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 September 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: 3,317,913 shares of common
stock, par value $0.01 per share, were outstanding as of November 9, 2000.
1
<PAGE>
<TABLE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
INDEX
<CAPTION>
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements Of Financial Condition As Of
September 30, 2000 (unaudited) And December 31, 1999 3 - 4
Consolidated Statements Of Operations (unaudited) For The Three
And Nine Months Ended September 30, 2000 And September 30, 1999 5 - 6
Consolidated Statement Of Stockholders' Equity (unaudited) For The
Nine Months Ended September 30, 2000 7
Consolidated Statements Of Cash Flows (unaudited) For The Nine
Months Ended September 30, 2000 And September 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 - 45
Item 3. Quantitative And Qualitative Disclosure About Market Risk 45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 46
Item 2. Changes In Securities 46
Item 3. Defaults Upon Senior Securities 46
Item 4. Submission Of Matters To A Vote Of Security Holders 46
Item 5. Other Information 46
Item 6. Exhibits And Reports On Form 8-K 46
(a) Exhibits
(27) Financial Data Schedule
(b) Reports On Form 8-K
Signature Page 47
</TABLE>
2
<PAGE>
Item 1. Financial Statements
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(Dollars In Thousands, Except Per Share Amounts)
---------------------------------------------------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 18,089 $ 12,833
Securities available for sale, at estimated fair value:
Investment securities (amortized cost of $7,693 and $11,456 at
September 30, 2000 and December 31, 1999, respectively) 7,470 11,463
Mortgage backed securities (amortized cost of $59,391 and $59,710
at September 30, 2000 and December 31, 1999, respectively) 57,749 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 174 --
Loans receivable held for investment (net of allowances for loan losses of
$4,806 at September 30, 2000 and $3,502 at December 31, 1999) 382,168 360,686
Investment in capital stock of the Federal Home Loan Bank, at cost 2,836 3,213
Accrued interest receivable 2,922 2,688
Premises and equipment, net 7,138 7,042
Core deposit premiums and other intangible assets, net 2,394 2,918
Real estate acquired via foreclosure, net -- 96
Other assets 4,061 4,112
-------- --------
TOTAL ASSETS $485,001 $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)
SEPTEMBER 30, 2000 (UNAUDITED) AND DECEMBER 31, 1999
(Dollars In Thousands, Except Per Share Amounts)
---------------------------------------------------------------------------------------------------------------------
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Non-interest bearing demand deposits $ 16,078 $ 17,316
Interest bearing NOW checking accounts 40,402 31,385
Savings deposits 16,472 15,312
Money market deposits 91,381 81,245
Certificates of deposit 233,718 222,144
-------- --------
Total deposits 398,051 367,402
-------- --------
Advances from the Federal Home Loan Bank 40,582 49,582
Securities sold under agreements to repurchase -- 2,410
Accounts payable and other liabilities 3,925 2,630
-------- --------
Total liabilities 442,558 422,024
-------- --------
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 September 30, 2000 and December 31, 1999;
3,317,913 outstanding at September 30, 2000 and
3,422,637 outstanding at December 31, 1999 45 45
Additional paid-in capital 28,239 28,237
Retained earnings, substantially restricted 32,013 30,473
Unallocated ESOP shares (978) (1,150)
Treasury shares designated for compensation plans, at cost (43,762 shares
at September 30, 2000 and 126,330 shares at December 31, 1999) (421) (1,376)
Treasury stock, at cost (1,174,172 shares at September 30, 2000 and
1,069,448 shares at December 31, 1999) (15,358) (14,257)
Accumulated other comprehensive loss, net of taxes (1,097) (1,169)
-------- --------
Total stockholders' equity 42,443 40,803
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $485,001 $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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
-----------------------------------------------------------------------------------------------------------------------
(Dollars In Thousands, Except Per Share Amounts)
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST AND DIVIDEND INCOME:
Loans receivable $ 8,118 $ 7,211 $ 23,972 $ 20,103
Mortgage backed securities 1,011 1,085 2,888 3,842
Investment securities and cash equivalents 385 282 1,116 1,031
------- ------- -------- --------
Total interest income 9,514 8,578 27,976 24,976
------- ------- -------- --------
INTEREST EXPENSE:
Deposit accounts 4,532 3,675 12,569 11,347
FHLB advances and other borrowings 583 543 1,961 1,589
------- ------- -------- --------
Total interest expense 5,115 4,218 14,530 12,936
------- ------- -------- --------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 4,399 4,360 13,446 12,040
PROVISION FOR LOAN LOSSES 650 265 1,675 685
------- ------- -------- --------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 3,749 4,095 11,771 11,355
------- ------- -------- --------
NON-INTEREST INCOME:
Gain (loss) on sale of mortgage backed securities
and investment securities, net -- -- (77) 503
Commissions from sales of noninsured products 145 194 534 465
Customer service charges 356 270 949 747
Income from loan servicing 30 46 90 111
Other income 99 54 218 200
------- ------- -------- --------
Total non-interest income 630 564 1,714 2,026
------- ------- -------- --------
<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 NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(Dollars In Thousands, Except Per Share Amounts)
-----------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
----------------------------- -----------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
GENERAL & ADMINISTRATIVE EXPENSE:
Compensation and employee benefits 1,904 1,361 4,991 4,082
Occupancy and equipment 329 285 960 856
Deposit insurance premiums 48 40 140 123
Data processing fees 271 269 837 757
Legal and accounting expenses 148 94 489 322
Supplies, postage, telephone, and office expenses 163 156 522 443
Advertising and promotion 84 69 283 234
Amortization of intangible assets 175 174 524 523
Other expense 430 523 1,514 1,344
------ ------ ------ ------
Total general & administrative expense 3,552 2,971 10,260 8,684
------ ------ ------ ------
INCOME BEFORE INCOME TAX EXPENSE 827 1,688 3,225 4,697
INCOME TAX EXPENSE 366 738 1,411 2,041
------ ------ ------ ------
NET INCOME $ 461 $ 950 $ 1,814 $ 2,656
====== ====== ====== ======
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE $ 0.15 $ 0.29 $ 0.58 $ 0.82
====== ====== ====== ======
DILUTED EARNINGS PER SHARE $ 0.15 $ 0.28 $ 0.58 $ 0.80
====== ====== ====== ======
<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)
NINE MONTHS ENDED SEPTEMBER 30, 2000
(Dollars And Shares In Thousands)
------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Treasury
Shares
Desig- Accum-
nated ulated
For Other
Addi- Unal- Com- Compre-
tional Re- located pen- hensive
Common Stock 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 15 8 150 158
stock
Dividends paid ($0.08 per share) (274) (274)
Amortization of stock
compensation (6) 172 955 1,121
Comprehensive income:
Net income 1,814 1,814
Other comprehensive income:
Change in net unrealized
loss on securities
available for sale, net
of taxes of $19 27 27
Reclassification adjustment
for losses on securities
available for sale
included in income, net
of taxes of $32 45
45
========
Other comprehensive income,
net 72
========
Total comprehensive income 1,886
========
----- ----- -------- -------- ------ ------ -------- ------- --------
Balance at September 30, 2000 3,318 $ 45 $ 28,239 $ 32,013 $ (978) $ (421) $(15,358) $(1,097) $ 42,443
===== ===== ======== ======== ====== ====== ======== ======= ========
<FN>
See Notes to Consolidated Financial Statements
</FN>
</TABLE>
7
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(Dollars In Thousands)
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,814 $ 2,656
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization of premises and equipment 327 355
Amortization of intangible assets 524 523
Amortization of purchase premiums, net of accretion of discounts 55 136
Amortization of deferred loan fees (211) (252)
Provision for loan losses 1,675 685
Provision for losses on real estate acquired via foreclosure -- 12
Federal Home Loan Bank stock dividends (166) (131)
Gross ESOP expense before dividends received on unallocated shares 243 374
Compensation expense associated with stock compensation plans 215 222
Loss (gain) on sale of mortgage-backed and investment securities 77 (503)
Gain on sale of loans (15) (54)
Loss (gain) on sale of real estate acquired via foreclosure 5 (11)
Origination of loans held for sale (1,927) (5,884)
Proceeds from sales of loans held for sale 1,768 8,115
Increase in accrued interest receivable (234) (141)
Decrease in other assets 51 896
Increase (decrease) in accounts payable and other liabilities 1,295 (447)
Other, net (1,031) (665)
------- -------
Net cash provided by operating activities 4,465 5,886
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net increase in loans held for investment (21,482) (60,006)
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 (23,482) --
Principal repayments on mortgage backed securities 11,254 17,400
Proceeds from sales of mortgage backed securities available for sale 12,571 16,920
Redemptions of FHLB stock 543 --
Purchases of premises and equipment (423) (1,092)
------- -------
Net cash used in investing activities (17,289) (18,780)
------- -------
<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)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(Dollars In Thousands)
-------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 30,649 (745)
(Repayments) proceeds of FHLB advances, net (9,000) 11,400
(Repayments) proceeds of securities sold under agreements to repurchase, net (2,410) (1,960)
Cash dividends paid to stockholders (274) (530)
Purchases of treasury stock (1,251) --
Sales of treasury stock 150 346
Sales of treasury stock for stock compensation plans 216 --
-------- --------
Net cash provided by financing activities 18,080 8,511
-------- --------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 5,256 (4,383)
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 12,833 16,951
-------- --------
CASH & CASH EQUIVALENTS AT END OF PERIOD $18,089 $12,568
======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for:
Interest on deposits and borrowings $ 14,309 $ 12,930
Income taxes 2,410 2,259
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES
Loans transferred to held for investment, at fair 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 nine month
period ended September 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
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 ("EPS") 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.
<TABLE>
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 nine month periods ended September 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.
<CAPTION>
For The Three Months For The Nine Months
Ended September 30, Ended September 30,
--------------------------- ---------------------------
(In Whole Dollars And Whole Shares)
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income $461,000 $950,000 $1,814,000 $2,656,000
========= ========= ========= =========
Average shares issued 4,492,085 4,492,085 4,492,085 4,492,085
Less weighted average:
Uncommitted ESOP shares (157,227) (193,164) (166,211) (202,149)
Non-vested stock award shares (58,378) (85,802) (67,236) (94,192)
Treasury shares (1,176,316) (956,700) (1,154,058) (960,561)
--------- --------- --------- ---------
Sub-total (1,391,921) (1,235,666) (1,387,505) (1,256,902)
--------- --------- --------- ---------
Weighted average BASIC shares outstanding 3,100,164 3,256,419 3,104,580 3,235,183
Add dilutive effect of:
Stock options 3,635 96,882 5,599 89,033
Stock awards -- 5,823 163 6,168
--------- --------- --------- ---------
Sub-total 3,635 102,705 5,762 95,201
--------- --------- --------- ---------
Weighted average DILUTED shares outstanding 3,103,799 3,359,124 3,110,342 3,330,384
========= ========= ========= =========
Earnings per share:
BASIC EPS $ 0.15 $ 0.29 $ 0.58 $ 0.82
========= ========= ========= =========
DILUTED EPS $ 0.15 $ 0.28 $ 0.58 $ 0.80
========= ========= ========= =========
</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.
<TABLE>
Reclassification adjustments for realized net gains (losses) included
in other comprehensive income for investment and mortgage backed securities
classified as available for sale for the three and nine months ended September
30, 2000 and 1999 are summarized as follows:
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Gross reclassification adjustment $ -- $ -- $ (77) $ 503
Tax benefit (expense) -- -- 32 (207)
------ ------ ----- ------
Reclassification adjustment, net of tax $ -- $ -- $ (45) $ 296
====== ====== ===== ======
</TABLE>
<TABLE>
A reconciliation of the net unrealized gain or loss on available for
sale securities recognized in other comprehensive income is as follows:
<CAPTION>
Three Months Nine Months
Ended Ended
September 30, September 30,
--------------------------- ---------------------------
2000 1999 2000 1999
---- ---- ---- ----
(Dollars In Thousands)
<S> <C> <C> <C> <C>
Holding gain (loss) arising during the period, net $ 334 $ (464) $ 27 $ (1,346)
of tax
Reclassification adjustment, net of tax -- -- 45 (296)
----- ------ ----- --------
Net unrealized gain (loss) recognized in
other comprehensive income $ 334 $ (464) $ 72 $ (1,642)
===== ====== ===== ========
</TABLE>
12
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 4: Stock Option Plans
<TABLE>
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:
<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
September 30, 2000 757,929 486,736 308,262 80,150 191,043 $9.65
</TABLE>
Activity during the three and nine months ended September 30, 2000 included:
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------ ------------------
Granted 12,500 134,365
Canceled -- 10,226
Exercised -- --
Vested 62,980 78,635
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 September 30, 2000.
The 1995 Incentive Stock Option Plan was amended in May 2000. The
amendments included 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 5: Stock Award Plans
<TABLE>
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:
<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
September 30, 2000 141,677 38,594 100,406 2,677
</TABLE>
Activity during the three and nine months ended September 30, 2000
included:
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------ ------------------
Granted -- 29,744
Canceled -- 646
Vested 18,669 21,368
<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 --
March 31, 2000 38,010 8,713 29,297 --
June 30, 2000 38,010 8,713 29,297 --
September 30, 2000 38,010 2,491 35,519 --
</TABLE>
Activity during the three and nine months ended September 30, 2000
included:
Three Months Ended Nine Months Ended
September 30, 2000 September 30, 2000
------------------ ------------------
Granted -- --
Canceled -- --
Vested 6,222 7,050
14
<PAGE>
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (Continued)
--------------------------------------------------------------------------------
NOTE 6: Commitments
At September 30, 2000, commitments maintained by the Company included
commitments to originate $13.1 million in various types of loans and to sell
$174 thousand in fixed rate residential mortgages on a servicing released basis.
The Company maintained no firm commitments to purchase loans or securities, to
assume borrowings, or to sell securities at September 30, 2000.
NOTE 7: Recent Accounting Pronouncements
Statement of Financial Accounting Standards ("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.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" was issued in September 2000. SFAS
No. 140 is a replacement of SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". Most of the
provisions of SFAS No. 125 were carried forward to SFAS No. 140 without
reconsideration by the FASB, and some were changed in only minor ways. In
issuing SFAS No. 140, the FASB included issues and decisions that had been
addressed and determined since the original publication of SFAS No. 125. SFAS
No. 140 is effective for transfers after March 31, 2001. It is effective for
disclosures about securitizations and collateral and for recognition and
reclassification of collateral for fiscal years ending after December 15, 2000.
Management does not expect the adoption of SFAS No. 140 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 or phrases such as "believe",
"expect", "intend", "anticipate", "estimate", "project", "forecast", "may
increase", "may fluctuate", "may improve" and similar expressions or future or
conditional verbs such as "will", "should", "would", and "could". 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, the demand for the Company's products and services, accounting
principles or guidelines, legislative and regulatory changes, monetary and
fiscal policies of the US Government, US Treasury, and Federal Reserve, real
estate markets, 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. These factors should be considered
in evaluating the forward-looking statements, and undue reliance should not be
placed on such statements. 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 September 30, 2000, the Company had $485.0 million in total assets,
$382.3 million in net loans receivable, and $398.1 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, Internet 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 fixed and
variable annuities, mutual funds, and individual securities.
16
<PAGE>
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.
Recent Developments
Congress, the SEC, the Federal Financial Institutions Examination
Council ("FFIEC"), the OTS, and the Federal Administration continue to consider
a series of issues that may impact the financial services industry, including
the Company. Recent developments in this regard include:
o the potential reform of bankruptcy legislation (S 625, HR 833) remains
stalled in Congress, with disagreements between Congress and the White
House on various provisions
o the potential approval for interest to be paid on business checking
accounts and possibly on reserves held at Federal Reserve Banks (S 576, HR
4067, HR 5341) also remains stalled in Congress
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") continues to be debated in Congress
o new capital and membership rules for the FHLB System continue to be
drafted, with implementation anticipated during 2001
o the OTS is considering possible new rules for thrift holding companies,
including debt and capital restrictions
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, perhaps combined with a new formula for FDIC insurance premiums,
is under evaluation at the FDIC
o potential changes in the methodology used by insured depository
institutions to account for loan loss reserves continue to be debated by
the SEC, the American Institute of Certified Public Accountants, and the
FFIEC
Safeway, Inc. a major supermarket chain in the Company's primary market
area, has announced the creation of Safeway SELECT bank. The bank will operate
branches inside Safeway stores and open an online bank. This represents a new
source of competition for the Company.
During October, 2000, the Company announced the resignation of Marshall
G. Delk from the Board of Directors. Mr. Delk resigned as President and Chief
Operating Officer of the Company during September 2000. The Company is currently
negotiating a separation package with Mr. Delk. This package will incorporate
the disposition of Mr. Delk's vested stock options.
During October, 2000, the Company announced that McKenzie Moss would
become Chairman of the Board effective January 1, 2001. Eugene R. Friend will
retire as Chairman of the Board at that time and continue to serve the Company
as Vice Chairman until his planned retirement from the Board of Directors at the
2001 annual meeting of shareholders. This change was conducted to facilitate the
Company's preparation for Mr. Friend's upcoming retirement following over 40
years of service. Mr. Moss has a enjoyed a long and successful career in the
financial services industry, including being the Chief Executive Officer of a
California commercial bank.
Mr. P.W. Bachan has announced his intention to retire from the Board of
Directors at the 2001 annual meeting of shareholders. Mr. Bachan has served the
Company as a Director for 46 years.
17
<PAGE>
Overview Of Business Activity
Throughout 2000, the Company continued in its business strategy of
diversifying away from its traditional savings & loan roots toward a community
commercial bank profile. The Board of Directors and Management has targeted this
strategy because of the belief that it presents the opportunity to better serve
the Greater Monterey Bay Area while enhancing shareholder value.
During the first nine months of 2000, progress was realized in loan
volume and mix, deposit volume and composition, and fee income generation,
particularly from customer service charges. This progress was accelerated at mid
year following the hiring of a new Chief Executive Officer with substantial
commercial banking experience. The Company recently signed an agreement to
convert to a new core processing system. Internet banking was introduced in
October, 2000, along with a significantly enhanced Internet site
(www.montereybaybank.com). A new remote ATM at the Monterey Bay Aquarium was
recently activated. David E. Porter, with 26 years of commercial banking
experience, started working for the Bank as Director of Commercial and Retail
Banking at the end of October, 2000. Jack Evans, with over 25 years of
commercial banking experience, recently joined the Bank as a commercial lending
relationship manager and business loan officer. In accomplishing these steps,
the Company is working to establish the human and technological infrastructure
that is integral to its transformation into an effective community commercial
bank.
In its October 31, 2000 Form 8-K, the Company reported that its
Directors and Management are disappointed with the level of earnings generated
in recent quarters. This document further presented the Company's appreciation
of the importance of building shareholder value and producing a competitive
return on shareholders' equity. However, many of the initiatives key to the
strategic transformation of the Company require up front operating costs and
initial capital investments before associated revenues may be realized. In
addition, the Company has had to allocate significant resources toward resolving
several historical issues, including a $4.85 million non-accrual business term
loan originated by MBBC, certain classified assets, the Special Residential Loan
Pool (see "Special Residential Loan Pool"), and the need to recruit a
significant portion of the Bank's management team during 2000.
The Company exceeded 29,500 deposit accounts at the end of the third
quarter of 2000, representing a new high.
Thus far in 2000, the Company's primary market areas have generally
continued to see good demand for housing, 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 is under development 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. This proposal is primarily being advanced by a single
large technology firm.
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 may present opportunities to acquire
personnel, branches, and customers from institutions being sold or that have
recently been sold.
18
<PAGE>
Changes In Financial Condition From December 31, 1999 To September 30, 2000
Total assets increased $22.2 million, or 4.8%, from $462.8 million at
December 31, 1999 to $485.0 million at September 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
$18.1 million at September 30, 2000. This rise in cash & cash equivalents
primarily stemmed from lower than targeted internal loan production during the
third quarter of 2000. The Company intends to reinvest some of these funds into
pools of primarily multifamily whole loans, generally acquired on a servicing
released basis, during the fourth quarter of 2000. These secondary market
purchases are projected to increase asset yield while at the same time
supporting the Bank's Qualified Thrift Lender test ratio.
Investment and mortgage backed securities available for sale decreased
from $69.2 million at December 31, 1999 to $65.2 million at September 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 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
During the third quarter of 2000, the Company purchased $17.5 million
of mortgage backed securities, primarily low duration, high cash flow, Agency
collateralized mortgage obligations ("CMO's"). The third quarter purchases were
designed to:
o quickly deploy $8.0 million in new funding received through the State of
California time deposit program (see below)
o reallocate excess liquidity to higher yielding assets during a period of
comparatively slower (versus earlier in 2000) internal loan production
Security purchases throughout 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 or
loan purchases. Management anticipates continuing the above pattern of security
purchases and sales during the final quarter of 2000, subject to business and
market conditions.
Net loans receivable held for investment rose from $360.7 million at
December 31, 1999 to $382.2 million at September 30, 2000. The total at
September 30, 2000 was increased by the acquisition of two whole loan pools
totaling $11.2 million during September, 2000. These pools were primarily
comprised of adjustable rate multifamily mortgages secured by real property
throughout California. The Company followed its normal underwriting policies in
evaluating these loan pools. Because these whole loan pools were acquired near
the end of the third quarter, there was no significant effect on September 30,
2000 year to date interest income.
Third quarter credit originations (excluding loan pool purchases)
totaled $28.4 million. This figure was constrained by the Company's having a
number of unfilled loan sales positions during the quarter.
19
<PAGE>
The 2000 year to date increase in loans was concentrated in the income
property loan portfolios, 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 41.6% during the first nine months of 2000. At the same time,
commercial & industrial real estate loans increased from 18.6% to 24.1% of gross
loans.
Gross construction loans declined from $79.0 million at December 31,
1999 to $58.9 million at September 30, 2000, as completed projects were paid off
and the pipeline of new construction loans was insufficient to offset the
payoffs. The Company will seek to increase its construction loan portfolio in
future quarters through a combination of increased marketing efforts,
establishing ongoing relationships with local developers, and purchases of
participations in construction loans on California real estate originated by
other financial institutions.
The Company's strategy of continuing the diversification of its loan
portfolio away from residential mortgages creates pressure on the Bank's
compliance with the Qualified Thrift Lender ("QTL") test, which requires that
the Bank maintain at least 65.0% of its portfolio assets (as defined) in
qualified thrift investments (as defined). The increasing volume of commercial
and industrial real estate loans maintained by the Company has at times resulted
in the Bank's QTL ratio falling below 70.0%. However, in conjunction with the
aforementioned acquisition of two whole loan pools comprised of primarily
multifamily (QTL qualifying) mortgages, the Bank's QTL ratio increased to 71.0%
at September 30, 2000.
As the Company continues its strategic transformation into a community
commercial bank, however, additional pressure upon the Bank's QTL ratio is
expected. As a result, the Company 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 QTL test
o applying for a commercial bank charter
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's strategic plan incorporates expanding the types of residential
mortgages sold into the secondary market in future periods (e.g. to include
adjustable rate mortgages) should such sales be consistent with objectives for
asset / liability management, cash flow, and regulatory capital management.
20
<PAGE>
<TABLE>
Additional information regarding the composition of the Company's loan
portfolio is presented in the following table:
<CAPTION>
September 30, December 31,
2000 1999
---- ----
<S> <C> <C>
(Dollars In Thousands)
Held for investment:
Loans secured by real estate:
Residential one to four unit $170,815 $168,465
Multifamily five or more units 53,994 42,173
Commercial and industrial 99,212 72,344
Construction 58,931 79,034
Land 14,773 13,930
-------- --------
Sub-total loans secured by real estate 397,725 375,946
Other loans:
Home equity lines of credit 5,014 3,968
Loans secured by deposits 567 385
Consumer lines of credit, unsecured 152 202
Business term loans 6,511 6,670
Business lines of credit 1,075 1,027
-------- --------
Sub-total other loans 13,319 12,252
Sub-total gross loans held for investment 411,044 388,198
(Less) / Plus:
Undisbursed construction loan funds (23,952) (23,863)
Unamortized purchase premiums, net of purchase discounts 82 134
Deferred loan fees and costs, net (200) (281)
Allowance for estimated loan losses (4,806) (3,502)
-------- --------
Loans receivable held for investment, net $382,168 $360,686
======== ========
Held for sale:
Residential one to four unit $ 174 $ --
======== ======
</TABLE>
Premises and equipment increased slightly in 2000 primarily due to the
installation of a remote ATM at the Monterey Bay Aquarium and the remodeling of
one branch in order to sub-lease space to a tenant. The Company anticipates a
higher level of premises and equipment later in 2000 and into 2001 as new
computer hardware, telecommunications equipment, and software is acquired in
conjunction with the Company's scheduled conversion to a new and significantly
more advanced core processing platform.
Intangible assets declined by $524 thousand during the first nine
months 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.
21
<PAGE>
Total deposits increased from $367.4 million at December 31, 1999 to a
record $398.1 million at September 30, 2000. Key trends within the deposit
portfolio included:
o Checking account balances continued to rise during the third quarter of
2000, and have now increased $7.8 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, debit card access, 24 hour telephone banking, and
Internet Banking including electronic bill payment.
o Savings deposits increased from $15.3 million at December 31, 1999 to $16.5
million at September 30, 2000. The Company has been actively encouraging
its customers to migrate to statement (versus passbook) based savings
accounts in preparation for the new core processing platform, which will be
implemented without passbooks. The Company believes that passbooks
constitute a less desirable form of account to both customers and financial
institution in an age of debit cards, Internet banking, telephone banking,
and global ATM networks. Management also believes that statement based
deposit products present a lower likelihood of operating losses and provide
a more regular opportunity for customer communication and marketing.
o Early in 2000, the Bank introduced its "Money Market Plus" deposit account,
which provides competitive, tiered rates for liquid funds. In conjunction
with this product, total money market deposits rose from $81.2 million at
December 31, 1999 to $91.4 million nine months later.
o Certificate of deposit balances rose $11.6 million during the first nine
months of 2000. 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 During the third quarter of 2000, the Bank commenced participation ($8.0
million) in the State of California time deposit program. Under this
program, the State places time deposits with banks as a means of
encouraging the lending of funds back into California's communities. The
State prices these funds to be competitive with the capital markets and
FHLB advances to enhance participation in the program.
o During 2000, the Bank commenced directly soliciting certificates of deposit
from targeted potential customer segments identified as having a propensity
to invest in that product line. At September 30, 2000, this program had
attracted $896 thousand in funds.
o Transaction accounts constituted 41.3% of total deposits at September 30,
2000, up from 39.5% nine 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, generate fee
income, furnish opportunities for cross-selling other products and services
to customers, and are typically less interest rate sensitive than many
other funding sources.
The Company's ratio of loans to deposits declined from 98.2% at
December 31, 1999 to 96.1% at September 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 September 30, 2000, all of which were then comprised of FHLB
advances. Over the past nine 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 and $2.4 million in securities sold under agreements to
repurchase. The next scheduled maturity of the Company's borrowings is in
January, 2001.
22
<PAGE>
Total stockholders' equity increased from $40.8 million at December 31,
1999 to $42.4 million at September 30, 2000. Factors contributing to the
increase included:
o $1.8 million in 2000 year to date net income
o continued amortization of deferred stock compensation, including but not
limited to:
o accelerated amortization of certain shares during the second quarter in
conjunction with the settlement of certain non-qualified benefits
obligations payable in Company common stock
o the vesting of a significant volume of stock award shares during the
third quarter
o the election by certain Directors to have their Directors fees paid with
common stock, with all Directors to be paid exclusively in common stock
beginning November 1, 2000
o $72 thousand in other comprehensive income, net, during 2000 stemming from
a slight appreciation in the portfolios of securities classified as
available for sale
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
As previously announced, the Company's Board of Directors has
determined to indefinitely suspend the declaration and payment of cash
dividends. The decision by the Board of Directors to receive their Directors
fees exclusively in common stock effective November 1, 2000 was made to:
o augment MBBC's cash flow
o communicate the Directors support of the Company and alignment with
shareholder value
The Company's tangible book value per share was $12.07 at September 30,
2000. This compares to a tangible book value per share of $11.07 at December 31,
1999.
23
<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 believes 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 nine months of 2000 and forecast to affect the Company's interest rate
exposure for the remainder of the year include:
Factors reducing net liability sensitivity:
o The $19.1 million rise in transaction account balances during
the first nine months 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 as an integral part of its
business strategy.
o The sale of $10.5 million in high duration mortgage backed
securities during the first nine months of 2000. Additional
such sales may be made during the fourth quarter of 2000 in
conjunction with plans to further reduce net liability
sensitivity and provide funding for reinvestment into higher
yielding pools of purchased income property loans.
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. As interest rates on new fixed
rate mortgages declined over the past several months, certain
refinance activity accelerated, shortening the average
remaining lives of certain mortgage related securities. The
Mortgage Bankers Association Volume Refinance Index, a measure
of mortgage refinance activity, increased from approximately
339 at June 30, 2000 to almost 471 by the end of September,
2000.
o The pending conversion during the last quarter of 2000 of
approximately $26.5 million in previously purchased "hybrid"
residential loans from fixed rate to floating rate.
o The Company's pricing for new loan originations has been
designed 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 introduction of a new, Prime-based owner construction loan
product during 2000 that continues to effectively serve that
target market while also generating relatively interest
sensitive assets.
Factors increasing net liability sensitivity:
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.
24
<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 September 30, 2000, the Company maintained $18.1 million in cash and
cash equivalents, untapped borrowing capacity in excess of $140 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 September 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 is 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 nine months of 2000, the regulatory liquidity
ratio of the Bank exceeded regulatory requirements, with the average ratio for
the third quarter equaling 7.53%. 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 September 30, 2000, MBBC had cash & cash equivalents of $717
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 of $230 thousand from
the Bank in conjunction with the ESOP, the sale of Treasury shares in
conjunction with stock compensation plans, and payments on the $4.85 million
commercial business term loan primarily secured by stock in an insured
depository institution and maintained on non-accrual status at September 30,
2000. As this non-accrual loan nears its December 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.
MBBC intends to pursue obtaining a line of credit from a financial
institution (other than the Bank) during the fourth quarter of 2000 to provide
an additional source of liquidity. In order to obtain this line of credit, MBBC
may need to pledge or encumber a portion of its treasury shares.
25
<PAGE>
Capital Resources And Regulatory Capital Compliance
<TABLE>
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:
<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>
<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 September 30, 2000 as compared to such ratios.
<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 $ 35,597 7.43% $ 35,597 10.53% $ 39,825 11.79%
Well capitalized requirement 23,944 5.00% 20,276 6.00% 33,793 10.00%
-------- ---- -------- ---- -------- ----
Excess $ 11,653 2.43% $ 15,321 4.53% $ 6,032 1.79%
======== ==== ======== ==== ======== ====
Adjusted assets (1) $478,875 $337,928 $337,928
======== ======== ========
<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.
September 30, 2000 December 31, 1999
------------------ -----------------
Core capital to adjusted total assets 7.43% 7.11%
Core capital to risk-weighted assets 10.53% 9.58%
Total capital to risk-weighted assets 11.79% 10.56%
26
<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 September 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 $35,597 7.43%
Minimum required 7,183 1.50%
------- ----
Excess $28,414 5.93%
======= ====
Core Capital
------------
Regulatory capital $35,597 7.43%
Minimum required 19,155 4.00%
------- ----
Excess $16,442 3.43%
======= ====
Percent Of
Risk-
weighted
Amount Assets
------ ------
Risk-based Capital
------------------
Regulatory capital $39,825 11.79%
Minimum required 27,034 8.00%
------- ----
Excess $12,791 3.79%
======= ====
At September 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.
27
<PAGE>
Asset Quality / Credit Profile
Non-performing Assets
<TABLE>
The following table sets forth information regarding non-performing
assets at the dates indicated.
<CAPTION>
(Dollars In Thousands) September 30, 2000 December 31, 1999
<S> <C> <C>
Outstanding Balances Before Valuation Reserves
Non-accrual loans $ 6,756 $ 6,888
Loans 90 or more days delinquent and accruing interest -- --
Restructured loans in compliance with modified terms 75 1,294
------- -------
Total gross non-performing loans 6,831 8,182
Investment in foreclosed real estate before valuation reserves -- 96
Repossessed consumer assets -- --
Total gross non-performing assets $ 6,831 $ 8,278
======= =======
Gross non-accrual loans to total loans 1.75% 1.89%
Gross non-performing loans to total loans 1.76% 2.25%
Gross non-performing assets to total assets 1.41% 1.79%
Allowance for loan losses $ 4,806 $ 3,502
Valuation allowances for foreclosed real estate $ -- $ --
</TABLE>
Non-accrual loans at September 30, 2000 are detailed in the following
table:
(Dollars In Thousands) Number Principal Balance
Of Outstanding At
Category Of Loan Loans September 30, 2000
---------------- ----- ------------------
Residential mortgage 4 $ 695
Commercial & industrial real estate loan 2 1,129
Business term loan 1 4,850
Business line of credit 3 82
-- -------
Total 10 $ 6,756
== =======
The $4.85 million business term loan in the above table was originated
by MBBC and is primarily secured by the common stock of a depository institution
conducting business outside the State of California. The common stock collateral
is not publicly traded. However, the reported book value of the associated
depository institution is approximately $8.2 million at September 30, 2000.
During the third quarter of 2000, the MBBC obtained additional collateral for
this credit, including a third deed of trust on a commercial building, a third
party promissory note, and common stock in two closely held, privately owned
corporations. MBBC also has a personal guarantee signed by a large stockholder
of the borrower.
The outstanding balance of this $4.85 million business term loan was
reduced by $150 thousand during the most recent quarter in conjunction with
principal payments received from the borrower. An additional $25 thousand
principal repayment was received in early October, 2000, reducing the principal
balance to $4,825,000. 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 maintained a $200 thousand specific
reserve for this loan as of September 30, 2000. While the Company's management
has been working with the borrower and legal counsel for both parties to secure
timely repayment, the Company is presently unable to verify that the borrower
has access to sufficient liquidity to repay this loan at maturity. If the
borrower does not repay the loan by its maturity date, the Company will pursue
one or more of various alternatives including, but not limited to, acquiring
ownership of the associated collateral and seeking payment from the guarantor.
28
<PAGE>
The two commercial and industrial real estate loans on non-accrual
status at September 30, 2000 are secured by real property located in the
Company's primary market area. Periodic payments have recently been received on
both these loans.
Criticized And Classified Assets
<TABLE>
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.
<CAPTION>
(Dollars In Thousands) OAEM Substandard Doubtful Loss Total
---- ----------- -------- ---- -----
<S> <C> <C> <C> <C> <C>
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
September 30, 2000 $ 2,875 $ 13,249 $ -- $ 200 $16,324
</TABLE>
Classified assets as a percent of stockholders' equity increased from
21.5% at December 31, 1999 to 31.7% at September 30, 2000. The increase in
substandard loans during the third quarter of 2000 primarily stemmed from the
internal credit downgrade of a commercial construction loan with an outstanding
balance of $2.8 million and a total commitment amount of $3.1 million. The real
property associated with this loan is located in the Company's primary market
area. This loan was negatively impacted by the inability of the principals to
obtain an occupancy permit from local governmental agencies. The project is
nearing completion and the Company believes there is reasonable market demand
for the project. The Company is currently negotiating and working with the
principals to:
o have them complete the final stages of construction without additional
Company funds
o have them place additional funds on deposit with the Company
o timely pursue the acquisition of at least a partial occupancy permit in
order to generate cash flow from the project
However, there can be no assurance that the Company will be successful in the
above pursuits. There is a second deed of trust holder on the real property that
is subordinate to the Company. Based upon the value of the real property and the
financial strength and liquidity of the principals, no specific reserve has been
allocated to this loan at September 30, 2000. The loan is current in its
payments as of September 30, 2000.
At September 30, 2000, the Company was in the process of working with
borrowers to improve the credit profile of a number of criticized and classified
loans. The Company's efforts in this regard are projected to be bolstered by the
recent addition of two veteran commercial bankers with extensive credit
experience. Although there can be no assurances, should the Company be
successful in these efforts, a reduction in criticized and classified assets
could be realized before the conclusion of 2000, as a number of the loans with
OAEM or substandard grades at September 30, 2000 presented the potential for an
improvement in credit profile.
Impaired Loans
At September 30, 2000, the Company had total gross impaired loans,
before specific reserves, of $10.5 million, constituting 17 credits. This
compares to gross impaired loans of $8.2 million at December 31, 1999. Of the
total impaired loans at September 30, 2000, $3.8 million were either 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 nine months ended September 30, 2000,
accrued interest on impaired loans was $61 thousand and interest of $849
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 $564 thousand during the nine months ended September 30,
2000, instead of interest income actually recognized on cash payments of $537
thousand.
29
<PAGE>
Special Residential Loan Pool
During 1998, the Bank purchased a $40.0 million residential mortgage
pool comprised of loans secured by homes throughout the nation (but with a
concentration in California) 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 September 30, 2000, the outstanding balance of this mortgage loan
pool was $29.3 million, with $2.83 million received during October, 2000 (normal
monthly remittance cycle) based upon prepayments and scheduled principal for
September, 2000. At December 31, 1999, the outstanding principal balance of this
mortgage loan pool was $35.0 million. By the end of 2000, all of the loans in
the pool will have converted from fixed rate to adjustable rate, with a
substantial increase in interest rate at the time of such conversion. Because of
this upward rate reset feature, the Bank anticipates that the pool will continue
experiencing significant prepayments, particularly during the fourth quarter of
2000 when there is a high concentration of initial interest rate reset dates.
Following their initial interest rate adjustment, the loans will reprice on a
semi-annual basis. The Bank continues to report to the OTS in this regard on a
monthly basis.
Through the October 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 2000, the Company determined to
allocate additional reserves for this loan pool due to:
o concerns regarding the future capacity of the seller / servicer to honor
the credit guaranty
o the present delinquency and credit profile of the loan pool
o the differential between loan principal balances and current appraisals for
certain loans in the process of foreclosure or already foreclosed upon
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. Portfolio statistics as of the October 20, 2000 remittance
for activity through September 30, 2000 include the following:
(Dollars In Thousands) Company
Number Outstanding
Of Investment
Category Loans In Loans
-------- ----- --------
Customer paying per note terms 149 $ 22,760
Customer 30 days delinquent 16 1,683
Customer 60 days delinquent 2 218
Customer 90 days or more delinquent 9 1,073
Foreclosed 5 727
--- --------
Total 181 $ 26,461
=== ========
The loans presented as delinquent or foreclosed in the above table are
not reported as delinquent, non-accrual, impaired, or foreclosed by the Company,
as the seller / servicer has advanced scheduled interest and scheduled principal
payments on the loans and thus maintained them all on a current status with the
Company.
30
<PAGE>
Additional portfolio statistics as of the October 20, 2000 remittance
for activity through September 30, 2000 include the information presented in the
following table. FICO Score is a mathematical calculation used throughout the
mortgage banking industry that incorporates various variables in quantifying a
borrower's credit strength. A higher FICO Score is associated with a borrower
who presents a stronger credit profile; e.g. few or no late payments on existing
or historical debt, regular employment history, favorable financial profile,
etc. A lower FICO Score is associated with a borrower who presents a weaker
credit profile; e.g. multiple late payments, uncollected debt, open judgements
against the borrower, etc. Various statistical studies in the mortgage banking
industry have shown that credit losses typically increase exponentially as FICO
Scores decline. In other words, the incremental default rate expected for a
change from a 550 FICO Score to a 500 FICO Score is much larger than the
incremental default rate expected for a change from a 750 FICO Score to a 700
FICO Score. According to an article posted on the Fair, Isaac, and Company
Internet site (Fair Isaac is an industry leader in credit scoring), most
mortgage bankers view a FICO Score of 640 or more as allowing the average
borrower to obtain a home loan. Actual results may vary on a case by case basis.
The FICO Scores utilized in the following table are the original FICO
Scores for the borrowers which were calculated in 1998 by the seller / servicer
of the Special Residential Loan Pool. Borrower credit profiles could have
changed, favorably or unfavorably, since that time.
(Dollars In Thousands) Company
Number Outstanding
Of Investment
Original FICO Score Range Loans In Loans
------------------------- ----- --------
Less than 500 6 $ 1,405
500 through 549 26 4,094
550 through 599 57 7,509
600 through 649 57 9,162
650 through 699 28 3,467
700 through 749 3 284
Above 749 4 540
--- --------
Total 181 $ 26,461
=== ========
The weighted average original FICO score for the Special Residential
Loan Pool as of the October 20, 2000 remittance for activity through September
30, 2000 was 595.
The original loan to value ratios for the Special Residential Loan Pool
as of the October 20, 2000 remittance for activity through September 30, 2000
ranged from 26% to 100%. A single loan presented an original loan to value ratio
of 100%, with the next highest original loan to value ratio being 90%. However,
based upon current appraisals for foreclosed properties and properties in the
process of foreclosure within the Special Residential Loan Pool, the Company has
become aware of deficiencies in the current market value of certain collateral
versus the associated loan balances.
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
31
<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.
<TABLE>
The following table presents activity in the Company's allowance for
loan losses during the nine months ended September 30, 2000 and September 30,
1999:
<CAPTION>
Nine Months Ended September 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 1,675 685
------- -------
Balance at September 30 $ 4,806 $ 3,352
======= =======
Ratio of net charge-offs during the period to average gross loans
outstanding during the period net of undisbursed loan funds 0.13% 0.04%
Additional ratios applicable to the allowance for loan losses include:
September 30, 2000 December 31, 1999
------------------ -----------------
Allowance for loan losses as a percent of non-performing loans 70.36% 42.80%
Allowance for loan losses as a percent of gross loans receivable
net of undisbursed loan funds 1.24% 0.96%
Allowance for loan losses as a percent of classified assets 35.73% 39.91%
</TABLE>
32
<PAGE>
As subsequently discussed (see "Provision For Loan Losses"), the higher
provision for loan losses recorded during the first nine months of 2000 versus
the same period in the prior year resulted from several factors, including:
o a $371 thousand charge-off during the second quarter of 2000 that
represented a 100% charge-off of a residential mortgage secured by a home
significantly damaged by substantial earth movement
o additional reserves for the Special Residential Loan Pool described above
o an increase in classified assets
o growth in the size of the loan portfolio
o the portfolio's continuing diversification away from its historic
concentration in residential real estate.
Management anticipates that further growth in loans receivable, ongoing
emphasis on the origination and purchase of construction and income property
real estate loans, and the planned expansion of commercial business lending 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, commercial business, and income property
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 Nine Months
Ended September 30, 2000 and September 30, 1999
General
For the quarter ended September 30, 2000, the Company reported net
income of $461 thousand, equivalent to $0.15 basic and diluted earnings per
share. This compares to net income of $950 thousand, or $0.29 basic earnings per
share and $0.28 diluted earnings per share, during the third quarter of 1999.
For the nine months ended September 30, 2000, the Company reported net
income of $1.81 million, equivalent to $0.58 basic and diluted earnings per
share. This compares to net income of $2.66 million, or $0.82 basic earnings per
share and $0.80 diluted earnings per share, during the first nine months of
1999.
Primary factors which constrained earnings during 2000 compared to the
same periods in 1999 included:
o increased provisions for loan losses
o less favorable results on the sale of securities
o an adjustment to net deferred loan fees during the third quarter of 1999
that increased interest income by $140 thousand on a one-time basis
o higher operating costs
o during the third quarter of 2000, an accrual of $250 thousand for a
separation package being negotiated with Marshall G. Delk, who resigned as
President & Chief Operating Officer of the Company on September 29, 2000.
Mr. Delk had employment agreements with the Bank and MBBC.
The above factors more than offset a strong expansion in net interest income,
increased service charge income, and other beneficial impacts arising from the
Company's progress in achieving its strategic transformation into a community
commercial bank.
33
<PAGE>
Interest Rate Environment
The table below presents an overview of the interest rate environment
during the most recent seven quarters. Market interest rates have varied
considerably during this time period. In mid 1999, the Federal Reserve commenced
what became six separate increases totaling 175 basis points in its target
federal funds rate, with the last increase occurring in May, 2000. As a result,
market interest rates generally rose through mid-2000.
During the third quarter of 2000, many market interest rates began
declining, as a slowing, though still healthy, economy combined with strong
productivity increases convinced many capital markets participants that the
crest of the interest rate cycle had been attained. By the end of the third
quarter of 2000, the LIBOR curve had become almost flat, the Treasury curve had
inverted, fixed mortgage rates were in decline (resulting in increased refinance
activity), and forward interest rates began to reflect a possible rate cut by
the Federal Reserve during the first half of 2001. However, there can be no
assurances as to what action, if any, the Federal Reserve might take at any
time.
During much of the past seven quarters, the Treasury curve has also
been impacted by the US Government's repurchasing of longer dated Treasury
securities in conjunction with the growing federal budget surplus. These
repurchases reduced the supply of 30 year Treasury bonds, thereby driving up the
price and decreasing the yield.
At September 30, 2000, the entire Treasury curve provided a bond
equivalent yield notably below the Federal Reserve's targeted federal funds rate
of 6.50%. 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.
<TABLE>
The interest rate environment at September 30, 2000 constituted a
traditionally difficult one for financial institutions, including the Bank. The
flatness of the term structure of interest rates reduced net interest income
generated by differences in asset and liability durations. In addition, yield
differentials between shorter term wholesale funding and most high credit
quality, low duration spread products (i.e. securities bought with the objective
of generating net interest income) were at historically low levels, impairing
interest margins and leading a number of financial institutions to sell
securities, repay wholesale debt, and re-deploy the freed capital into other
areas.
<CAPTION>
Index 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99 3/31/00 6/30/00 9/30/00
----- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <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% 6.21%
6 month Treasury bill 4.54% 4.52% 5.03% 4.96% 5.73% 6.14% 6.22% 6.27%
1 year Treasury bill 4.52% 4.71% 5.05% 5.18% 5.96% 6.24% 6.06% 6.08%
2 year Treasury note 4.53% 4.98% 5.52% 5.60% 6.24% 6.48% 6.36% 5.97%
5 year Treasury note 4.54% 5.10% 5.65% 5.76% 6.34% 6.32% 6.18% 5.84%
30 year Treasury bond 5.09% 5.62% 5.97% 6.05% 6.48% 5.84% 5.90% 5.88%
Prime rate 7.75% 7.75% 7.75% 8.25% 8.50% 9.00% 9.50% 9.50%
COFI 4.66% 4.52% 4.50% 4.61% 4.85% 5.00% 5.36% 5.55%
</TABLE>
34
<PAGE>
Net Interest Income
Net interest income rose slightly from $4.36 million during the quarter
ended September 30, 1999 to $4.40 million during the most recent three months.
The third quarter of 1999 benefited from a $140 thousand, one-time adjustment to
net deferred loan fees. Net interest income for the first nine months of 2000
totaled $13.45 million, up 11.7% from $12.04 million during the first nine
months of 1999. These increases were favorably impacted by a larger average
balance sheet in 2000 versus 1999. The Company's average margin on total assets
improved from 3.56% during the first nine months of 1999 to 3.80% for the first
nine months of 2000. The Company's average margin on total assets declined from
3.87% during the quarter ended September 30, 1999 to 3.67% in the three months
ended September 30, 2000. The Company's ratio of net interest income to average
total assets was lower in the most recent quarter than during the first half of
2000 due to:
o the maturity of certain funding locked in during the latter part of 1999
and early 2000, which provided the Company with additional net interest
income during a rising interest rate environment during the first half of
the year
o the aforementioned interest rate environment during the third quarter of
2000, with incremental funding costs and incremental investment yields at
historically narrow spreads (i.e. the Company realized a comparatively
small spread on the $12.6 million in balance sheet growth recorded during
the third quarter of 2000)
o loans receivable representing a lower percentage of average total assets
during the third quarter of 2000 than earlier in 2000, in conjunction with
a softening in loan production during the most recent quarter
o a lower average balance of certain relatively higher yielding construction
loans during the third quarter of 2000 than during the first half of 2000
The following factors contributed toward the improvement in spreads
realized in the first nine months of 2000 versus the similar period in 1999,
coincident with the Company's ongoing implementation of its strategic plan:
o Average loans as a percentage of average total assets increased from 73.2%
during the first nine months of 1999 to 79.5% during the first nine months
of 2000. This change in asset 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 nine months of 2000 (32.8%) than during the
same period a year earlier (30.5%). 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 8.26% during the nine
months of 2000, up 55 basis points from a year earlier. In contrast, the
Company's average cost of interest bearing liabilities was just 27 basis
points higher during the first nine months of 2000 than during the first
nine 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, utilizing new and lower cost sources of wholesale
funding, and by having a portion of its 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. During 2000, the Company 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 fixed rate hybrid products.
35
<PAGE>
<TABLE>
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 September 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.
<CAPTION>
Three Months Ended September 30, 2000 Three Months Ended September 30, 1999
---------------------------------------- ----------------------------------------
(Dollars In Thousands) Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets
------
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C> <C>
Cash equivalents (1) $ 11,303 $ 187 6.58% $ 4,942 $ 62 4.71%
Investment securities (2) 7,471 150 8.03% 11,476 179 6.06%
Mortgage backed securities (3) 58,392 1,011 6.93% 63,705 1,085 6.58%
Loans receivable, net (4) 379,048 8,118 8.57% 347,167 7,211 8.00%
FHLB stock 2,869 48 6.66% 3,159 41 5.27%
--------- ------ --------- ------
Total interest earning assets 459,083 9,514 8.29% 430,449 8,578 7.60%
Non-interest earnings assets 20,344 ------ 20,152 ------
--------- ---------
Total assets $ 479,427 $ 450,601
Liabilities & Equity
--------------------
Interest bearing liabilities:
NOW accounts $ 37,419 137 1.46% $ 26,798 107 1.54%
Savings accounts 15,885 64 1.60% 15,571 71 1.79%
Money market accounts 91,749 1,088 4.72% 91,697 962 4.16%
Certificates of deposit 233,497 3,243 5.53% 216,152 2,535 4.79%
--------- ------ --------- ------ ----
Total interest-bearing deposits 378,550 4,532 4.76% 350,218 3,675 4.29%
FHLB advances 40,675 583 5.70% 36,652 505 5.50%
Other borrowings (5) 11 -- 6.73% 2,530 38 5.78%
--------- ------ --------- ------
Total interest-bearing liabilities 419,236 5,115 4.85% 389,400 4,218 4.41%
Demand deposit accounts 16,642 ------ 17,856 ------
Other non-interest bearing
liabilities 3,001 1,647
--------- ---------
Total liabilities 438,879 408,903
Stockholders' equity 40,548 41,698
--------- ---------
Total liabilities & equity $ 479,427 $ 450,601
========= =========
Net interest income $4,399 $4,360
====== ======
Interest rate spread (6) 3.44% 3.67%
Net interest earning assets 39,847 41,049
Net interest margin (7) 3.83% 4.05%
Net interest income /
average total assets 3.67% 3.87%
Interest earnings assets /
interest bearing liabilities 1.10 1.11
<FN>
Average balances in the above table were calculated using average daily figures.
--------------------------------------------------------------------------------
(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 $69,000 and $182,000 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>
36
<PAGE>
<TABLE>
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 nine months ended September 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.
<CAPTION>
Nine Months Ended September 30, 2000 Nine Months Ended September 30, 1999
---------------------------------------- ----------------------------------------
(Dollars In Thousands) Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
Assets
------
Interest earning assets:
<S> <C> <C> <C> <C> <C> <C>
Cash equivalents (1) $ 8,733 $ 411 6.29% $ 6,830 $ 244 4.78%
Investment securities (2) 9,397 536 7.62% 14,394 669 6.21%
Mortgage backed securities (3) 55,052 2,888 6.99% 77,510 3,842 6.61%
Loans receivable, net (4) 375,140 23,972 8.52% 329,965 20,103 8.12%
FHLB stock 3,047 169 7.41% 3,118 118 5.06%
--------- -------- --------- --------
Total interest earning assets 451,369 27,976 8.26% 431,817 24,976 7.71%
Non-interest earnings assets 20,491 19,031
--------- ---------
Total assets $ 471,860 $ 450,848
========= =========
Liabilities & Equity
--------------------
Interest bearing liabilities:
NOW accounts $ 34,781 399 1.53% $ 23,538 270 1.53%
Savings accounts 15,506 199 1.71% 15,444 208 1.80%
Money market accounts 87,747 2,986 4.55% 81,043 2,515 4.15%
Certificates of deposit 228,437 8,985 5.25% 231,229 8,354 4.83%
--------- -------- --------- --------
Total interest-bearing deposits 366,471 12,569 4.58% 351,254 11,347 4.32%
FHLB advances 45,392 1,950 5.74% 35,098 1,443 5.50%
Other borrowings (5) 225 11 6.53% 3,413 146 5.72%
--------- -------- --------- --------
Total interest-bearing liabilities 412,088 12,530 4.71% 389,765 12,936 4.44%
Demand deposit accounts 16,722 -------- 17,635 --------
Other non-interest bearing 3,058 1,804
liabilities --------- ---------
Total liabilities 431,868 409,204
Stockholders' equity 39,992 41,644
--------- ---------
Total liabilities & equity $ 471,860 $ 450,848
========= =========
Net interest income $ 13,446 $ 12,040
======== ========
Interest rate spread (6) 3.55% 3.27%
Net interest earning assets 39,281 42,052
Net interest margin (7) 3.97% 3.72%
Net interest income /
average total assets 3.80% 3.56%
Interest earnings assets /
interest bearing liabilities 1.10 1.11
<FN>
Average balances in the above table were calculated using average daily figures.
--------------------------------------------------------------------------------
(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 $211,000 and $252,000 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>
37
<PAGE>
Rate / Volume Analysis
<TABLE>
The following tables utilize the figures from the preceding 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.
<CAPTION>
Three Months Ended September 30, 2000
Compared To
Three Months Ended September 30, 1999
----------------------------------------------------------------------
Volume
(Dollars In Thousands) Volume Rate / Rate Net
------ ---- ------ ---
<S> <C> <C> <C> <C>
Interest-earning assets
-----------------------
Cash equivalents $ 79 $ 20 $ 26 $ 125
Investment securities (62) 51 (18) (29)
Mortgage backed securities (90) 18 (2) (74)
Loans receivable, net 662 224 21 907
FHLB Stock (4) 12 (1) 7
----- ------ ----- -----
Total interest-earning assets 585 325 26 936
----- ------ ----- -----
Interest-bearing liabilities
----------------------------
NOW Accounts 42 (9) (3) 30
Savings accounts 1 (8) -- (7)
Money market accounts 1 125 -- 126
Certificates of deposit 202 471 35 708
----- ------ ----- -----
Total interest-bearing deposits 246 579 32 857
FHLB advances 55 22 1 78
Other borrowings (38) 5 (5) (38)
----- ------ ----- -----
Total interest-bearing liabilities 263 606 28 897
----- ------ ----- -----
Increase in net interest income $ 322 $ (281) $ (2) $ 39
===== ====== ===== =====
</TABLE>
38
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
Compared To
Nine Months Ended September 30, 1999
----------------------------------------------------------------------
Volume
(Dollars In Thousands) Volume Rate / Rate Net
------ ---- ------ ---
<S> <C> <C> <C> <C>
Interest-earning assets
-----------------------
Cash equivalents $ 68 $ 77 $ 22 $ 167
Investment securities (233) 152 (52) (133)
Mortgage backed securities (1,113) 224 (65) (954)
Loans receivable, net 2,752 982 135 3,869
FHLB Stock (3) 55 (1) 51
----- ----- ----- ------
Total interest-earning assets 1,471 1,490 39 3,000
----- ----- ----- ------
Interest-bearing liabilities
----------------------------
NOW Accounts 129 -- -- 129
Savings accounts 1 (10) -- (9)
Money market accounts 209 241 21 471
Certificates of deposit (101) 738 (6) 631
----- ----- ----- ------
Total interest-bearing deposits 238 969 15 1,222
FHLB advances 424 64 19 507
Other borrowings (137) 21 (19) (135)
----- ----- ----- ------
Total interest-bearing liabilities 525 1,054 15 1,594
----- ----- ----- ------
Increase (decrease) in net interest income $ 946 $ 436 $ 24 $1,406
===== ===== ===== ======
</TABLE>
Interest Income
Interest income increased from $8.6 million and $25.0 million during
the three and nine months ended September 30, 1999 to $9.5 million and $28.0
million during the three and nine 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 nine months ended
September 30, 2000 compared to the same periods during the prior year
39
<PAGE>
Interest income on loans rose from $7.2 million during the three months
ended September 30, 1999 to $8.1 million during the most recent quarter. For the
nine months ended September 30, 2000, interest income on loans totaled $24.0
million, up 19.2% from $20.1 million during the first nine months 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 strategic plan of increasing the percentage of the balance sheet
comprised of loans through internal originations, loan pool purchases on the
secondary market, and loan participations; with the latter primarily through
other California community banks. 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
Interest income on cash equivalents rose from $62 thousand and $244
thousand for the three and nine months ended September 30, 1999 to $187 thousand
and $411 thousand for the same periods in 2000. These increases occurred due to
a combination of higher volumes and higher 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. During the
third quarter of 2000, the Company maintained a higher average balance of cash
equivalents than targeted due to loan originations below forecasted levels and
due to loan purchases closing toward the end of the period.
Interest income on investment securities declined from $179 thousand
and $669 thousand during the three and nine months ended September 30, 1999 to
$150 thousand and $536 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 $1.1 million
and $3.8 million during the three and nine months ended September 30, 1999 to
$1.0 million and $2.9 million during the same periods in 2000. This decrease was
primarily caused by a reduction in volume, as the Company used the proceeds from
prepayments and sales of mortgage backed securities to fund growth in the loan
portfolio and, in 2000, repay FHLB advances and other borrowings. 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 $118
thousand during the three and nine months ended September 30, 1999 to $48
thousand and $169 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 two quarters of 2000 in conjunction with its capital management plan
40
<PAGE>
Interest Expense
Interest expense on deposits increased from $3.7 million and $11.3
million during the three and nine months ended September 30, 1999 to $4.5
million and $12.6 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 strategic plan to continue
expanding its deposit base. 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 other financial institutions
and non-bank competitors including money market mutual funds.
The Company's interest expense on deposits during the third quarter of
2000 was impacted by:
o the addition of the State of California $8.0 million time deposit, which is
priced more similar to a wholesale borrowing than to a retail certificate
of deposit
o the rollover and substantial upward repricing of a significant portion of
the certificate of deposit portfolio in June, 2000
These factors significantly contributed to the weighted average cost of deposits
rising from 4.39% during the second quarter of 2000 to 4.56% during the third
quarter of 2000.
A number of financial institution competitors also priced their
deposits more aggressively and extensively marketed those products and price
points during the third quarter of 2000, causing the Company to selectively
raise deposit rates in order to retain both funds and customer relationships.
Actions by competitors included extensive but targeted direct mail campaigns and
the introduction of a new indexed money market product accompanied by widespread
media advertising. In addition, many Internet based financial institutions
continue to offer relatively high certificate of deposit rates. The Company has
sought to constrain the rise in its cost of deposits by attracting additional
transaction account balances, particular consumer and business checking
accounts.
During 2000, the Company has been 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. To further reduce the
concentration of certificates of deposit in the deposit portfolio and moderate
the cost of funds, the Company intends to introduce new transaction account
products and services in the future, particularly those targeted at business
customers,.
At September 30, 2000, the Company's weighted average nominal cost of
deposits was 4.60%, or 95 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. The Company's weighted average
nominal cost of deposits was 4.48% at June 30, 2000, or 88 basis points below
the COFI Index for the same date.
Interest expense on borrowings increased from $543 thousand and $1.6
million during the three and nine months ended September 30, 1999 to $583
thousand and $2.0 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 in
conjunction with the capital markets environment.
41
<PAGE>
Provision For Loan Losses
Provision for loan losses totaled $650 thousand during the three months
ended September 30, 2000, up from $265 thousand during the third quarter of
1999. Provision for loan losses for 2000 year to date total $1,675 thousand,
significantly above the $685 thousand recorded during the first nine months of
1999. The significantly higher provisions during the 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 and third
quarters of 2000 for the Special Residential Loan Pool which the Company
purchased in 1998. While the seller has met all its contractual obligations
through October, 2000, the Company allocated additional reserves due to concerns
regarding the future capacity of the seller to honor its credit guaranty, the
present delinquency profile of the mortgage pool, and the differential between
loan principal balances and current appraisals for foreclosed loans and loans in
the process of foreclosure (see Special Residential Loan Pool).
Loans rated "substandard" by the Company increased from $7.8 million at
March 31, 2000 to $9.9 million at June 30, 2000 to $13.2 million at September
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. During the third quarter of 2000, a commercial construction loan
with an outstanding balance of $2.8 million and a total commitment amount of
$3.1 million was downgraded to substandard, contributing to an increased need
for loan loss reserves at September 30, 2000.
The size of the Company's loan portfolio has increased throughout 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 1.24% at September 30, 2000. The
Company anticipates that this ratio will continue to increase in the fourth
quarter of 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. The Company has recently hired two experienced
commercial bankers to augment its production and management of commercial
business loans.
42
<PAGE>
Non-interest Income
Non-interest income increased from $564 thousand during the third
quarter of 1999 to $630 thousand during the three months ended September 30,
2000. In contrast, non-interest income declined from $2.0 million during the
first nine months of 1999 to $1.7 million during the first nine months of 2000.
The reduction in year to date figures was primarily caused by differing results
on the sale of securities; partially mitigated by an increase in service
charges. During the first nine months 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, resulting in an aggregate $580 thousand pre-tax difference.
Non-interest income from the Company's core operations has generally
showed strong improvement over the past year. Fee income from customer service
charges increased 31.9% from $270 thousand during the third quarter of 1999 to
$356 thousand during the third quarter of 2000. Year to date results are
similar, with customer service charges increasing from $747 thousand during the
first nine months of 1999 to $949 thousand for 2000. The rise in service charge
income during 2000 has resulted from:
o the Company's growing base of transaction accounts
o increased debit card activity by the Bank's customers
o a new fee & service charge schedule that was implemented during the third
quarter of 2000
The Company is pursuing higher service charge income in future quarters
through:
o the installation of an additional remote ATM
o further increases in the portfolio of transaction accounts
o the implementation of Internet banking with electronic bill payment
o the conversion of additional business checking accounts to account analysis
Commissions from the sale of non-FDIC insured products experienced a
comparatively weak quarter during the third quarter of 2000, with results
impaired by a lack of a President for the Bank's Portola Investment Corporation
subsidiary and by the write-off of certain accounts receivable. Commissions from
sales of noninsured products declined from $194 thousand during the third
quarter of 1999 to $145 thousand during the third quarter of 2000. The Bank has
retained an executive search firm to assist in hiring a new President for
Portola Investment Corporation, who functions as the alternative investment
program manager for the Bank. For the first nine months of 2000, commissions
from the sale of non-FDIC insured investment products totaled $534 thousand, up
from $465 thousand during the first nine months of 1999.
Income from loan servicing declined from $46 thousand and $111 thousand
during the three and nine months ended September 30, 1999 to $30 thousand and
$90 thousand during the similar periods in 2000. Because the Company has been
conducting its mortgage banking on a servicing released basis and because of
principal reductions on the existing portfolio of loans serviced for others
(particularly Agency servicing), the Company anticipates that loan servicing for
others will continue to decrease.
43
<PAGE>
General & Administrative Expense
General & administrative expenses rose from $2.97 million during the
third quarter of 1999 to $3.55 million during the most recent three months.
General & administrative expenses increased from $8.68 million during the first
nine months of 1999 to $10.26 million during the first nine months of 2000. The
Company's ratio of general & administrative expense to average total assets
increased from 2.64% during the quarter ended September 30, 1999 to 2.96% for
the most recent three months. There was a similar increase in this ratio for the
first nine months of 2000 versus 1999. Higher expense levels were realized in
most areas of the Company's operations as a result of increased business volumes
and several other factors, as discussed below.
Compensation and employee benefits expense was $543 thousand higher
during the third quarter of 2000 than during the third quarter of 1999.
September 30 year to date compensation and employee benefits expense was $909
thousand higher in 2000 than in 1999. Factors leading to these increases
included:
o an accrual of $250 thousand during the third quarter of 2000 in conjunction
with the negotiation of a separation package for Marshall G. Delk, who
resigned as President & Chief Operating Officer on September 29, 2000. Mr.
Delk maintained employment contracts with both the Bank and MBBC.
o a larger average employee base in 2000, with 9.5% more full-time
equivalents ("FTE's") employed at September 30, 2000 versus September 30,
1999
o $30 thousand in employee relocation costs during 2000, including $20
thousand during the third quarter
o higher expenses for performance based incentive and commission plans,
including $150 thousand in accrued costs for a new program introduced in
2000 associated with performance based cash incentives
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 a new Chief Executive Officer, a Chief Financial Officer, a
Controller, and a Systems Conversion Manager 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
Occupancy and equipment expenses increased in 2000 versus the prior
year in part in conjunction with the hiring of a new facility management company
in 2000. The new facility management company 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. In addition, due to the short term, and more expensive, renewal of the
Company's current primary data processing contract during the second quarter of
2000, the Company anticipates continuing to incur greater data processing costs
until conversion to the new core processing platform during 2001. The new core
processing platform is built upon a leading relational database and operates in
a client / server environment. This new core processing platform was selected
because of its ability to effectively support the Company's strategic
transformation and due to the efficiencies inherent in its structure and design.
The Company is using the implementation of the new core processing system as an
opportunity to re-engineer a wide range of processes, from demand deposit
account analysis to security accounting to safe deposit box billing.
Legal and accounting costs were $54 thousand greater in the most recent
quarter than they were during the third quarter of 1999. September 30, 2000 year
to date legal and accounting costs totaled $167 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 nine 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, a review
of certain employee benefit plans, the administration and collection of the
$4.85 million non-accrual loan originated by MBBC, and research into a potential
change in charter for the Bank.
44
<PAGE>
Expenses for consulting increased from $49 thousand during the first
nine months of 1999 to $118 thousand during the first nine months of 2000.
During 2000, the Company has retained consultants to assist in a number of
areas, including systems conversions, Internet banking, regulatory compliance
testing, compensation and benefit planning, and loan credit review. Charitable
contributions increased from $33 thousand during the first nine months of 1999
to $65 thousand during the first nine months of 2000.
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; and to receive upon retirement certain benefits 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 $56 thousand in
expense has been recorded for this Program in 2000.
During the nine months ended September 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 growth in customer accounts. Operating expenses during the third
quarter of 2000 were also increased by various promotional costs related to the
Company's 75th anniversary. The Company used the 75th anniversary milestone to
conduct a series of community outreach events aimed at increasing visibility and
developing new customer relationships. 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. In conjunction with this process, the Bank commenced
operating as the "bank of first deposit" in October, and thus settled certain of
its accounts directly with the Federal Reserve Bank of San Francisco.
The Company's Board of Directors and Management recognize the
importance of reducing the Company's ratio of general & administrative expense
to average total assets in improving profitability. During the second quarter of
2000, the Company made the final payment to the investment banking firm that had
been retained in 1999. The Company terminated all of its directly owned
universal life insurance policies during 2000. The surrender of these policies
reduces future periodic operating costs and provides additional cash for lending
and investment. During the third quarter of 2000, the Company commenced a broad
initiative to constrain its operating costs. The Company intends to continue
reviewing its vendor relationships and internal operating costs as the tactical
business plan for 2001 is finalized and as the integration planning and
re-engineering for the new core processing environment is completed.
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 nine 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.
45
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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
No matters were submitted to a vote of security holders during the
quarter ended September 30, 2000.
Item 5. Other Information
None.
Item 6. Exhibits And Reports On Form 8-K
A. Exhibits
27 Financial Data Schedule (in electronic filing only)
B. Reports On Form 8-K
During the period July 1, 2000 through October 31, 2000, the
Company filed the following Current Reports on Form 8-K:
1. Form 8-K dated September 8, 2000. This Current Report
reported the signing of an Information Processing
System Agreement between Monterey Bay Bank and Open
Solutions, Inc.
2. Form 8-K dated September 29, 2000. This Current
Report reported the resignation of Marshall G. Delk
from his positions as President and Chief Operating
Officer at both Monterey Bay Bancorp, Inc. and
Monterey Bay Bank.
3. Form 8-K dated October 20, 2000. This Current Report
reported the hiring of David E. Porter as Senior Vice
President of Commercial and Retail Banking for
Monterey Bay Bank. This Current Report also reported
that C. Edward Holden was appointed President of both
Monterey Bay Bancorp, Inc. and Monterey Bay Bank.
This Current Report also reported the resignation of
Gary C. Tyack as Senior Vice President and Director
of Retail Banking for Monterey Bay Bank.
4. Form 8-K dated October 31, 2000. This Current Report
contained Registrant's third quarter earnings release
and information regarding changes in the Board of
Directors.
46
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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: November 13, 2000 By: /s/ C. Edward Holden
---------------------
C. Edward Holden
Chief Executive Officer
President
Vice Chairman
Date: November 13, 2000 By: /s/ Mark R. Andino
---------------------
Mark R. Andino
Chief Financial Officer
(Principal Financial &
Accounting Officer)
47
