UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _________
Commission File Number: 0-24802
MONTEREY BAY BANCORP, INC.
(Exact Name Of Registrant As Specified In Its Charter)
DELAWARE 77-0381362
(State Or Other Jurisdiction Of (I.R.S. Employer Identification Number)
Incorporation Or Organization)
567 Auto Center Drive, Watsonville, California 95076
(Address Of Principal Executive Offices)(Zip Code)
(831) 768 - 4800
(Registrant's Telephone Number, Including Area Code)
WWW.MONTEREYBAYBANK.COM
(Registrant's Internet Site)
[email protected]
(Registrant's Electronic Mail Address)
Indicate by check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES ___X____ NO ________
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 3,315,054 shares of common
stock, par value $0.01 per share, were outstanding as of August 9, 2000.
1
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements Of Financial Condition As Of
June 30, 2000 (unaudited) And December 31, 1999 3 - 4
Consolidated Statements Of Operations (unaudited) For The Three
And Six Months Ended June 30, 2000 And June 30, 1999 5 - 6
Consolidated Statement Of Stockholders' Equity (unaudited) For The
Six Months Ended June 30, 2000 7
Consolidated Statements Of Cash Flows (unaudited) For The Six
Months Ended June 30, 2000 And June 30, 1999 8 - 9
Notes To Consolidated Financial Statements (unaudited) 10 - 15
Item 2. Management's Discussion And Analysis Of Financial Condition
And Results Of Operations 16 - 40
Item 3. Quantitative And Qualitative Disclosure About Market Risk 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 2. Changes In Securities 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Submission Of Matters To A Vote Of Security Holders 41 - 42
Item 5. Other Information 42
Item 6. Exhibits And Reports On Form 8-K 42
(a) Exhibits
(10.16) Employment Agreement Between Monterey Bay Bancorp, Inc.
And Mark R. Andino
(27) Financial Data Schedule
(b) Reports On Form 8-K
Signature Page 43
</TABLE>
2
<PAGE>
Item 1. Financial Statements
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(Dollars In Thousands, Except Per Share Amounts)
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 21,859 $ 12,833
Securities available for sale, at estimated fair value:
Investment securities (amortized cost of $7,690 and $11,456 at
June 30, 2000 and December 31, 1999, respectively) 7,470 11,463
Mortgage backed securities (amortized cost of $48,926 and $59,710
at June 30, 2000 and December 31, 1999, respectively) 46,715 57,716
Securities held to maturity, at amortized cost:
Mortgage backed securities (estimated fair value of $60
at December 31, 1999) -- 60
Loans held for sale -- --
Loans receivable held for investment (net of allowances for loan losses of
$4,156 at June 30, 2000 and $3,502 at December 31, 1999) 376,243 360,686
Investment in capital stock of the Federal Home Loan Bank, at cost 2,918 3,213
Accrued interest receivable 2,704 2,688
Premises and equipment, net 7,160 7,042
Core deposit premiums and other intangible assets, net 2,569 2,918
Real estate acquired via foreclosure, net 96 96
Other assets 4,658 4,112
-------- --------
TOTAL ASSETS $472,392 $462,827
======== ========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
3
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Continued)
JUNE 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(Dollars In Thousands, Except Per Share Amounts)
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Non-interest bearing demand deposits $ 17,473 $ 17,316
Interest bearing NOW accounts 35,863 31,385
Savings deposits 15,513 15,312
Money market deposits 92,014 81,245
Certificates of deposit 226,592 222,144
--------- ---------
Total deposits 387,455 367,402
--------- ---------
Advances from the Federal Home Loan Bank 40,582 49,582
Securities sold under agreements to repurchase -- 2,410
Accounts payable and other liabilities 3,035 2,630
--------- ---------
Total liabilities 431,072 422,024
--------- ---------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued) -- --
Common stock, $0.01 par value, 9,000,000 shares authorized;
4,492,085 issued at June 30, 2000 and December 31, 1999;
3,315,054 outstanding at June 30, 2000 and
3,422,637 outstanding at December 31, 1999 45 45
Additional paid-in capital 28,236 28,237
Retained earnings, substantially restricted 31,552 30,473
Unallocated ESOP shares (1,035) (1,150)
Treasury shares designated for compensation plans, at cost (68,653 shares
at June 30, 2000 and 126,330 shares at December 31, 1999) (661) (1,376)
Treasury stock, at cost (1,177,031 shares at June 30, 2000 and
1,069,448 shares at December 31, 1999) (15,386) (14,257)
Accumulated other comprehensive loss, net of taxes (1,431) (1,169)
----------- ----------
Total stockholders' equity 41,320 40,803
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 472,392 $ 462,827
========= =========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
4
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(Dollars In Thousands, Except Per Share Amounts)
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 8,117 $ 6,596 $15,853 $12,892
Mortgage backed securities 917 1,229 1,876 2,757
Investment securities and cash equivalents 377 348 732 749
---------- ---------- ---------- ----------
Total interest income 9,411 8,173 18,461 16,398
---------- ---------- ---------- ----------
INTEREST EXPENSE:
Deposit accounts 4,198 3,758 8,038 7,672
FHLB advances and other borrowings 661 510 1,379 1,047
---------- ---------- ---- ----- ----------
Total interest expense 4,859 4,268 9,417 8,719
---------- ---------- ---------- ----------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 4,552 3,905 9,044 7,679
PROVISION FOR LOAN LOSSES 775 200 1,025 420
---------- ----------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,777 3,705 8,019 7,259
---------- ----------- ---------- ----------
NON-INTEREST INCOME:
Gain (loss) on sale of mortgage backed securities
and investment securities, net 2 285 (77) 503
Commissions from sales of noninsured products 183 139 390 271
Customer service charges 312 243 592 476
Income from loan servicing 24 48 61 65
Other income 62 63 118 147
---------- ---------- ---------- ----------
Total non-interest income 583 778 1,084 1,462
---------- ---------- ---------- ----------
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
5
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Continued)
THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(Dollars In Thousands, Except Per Share Amounts)
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
----------------------------- -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
GENERAL & ADMINISTRATIVE EXPENSE:
Compensation and employee benefits 1,627 1,362 3,087 2,721
Occupancy and equipment 319 286 631 571
Deposit insurance premiums 46 41 93 83
Data processing fees 278 245 566 488
Legal and accounting expenses 132 121 342 228
Supplies, postage, telephone, and office expenses 170 146 358 287
Advertising and promotion 98 108 199 165
Amortization of intangible assets 175 174 349 349
Other expense 524 407 1,081 821
------- ------- ------- -------
Total general & administrative expense 3,369 2,890 6,706 5,713
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 991 1,593 2,397 3,008
INCOME TAX EXPENSE 437 691 1,044 1,302
------- ------- ------- -------
NET INCOME $ 554 $ 902 $ 1,353 $ 1,706
======= ======= ======= =======
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE $ 0.18 $ 0.28 $ 0.44 $ 0.53
======= ======= ======= =======
DILUTED EARNINGS PER SHARE $ 0.18 $ 0.27 $ 0.43 $ 0.51
======= ======= ======= =======
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
6
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000
(Dollars And Shares In Thousands)
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Treasury
Shares
Desig- Accum-
nated ulated
For Other
Addi- Unal- Com- Compre-
Common Stock tional Re- located pen- hensive Income
------------ Paid-In tained ESOP sation Treasury Income / ------
Shares Amount Capital Earnings Shares Plans Stock (Loss) Total
------ ------ ------- -------- ------ ----- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance At December 31, 1999 3,423 $45 $ 28,237 $ 30,473 $(1,150) $(1,376) $(14,257) $(1,169) $ 40,803
Purchase of treasury stock (120) (1,251) (1,251)
Director fees paid using treasury
stock 12 12 122 134
Dividends paid ($0.08 per share) (274) (274)
Amortization of stock
compensation (13) 115 715 817
Comprehensive income:
Net income 1,353 1,353
Other comprehensive income:
Change in net unrealized loss
on securities available for
sale, net of taxes of $(216) (307) (307)
Reclassification adjustment for
losses on securities available
for sale included in income,
net of taxes of $32 45 45
-----
Other comprehensive income, net (262)
-----
Total comprehensive income 1,091
-----
Balance at June 30, 2000 ------- ------- -------- -------- -------- ------- --------- -------- --------
3,315 $45 $ 28,236 $ 31,552 $(1,035) $ (661) $(15,386) $(1,431) $ 41,320
======= ======= ======== ======== ======== ======= ========= ======== ========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
7
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(Dollars In Thousands)
--------------------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED JUNE 30,
--------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,353 $ 1,706
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization of premises and equipment 218 237
Amortization of intangible assets 349 349
Amortization of purchase premiums, net of accretion of discounts 39 207
Amortization of deferred loan fees (142) (70)
Provision for loan losses 1,025 420
Provision for losses on real estate acquired via foreclosure -- 12
Federal Home Loan Bank stock dividends (111) (90)
Gross ESOP expense before dividends received on unallocated shares 163 242
Compensation expense associated with stock compensation plans 151 167
Loss (gain) on sale of investment and mortgage-backed securities 77 (503)
Gain on sale of loans (11) --
Gain on sale of real estate acquired via foreclosure -- (11)
Origination of loans held for sale (1,097) (5,390)
Proceeds from sales of loans held for sale 1,108 7,277
Increase in accrued interest receivable (16) (18)
(Increase) decrease in other assets (546) 45
Increase (decrease) in accounts payable and other liabilities 405 (416)
Other, net (437) (627)
------- -------
Net cash provided by operating activities 2,528 3,537
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans held for investment (15,557) (37,747)
Purchases of investment securities available for sale -- (7)
Proceeds from sales of investment securities available for sale 3,730 8,005
Purchases of mortgage backed securities available for sale (6,032) --
Principal repayments on mortgage backed securities 4,259 14,002
Proceeds from sales of mortgage backed securities available for sale 12,572 16,920
Redemptions of FHLB stock 406 --
Purchases of premises and equipment (336) (1,048)
------- -------
Net cash (used in) provided by investing activities (958) 125
------- -------
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
8
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
SIX MONTHS ENDED JUNE 30, 2000 AND JUNE 30, 1999
(Dollars In Thousands)
<CAPTION>
--------------------------------------------------------------------------------------------------------------
FOR THE SIX MONTHS
ENDED JUNE 30,
-----------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 20,053 (7,059)
(Repayments) proceeds of FHLB advances, net (9,000) (1,100)
(Repayments) proceeds of securities sold under agreements to repurchase, net (2,410) (1,960)
Cash dividends paid to stockholders (274) (246)
Purchases of treasury stock (1,251) --
Sales of treasury stock 122 346
Sales of treasury stock for stock compensation plans 216 --
------- -------
Net cash provided by (used in) financing activities 7,456 (10,019)
------- -------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 9,026 (6,357)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,833 16,951
------- -------
CASH & CASH EQUIVALENTS AT END OF PERIOD $21,859 $10,594
======= =======
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for:
Interest on deposits and borrowings $ 9,217 $ 8,747
Income taxes 2,050 1,664
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES
Loans transferred to held for investment, at market value 202 171
Real estate acquired in settlement of loans -- 280
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
9
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
--------------------------------------------------------------------------------
NOTE 1: Basis Of Presentation
The accompanying consolidated unaudited financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for annual
financial statements. In the opinion of management, all necessary adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation have been included. The results of operations for the six month
period ended June 30, 2000 are not necessarily indicative of the results that
may be expected for the entire fiscal year or any other interim period.
Monterey Bay Bancorp, Inc. ("MBBC") is the holding company for Monterey
Bay Bank ("Bank"). The Bank maintains a subsidiary, Portola Investment
Corporation ("Portola"). These three companies are referred to herein on a
consolidated basis as the "Company". The Company's headquarters are in
Watsonville, California. The Company offers a broad range of financial services
to both consumers and small businesses. All significant intercompany
transactions and balances have been eliminated. Certain reclassifications have
been made to prior year's consolidated financial statements to conform to the
current presentation.
These unaudited consolidated financial statements and the information
under the heading "Item 2. Management's Discussion And Analysis Of Financial
Condition And Results Of Operations" and the information under the heading "Item
3. Quantitative And Qualitative Disclosure About Market Risk" have been prepared
with presumption that users of this interim financial information have read, or
have access to, the most recent audited consolidated financial statements and
notes thereto of Monterey Bay Bancorp, Inc. for the fiscal year ended December
31, 1999 included in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999.
The preparation of the consolidated financial statements of Monterey
Bay Bancorp, Inc. and subsidiary requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
reported revenues and expenses for the periods covered. These estimates are
based on information available as of the date of the financial statements.
Therefore, actual results could significantly differ from those estimates.
10
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 2. Computation Of Earnings Per Share
The Company calculates earnings per share ("EPS") in accordance with
Statement Of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share". All of the Company's net income has been available to common
stockholders during the periods covered in this Form 10-Q.
Basic earnings per share are computed by dividing net income by the
weighted average common shares outstanding for the period. Diluted earnings per
share reflect the potential dilution that could occur if options or other
contracts to issue common stock were exercised and converted into common stock.
There was no difference in the numerator, net income, used in the
calculation of basic earnings per share and diluted earnings per share. The
denominator used in the calculation of basic earnings per share and diluted
earnings per share for the three and six month periods ended June 30, 2000 and
1999 is reconciled in the following table. The following table also reconciles
the calculation of the Company's Basic EPS and Diluted EPS for the periods
indicated.
<TABLE>
<CAPTION>
For The Three Months For The Six Months
Ended June 30, Ended June 30,
--------------------------- ---------------------------
(In Whole Dollars And Whole Shares)
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $ 554,000 $ 902,000 $1,353,000 $1,706,000
========== ========== ========== ==========
Average shares issued 4,492,085 4,492,085 4,492,085 4,492,085
Less weighted average:
Uncommitted ESOP shares (166,211) (202,149) (170,703) (206,641)
Non-vested stock award shares (71,322) (98,046) (71,664) (98,387)
Treasury shares (1,179,399) (956,700) (1,142,929) (962,491)
----------- ----------- ----------- -----------
Sub-total (1,416,932) (1,256,895) (1,385,296) (1,267,519)
----------- ----------- ----------- -----------
Weighted average BASIC shares outstanding 3,075,153 3,235,190 3,106,789 3,224,566
Add dilutive effect of:
Stock options 1,250 81,796 6,581 85,108
Stock awards 0 6,219 244 6,340
----------- ----------- ----------- -----------
Sub-total 1,250 88,015 6,825 91,448
----------- ----------- ----------- -----------
Weighted average DILUTED shares outstanding 3,076,403 3,323,205 3,113,614 3,316,014
========== ========== ========== ==========
Earnings per share:
BASIC EPS $ 0.18 $ 0.28 $ 0.44 $ 0.53
========== ========== ========== ==========
DILUTED EPS $ 0.18 $ 0.27 $ 0.43 $ 0.51
========== ========== ========== ==========
</TABLE>
11
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 3: Other Comprehensive Income
Currently, the Company's only source of other comprehensive income is
derived from unrealized gains and losses on the portfolios of investment and
mortgage backed securities classified as available for sale.
Reclassification adjustments, as defined by SFAS No. 130, for realized
net gains (losses) included in other comprehensive income for investment and
mortgage backed securities classified as available for sale for the six months
ended June 30, 2000 and 1999 are summarized as follows:
Six Months Ended June 30,
----------------------------
2000 1999
---- ----
(Dollars In Thousands)
Gross reclassification adjustment $ (77) $ 503
Tax benefit (expense) 32 (209)
----- -----
Reclassification adjustment, net of tax $ (45) $ 294
====== ======
A reconciliation of the net unrealized gain or loss on available for
sale securities recognized in other comprehensive income is as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------
2000 1999
---- ----
<S> <C> <C>
(Dollars In Thousands)
Holding loss arising during the period, net of tax $ (307) $ (884)
Reclassification adjustment, net of tax 45 (294)
----- -----
Net unrealized loss recognized in other comprehensive income $ (262) $(1,178)
======= ========
</TABLE>
NOTE 4: Cash & Cash Equivalents
For the purposes of reporting cash flows and the statement of financial
condition, cash & cash equivalents includes cash on hand, amounts due from
banks, federal funds sold, securities purchased under agreements to resell with
original maturities of 90 days or less, certificates of deposit with original
maturities of 90 days or less, investments in money market mutual funds, and US
Treasury securities with original maturities of 90 days or less.
12
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 5: Stock Option Plans
The Company maintains the Amended 1995 Incentive Stock Option Plan and
the 1995 Stock Option Plan For Outside Directors. Under these plans, stock
options typically vest over a five year time period. All outstanding stock
options under both of these plans vest upon a change in control of the Company.
The following tables summarize the combined status of these Plans:
<TABLE>
<CAPTION>
Stock Stock Average
Options Stock Options Exercise
Stock Stock Cumulatively Options Available Price Of
Options Options Vested And Cumulatively For Future Vested
Date Authorized Outstanding Outstanding Exercised Grants Options
---- ---------- ----------- ----------- --------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
December 31, 1999 512,036 362,597 239,853 80,150 69,289 $9.51
March 31, 2000 512,036 419,236 231,100 80,150 12,650 $9.51
June 30, 2000 757,929 474,236 245,282 80,150 203,543 $9.79
</TABLE>
Activity during the three and six months ended June 30, 2000 included:
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------- -------------
Granted 55,000 121,865
Canceled 0 10,226
Exercised 0 0
Vested 14,182 15,655
The exercise price of individual vested stock options ranged from a low
of $9.10 per share to a high of $16.60 per share as of June 30, 2000.
A proposal to amend the 1995 Incentive Stock Option Plan was approved
by stockholders at the Company's Annual Meeting of Stockholders held on May 25,
2000. The proposal included, among other factors, an increase in the number of
shares reserved for issuance to 660,000 shares (exclusive of 97,929 shares
reserved under the 1995 Stock Option Plan For Outside Directors) and a change in
the minimum exercise price of all new option grants to 110% of the fair market
value of the Company's common stock on the date of grant.
13
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 6: Stock Award Plans
The Company maintains two stock award plans: a Performance Equity
Program ("PEP") for Officers and a Recognition and Retention Plan ("RRP") for
Outside Directors. Awards under these plans typically vest over a five year time
period. Awards under the RRP are time-based, while awards under the PEP are both
time-based and performance-based. All outstanding stock awards under the plans
vest in the event of a change in control of the Company. The following tables
summarize the status of these plans:
<TABLE>
<CAPTION>
PEP: Stock
Stock Awards
Stock Stock Awards Available
Awards Awards Cumulatively For Future
Date Authorized Outstanding Vested Grants
---- ---------- ----------- ------ ------
<S> <C> <C> <C> <C>
December 31, 1999 141,677 30,864 79,038 31,775
March 31, 2000 141,677 59,212 79,038 3,427
June 30, 2000 141,677 57,263 81,737 2,677
</TABLE>
Activity during the three and six months ended June 30, 2000 included:
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------- -------------
Granted 750 29,744
Canceled 0 646
Vested 2,699 2,699
<TABLE>
<CAPTION>
RRP: Stock
Stock Awards
Stock Stock Awards Available
Awards Awards Cumulatively For Future
Date Authorized Outstanding Vested Grants
---- ---------- ----------- ------ ------
<S> <C> <C> <C> <C>
December 31, 1999 38,010 9,541 28,469 0
March 31, 2000 38,010 8,713 29,297 0
June 30, 2000 38,010 8,713 29,297 0
</TABLE>
Activity during the three and six months ended June 30, 2000 included:
Three Months Ended Six Months Ended
June 30, 2000 June 30, 2000
------------- -------------
Granted 0 0
Canceled 0 0
Vested 0 828
14
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 7: Commitments
At June 30, 2000, commitments maintained by the Company included
commitments to originate $15.5 million in various types of loans. The Company
maintained no firm commitments to purchase loans or securities, to assume
borrowings, or to sell loans or securities at June 30, 2000.
NOTE 8: Recent Accounting Pronouncements
SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities", was issued in June 1998 and amended by SFAS No. 138, issued in June
2000. The standard defines derivatives, requires that all derivatives be carried
at fair value, and provides for hedge accounting when certain conditions are
met. The requirements of SFAS No. 133 as amended by SFAS No. 138 will be
effective for the Company in the first quarter of the fiscal year beginning
January 1, 2001. Management does not expect the adoption of SFAS No. 133 as
amended by SFAS No. 138 to have a significant impact upon the Company's
financial statements.
15
<PAGE>
Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
Forward-looking Statements
Discussions of certain matters in this Report on Form 10-Q may
constitute forward-looking statements within the meaning of the Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities and
Exchange Act of 1934, as amended (the "Exchange Act"), and as such, may involve
risks and uncertainties. Forward-looking statements, which are based on certain
assumptions and describe future plans, strategies, and expectations, are
generally identifiable by the use of words such as "believe", "expect",
"intend", "anticipate", "estimate", "project", or similar expressions. These
forward-looking statements relate to, among other things, expectations of the
business environment in which Monterey Bay Bancorp, Inc. operates, projections
of future performance, potential future credit experience, perceived
opportunities in the market, and statements regarding the Company's mission and
vision. The Company's actual results, performance, and achievements may differ
materially from the results, performance, and achievements expressed or implied
in such forward-looking statements due to a wide range of factors. These factors
include, but are not limited to, changes in interest rates, general economic
conditions, legislative and regulatory changes, monetary and fiscal policies of
the US Government, real estate valuations, competition in the financial services
industry, and other risks detailed in the Company's reports filed with the
Securities and Exchange Commission ("SEC") from time to time, including the
Annual Report on Form 10-K for the fiscal year ended December 31, 1999. The
Company does not undertake, and specifically disclaims any obligation, to update
any forward-looking statements to reflect occurrences or unanticipated events or
circumstances after the date of such statements.
General
Monterey Bay Bancorp, Inc. (referred to herein on an unconsolidated
basis as "MBBC" and on a consolidated basis as the "Company") is a unitary
savings and loan holding company incorporated in 1994 under the laws of the
state of Delaware. MBBC currently maintains a single subsidiary company,
Monterey Bay Bank (the "Bank"), a federally chartered savings & loan. MBBC was
organized as the holding company for the Bank in connection with the Bank's
conversion from the mutual to stock form of ownership in 1995.
At June 30, 2000, the Company had $472.4 million in total assets,
$376.2 million in net loans receivable, and $387.5 million in total deposits.
The Company is subject to regulation by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation ("FDIC"). The principal executive
offices of the Company and the Bank are located at 567 Auto Center Drive,
Watsonville, California, 95076, telephone number (831) 768 - 4800, facsimile
number (831) 722 - 6794. The Company may also be contacted via electronic mail
at: [email protected]. The Bank is a member of the Federal Home Loan Bank
of San Francisco ("FHLB") and its deposits are insured by the FDIC to the
maximum extent permitted by law.
The Company conducts business from eight branch offices and its
administrative facilities. In addition, the Company supports its customers
through 24 hour telephone banking and ATM access through an array of networks
including STAR, CIRRUS, and PLUS. Through its network of banking offices, the
Bank emphasizes personalized service focused upon two primary markets:
households and small businesses. The Bank offers a wide complement of lending
and deposit products. The Bank also supports its customers by functioning as a
federal tax depository, selling and purchasing foreign banknotes, issuing debit
cards, providing domestic and international collection services, and supplying
various forms of electronic funds transfer. Through its wholly-owned subsidiary,
Portola Investment Corporation ("Portola"), the Bank provides, on an agency
basis, mortgage life insurance, fire insurance, and a large selection of
non-FDIC insured investment products including annuities, mutual funds, and
individual securities.
The Company's revenues are primarily derived from interest on its loan
and mortgage backed securities portfolios, interest and dividends on its
investment securities, and fee income associated with the provision of various
customer services. Interest paid on deposits and borrowings constitutes the
Company's largest type of expense. The Company's primary sources of funds are
deposits, principal and interest payments on its asset portfolios, and various
sources of wholesale borrowings including FHLB advances and securities sold
under agreements to repurchase. The Company's most significant operating
expenditures are its staffing expenses and the costs associated with maintaining
its branch network.
16
<PAGE>
Recent Developments
Congress, the SEC, and the Federal Administration continue to consider
a series of issues that may impact the financial services industry, including
the Company. These issues include:
o the potential reform of bankruptcy legislation
o the possible privatization of or reduced government support for certain
government sponsored enterprises, most notably the Federal Home Loan
Mortgage Corporation ("FHLMC") and the Federal National Mortgage
Association ("FNMA")
o new capital and membership rules for the FHLB System
o the potential merger of the bank and thrift deposit insurance funds
o a possible increase in (e.g. from $100,000 to $200,000 per depositor) or
broadening of (e.g. all public agency deposits) federal deposit insurance
coverage
o potential new federal regulations involving the privacy of customer
information (the State of California has also recently been considering
this issue)
o the possible elimination of prohibitions on the payment of interest by the
Federal Reserve on bank reserves and by insured depository institutions on
commercial demand deposits
o various topics related to the growing presence and impact of the Internet,
from the validity of electronic signatures to controls over digital
certificates representing monetary value to taxation
o potential changes in the methodology used by insured depository
institutions to account for loan loss reserves
In addition, legislators and regulators continue to develop new laws
and rules as a result of implementing the landmark Gramm-Leach-Bliley Act, which
modified laws that had governed and controlled the financial services industry
for more than 50 years. The Company is unable to predict what, if any,
legislation or regulation might be enacted and the potential impact of such
legislation or regulation upon the Company's financial condition or results of
operations.
Since mid-1999, the Federal Reserve has implemented six interest rate
increases totaling 175 basis points in the target federal funds rate in response
to various US economic trends, including low unemployment, strong expansion in
gross domestic product, and increases in the consumer price index. While the
Company, through its strategic plan and asset / liability management program,
has been able to increase its net interest income during this time period,
additional future increases in interest rates could unfavorably impact the
Company due to a number of factors, including the potential negative impacts
upon the demand for loans and upon delinquencies. With further increases in
general market interest rates, delinquencies might rise due to larger demands on
customer cash flows associated with variable rate loans and due to reduced
customer income should the higher general market interest rates slow the
economy. Future actions by the Federal Reserve and the impacts from such actions
are beyond the Company's ability to predict and control.
During the second quarter of 2000, Mr. Louis Resetar, Jr. and Mr.
Donald K. Henrichsen retired from the Board of Directors and became Directors
Emeritus. Mr. Josiah T. Austin's one year term on the Board of Directors expired
in May, 2000. However, the Board of Directors appointed Mr. Austin to a new term
on the Board effective July 27, 2000 through the next annual meeting of
stockholders. In May, 2000, Mr. C. Edward Holden joined the Company as its new
Chief Executive Officer and was named to the Board of Directors as Vice
Chairman. Mr. Eugene R. Friend retired as Chief Executive Officer upon the
appointment of Mr. Holden, and continues to serve the Company as Chairman of the
Board.
17
<PAGE>
Overview Of Business Activity
During the first half of 2000, the Company continued in its business
strategy of evolving away from its traditional savings and loan roots toward
more of a community banking orientation. Management has targeted this strategy
because of the belief that it presents the opportunity to better serve the
Greater Monterey Bay Area while also enhancing shareholder value.
During the first six months of 2000, progress was realized in loan
volume and mix, deposit volume and composition, and fee income generation,
particularly resulting from the sale of non-FDIC insured investment products
through Portola. To further enhance non-interest income, the Company adopted a
revised fee and service charge schedule effective July 1, 2000. This new
schedule is designed to provide avenues for customers to moderate fees via the
use of electronic features, while also generating increased revenue for the
Company in conjunction with those services which require a higher level of
manual support.
The Company neared 29,000 deposit accounts at the end of the second
quarter of 2000, representing a new high. The Company regularly encourages and
supports its employees' contributions to community organizations targeted at
improving the quality of life in the Greater Monterey Bay Area and helping those
individuals and groups in need of assistance. In addition, the Company provides
direct financial support to a range of local organizations, including a
substantial pledge this year to foster education.
The Company's hiring of a Chief Executive Officer with extensive
commercial banking experience constituted another step in progressing along its
strategic plan. The new Chief Executive Officer materially augments the
management team's knowledge of designing, implementing, and profitably
delivering a broader range of financial products and services to small
businesses.
During the first half of 2000, the Company continued to pursue several
tactical and strategic objectives. These objectives include collection of the
$5.0 million non-accrual loan extended by MBBC, the introduction of Internet
Banking to the Company's customer base, and the signing of a contract for a new
core data processing system. The Company's Internet Banking product is currently
undergoing employee testing, with introduction to customers planned for later in
the year. The Company has been negotiating a contract for a new core data
processing system, with the goal of being able to offer a broader range of
financial products and services, particularly for small businesses, before the
end of 2001. The new core data processing system is also being pursued as an
avenue to improve the Company's productivity and thereby enhance its efficiency
ratio.
Thus far in 2000, the Company's primary market areas continued to see
high demand for housing, strong real estate price appreciation, population
increases, and economic expansion. The Company's primary market areas have also
benefited from the ongoing growth in employment, geography, and financial
capacity of the adjacent, technology oriented Silicon Valley area of the San
Francisco Bay Area. A significant proposal was recently circulated that would
lead to the addition of approximately 20,000 new technology related jobs in the
Coyote Valley area in the Highway 101 corridor stretching south from San Jose
toward Morgan Hill.
By the end of the second quarter, however, housing related activity
began to slow in the Company's market areas, likely at least in part due to the
impact of general market interest rate increases by the Federal Reserve. As a
result, the Company's loan pipeline experienced some weakening at the end of the
second quarter versus that experienced earlier in the year.
At its July 27, 2000 meeting, the Board of Directors determined to
indefinitely suspend the declaration and payment of cash dividends. The Board of
Directors concluded that, at this time, the payment of cash dividends did not
represent the best use of the Company's capital.
The Company intends to continue pursuing this business strategy,
explained in greater detail in the Company's Annual Report on Form 10-K for
1999, while seeking avenues for further growth in market share and product
diversification. Management believes that the continued consolidation occurring
in the financial services industry will present opportunities to acquire
personnel, branches, and customers from institutions being sold.
18
<PAGE>
Changes In Financial Condition From December 31, 1999 To June 30, 2000
Total assets increased $9.6 million, or 2.1%, from $462.8 million at
December 31, 1999 to $472.4 million at June 30, 2000. This rise in assets was
primarily fueled by a strong deposit performance.
Cash & cash equivalents rose from $12.8 million at December 31, 1999 to
$21.9 million at June 30, 2000. The Company received payoffs on several
comparatively large loans late in the second quarter, with the associated funds
maintained in interest bearing cash equivalents at June 30, 2000. The Company
intends to reinvest these funds into loans or securities and thereby reduce the
balance of cash & cash equivalents in order to increase asset yield.
Investment and mortgage backed securities available for sale decreased
from $69.2 million at December 31, 1999 to $54.2 million at June 30, 2000. The
Company sold $12.6 million in mortgage backed securities and $3.7 million in
investment securities in 2000. These sales, which were concentrated in the
second quarter, were conducted to:
o generate cash for funding loan originations
o reduce the Company's sensitivity to changes in general market interest
rates, via the sale of higher duration securities
o shift the Bank's asset allocation towards those assets, including
securities, which qualify under the Qualified Thrift Lender test
Security purchases during 2000 have been concentrated in low duration, high cash
flow, primarily Agency collateralized mortgage obligations in order to avoid
adding long term, fixed rate assets to the balance sheet and in order to furnish
a recurring source of cash in future periods for lending. Management anticipates
continuing the above pattern of security purchases and sales during the second
half of 2000, subject to business and market conditions.
Net loans receivable held for investment rose from $360.7 million at
December 31, 1999 to $376.2 million at June 30, 2000 on the strength of $68.0
million in credit commitments during the first half of 2000. The increase in
loans was concentrated in the commercial & industrial real estate loan
portfolio, as the Company continued the diversification of its balance sheet
away from the historical concentration in residential mortgage related assets.
Residential loans as a percentage of gross loans declined from 43.4% to 42.0%
during the first half of 2000. At the same time, commercial & industrial real
estate loans increased from 18.6% to 23.9% of gross loans.
During the second quarter of 2000, the Company augmented its "Business
Express" line of credit product aimed at relatively small businesses operating
in the Company's local communities with increased marketing for $100,000 to
$250,000 business lines of credit among more established and / or larger
commercial enterprises. Outstanding balances of business lines of credit
increased from $1.0 million at December 31, 1999 to $1.4 million at June 30,
2000.
The Company's increasing volume of commercial & industrial real estate
loans has reduced the Bank's qualified thrift lender test results, with the
qualified thrift lender ratio declining from 70.4% at December 31, 1999 to 68.2%
at June 30, 2000. Because the regulatory limit for the Qualified Thrift Lender
ratio is 65.0%, management is considering a number of alternatives, including:
o sales of non-qualified assets, including securities
o altering loan pricing and marketing to encourage increased origination of
qualified credits
o moderately leveraging the balance sheet through the addition of assets
which qualify under the test
o applying for a commercial bank charter
19
<PAGE>
Additional information regarding the composition of the Company's loan
portfolio is presented in the following table:
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
(Dollars In Thousands)
Held for investment:
Loans secured by real estate:
Residential one to four unit $168,497 $168,465
Multifamily five or more units 44,798 42,173
Commercial and industrial 95,711 72,344
Construction 64,668 79,034
Land 13,797 13,930
-------- --------
Sub-total loans secured by real estate 387,471 375,946
Other loans:
Home equity lines of credit 4,652 3,968
Loans secured by deposits 511 385
Consumer lines of credit, unsecured 149 202
Business term loans 6,718 6,670
Business lines of credit 1,387 1,027
-------- --------
Sub-total other loans 13,417 12,252
Sub-total gross loans held for investment 400,888 388,198
(Less) / Plus:
Undisbursed construction loan funds (20,375) (23,863)
Unamortized purchase premiums, net of purchase discounts 109 134
Deferred loan fees and costs, net (223) (281)
Allowance for estimated loan losses (4,156) (3,502)
-------- --------
Loans receivable held for investment, net $376,243 $360,686
======== ========
Held for sale:
Residential one to four unit $ -- $ --
======== ========
</TABLE>
Although there were no loans held for sale at June 30, 2000, the
Company continues to originate fixed rate residential loans for sale into the
secondary market on a servicing released basis. This practice allows the Company
to provide a full range of residential loan products to its customers without
adding to the Company's sensitivity to rising interest rates. The Company
generally sells the loans on a servicing released (versus retained) basis
because of management's belief that servicing released sales present a better
financial return.
Premises and equipment increased slightly in 2000 primarily due to the
Company's remodeling of one branch in order to sub-lease space to a tenant later
this year.
Intangible assets declined by $349 thousand during the first half of
2000 in conjunction with periodic amortization. Under OTS regulations,
intangible assets net of associated deferred tax liabilities reduce regulatory
capital, resulting in lower regulatory capital ratios than would otherwise be
the case.
20
<PAGE>
Total deposits increased from $367.4 million at December 31, 1999 to a
record $387.5 million at June 30, 2000. Key trends within the deposit portfolio
included:
o Checking account balances continued to rise during the second quarter of
2000, and have now increased $4.6 million year to date. The Company has
targeted increases in checking account balances as a source of low cost
funds and non-interest income. Initiatives employed by the Company in
expanding the checking account base have included the introduction of a
new, highly tiered SuperNOW product, an internal employee incentive
campaign to generate new checking accounts, ongoing advertising support,
and checking account options viewed as desirable by consumers including
imaged statements and debit card access. The Company plans to augment its
sales and marketing of checking accounts later in 2000 with the
introduction of Internet Banking.
o Customers reacted positively to the Bank's new "Money Market Plus" deposit
account, which provides competitive, highly tiered rates for liquid funds.
In conjunction with this product, total money market deposits rose from
$81.2 million at December 31, 1999 to $92.0 million six months later.
o Certificate of deposit balances rose $4.4 million during the first half of
2000, as the Company continued two key sales efforts for this product line.
Premium CD rates are made available to customers for whom the Bank is their
primary financial services provider. The Company also promotes "CD
Specials" of various terms and with various minimum balance requirements in
response to competitive actions and in order to attract funds consistent
with its asset / liability management program.
o Transaction accounts constituted 41.5% of total deposits at June 30, 2000,
up from 39.5% six months earlier. This change in deposit mix is integral to
the Company's strategic plan, as transaction accounts provide for a lower
cost of funds versus most other funding sources, furnish opportunities for
cross-selling other products and services to customers, are less interest
rate sensitive than many other funding sources, and generate fee income.
During the second quarter of 2000, the Bank commenced limited direct
marketing of certificates of deposit to targeted potential customer segments
identified as presenting a propensity to invest in that product line. At June
30, 2000, this program had attracted $443 thousand in new funds.
The Bank recently became eligible for participation in a deposit
placement program sponsored by the State of California. The Company anticipates
acquiring relatively attractively priced funding, in the form of certificates of
deposit, via this program in future periods.
The Company's ratio of loans to deposits declined from 98.2% at
December 31, 1999 to 97.1% at June 30, 2000, as the strong deposit growth
eclipsed the expansion in loans. In light of this ratio, the Company is
exploring various strategic alternatives for increasing its funding base,
including new sites for traditional stand-alone branches and sites for branches
domiciled within larger retail outlets. No assurance can, however, be provided
that the Company will be successful in obtaining additional distribution and
sales locations.
Borrowings declined from $52.0 million at December 31, 1999 to $40.6
million at June 30, 2000, all of which was then comprised of FHLB advances.
During the first quarter of 2000, MBBC repaid all of its securities sold under
agreements to repurchase in conjunction with the sale of the associated
securities. Over the past six months, the Company has used deposit inflows and
cash flows from the amortization and sale of securities to repay $9.0 million in
FHLB advances. The next scheduled maturity of the Company's borrowings is in
January, 2001.
21
<PAGE>
Total stockholders' equity increased from $40.8 million at December 31,
1999 to $41.3 million at June 30, 2000. Factors contributing to the increase
included:
o $1.35 million in 2000 year to date net income
o continued amortization of deferred stock compensation, including
accelerated amortization of certain shares during the most recent quarter
in conjunction with the settlement of certain non-qualified benefits
obligations payable in Company common stock
o the election by certain Directors to have their Directors fees paid with
common stock
The above factors more than offset:
o the repurchase of 120,000 of the Company's common shares on the open market
for $1.25 million during the first quarter of 2000
o the payment of $274 thousand in cash dividends (equivalent to $0.08 per
share) during the first quarter of 2000
o a reduction in the fair market value of the portfolios of investments
designated as available for sale
The Company's tangible book value per share was $11.69 at June 30, 2000.
This figure will be favorably impacted during the third quarter of 2000 by the
vesting of a particularly large volume of deferred stock compensation. The
vesting of deferred stock compensation decreases the contra-equity balance
associated with those programs, thereby increasing the book value of the
Company.
22
<PAGE>
Interest Rate Risk Management And Exposure
In an effort to limit the Company's exposure to interest rate changes,
management monitors and evaluates interest rate risk on a regular basis,
including participation in the OTS Net Portfolio Value Model and associated
regulatory reporting. Management acknowledges that interest rate risk and credit
risk compose the two greatest financial exposures faced by the Company in the
normal course of its business. The Company is not directly exposed to risks
associated with commodity prices or fluctuations in foreign currency values.
In recent quarters, the Company has maintained a net liability
sensitivity in regards to net portfolio value, also referred to as market value
of portfolio equity. This means that the fair value of the Company's assets is
more volatile than that of its liabilities. This net liability sensitivity
primarily arises from the longer term, fixed rate real estate loans and mortgage
related securities maintained on the Company's balance sheet, for which the
Company's only current match funding sources are demand deposit accounts, non
interest bearing liabilities, a segment of core deposit transaction accounts,
certain borrowings, and capital. A net liability sensitive position typically
translates to improved net portfolio value during periods of falling general
market interest rates. Conversely, this position presents the likelihood of
reductions in net portfolio value during increasing rate environments. However,
in addition to the overall direction of general market interest rates, changes
in relative rates (i.e. the slope of the term structure of interest rates) and
relative credit spreads also impact net portfolio value and the Company's
profitability.
Factors impacting the Company's net liability sensitivity during the
first half of 2000 and forecast to affect the Company's interest rate exposure
throughout 2000 include:
Factors reducing net liability sensitivity:
o The $15.6 million rise in transaction account balances during
the first half of 2000, as transaction deposit accounts are
typically less interest rate sensitive than many other sources
of funding. The Company intends to continue pursuing growth in
transaction deposits throughout 2000 as an integral part of
its business strategy.
o The sale of $10.5 million in high duration mortgage backed
securities during the first half of 2000. Further such sales
are possible later in 2000 depending upon market conditions
and cash needs.
o The continued amortization and prepayment of long term, fixed
rate loans and mortgage backed securities combined with the
sale of most new, long term, fixed rate loans into the
secondary market and the focus of new security purchases in
lower duration instruments.
o The pending conversion during the last two quarters of 2000 of
approximately $30.4 million in previously purchased "hybrid"
residential loans from fixed rate to floating rate.
o The Company's pricing for new loan originations has been
skewed to encourage adjustable rate lending and hybrid lending
with shorter initial fixed rate periods (e.g. 3 years versus 5
to 7 years).
o The recent introduction of a new, Prime-based owner
construction loan product that continues to effectively serve
that target market while also generating relatively interest
sensitive assets.
Factors increasing net liability sensitivity:
o Slowing prepayments on certain fixed rate whole loan and
mortgage related security positions in conjunction with
reduced consumer refinance activity. The slower prepayment
rates increase the average lives of these assets and provide
less periodic cash flow for reinvestment into alternative
assets that would likely be more interest rate sensitive.
o The reduced duration of the Company's borrowings, as few new
borrowings have been added and the existing portfolio moves,
over time, towards the maturity dates of the individual FHLB
advances.
23
<PAGE>
Liquidity
Liquidity is actively managed to ensure sufficient funds are available
to meet ongoing needs of both the Company in general and the Bank in particular.
Liquidity management includes projections of future sources and uses of funds to
ensure the availability of sufficient liquid reserves to provide for
unanticipated circumstances. The Company's primary sources of funds are customer
deposits, principal and interest payments on loans and securities, FHLB advances
and other borrowings, and, to a lesser extent, proceeds from sales of loans and
securities. While maturities and scheduled amortization of loans and securities
are predictable sources of funds, deposit flows and prepayments on mortgage
related assets are significantly influenced by general market interest rates,
economic conditions, and competition.
At June 30, 2000, the Company maintained $21.9 million in cash and cash
equivalents, untapped borrowing capacity in excess of $125 million at the
FHLB-SF, and significant excess collateral in both loans and securities;
collateral which is available for either liquidation or secured borrowings in
order to meet future liquidity requirements. During 2000, MBBC and the Bank each
entered into several Master Repurchase Agreements to permit securities sold
under agreements to repurchase transactions with a greater number of
counterparties. In addition, at June 30, 2000, the Bank maintained $25.5 million
in unsecured federal funds lines of credit from four correspondent financial
institutions. However, there can be no assurance that funds from these lines of
credit will be available at all times, or that the line will be maintained in
future periods. The Bank has recently completed the steps necessary to be able
to issue wholesale "DTC" certificates of deposit through two large, national
investment banking firms as an additional source of liquidity.
Federal regulations currently require thrift institutions to maintain
an average daily balance of liquid assets (including cash, certain cash
equivalents, certain mortgage-related securities, certain mortgage loans with
the security of a first lien on residential property, and specified US
Government, state, and federal agency obligations) equal to at least 4.0% of
either (i) the average daily balance of its net withdrawable accounts plus short
term borrowings (the "liquidity base") during the preceding calendar quarter, or
(ii) the amount of the liquidity base at the end of the preceding calendar
quarter. This liquidity requirement may be changed from time to time by the OTS
to an amount within a range of 4.0% to 10.0% of such accounts and borrowings
depending upon economic conditions and the deposit flows of thrift institutions.
In addition, the Bank must comply with a general non-quantitative requirement to
maintain a safe and sound level of liquidity.
Throughout the first six months of 2000, the regulatory liquidity ratio
of the Bank exceeded regulatory requirements, with the average ratio for the
second quarter equaling 6.97%. The Company's strategy generally is to maintain
its regulatory liquidity ratio near the required minimum in order to maximize
borrowing capacity by pledging loans and securities and in order to maximize its
yield through alternative investments.
At June 30, 2000, MBBC had cash & cash equivalents of $557 thousand.
Following the sale of its security portfolio during the first quarter of 2000
and the use of those proceeds largely to repurchase shares, MBBC's primary
sources of funds are annual (December) payments from the Bank in conjunction
with the ESOP, the sale of Treasury shares in conjunction with stock
compensation plans, and payments on the $5.0 million commercial business term
loan primarily secured by stock in an insured depository institution and
maintained on non-accrual status at June 30, 2000. As this non-accrual loan
nears its late 2000 maturity, MBBC may encounter higher operating costs, and
cash outflows, in conjunction with its collection efforts for the debt. Due to
additional capital requirements implemented by the OTS for the Bank, the Bank is
currently limited in its ability to pay dividends to MBBC. As a result of the
foregoing, MBBC may be constrained in its ability to pay stockholder cash
dividends and / or repurchase additional shares of common stock in future
periods.
24
<PAGE>
Capital Resources And Regulatory Capital Compliance
The Federal Deposit Insurance Act of 1991 ("FDICIA") required the OTS
to implement a system providing for regulatory sanctions against institutions
that are not adequately capitalized. The severity of these sanctions increases
to the extent that an institution's capital falls further below the adequately
capitalized thresholds. Under FDICIA, the OTS issued the Prompt Corrective
Action ("PCA") regulations which established specific capital ratios for five
separate capital categories as set forth below:
<TABLE>
<CAPTION>
Core Capital Core Capital Total Capital
To Adjusted To To
Total Assets Risk-weighted Risk-weighted
(Leverage Ratio) Assets Assets
---------------- ------ ------
<S> <C> <C> <C>
Well capitalized 5% or above 6% or above 10% or above
Adequately capitalized 4% or above 4% or above 8% or above
Undercapitalized Under 4% Under 4% Under 8%
Significantly undercapitalized Under 3% Under 3% Under 6%
Critically undercapitalized Ratio of tangible equity to adjusted total assets of 2% or less
</TABLE>
The following table summarizes the capital ratios required by FDICIA
for an institution to be considered well capitalized and the Bank's regulatory
capital at June 30, 2000 as compared to such ratios.
<TABLE>
<CAPTION>
Core Capital Core Capital To Total Capital To
To Adjusted Risk-weighted Risk-weighted
Total Assets Assets Assets
----------------------- ----------------------- -----------------------
Balance Percent Balance Percent Balance Percent
------- ------- ------- ------- ------- -------
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Bank regulatory capital $34,697 7.43% $34,697 10.26% $38,653 11.43%
Well capitalized requirement 23,338 5.00% 20,290 6.00% 33,817 10.00%
------ ----- ------ ----- ------ ------
Excess $11,359 2.43% $14,407 4.26% $ 4,836 1.43%
======= ===== ======= ===== ======= =====
Adjusted assets (1) $466,763 $338,172 $338,172
======== ======== ========
-------------------------------------
<FN>
(1) The above line for "adjusted assets" refers to the term "adjusted total
assets" as defined in 12 C.F.R. Section 567.1(a) for purposes of core capital
requirements, and refers to the term "risk-weighted assets" as defined in C.F.R.
Section 567.1(bb) for purposes of risk-based capital requirements.
</FN>
</TABLE>
The Bank has been informed by the OTS that it is to maintain its
regulatory capital ratios at levels no less than those in effect at December 31,
1999 until further notice (see "Special Residential Loan Pool"). The following
table demonstrates the Bank's compliance with this institution-specific
regulatory capital requirement.
June 30, 2000 December 31, 1999
------------- -----------------
Core capital to adjusted total assets 7.43% 7.11%
Core capital to risk-weighted assets 10.26% 9.58%
Total capital to risk-weighted assets 11.43% 10.56%
25
<PAGE>
The Bank is also subject to OTS capital regulations under the Financial
Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA") and
amendments thereto. These regulations require the Bank to maintain: (a) tangible
capital of at least 1.5% of adjusted total assets (as defined in the
regulations), (b) core capital of at least 4.0% of adjusted total assets (as
defined in the regulations), and (c) total capital of at least 8.0% of
risk-weighted assets (as defined in the regulations).
The following table summarizes the regulatory capital requirements
under FIRREA for the Bank. As indicated in the table, the Bank's capital levels
at June 30, 2000 exceeded all three of the currently applicable minimum FIRREA
capital requirements.
Percent Of
Adjusted
(Dollars In Thousands) Total
Amount Assets
------ ------
Tangible Capital
----------------
Regulatory capital $34,697 7.43%
Minimum required 7,001 1.50%
----- -----
Excess $27,696 5.93%
======= =====
Core Capital
------------
Regulatory capital $34,697 7.43%
Minimum required 18,671 4.00%
------ -----
Excess $16,026 3.43%
======= =====
Percent Of
Risk-
weighted
Amount Assets
------ ------
Risk-based Capital
------------------
Regulatory capital $38,653 11.43%
Minimum required 27,054 8.00%
------ -----
Excess $11,599 3.43%
======= =====
At June 30, 2000, the Bank's regulatory capital levels exceeded the
thresholds required to be classified as a "well capitalized" institution. The
Bank's regulatory capital ratios detailed above do not reflect the additional
capital (and assets) maintained by MBBC. Management believes that, under current
regulations and institution-specific requirements, the Bank will continue to
meet its minimum capital requirements. However, events beyond the control of the
Bank, such as changing interest rates or a downturn in the economy or real
estate markets in the areas where the Bank has most of its loans, could
adversely affect future earnings and, consequently, the ability of the Bank to
meet its future minimum regulatory capital requirements.
26
<PAGE>
Asset Quality / Credit Profile
Non-performing Assets
The following table sets forth information regarding non-performing
assets at the dates indicated.
<TABLE>
<CAPTION>
(Dollars In Thousands) June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Outstanding Balances Before Valuation Reserves
----------------------------------------------
Non-accrual loans $ 6,364 $ 6,888
Loans 90 or more days delinquent and accruing interest -- --
Restructured loans in compliance with modified terms 970 1,294
------- -------
Total gross non-performing loans 7,334 8,182
Investment in foreclosed real estate before valuation reserves 96 96
Repossessed consumer assets -- --
------- -------
Total gross non-performing assets $ 7,430 $ 8,278
======= =======
Gross non-accrual loans to total loans 1.67% 1.89%
Gross non-performing loans to total loans 1.93% 2.25%
Gross non-performing assets to total assets 1.57% 1.79%
Allowance for loan losses $4,156 $3,502
Valuation allowances for foreclosed real estate $ -- $ --
</TABLE>
Non-accrual loans at June 30, 2000 consisted of two residential
mortgages totaling $228 thousand, two commercial real estate loans to a single
borrower totaling $1.1 million, and a $5.0 million term business loan extended
by MBBC primarily secured by the common stock of a depository institution. The
borrower for this business term loan is current in its payments. However, the
loan has been maintained on non-accrual status due to concern regarding the
borrower's potential sources of funds to repay the loan at maturity in December,
2000. The Company has established a $200 thousand specific reserve for this
loan. Real estate acquired via foreclosure at June 30, 2000 consisted of one
residential property.
Criticized And Classified Assets
The following table presents information concerning the Company's
inventory of criticized ("OAEM") and classified ("substandard" and lower)
assets. The category "OAEM" refers to "Other Assets Especially Mentioned", or
those assets which present indications of potential future credit deterioration.
(Dollars In Thousands) OAEM Substandard Doubtful Loss Total
---- ----------- -------- ---- -----
December 31, 1999 $7,940 $8,574 $ -- $ 200 $16,714
March 31, 2000 $5,116 $7,815 $ -- $ 200 $13,131
June 30, 2000 $3,048 $9,925 $ -- $ 200 $13,173
Classified assets as a percent of stockholders' equity increased from
21.5% at December 31, 1999 to 24.5% at June 30, 2000. The increase in
substandard loans during the second quarter of 2000 primarily stemmed from the
internal credit downgrade (from "OAEM") of a $1.9 million commercial real estate
loan. This loan is secured by two retail buildings in Monterey, California. The
downgrade resulted from poor operating cash flows stemming from vacancies, which
in turn was primarily associated with property management rather than local
market conditions. A specific reserve for this loan is not required at June 30,
2000 primarily due to a loan to value ratio below 60%.
27
<PAGE>
Impaired Loans
At June 30, 2000, the Company maintained total gross impaired loans,
before specific reserves, of $7.3 million, constituting 12 credits. This
compares to gross impaired loans of $8.2 million at December 31, 1999. Of the
total impaired loans at June 30, 2000, $1.0 million were either fully current or
exhibited only minor delinquency and were therefore maintained on accrual
status. Interest is accrued on impaired loans on a monthly basis except for
those loans that are 90 or more days delinquent or those loans which are less
than 90 days delinquent but where management has identified concerns regarding
the collection of the credit. For the six months ended June 30, 2000, accrued
interest on impaired loans was $6 thousand and interest of $357 thousand was
received in cash. If all non-accrual loans had been performing in accordance
with their original loan terms, the Company would have recorded interest income
of $435 thousand during the six months ended June 30, 2000, instead of interest
income actually recognized on cash payments of $322 thousand.
Special Residential Loan Pool
During 1998, the Bank purchased a $40.0 million residential mortgage
pool comprised of loans that presented a borrower credit profile and / or a loan
to value ratio outside of (less favorable than) the Bank's normal underwriting
criteria. To mitigate its credit risk for this portfolio, the Bank obtained a
scheduled principal / scheduled interest loan servicing agreement from the
seller. Further, this agreement also contained a warranty by the seller to
absorb any principal losses on the portfolio in exchange for the seller's
retention of a portion of the loans' yield through loan servicing fees. In
obtaining these favorable loan servicing terms, the Bank functionally aggregated
the credit risk for this loan pool into a single borrower credit risk to the
seller / servicer of the loans. The Bank was subsequently informed by the OTS
that structuring the purchase in this manner made the transaction an "extension
of credit" by the Bank to the seller / servicer, which, by virtue of its size,
violated the OTS' "Loans To One Borrower" regulation.
At June 30, 2000, the outstanding balance of this mortgage loan pool
was $31.45 million, with slightly more than $1.0 million receivable during July,
2000 based upon prepayments and scheduled principal for June, 2000. At December
31, 1999, the outstanding principal balance of this mortgage loan pool was $35.0
million, with $1.2 million in principal receivable during January, 2000. Because
the residential loans contain a substantial upward rate reset feature in the
year 2000, the Bank anticipates that the pool will continue experiencing
significant prepayments, particularly during the fourth quarter of 2000 when
there is a concentration of interest rate reset dates. The Bank continues to
report to the OTS in this regard on a monthly basis.
Through the July 20, 2000 regularly scheduled remittance date, the
seller / servicer performed per the loan servicing agreement, making scheduled
principal and interest payments to the Bank while also absorbing all credit
losses on the loan portfolio. However, during the second quarter of 2000, the
Company determined to allocate additional reserves for this loan pool due to
concerns regarding the future capacity of the seller / servicer to honor the
credit guaranty and because of the present delinquency and credit profile of the
loan pool. The Company continues to monitor the financial performance and
condition of the seller / servicer on a monthly basis. In addition, the Company
regularly analyzes the payment performance and credit profile of the remaining
outstanding loans. Recent information acquired by the Company in conjunction
with a review of foreclosure activity for the loan pool suggested that certain
loans may have incorporated relatively high original appraisals.
During the first quarter of 2000, the Bank was informed by the OTS
that:
1. all loans associated with this loan pool would be required to be assigned
to the 100% risk based capital category in calculating regulatory capital
ratios that incorporate risk weighted assets
2. the Bank's regulatory capital position at December 31, 1999 and thereafter
was mandated to reflect the above requirement
3. until further notice, the Bank's regulatory capital ratios were required to
be maintained at levels no lower than the levels at December 31, 1999
28
<PAGE>
Because remaining a "well capitalized" financial institution is
integral to the Bank's business strategy and due to the planned generation of
additional regulatory capital in 2000 through a combination of net income,
amortization of deferred stock compensation, and amortization of intangible
assets, management does not foresee that the aforementioned requirements will
have a material adverse impact upon the Company in 2000. However, depending upon
the tenure of and any potential modification of the additional requirements, as
determined by the OTS, such requirements could present an unfavorable impact
upon MBBC's liquidity and ability to pay cash dividends to stockholders and
conduct share repurchases, as a result of potential restrictions upon the Bank's
ability to pay dividends to MBBC.
Allowance For Loan Losses
The allowance for loan losses is established through a provision for
loan losses based on management's evaluation of the risks inherent in the loan
portfolio. In determining levels of risk, management considers a variety of
factors, including, but not limited to, asset classifications, economic trends,
industry experience and trends, geographic concentrations, estimated collateral
values, historical loan loss experience, and the Company's underwriting
policies. The allowance for loan losses is maintained at an amount management
considers adequate to cover losses in loans receivable which are deemed probable
and estimable. While management uses the best information available to make
these estimates, future adjustments to allowances may be necessary due to
economic, operating, regulatory, and other conditions that may be beyond the
Company's control. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgements different from those of management.
The following table presents activity in the Company's allowance for
loan losses during the six months ended June 30, 2000 and June 30, 1999:
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------
2000 1999
---- ----
Allowance For Loan Losses (Dollars In Thousands)
-------------------------
<S> <C> <C>
Balance at beginning of year $ 3,502 $ 2,780
Charge-offs: Residential one to four unit real estate loans (371) (113)
Recoveries -- --
Provision for loan losses 1,025 420
------- -------
Balance at March 31 $ 4,156 $ 3,087
======= =======
Ratio of net charge-offs during the period to average gross loans
outstanding during the period net of undisbursed loan funds 0.20% 0.07%
Additional ratios applicable to the allowance for loan losses include:
June 30, 2000 December 31, 1999
------------- -----------------
Allowance for loan losses as a percent of non-performing loans 56.67% 42.80%
Allowance for loan losses as a percent of gross loans receivable
net of undisbursed loan funds 1.09% 0.96%
Allowance for loan losses as a percent of classified assets 41.05% 39.91%
</TABLE>
29
<PAGE>
As subsequently discussed (see "Provision For Loan Losses"), the higher
provision for loan losses recorded during the first half of 2000 versus prior
year resulted from several factors, including a $371 thousand charge-off during
the second quarter of 2000, additional reserves for the Special Residential Loan
Pool described above, an increase in classified assets, growth in the size of
the loan portfolio, and from the portfolio's continuing diversification away
from its historic concentration in residential real estate. Management
anticipates that further growth in loans receivable and ongoing emphasis on the
origination of construction and commercial real estate loans will result in
future provisions and in an increase in the ratio of the allowance for loan
losses to loans outstanding. Experience across the financial services industry
indicates that construction and commercial real estate loans present greater
risks than residential real estate loans, and therefore should be accompanied by
suitably higher levels of reserves.
Comparison Of Operating Results For The Three Months And Six Months
Ended June 30, 2000 and June 30, 1999
General
For the quarter ended June 30, 2000, the Company reported net income of
$554 thousand, equivalent to $0.18 basic and diluted earnings per share. This
compares to net income of $902 thousand, or $0.28 basic earnings per share and
$0.27 diluted earnings per share, during the second quarter of 1999. Net income
during the first quarter of 2000 (the immediately preceding quarter) was $799
thousand, equivalent to $0.25 basic and diluted earnings per share.
For the six months ended June 30, 2000, the Company reported net income
of $1.35 million, equivalent to $0.44 basic earnings per share and $0.43 diluted
earnings per share. This compares to net income of $1.71 million, or $0.53 basic
earnings per share and $0.51 diluted earnings per share, during the first half
of 1999.
Primary factors which constrained earnings during 2000 versus the same
periods in 1999 included:
o increased provisions for loan losses
o less favorable results on the sale of securities
o higher operating costs
The above factors more than offset a strong expansion in net interest income,
increased levels of various types of non-interest income, and other beneficial
impacts arising from the Company's progress in achieving its strategic
transformation into a community commercial bank.
Interest Rate Environment
The table below presents an overview of the interest rate environment
during the most recent six quarters. Market interest rates generally trended
upward during this time period, with an acceleration starting in mid 1999, as
the Federal Reserve commenced what has become six separate increases totaling
175 basis points in its target federal funds rate. The Treasury yield curve
became steeper during 1999, after starting the year with just a 63 basis point
yield differential between a three month Treasury bill and a 30 year Treasury
bond. Then, in 2000, the Treasury curve inverted at the longer end, with the 30
year Treasury bond often presenting a lower yield to maturity than most of the
Treasury curve. This inversion stemmed from a number of factors, including the
US Government's repurchasing of longer dated Treasury securities in conjunction
with the growing federal budget surplus. By the end of the second quarter of
2000, various economic statistics suggested that the rate increases implemented
by the Federal Reserve, combined with higher energy prices, were slowing the
economy, particularly interest sensitive sectors such as housing and real
estate. The market reaction to these reports, combined with a diminishing supply
of Treasury securities, led to the entire Treasury curve providing a bond
equivalent yield below the Federal Reserve's targeted federal funds rate of
6.50% at June 30, 2000. Note that the 11th District Cost Of Funds Index ("COFI")
is by nature a lagging index that trails changes in more responsive interest
rate indices such as those associated with the Treasury or LIBOR markets.
30
<PAGE>
<TABLE>
<CAPTION>
Index 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99 3/31/00 6/30/00
----- -------- ------- ------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
3 month Treasury bill 4.46% 4.47% 4.76% 4.85% 5.31% 5.89% 5.86%
6 month Treasury bill 4.54% 4.52% 5.03% 4.96% 5.73% 6.14% 6.22%
1 year Treasury bill 4.52% 4.71% 5.05% 5.18% 5.96% 6.24% 6.06%
2 year Treasury note 4.53% 4.98% 5.52% 5.60% 6.24% 6.48% 6.36%
5 year Treasury note 4.54% 5.10% 5.65% 5.76% 6.34% 6.32% 6.18%
30 year Treasury bond 5.09% 5.62% 5.97% 6.05% 6.48% 5.84% 5.90%
Prime rate 7.75% 7.75% 7.75% 8.25% 8.50% 9.00% 9.50%
COFI 4.66% 4.52% 4.50% 4.61% 4.85% 5.00% 5.36%
</TABLE>
Net Interest Income
Net interest income rose $647 thousand (16.6%) from $3.9 million during
the quarter ended June 30, 1999 to $4.6 million during the most recent three
months. Net interest income for the first half of 2000 totaled $9.0 million, up
17.8% from $7.7 million during the first six months of 1999. These increases
resulted from a larger average balance sheet and improved spreads. The Company's
average margin on total assets improved from 3.41% during the first half of 1999
to 3.86% for the first six months of 2000. The Company's average margin on total
assets has remained relatively constant thus far in 2000 despite increases in
general market interest rates engineered by the Federal Reserve in large part
due to the Company's interest rate risk management program (see Item 2.
"Interest Rate Risk Analysis And Exposure"). Actions by management under this
program included locking in a significant volume of funding in late 1999 and
early 2000, with associated maturities distributed throughout the current year,
with a concentration at near the middle of 2000.
The following factors contributed toward the improvement in spreads
realized in 2000 versus 1999, coincident with the Company's ongoing
implementation of its strategic plan:
o Average loans as a percentage of average total assets increased from
71.3% during the first half of 1999 to 79.7% during the first six
months of 2000. This change in assets mix was particularly beneficial
to the Company's spreads because loans are, by a significant margin,
the Company's highest yielding asset category.
o Transaction deposit accounts comprised a greater percentage of average
total assets during the first half of 2000 (32.3%) than during the same
period a year earlier (28.9%). This change in funding mix was also
particularly beneficial to the Company's spreads, as transaction
deposit accounts present a significantly lower cost of funds than do
certificates of deposit and wholesale borrowings.
o The average rate on interest earning assets was 8.25% during the half
of 2000, up 67 basis points from a year earlier. In contrast, the
Company's average cost of interest bearing liabilities was just 13
basis points higher during the first half of 2000 than during the first
six months of 1999. The Company was able to constrain the average cost
of its funding in a rising general market interest rate environment by
the shift in the deposit mix and by having a portion of its wholesale
borrowings locked in at a fixed rate for an extended period of time.
o The increase in the average rate on interest earning assets during 2000
was fostered by the Company's shift in loan mix toward more interest
sensitive types of loans (e.g. commercial real estate) and more
interest sensitive products across all types of loans. The Company
recently introduced new adjustable rate loan products and new hybrid
loan products with three year initial fixed rates for income property
loans, aiming to shift business away from, for example, the less
interest rate sensitive 5 year fixed rate balloon and 5 year fixe rate
hybrid products.
31
<PAGE>
The following table presents the average annualized rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing liabilities, and the resulting net
interest spread, net interest margin, and average interest margin on total
assets for the three months ended June 30, 2000 and 1999. Annualized rates were
calculated by using the day counts (e.g. 30/360, actual/365) applicable to each
major category of financial instruments.
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 Three Months Ended June 30, 1999
---------------------------------------- ----------------------------------------
(Dollars In Thousands) Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets
------
Interest earning assets:
Cash equivalents (1) $ 7,933 $ 125 6.34% $ 9,544 $ 112 4.71%
Investment securities (2) 9,259 177 7.69% 12,906 195 6.06%
Mortgage backed securities (3) 52,406 917 7.00% 74,728 1,229 6.58%
Loans receivable, net (4) 379,860 8,117 8.55% 329,914 6,596 8.00%
FHLB stock 3,023 75 9.98% 3,118 41 5.27%
-------- -------- -------- --------
Total interest earning assets 452,481 9,411 8.32% 430,210 8,173 7.60%
Non-interest earnings assets 20,980 -------- 18,839 --------
-------- --------
Total assets $ 473,461 $ 449,049
========= =========
Liabilities & Equity
--------------------
Interest bearing liabilities:
NOW accounts $ 35,548 140 1.58% $ 23,159 89 1.54%
Savings accounts 15,429 68 1.77% 15,459 69 1.79%
Money market accounts 89,272 1,025 4.62% 83,123 862 4.16%
Certificates of deposit 227,228 2,965 5.25% 229,299 2,738 4.79%
-------- -------- -------- --------
Total interest-bearing deposits 367,477 4,198 4.59% 351,040 3,758 4.29%
FHLB advances 45,885 660 5.79% 33,593 461 5.50%
Other borrowings (5) 44 1 6.38% 3,399 49 5.78%
-------- -------- -------- --------
Total interest-bearing liabilities 413,406 4,859 4.73% 388,032 4,268 4.41%
Demand deposit accounts 17,221 -------- 17,591 --------
Other non-interest bearing liabilities 3,079 1,508
-------- --------
Total liabilities 433,706 407,131
Stockholders' equity 39,755 41,918
-------- --------
Total liabilities & equity $ 473,461 $ 449,049
========= =========
Net interest income $ 4,552 $ 3,905
======== ========
Interest rate spread (6) 3.59% 3.19%
Net interest earning assets 39,075 42,178
Net interest margin (7) 4.02% 3.63%
Net interest income /
average total assets 3.85% 3.48%
Interest earnings assets /
interest bearing liabilities 1.09 1.11
Average balances in the above table were calculated using average daily figures.
---------------------------------
<FN>
(1) Includes federal funds sold, money market fund investments, banker's acceptances, commercial paper, interest
earning deposit accounts, and securities purchased under agreements to resell.
(2) Includes investment securities both available for sale and held to maturity.
(3) Includes mortgage backed securities, including CMO's, both available for sale and held to maturity.
(4) In computing the average balance of loans receivable, non-accrual loans and loans held for sale have been
included. Amount is net of deferred loan fees, premiums and discounts, and undisbursed loan funds. Interest
income on loans includes amortized loan fees of $66,000 and $37,000 in 2000 and 1999, respectively.
(5) Includes federal funds purchased and securities sold under agreements to repurchase.
(6) Interest rate spread represents the difference between the average rate on interest earning assets and the
average rate on interest bearing liabilities.
(7) Net interest margin equals net interest income before provision for estimated loan losses divided by average
interest earning assets.
</FN>
</TABLE>
32
<PAGE>
The following table presents the average annualized rate earned upon
each major category of interest earning assets, the average annualized rate paid
for each major category of interest bearing liabilities, and the resulting net
interest spread, net interest margin, and average interest margin on total
assets for the six months ended June 30, 2000 and 1999. Annualized rates were
calculated by using the day counts (e.g. 30/360, actual/365) applicable to each
major category of financial instruments.
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 Six Months Ended June 30, 1999
---------------------------------------- ----------------------------------------
(Dollars In Thousands) Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
Assets
------
Interest earning assets:
Cash equivalents (1) $ 7,448 $ 225 6.08% $ 7,774 $ 182 4.72%
Investment securities (2) 10,360 386 7.49% 15,853 490 6.22%
Mortgage backed securities (3) 53,382 1,876 7.03% 84,413 2,757 6.53%
Loans receivable, net (4) 373,185 15,853 8.50% 321,365 12,892 8.02%
FHLB stock 3,136 121 7.76% 3,097 77 5.00%
-------- -------- -------- --------
Total interest earning assets 447,511 18,461 8.25% 432,502 16,398 7.58%
Non-interest earnings assets 20,565 -------- 18,469 --------
-------- --------
Total assets $ 468,076 $ 450,971
========= =========
Liabilities & Equity
--------------------
Interest bearing liabilities:
NOW accounts $ 33,462 261 1.57% $ 21,908 164 1.51%
Savings accounts 15,317 136 1.79% 15,380 137 1.80%
Money market accounts 85,746 1,898 4.45% 75,716 1,554 4.14%
Certificates of deposit 225,907 5,743 5.11% 238,768 5,817 4.91%
-------- -------- -------- --------
Total interest-bearing deposits 360,432 8,038 4.48% 351,772 7,672 4.40%
FHLB advances 47,749 1,369 5.76% 34,322 939 5.52%
Other borrowings (5) 333 10 6.04% 3,854 108 5.65%
-------- -------- -------- --------
Total interest-bearing liabilities 408,514 9,417 4.64% 389,948 8,719 4.51%
Demand deposit accounts 16,763 -------- 17,525 --------
Other non-interest bearing liabilities 3,085 1,882
-------- --------
Total liabilities 428,362 409,355
Stockholders' equity 39,714 41,616
-------- --------
Total liabilities & equity $ 468,076 $ 450,971
========= =========
Net interest income $9,044 $ 7,679
====== =======
Interest rate spread (6) 3.61% 3.07%
Net interest earning assets 38,997 42,554
Net interest margin (7) 4.04% 3.55%
Net interest income /
average total assets 3.86% 3.41%
Interest earnings assets /
interest bearing liabilities 1.10 1.11
Average balances in the above table were calculated using average daily figures.
--------------------------------------------
<FN>
(1) Includes federal funds sold, money market fund investments, banker's acceptances, commercial paper, interest
earning deposit accounts, and securities purchased under agreements to resell.
(2) Includes investment securities both available for sale and held to maturity.
(3) Includes mortgage backed securities, including CMO's, both available for sale and held to maturity.
(4) In computing the average balance of loans receivable, non-accrual loans and loans held for sale have been
included. Amount is net of deferred loan fees, premiums and discounts, and undisbursed loan funds. Interest
income on loans includes amortized loan fees of $142,000 and $70,000 in 2000 and 1999, respectively.
(5) Includes federal funds purchased and securities sold under agreements to repurchase.
(6) Interest rate spread represents the difference between the average rate on interest earning assets and the
average rate on interest bearing liabilities.
(7) Net interest margin equals net interest income before provision for estimated loan losses divided by average
interest earning assets.
</FN>
</TABLE>
33
<PAGE>
Rate / Volume Analysis
The following tables utilize the figures from the preceding two tables
to present a comparison of interest income and interest expense resulting from
changes in volumes and the rates on average interest earning assets and average
interest bearing liabilities for the periods indicated. Changes in interest
income or interest expense attributable to volume changes are calculated by
multiplying the change in volume by the prior period average interest rate. The
changes in interest income or interest expense attributable to interest rate
changes are calculated by multiplying the change in interest rate by the prior
year period volume. The changes in interest income or interest expense
attributable to the combined impact of changes in volume and changes in interest
rate are calculated by multiplying the change in rate by the change in volume.
Three Months Ended June 30, 2000
Compared To
Three Months Ended June 30, 1999
---------------------------------------
Volume
(Dollars In Thousands) Volume Rate / Rate Net
------ ---- ------ ---
Interest-earning assets
-----------------------
Cash equivalents $ (19) $ 39 $ (7) $ 13
Investment securities (55) 52 (15) (18)
Mortgage backed securities (367) 79 (24) (312)
Loans receivable, net 999 454 68 1,521
FHLB Stock (1) 36 (1) 34
----- ----- ----- -----
Total interest-earning assets 557 660 21 1,238
----- ----- ----- -----
Interest-bearing liabilities
----------------------------
NOW Accounts 48 2 1 51
Savings accounts -- (1) -- (1)
Money market accounts 64 95 4 163
Certificates of deposit (24) 263 (12) 227
----- ----- ----- -----
Total interest-bearing deposits 88 359 (7) 440
FHLB advances 169 25 5 199
Other borrowings (48) 5 (5) (48)
----- ----- ----- -----
Total interest-bearing liabilities 209 389 (7) 591
----- ----- ----- -----
Increase in net interest income $ 348 $ 271 $ 28 $ 647
===== ===== ===== =====
34
<PAGE>
Six Months Ended June 30, 2000
Compared To
Six Months Ended June 30, 1999
-----------------------------------
Volume
(Dollars In Thousands) Volume Rate / Rate Net
------ ---- ------ ---
Interest-earning assets
-----------------------
Cash equivalents $ (8) $ 53 $ (2) $ 43
Investment securities (171) 101 (34) (104)
Mortgage backed securities (1,014) 210 (77) (881)
Loans receivable, net 2,079 760 122 2,961
FHLB Stock 1 43 -- 44
------ ----- ------ -----
Total interest-earning assets 887 1,167 9 2,063
------ ----- ------ -----
Interest-bearing liabilities
----------------------------
NOW Accounts 87 7 3 97
Savings accounts (1) (1) 1 (1)
Money market accounts 208 121 15 344
Certificates of deposit (316) 251 (9) (74)
------ ------ ------ -----
Total interest-bearing deposits (22) 378 10 366
FHLB advances 370 43 17 430
Other borrowings (99) 8 (7) (98)
------ ------ ------ -----
Total interest-bearing liabilities 249 429 20 698
----- ----- ----- -----
Increase (decrease) in net interest income $ 638 $ 738 $ (11) $1,365
===== ===== ====== ======
Interest Income
Interest income increased from $8.2 million and $16.4 million during
the three and six months ended June 30, 1999 to $9.4 million and $18.5 million
during the three and six months ended June 30, 2000. This increase was primarily
due to:
o a shift in asset mix towards relatively higher yielding loans versus
securities, coincident with the Company's strategic plan of better
supporting its local communities with the delivery of credit
o a generally higher interest rate environment in 2000 versus 1999,
leading to greater amounts of interest income on adjustable rate loans
and new asset originations and purchases
o a larger average balance sheet during the three and six months ended
June 30, 2000 compared to the same periods during the prior year
Interest income on loans rose from $6.6 million during the three months
ended June 30, 1999 to $8.1 million during the most recent quarter. For the six
months ended June 30, 2000, interest income on loans totaled $15.9 million, up
23.0% from $12.9 million during the first half of 1999. The expansion in
interest income on loans during 2000 versus 1999 was due to a combination of
greater volumes and higher rates. The greater volume stemmed from the Company's
strong loan demand over the past year combined with a reduction in residential
loan prepayment rates during 2000 as higher general market interest rates slowed
customer refinance activity. The higher rates on loans resulted from two
factors:
o a loan mix which has become less concentrated in lower yielding
residential mortgages, in favor of higher yielding income property and
other non-residential loans
o the upward repricing of adjustable rate loans within the Company's loan
portfolio in conjunction with higher general market interest rates
35
<PAGE>
Interest income on cash equivalents rose from $112 thousand and $182
thousand for the three and six months ended June 30, 1999 to $125 thousand and
$225 thousand for the same periods in 2000. This increase occurred despite
reductions in average volumes, as the Company earned higher average interest
rates. The higher average interest rates stemmed from both the higher general
interest rate environment in 2000 and from the Company's enhanced cash
management practices in 2000. These enhanced cash management practices included
utilizing a wider range of short term investment products shopped among a
greater number of counterparties. In particular, the Company earned
comparatively attractive rates of return during 2000 on certain overnight
repurchase agreements collateralized with whole loans conducted with
counterparties presenting a strong credit profile.
Interest income on investment securities declined from $195 thousand
and $490 thousand during the three and six months ended June 30, 1999 to $177
thousand and $386 thousand during the same periods in 2000. This reduction
occurred as higher interest rates, particularly on LIBOR based, variable rate
corporate trust preferred securities, were insufficient to offset the impact of
lower average volumes stemming from the Company's strategic plan of shifting
assets into loans.
Interest income on mortgage backed securities fell from $1.2 million
and $2.8 million during the three and six months ended June 30, 1999 to $0.9
million and $1.9 million during the same periods in 2000. This reduction was
primarily caused by a reduction in volume, as the Company used the proceeds from
prepayments and sales of mortgage backed securities to reinvest into the loan
portfolio and, in 2000, repay FHLB advances. All securities purchased by the
Company in 2000 have been mortgage backed securities, primarily short term, low
duration, Agency collateralized mortgage obligations, as these assets provide a
steady stream of cash for reinvestment into loans, are relatively liquid, can be
easily used in collateralized borrowings, count under the Qualified Thrift
Lender test, and support the Company's interest rate risk management objectives.
Interest income on FHLB stock increased from $41 thousand and $77
thousand during the three and six months ended June 30, 1999 to $75 thousand and
$121 thousand during the same periods in 2000. This increase largely stemmed
from higher effective dividend rates, which in turn resulted from two factors:
o the higher general market interest rate environment in 2000 versus 1999
o the FHLB-SF decision to pay particularly high dividend rates during the
first half of 2000 in conjunction with its capital management plan
Interest Expense
Interest expense on deposits increased from $3.8 million and $7.7
million during the three and six months ended June 30, 1999 to $4.2 million and
$8.0 million during the same periods in 2000. These increases were due to both
higher average volumes and greater interest rates. The higher volumes occurred
in conjunction with the Company's plan to replace relatively expensive wholesale
borrowings with deposits, while being cognizant of the elasticity of demand for
deposits and effective marginal costs of funds. The higher general market
interest rate environment in 2000 led the Company to raise interest rates across
most of its deposit product line in order to remain competitive with both other
financial institutions and non-bank competitors including money market mutual
funds. The increase in interest expense during 2000 was, however, slowed by a
favorable change in deposit mix. For example, CD's represented 59.1% of average
total deposits during the second quarter of 2000, down from 62.2% during the
second quarter of 1999.
During 2000, the Company was particularly successful in promoting its
Money Market Plus account, its new Interest Checking Plus account, and its "40+"
NOW account. These products present attractive benefits to consumers. For
example, customers earn progressively higher interest rates on their Money
Market Plus and Interest Checking Plus accounts as their balances increase
through the products' multiple tiers. Customers utilizing a "40+" NOW account
obtain free Bank image checks and other free services. The Company intends to
introduce new transaction account products and services later in 2000 to further
reduce the concentration of CD's in the deposit portfolio.
36
<PAGE>
At June 30, 2000, the Company's weighted average nominal cost of
deposits was 4.48%, or 88 basis points below the COFI Index for the same date.
The Company utilizes a comparison of its cost of deposits and cost of funds to
COFI as one measure of relative performance.
Interest expense on borrowings increased from $0.5 million and $1.0
million during the three and six months ended June 30, 1999 to $0.7 million and
$1.4 million during the same periods in 2000. This rise was due to both an
increase in average volume and a rise in average interest rate. Average balances
increased to partially fund the growth in the loan portfolio, while interest
rates on maturing / rollover and new borrowings increased over the past eighteen
months in conjunction with higher rates in the Treasury and LIBOR markets.
Provision For Loan Losses
Provision for loan losses totaled $775 thousand during the three months
ended June 30, 2000, up from $200 thousand during the second quarter of 1999 and
$250 thousand during the first quarter of 2000. Provision for loan losses for
2000 year to date total $1,025 thousand, significantly above the $420 thousand
recorded during the first half of 1999. The significantly higher provision
during the second quarter of 2000 stemmed from multiple factors, as discussed
below.
During the second quarter of 2000, the Company recorded its first
charge-off of the year. The $371 thousand charge-off represented a relatively
unusual 100% loss on a residential mortgage. The subject home was impacted by a
significant landslide, which was sufficiently extensive to both damage the house
and eliminate any land value. The Company plans to pursue recovery through
financial participation in any proceeds from litigation being pursued by the
borrower.
Additional reserve allocations were made during the second quarter of
2000 for the Special Residential Loan Pool which the Company purchased in 1998.
While the seller has met all its contractual obligations through July, 2000, the
Company determined to allocate additional reserves due to concerns regarding the
future capacity of the seller to honor its credit guaranty and the present
delinquency profile of the mortgage pool.
Loans rated "substandard" by the Company increased from $7.8 million at
March 31, 2000 to $9.9 million at June 30, 2000. The Company allocates a greater
percentage of reserves against loans classified as substandard versus those
loans receiving a more favorable internal credit rating.
The size of the Company's loan portfolio increased during the second
quarter of 2000, and the mix of loans continued to evolve away from its historic
concentration in relatively lower risk residential mortgages. The Company
allocates reserves in accordance with both loan portfolio size and mix, with the
recent growth in commercial & industrial real estate loans in particular
generating a greater internal requirement for loan loss reserves.
Other factors contributing to the higher provision for loan losses
recorded during 2000 included:
o the increasing concentration of the portfolio in relatively less
seasoned credits, because of the Company's growth rate in recent
periods
o higher concentrations of credit exposure as a result of increased
income property lending, as these loans generally are larger than
residential mortgages
Commercial & industrial real estate loans typically present greater
credit, concentration, and event risks than home mortgages, thereby requiring
proportionately greater reserve levels. Newer loans typically present more
credit exposure than seasoned loans with many years of prompt payment experience
and amortized principal balances.
The Company's ratio of loan loss reserves to gross loans outstanding
increased from 0.96% at December 31, 1999 to 1.09% at June 30, 2000. The Company
anticipates that this ratio will continue climbing throughout 2000 to the extent
that the Company is successful in its strategic plan of increasing total assets
while expanding construction, income property, and small business lending.
37
<PAGE>
Non-interest Income
Non-interest income declined from $0.8 million and $1.5 million during
the first three and six months of 1999 to $0.6 million and $1.1 million during
the same periods in 2000. This reduction was primarily caused by differing
results on the sale of securities. During the first half of 1999, a pre-tax gain
of $503 thousand was realized on the sale of securities, versus a $77 thousand
pre-tax loss during 2000, generating an aggregate $580 thousand pre-tax
variance.
In contrast, non-interest income from the Company's core operations
showed strong improvement over the past year. Commissions from the sale of
non-FDIC insured products increased from $139 thousand during the second quarter
of 1999 to $183 thousand during the most recent three months. For the first half
of 2000, commissions from the sale of non-FDIC insured investment products
totaled $390 thousand, up 43.9% from $271 thousand during the first six months
of 1999. Fee income from customer service charges increased 28.4% from $243
thousand during the second quarter of 1999 to $312 thousand during the second
quarter of 2000. Year to date results are similar, with customer service charges
increasing from $476 thousand during the first half of 1999 to $592 thousand for
2000. The Company's growing base of transaction accounts continues to bolster
non-interest income, as does increased debit card activity by the Bank's
customers. The Company plans to have an additional remote ATM in operation prior
to the conclusion of the third quarter of 2000 as an additional source of
non-interest income.
The Company recently surveyed competitor pricing and reviewed its
operations to better align its customer service charges with its costs. The
Company implemented a new fee and service charge schedule effective July 1, 2000
as a means of further increasing the percentage of its income derived from fees.
General & Administrative Expense
General & administrative expenses rose from $2.9 million during the
second quarter of 1999 to $3.4 million during the most recent three months.
General & administrative expenses increased from $5.7 million during the first
half of 1999 to $6.7 million during the first six months of 2000. The Company's
ratio of general & administrative expense to average total assets increased from
2.57% during the quarter ended June 30, 1999 to 2.85% for the most recent three
months. A similar increase in this ratio was registered for the first six months
of 2000 versus 1999. Higher expense levels were realized in most areas of the
Company's operations, spurred by increased business volumes and several other
factors, as discussed below.
Compensation and employee benefits expense was $265 thousand higher
during the second quarter of 2000 than during the second quarter of 1999. June
30 year to date compensation and employee benefits expense was $366 thousand
higher in 2000 than in 1999. Factors leading to these increases included:
o a larger average employee base in 2000, with 13.2% more FTE employed at
June 30, 2000 versus June 30, 1999
o higher expenses for performance based incentive and commission plans,
including $125 thousand in accrued costs for a new program introduced
in 2000 associated with performance based cash incentives payable, to
the extent earned, in early 2001
o the need to increase selected compensation levels during 2000 in order
to attract and retain qualified staff in a competitive environment for
labor
o the addition of new Chief Financial and Chief Executive Officers in
2000
o $34 thousand in non-recurring costs during the second quarter of 2000
associated with the settlement of certain non-qualified benefits
obligations payable in Company stock
38
<PAGE>
Occupancy and equipment expenses increased in 2000 versus the prior
year in part in conjunction with the hiring of a new facility manager in 2000.
The new facility manager identified deferred maintenance items for several
buildings that were addressed in 2000.
Data processing costs increased in conjunction with a larger number of
customer accounts, as the Company incurs certain expenses on a per account
basis. Due to the expiration of the Company's primary data processing contract
during the second quarter of 2000, the Company anticipates continuing to incur
greater data processing costs throughout 2000. The Company intends to convert to
a more technologically robust core processing platform sometime during 2001, and
is currently negotiating a software license with the preferred vendor. In
anticipation of this new systems environment, the Company has commenced phasing
out its passbook based deposit products in favor of statement based products.
Management believes that statement based products integrate far more effectively
with new electronic delivery channels, present a lower likelihood of operating
losses, and provide a more regular opportunity for customer communication and
marketing.
Legal and accounting costs were $11 thousand greater in the most recent
quarter than they were during the second quarter of 1999. June 30, 2000 year to
date legal and accounting costs totaled $114 thousand above their level of one
year earlier. During 2000, the Company has incurred higher costs for its
co-sourced internal audit program and in conjunction with the attestation work
of its independent auditors. During the past six months, the Company has
incurred significant legal costs in regards to several issues, including the
Special Residential Loan Pool, a now settled employment related matter, the
administration and collection of the $5.0 million non-accrual loan extended by
MBBC, and preparation for a potential change in charter for the Bank as a result
of the Bank's approaching the regulatory threshold for the Qualified Thrift
Lender test.
Other operating expense increased from $407 thousand during the second
quarter of 1999 to $524 thousand during the most recent three months. Other
operating expense totaled $821 thousand during the first half of 1999,
increasing to $1.1 million during 2000. Expenses for consulting increased from
$15 thousand during the first six months of 1999 to $103 thousand during the
first half of 2000. During 2000, the Company has retained consultants to assist
in a number of areas, including systems conversions, compensation and benefit
planning, and loan credit review. Charitable contributions increased from $29
thousand during the first six months of 1999 to $56 thousand during the first
half of 2000, as the Company increased its commitments to improving the quality
of life and helping the less advantaged in local communities throughout the
Greater Monterey Bay Area.
As detailed in the Company's Proxy Statement for the Annual Meeting of
Stockholders held on May 25, 2000, the Director Emeritus Program allows
individual Directors meeting certain service requirements to retire between the
ages of 65 and 72; receiving upon retirement certain benefits and recognition
including a cash payment equal to the then current annual Director retainer fee.
Two Directors retired from the Board during the second quarter of 2000, and the
Company is accruing additional expense under this program in order to provide
benefits to eligible Directors in future periods. A total of $39 thousand in
expense has been recorded for this program in 2000.
During the second quarter of 2000, the Company made the final payment
to the investment banking firm that had been retained in 1999. The conclusion of
this contract will reduce ongoing expense by $8 thousand per month. The Company
also recently terminated all of its directly owned universal life insurance
policies. The surrender of these policies will reduce future periodic operating
costs and provide additional cash for lending and investment.
39
<PAGE>
During the six months ended June 30, 2000, a range of other operating
costs, including supplies, postage, and correspondent bank service charges all
rose from their levels of one year earlier in conjunction with the Company's
maintaining a larger volume of customer accounts. The Company is currently in
the process of re-evaluating its correspondent banking and branch support
operations, with the intent to seek alternatives providing better customer
service combined with lower costs to the Bank.
Income Taxes
Income tax expense declined in 2000 versus 1999 due to reduced pre-tax
income. The Company's effective book tax rate during the first six months of
2000 was slightly higher than for the comparable period in 1999 due to the
increased effect of various permanent differences in light of lower levels of
pre-tax income.
Item 3. Quantitative And Qualitative Disclosures About Market Risk
For a current discussion of the nature of market risk exposures, see
"Item 2. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations - Interest Rate Risk Management And Exposure". Readers should also
refer to the quantitative and qualitative disclosures (consisting primarily of
interest rate risk) in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1999. There has been no significant change in these
disclosures since the filing of that document.
40
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not involved in any material pending legal proceedings
other than routine legal proceedings occurring in the ordinary course
of business. Such other routine legal proceedings in the aggregate are
believed by management to be immaterial to the Company's financial
condition or results of operations.
Item 2. Changes In Securities
None.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission Of Matters To A Vote Of Security Holders
a) TheCompany's annual meeting of stockholders was held on May 25,
2000.
b) Not applicable.
c) At the Company's annual meeting of stockholders held on May 25,
2000, the Company's stockholders approved the following:
1.)The election of the following individuals as Directors for the
term of three years each:
Name For Withheld
------------------------------ ------------ --------------
Ms. Diane S. Bordoni 2,010,305 757,246
Mr. Eugene R. Friend 2,045,327 722,224
Mr. McKenzie Moss 1,993,146 774,405
In addition to the above three individuals, the following
Directors were in office as of July 27, 2000:
Mr. Josiah T. Austin
Mr. P. W. Bachan
Mr. Edward K. Banks
Mr. Nicholas C. Biase
Mr. Marshall G. Delk
Mr. Steven Franich
Mr. Stephen G. Hoffmann
Mr. C. Edward Holden
Mr. Gary L. Manfre
41
<PAGE>
PART II - OTHER INFORMATION (Continued)
2.) Approval of amendments to the 1995 Incentive Option Plan:
Broker
For Against Abstain Non-Vote
----------- ------------ ------------ --------------
1,198,379 810,295 28,452 730,425
3.) The appointment of Deloitte & Touche LLP as independent
auditors of the Company for the fiscal year ending December
31, 2000.
Broker
For Against Abstain Non-Vote
----------- ------------ ------------ --------------
2,688,451 62,276 16,824 --
d) Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits And Reports On Form 8-K
A. Exhibits
10.16 Employment Agreement Between Monterey Bay Bancorp, Inc.
And Mark R. Andino
27 Financial Data Schedule
B. Reports On Form 8-K
The Company filed no reports on Form 8-K during the quarter
ended June 30, 2000.
42
<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.
(Registrant)
Date: August 11, 2000 By: /s/ C. Edward Holden
--------------------
C. Edward Holden
Chief Executive Officer
Date: August 11, 2000 By: /s/ Marshall G. Delk
--------------------
Marshall G. Delk
President
Chief Operating Officer
Date: August 11, 2000 By: /s/ Mark R. Andino
------------------
Mark R. Andino
Senior Vice President
Chief Financial Officer
(Principal Financial & Accounting
Officer)
43
