998. Equity increased by $0.9 million due to net
income for the first six months of 1999 of $1.7 million, partially offset by the
payment of cash dividends totaling $246,000, or $.07 per share, on the Company's
outstanding common stock, and an $0.9 million change in the unrealized gains on
securities available for sale, net of taxes. Tangible book value per share of
Monterey Bay Bancorp, Inc. common stock was $11.83 at June 30, 1999, compared to
$11.60 at December 31, 1998.
Interest Rate Sensitivity and Market Risk Analysis
Market risk is the risk of losses resulting from adverse changes in
market pricing and rates. The Company's market risk is primarily interest rate
risk associated with its lending, deposit and borrowing functions. Interest rate
risk arises when interest rates on assets change in a different time period or
in a different proportion from that of liabilities. Management actively monitors
its interest rate sensitivity position with the primary objective of prudently
structuring the balance sheet so that movements of interest rates on assets and
liabilities are highly correlated and produce reasonable net interest margin
even in periods of volatile interest rates. Interest rate risk is considered by
management to be the Company's most significant market risk in terms of
potential for material impact upon the Company's financial position and results
of operations. In the normal course of business, the Company is not exposed to
other types of market risk such as risk associated with commodity prices or
foreign currencies.
Management seeks to manage its asset and liability portfolios to help
reduce any adverse impact on its net interest income caused by fluctuating
interest rates. A key objective of asset/liability management is to manage
interest rate risk associated with changing asset and liability cash flows and
market interest rate movements. Interest rate risk occurs when interest rate
sensitive assets and liabilities do not reprice simultaneously and in equal
volumes. The Company's asset/liability committee provides oversight to the
interest rate risk management process and recommends policy guidelines regarding
exposure to interest rates for approval by the Board of Directors. Adherence to
these policies is monitored on an ongoing basis, and decisions related to the
management of interest rate exposure due to changes in balance sheet structure
and/or market interest rates are made when appropriate and agreed to by this
committee.
The Company manages interest rate risk principally through emphasizing
the origination of adjustable rate loans and short or intermediate term fixed
rate loans and the matching of these assets with short and intermediate term
certificates of deposit and adjustable rate borrowings. The Company's monitoring
activities related to managing interest rate risk include both interest rate
sensitivity "gap" analysis and the use of a simulation model. While gap analysis
provides a picture of the interest rate risk embedded in the balance sheet, it
provides only a static view of interest rate sensitivity at a specific point in
time, and does not measure the potential volatility in forecasted results
relating to changes in market interest rates over time. Accordingly, the Company
combines the use of gap analysis with use of a simulation model, which provides
a dynamic assessment of interest rate sensitivity. The simulation model is
designed to enable the Company to generate a forecast of net interest income and
market value of equity given various interest rate forecasts and alternative
strategies. The model is also designed to measure the anticipated impact that
prepayment risk, basis risk, customer maturity preferences, volumes of new
business and changes in the relationship between long- and short-term interest
rates have on the performance of the Company.
14
<PAGE>
Interest rate sensitivity estimated by management, as measured by the
change in the market value of equity as a percentage of the present value of
assets if interest rate levels were to increase by 2%, was negative 1.77% at
March 31, 1999 indicating that the Company is vulnerable to increases in
interest rates and advantaged if interest rates decline. The change in the
market value of equity as a percentage of the present value of assets if
interest rate levels were to increase by 2% was negative 1.92% and negative
3.11% at December 31, 1998 and December 31, 1997, respectively. While progress
in reducing interest rate sensitivity has been made, management continues to
pursue strategies to reduce the impact of changes in interest rates on its
market value of equity, primarily by shortening asset maturities, and
lengthening maturities of interest-bearing liabilities when possible, and by
originating and retaining variable-rate consumer, business, construction, and
commercial real estate loans, which generally have higher yields than permanent
residential loans.
Asset Quality
At June 30, 1999, the Company had $382,000 in nonaccrual loans past due
90 days or more compared to $1.5 million of nonaccrual loans at December 31,
1998. At June 30, 1999, impaired loans totaled $1.8 million, compared to $3.8
million at December 31, 1998.
At June 30, 1999, the Company had real estate owned totaling $159,300,
consisting of a single one-to-four family residential property acquired through
foreclosure in 1998.
To measure the quality of assets, the Company has established internal
asset classification guidelines as part of its credit monitoring system for
identifying and reporting problem assets and determining provisions for
anticipated loan losses. The Company classifies assets it considers of
questionable quality using the classification categories of substandard,
doubtful, and loss. The Company's classified assets consist of foreclosed
residential properties, nonperforming assets, and assets that are performing in
accordance with their contractual terms but are adversely classified because
they exhibit one or more well-defined weaknesses. Management monitors the
Company's assets regularly, classifies any problem assets, and provides specific
or general valuation allowances when necessary and appropriate.
Total classified assets of the Company decreased to $4.4 million, or
1.02% of total assets, at June 30, 1999 from $5.1 million, or 1.13% of assets,
at December 31, 1998. At June 30, 1999, the Company had $4.4 million of assets
classified as substandard and no assets classified as doubtful or loss.
Substandard assets are comprised of loans with identified risk characteristics
indicating the asset maybe inadequately protected by the current net worth and
paying capacity of the obligor or of the collateral pledged. The largest
substandard loan at June 30, 1999 was a one-to-four family residential mortgage
with an outstanding principal balance of $314,050.
The majority of the Company's mortgage loans are secured by real estate
located within the state of California. The majority of such loans 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
In connection with the insurance of its deposits by the Federal Deposit
Insurance Corporation ("FDIC") and general regulatory oversight by the Office of
Thrift Supervision ("OTS"), the Bank is required to maintain minimum levels of
regulatory capital, including tangible, core and risk-based capital. At June 30,
1999 and December 31, 1998, the Bank was in compliance with all regulatory
capital requirements. OTS prompt corrective action (PCA) regulations include
five capital tiers ranging
15
<PAGE>
from well capitalized to critically undercapitalized. At June 30, 1999 and
December 31, 1998, the Bank met the definition of a well-capitalized
institution.
<TABLE>
The following table sets forth the Bank's capital amounts and ratios
regarding actual and minimum tangible, core, and risk-based capital
requirements, together with the amounts and ratios required in order to meet the
definition of a "well capitalized" institution.
<CAPTION>
Minimum Capital Well Capitalized
Requirements Requirements Actual
--------------------- --------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
-------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1999:
Total capital
(to risk-weighted assets) $24,545 8.00% $30,681 10.00% $34,207 11.15%
Tier 1 capital
(to risk-weighted assets) N/A N/A 18,409 6.00% 31,309 10.30%
Tier 1 capital
(to adjusted assets) 17,752 4.00% 21,565 5.00% 31,309 7.26%
Tangible capital
(to tangible assets) 6,469 1.50% N/A N/A 31,309 7.26%
As of December 31, 1998:
Total capital
(to risk-weighted assets) $21,980 8.00% $27,475 10.00% $31,882 11.60%
Tier 1 capital
(to risk-weighted assets) N/A N/A 16,334 6.00% 29,319 10.77%
Tier 1 capital
(to adjusted assets) 17,522 4.00% 21,902 5.00% 29,319 6.69%
Tangible capital
(to tangible assets) 6,571 1.50% N/A N/A 29,319 6.69%
</TABLE>
Liquidity
The Company's primary sources of funds are customer deposits,
principal, and interest payments on loans and mortgage-backed securities, FHLB
advances and other borrowings and, to a lesser extent, proceeds from sales of
securities and loans. While maturities and scheduled amortization of loans are
predictable sources of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions, and competition.
The Company is required by OTS regulations to maintain an average daily
balance of liquid assets in each calendar quarter of not less than 4% of either
the amount of its liquidity base at the end of the preceding calendar quarter or
the average daily balance of its liquidity base during the preceding calendar
quarter. In addition to this minimum requirement, the Bank is required to
maintain sufficient liquidity to ensure its safe and sound operations. The
minimum liquidity requirement may be changed by the OTS to any amount within the
range of 4% to 10%, depending upon economic conditions and the savings deposit
flows of savings institutions. Monetary penalties may be imposed for failure to
meet these liquidity requirements. The Bank's average liquidity ratio for the
quarter ended June 30, 1999 was 8.8%, which exceeded the then-applicable
requirements. The Bank has never been subject to monetary penalties for failure
to meet its liquidity requirements. The Company's strategy generally is to
maintain its liquidity ratio at or near the required minimum in order to
maximize its yield on alternative investments.
16
<PAGE>
Year 2000
The "Year 2000 issue" relates to the fact that many computer programs
use only two digits to represent a year, such as "98" to represent "1998," which
means that in the Year 2000 such programs could incorrectly treat the Year 2000
as the year 1900. This issue has grown in importance as the use of computers and
microchips have become more pervasive throughout the economy, and
interdependencies between systems have multiplied. The issue must be recognized
as a business problem, rather than simply a computer problem, because of the way
its effects could ripple through the economy. The Year 2000 issue could
materially and adversely affect the Company either directly or indirectly. This
could happen if any of its critical computer systems or equipment containing
embedded logic fail, if the local infrastructure (electric power, phone system,
or water system) fails, if its significant vendors are adversely impacted, or if
its borrowers or depositors are adversely impacted by their internal systems or
those of their customers or suppliers. Failure of the Company to complete
testing and renovation of its critical systems on a timely basis, could have a
material adverse effect on the Company's financial condition and results of
operations, as could Year 2000 problems faced by others with whom the Company
does business.
Federal banking regulators have responsibility for supervision and
examination of banks to determine whether each institution has an effective plan
for identifying, renovating, testing and implementing solutions for Year 2000
processing and coordinating Year 2000 processing capabilities with its
customers, vendors and payment system partners. Bank examiners are also required
to assess the soundness of a bank's internal controls and to identify whether
further corrective action may be necessary to assure an appropriate level of
attention to Year 2000 processing capabilities.
The Company has a written plan to mitigate the risks associated with
the impact of the Year 2000. The plan directs the Company's Year 2000 activities
under the framework of the Federal Financial Institutions Examination Council
(FFIEC) five-step program. The FFIEC's five-step program includes the following
phases: awareness, assessment, renovation, validation, and implementation. The
awareness phase, which the Company has completed, discusses the Year 2000
problem and gains executive level support for the necessary resources to prepare
the Company for Year 2000 compliance. The assessment phase, which the Company
has also completed, assesses the size and complexity of the problem and details
the magnitude of the effort necessary to address the Year 2000 issues. Although
the awareness and assessment phases are completed, the Company will continue to
evaluate any new issues as they arise. In the renovation phase, which the
Company has substantially completed, the required incremental changes to
hardware and software components are tested. In the validation stage, which the
Company has also substantially completed, the hardware and software components
are tested. The implementation phase will be completed by September 30, 1999.
The Company is utilizing both internal and external sources to
identify, correct or reprogram, and test its systems for Year 2000 compliance.
The Company has identified fifteen applications which management believes are
material to the Company's operations. Based on information received from testing
results, the Company believes 100% of such applications are Year 2000 compliant
as of June 30, 1999. The testing of the mission critical systems for core
banking was completed May 31, 1999.
The core banking product includes software solutions for checking,
savings, time certificates of deposit, general ledger, accounts payable,
automated clearing house, individual retirement accounts, commercial, mortgage
and installment loans, proof of deposit and ancillary supporting products.
The Company is also making efforts to ensure that its customers,
particularly its significant customers, are aware of the Year 2000 problem. The
Company has sent Year 2000 correspondence to
17
<PAGE>
the Bank's significant deposit and loan customers. A customer of the bank is
deemed significant if the customer possesses any of the following
characteristics:
o Total indebtedness to the bank of $750,000 or more.
o Credit risk rating of five (substandard) or higher.
o The customers business is dependent on the use of high technology
and/or the electronic exchange of information.
o The customer's business is dependent on third party providers of data
processing services or products.
o An average ledger deposit balance greater than $100,000 and more than 12
transactions during the month.
The Company has amended its credit authorization documentation to include
consideration regarding the Year 2000 problem. The Company assesses its
significant customer's Year 2000 readiness and assigns an assessment of "low",
"medium", or "high" risks. Risk evaluation of the Bank's significant customers
was substantially completed by December 31, 1998. Any depositor determined to
have a high risk is scheduled for an evaluation by the Bank every 90 days until
the customer can be assigned a low risk assessment.
Additionally, the Company has conducted employee education classes on Year
2000 preparedness and customer education to attempt to minimize any customer
anxiety regarding Year 2000 issues. A customer and community education plan will
be implemented in the fourth quarter of 1999 to further inform the community on
the safety of money in banks.
Because of the range of possible issues and large number of variables
involved, it is impossible to quantify the total potential cost of the Year 2000
problems, or to determine the Company's worst-case scenario in the event the
Company's Year 2000 remediation efforts or the efforts of those with whom it
does business are not successful. In order to deal with the uncertainty
associated with the Year 2000 problem, the Company has developed a business
resumption contingency plan to address the possibility that efforts to mitigate
the Year 2000 risk are not successful either in whole or part. These plans
include manual and off-site processing of information for critical information
technology systems and increased cash on hand. The contingency plans, including
employee training, will be tested by August 15, 1999.
As of June 30, 1999, the Company had incurred approximately $250,000 in
total cumulative Year 2000 costs, which have been expensed as incurred. Year
2000-related costs have been funded from the continuing operations of the
Company and, as of March 31, 1999, have constituted approximately 2% of the
Company's information systems expenses for 1999. The Company estimates that
additional costs to complete Year 2000 compliance will be approximately $75,000.
This estimate includes the cost of purchasing hardware and licenses for software
programming tools, the cost of the time of internal staff and the cost of
consultants. The estimate does not include the time that internal staff is
devoting to testing programming changes. Certain information system projects at
the Company have been deferred as a result of the Company's Year 2000 compliance
efforts. However, these deferrals are not expected to have a material effect on
the Company's business.
Item 3. Quantitative and Qualitative Disclosure of Market Risk
For the above-captioned information, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Interest Rate
Sensitivity and Market Risk Analysis."
18
<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 June 11, 1999. At
the Annual Meeting, the Shareholders elected directors Marshall G. Delk,
Steven Franich, Stephen Hoffmann, and Gary Manfre to three year terms.
The following directors continued in office (their remaining terms
follow their names): Eugene R. Friend (one year); P.W. Bachan (two
years); Edward K. Banks (two years); Nicholas C. Biase (two years);
Diane Bordoni (one year); Donald K. Henrichsen (one year); McKenzie Moss
(one year); and Louis Resetar, Jr. (two years). The shareholders also
ratified the appointment of Deloitte & Touche, LLP, as independent
auditors of the Company for the year ending December 31, 1999.
<TABLE>
The vote on each matter was as follows:
<CAPTION>
1. For Directors:
Broker
For Withheld Non-Votes
------------ ------------- -------------
<S> <C> <C> <C>
Marshall G. Delk 3,003,804 203,865 -
Steven Franich 3,017,014 190,655 -
Stephen Hoffmann 2,999,670 207,999 -
Gary L. Manfre 3,017,563 190,106 -
2. Ratification of the appointment of Deloitte & Touche LLP, as
the independent auditors for the Company:
Broker
For Withheld Non-Votes
------------ ------------- -------------
3,166,655 14,152 26,862
</TABLE>
19
<PAGE>
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
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 Annual Report on Form 10-K for the year
ended December 31, 1998.
Exhibit 11.0 - Computation of per share earnings (filed herewith).
Exhibit 27.0 - Financial Data Schedule (filed herewith).
20
<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 6, 1999 By /s/ Marshall G. Delk
---------------------------- ----------------------------------
Marshall G. Delk
President, Chief Operating Officer
and Chief Financial Officer
21
<TABLE>
Exhibit No. 11. Statement re: Computation of Per Share Earnings for the six and
three months ended June 30, 1999 and 1998 (in thousands except
per share data).
<CAPTION>
Six Months Ended Three Months Ended
June 30, June, 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,706 $ 373 $ 902 $ (65)
======= ======= ======= =======
Basic weighted average shares outstanding 3,321 3,731 3,332 3,705
Common stock equivalents due to dilutive
effect of stock options 94 168 93 178
------- ------- ------- -------
Diluted weighted average common
shares outstanding 3,415 3,899 3,425 3,883
======= ======= ======= =======
Basic earnings (loss) per share $ .51 $ .09 $ .27 $ (.02)
======= ======= ======= =======
Diluted earnings (loss) per share $ .50 $ .09 $ .26 $ (.02)
======= ======= ======= =======
</TABLE>
22
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0
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