SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act
of 1934 For the fiscal year ended December 31, 2000
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
(Title Of Class)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ____.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by "non-affiliates"
of the registrant, based upon the closing sale price of its Common Stock on
March 5, 2001, as quoted on the Nasdaq National Market System, was approximately
$20,944,000. Shares of common stock held by each officer, director, and holder
of 5% or more of the outstanding Common Stock have been excluded in that such
persons or entities may be deemed to be affiliates. Such determination of
affiliate status is not necessarily a conclusive determination for other
purposes.
The registrant had 3,419,764 shares of Common Stock outstanding as of
March 6, 2001.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the 2001 Annual Meeting
of Stockholders to be filed within 120 days of the fiscal year ended December
31, 2000 are incorporated by reference into Part III of this Form 10-K.
1
INDEX
PAGE
PART I
Item 1. Business.................................................................................... 3
Item 2. Properties.................................................................................. 64
Item 3. Legal Proceedings........................................................................... 65
Item 4. Submission of Matters to a Vote of Security Holders......................................... 65
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 66
Item 6. Selected Financial Data..................................................................... 67
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 69
Item 7a. Quantitative and Qualitative Disclosures About Market Risk.................................. 89
Item 8. Financial Statements and Supplementary Data................................................. 93
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 144
PART III
Item 10. Directors and Executive Officers of the Registrant.......................................... 144
Item 11. Executive Compensation...................................................................... 144
Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 144
Item 13. Certain Relationships and Related Transactions.............................................. 144
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K............................ 145
SIGNATURES.................................................................................................... 147
2
PART I
Discussions of certain matters in this Annual Report on Form 10-K 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. For a
discussion of some of the factors that might cause such a difference, including,
but not limited to, changes in interest rates, general economic conditions,
technology, legislative and regulatory changes, monetary and fiscal policies of
the US Government, US Treasury, and Federal Reserve, real estate valuations, the
availability and price of energy in California, and competition in the financial
services industry, see "Item 1. Business - Factors That May Affect Future
Results." 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.
Item 1. Business.
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"), formerly Watsonville Federal Savings and Loan
Association. 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 December 31, 2000, the Company had $486.2 million in total assets,
$391.8 million in net loans receivable, and $407.8 million in total deposits.
The Company is subject to regulation by the Office of Thrift Supervision
("OTS"), the Federal Deposit Insurance Corporation ("FDIC"), and the Securities
and Exchange Commission ("SEC"). 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: INFO@MONTEREYBAYBANK.COM.
Information concerning the Company may be accessed at the following Internet
site: WWW.MONTEREYBAYBANK.COM. 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 headquarters. In addition, the Company supports its customers
through Internet Banking, 24 hour telephone banking, courier service, mail, and
ATM access through 11 owned ATM's and an array of ATM networks including STAR,
CIRRUS, and PLUS.
3
Through its network of banking offices, the Bank emphasizes
personalized service focused upon three primary markets: households,
professionals, and small businesses. The Bank offers a wide complement of
lending products, including:
o a broad array of residential mortgage products, both fixed and adjustable
rate
o consumer loans, including home equity lines of credit and overdraft lines
of credit
o specialized financing programs to support community development
o mortgages for multifamily real estate
o commercial and industrial real estate loans
o construction lending for single family residences, apartment buildings, and
commercial real estate
o commercial loans to businesses, including both revolving lines of credit
and term loans
The Bank also provides an extensive selection of deposit instruments. These
include:
o multiple checking products for both personal and business accounts, with
imaged statements available
o various savings accounts
o tiered money market accounts offering a variety of access methods
o tax qualified deposit accounts (e.g. IRA's)
o a broad array of certificate of deposit products
Through its wholly-owned subsidiary, Portola Investment Corporation
("Portola"), the Bank provides, on an agency basis, mortgage life insurance,
fire insurance, and a wide selection of non-FDIC insured investment products
including:
o fixed annuities
o variable annuities
o an extensive inventory of mutual funds
o individual fixed income and equity securities
Please see "Subsidiary Activities" for additional information regarding business
activities by Portola.
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.
The Company participates in the wholesale capital markets through the
management of its security portfolio and its use of various forms of wholesale
funding. The Company's security portfolio contains a variety of instruments,
including collateralized mortgage obligations ("CMO's"). The Company also
participates in the secondary market for loans as both a purchaser and a seller
of various types of loan products.
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.
Additional information concerning the Company's business is presented
under "Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations."
4
Company Strategy
During the past several years, the Company has adopted a business
strategy of evolving away from its traditional savings and loan roots toward a
community commercial banking orientation. This evolution was selected so that
the Company might better and more completely serve the financial needs of the
communities it serves and because of the constrained financial returns
associated with the traditional thrift business of funding residential mortgage
loans with certificates of deposit. In addition, the Company believes that
successful community commercial banks generally receive a more favorable
valuation in the capital markets than savings and loans, thus providing a means
to enhance stockholder value.
The Company's community commercial banking strategy incorporates a
balance sheet profile presenting loan and deposit portfolios diversified among
multiple products, a relationship based approach to customer service and
marketing, and a high level of community involvement and visibility by the
Company, its Directors, and its employees. As discussed below and throughout
this Annual Report, the Company has achieved progress in these regards over the
past several years, including some particular accomplishments in 2000.
At December 31, 2000, residential mortgage loans comprised 37.8% of
total gross loans held for investment. This compares to 43.4% at December 31,
1999 and is down significantly from 70.2% at the end of 1997. This shift in mix
was accomplished through the Company's emphasis upon originating and purchasing,
in particular, income property loans. Income property loans include both loans
secured by multifamily real estate (e.g. apartments) and by commercial and
industrial real estate (e.g. retail and office buildings). Increasing
construction lending constitutes another segment of the Company's business
strategy, although construction loans outstanding declined during 2000 due to an
insufficient inflow of new projects to offset the completion of projects under
construction at the end of 1999. Construction lending opportunities are
influenced by a number of factors outside the Company's control, including the
availability of local building permits, water, sewer, and energy services, the
general level of interest rates, market demand for new construction, and
competition.
At December 31, 2000, certificates of deposits constituted 60.0% of the
deposit portfolio, down from 60.5% at December 31, 1999 and 79.3% at the end of
1997. Certificates of deposit would have reflected a smaller percentage of the
deposit portfolio at December 31, 2000 if not for the Bank's acquiring $14.0
million in certificates of deposit through the State of California Time Deposit
Program during 2000, whereby the State of California makes deposits available to
support bank reinvestment back into California communities. Over the past
several years, the Company has emphasized checking and money market accounts in
its marketing, new product development, and advertising as a means of cementing
its relationship with its customers, decreasing its relative cost of funds, and
bolstering non-interest income.
The Company's strategy of transitioning into more of a community
commercial bank also incorporates increasing the percentage of the Company's
total revenues generated from fees and service charges, as compared to net
interest income. In this regard, the Company has expanded its scope of fee based
services, altered its pricing, and enhanced the product line offered through
Portola.
Another aspect of the Company's strategy is to enhance stockholder
value. During 2000, the Company repurchased 120,000 of its shares at prices
below tangible book value. Also during 2000, Directors determined to be paid
their director fees in Company common stock, and in early 2001 the Company
adopted new Bylaws that specify a minimum stock ownership requirement for all
Directors. A significant portion of the total compensation for the Company's
senior management is stock-based. In 2000, shares of the Company's stock were
used in lieu of cash as incentive compensation for various Bank middle and
senior management. Senior management change in control contracts were modified
during 2000 to present what the Company believed was a better balance between
the need to attract and retain well qualified employees and stockholder
interests.
5
During 2000 and in early 2001, the Company achieved a number of key
objectives in attracting the human resources and building the operational
foundation it believes important to successfully advance its strategy.
A majority of the Bank's senior management team has changed in the past
fifteen months, with the profile of the new officers including extensive
experience in commercial banking and financial services. These new officers
generally present a broad background in multiple functional areas, and have
proven track records of success. The composition of the Board of Directors has
also changed during the past fifteen months, with two Directors electing
Emeritus status in 2000 and two additional Directors planning to elect Emeritus
status at the 2001 annual meeting of stockholders. Two new Directors have been
named since December 31, 1999, both of whom present professional backgrounds and
managerial skills complementary to the Company's strategic plan.
Throughout 2000, the Company maintained its commitment to support the
quality of life in the Greater Monterey Bay Area. Employees are encouraged to be
involved with local community and service organizations. The Company continued
its participation in the United Way Program. A significant contribution was made
to advance post-secondary education, and other charitable donations of funds or
services were conducted throughout the year.
During 2000, the Bank signed an agreement to convert to a new core
processing platform based upon a leading relational database and client / server
technology. This new system will process the Bank's loan and deposit accounts,
among other applications, and constitutes a significant technological
advancement over the prior system. The new system also provides the capability
to offer a wider variety of financial products and services more efficiently
than the technology utilized over the past several years. The Company intends to
convert to the new system sometime during the first half of 2001. The Company
also intends to complement this new system before the end of 2001 with improved
ancillary operations, including a revised item processing environment.
At the beginning of 2001, the Bank added and relocated employees to
support expanded sales to two key markets: professionals and businesses. A
Professional Banking Group was established to conduct focused marketing to
accountants, attorneys, doctors, and similar professionals. The aforementioned
system conversion is planned to provide a broader product line and more
attractive customer service options to these customers. A Commercial Lending
Group was established to concentrate on the growing number of small to medium
sized businesses in the Company's primary market areas. This Group was staffed
with two veteran commercial bankers, one of whom has extensive experience
servicing businesses in the Company's markets. The Company's marketing efforts
were enhanced to target sales efforts on those professionals and businesses
presenting a profile that suggested the opportunity to establish more
comprehensive and longer lasting financial services relationships.
In implementing its strategy, the Company also intends to enhance the
services provided to its historic consumer market. The introduction of Internet
banking during 2000, including electronic bill payment, is planned to be
augmented by an improved consumer product line following the conversion to the
new core processing platform. Planned enhancements include more rate tiers on a
wider variety of deposit products, bilingual (English and Spanish) telephone
banking, and better positioned and delivered money market accounts.
The implementation of this strategy presents various costs and risks.
In general, the Company has had to incur operating and capital expenses in
advance of associated revenues, as the human and technology resources necessary
to implement the strategic plan must be in place before new sales are generated.
The amount of change concomitant with this strategy, particularly given the
relatively rapid pace of implementation undertaken by the Company, presents
significant execution risks. These execution risks include, for example, the
exposure in a comprehensive conversion to a new data processing platform and the
credit risk inherent in consumer and commercial (versus mortgage) lending. The
Company has endeavored to mitigate these risks, in part, by attracting the
aforementioned senior officer team. The new senior management team contains
individuals with significant experience in credit administration, sales
management, and commercial banking. The Company's senior officers also have
prior experience in tactical and strategic transactions designed to maximize
stockholder value. The Company has also sought to mitigate the risks inherent in
its strategic plan by hiring certain consultants to provide technical assistance
and asset quality review.
6
In 2001, the Company intends to continue pursuing this strategy, 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.
Market Area and Competition
Market Area. The Bank is a community-oriented financial institution
which originates residential, multifamily, construction, commercial real estate,
consumer, and business loans within its market area. The Bank's deposit
gathering and lending markets are concentrated primarily in the communities
surrounding its full service offices in the counties of Santa Cruz, Monterey,
and Santa Clara in Central California. The economy in the Company's primary
market areas has historically been primarily agricultural. However, in recent
years, other economic segments have assumed a larger portion of total business
activity, caused in part by the continuing southward expansion of the San
Francisco Bay Area in general and the technology focused Silicon Valley
community in particular. These newer and in some cases relatively rapidly
expanding segments include:
o an increasing professional presence, both in commercial property and in
residential housing, as the technology companies expand southward,
primarily down the Highway 101 corridor
o light manufacturing
o post-secondary education
o tourism, especially in the coastal communities on Monterey Bay
The Company believes that the primary market areas in which it operates
have experienced strong growth and favorable economic activity in the past
several years, as reflected in appreciating real estate values and continued
significant consumer demand for housing. However, in late 2000 and early 2001,
the Company noted some slowing in the local economy, likely in part due to the
decline of many technology companies during that time frame and the significant
reduction in the NASDAQ stock market index that occurred in the latter half of
2000. The Company believes the local economy benefited in 1999 and the first
half of 2000 from the significant stock and stock option wealth created by the
surge in market capitalization for many technology firms.
The Company's local market areas were also impacted in early 2001 by
the California energy crisis. The uncertain supply of electricity and higher
cost of electricity and natural gas impacted both businesses and consumers.
Businesses that are relatively energy intensive, including certain agricultural
products (e.g. hot houses heated with natural gas), were adversely impacted by
higher energy prices combined with a limited ability to increase product prices
to reflect greater costs. Consumers experiencing higher energy bills had less
disposable income to spend in the local economy. Management has particular
concern about the possible energy situation in the summer of 2001, when
California energy demand typically increases to peak levels. While the State of
California government is working to address the energy crisis, management is
unable to predict what, if any, resolution may ultimately be effected.
The Company has taken steps to reduce its energy consumption, including
a reduction in exterior lighting and electric signage, reduced interior lighting
in certain areas, and proactive efforts to power off inactive computers and
other machines. The Company maintains a natural gas fueled generator at its
administrative headquarters designed to keep the Bank's computer network
operational in the event of a power reduction or outage.
In late 2000 and early 2001, many large national corporations began
announcing the largest layoffs in several years. In addition, many local
technology companies were shutting down due to a combination of weak (or
negative) earnings and a lack of access to additional capital. While demand for
labor generally remained favorable in Central California at the end of 2000,
these recent trends present the potential for a slowing economy in 2001.
7
The economy in some segments of the Company's primary market area
remains seasonal. These segments include tourism and agriculture, both of which
slow during the winter months.
Competition. The banking and financial services business in California
generally, and in the Bank's market areas specifically, is highly competitive.
The increasingly competitive environment is a result of many factors including,
but not limited to:
o the rise of the Internet, whereby the Bank must more frequently compete
with remote entities soliciting customers in its primary market areas via
web based advertising and product delivery, especially for certificates of
deposit and residential mortgages
o the significant consolidation among financial institutions which has
occurred over the past several years, resulting in a number of
substantially larger competitors
o the increasing integration among commercial banks, insurance companies,
securities brokers, and investment banks
o the continued growth and market share of non-bank financial services
providers that often specialize in a single product line such as credit
cards or residential mortgages
o the introduction of new technologies which may bypass the traditional
banking system for funds settlement
o the addition of bank subsidiaries by firms not historically in the
financial services business, but with significant consumer reach, including
Safeway (supermarkets), Nordstrom (department stores), and State Farm
Insurance
The Company competes for loans, deposits, fee based products, and
customers for financial services with commercial banks, savings and loans,
credit unions, thrift and loans, mortgage bankers, securities and brokerage
companies, insurance firms, finance companies, mutual funds, and other non-bank
financial services providers. Many of these competitors are much larger than the
Bank in total assets, market reach, and capitalization; and enjoy greater access
to capital markets and can offer a broader array of products and services than
the Bank presently markets.
Two firms present particular competition to the Company. Both Greater
Bay Bancorp, Inc. and Pacific Capital Bancorp, Inc. follow the "super community
banking" model, whereby multiple community banks are owned and operated under a
unified umbrella organization. Both of these firms have expanded rapidly in
recent years and have acquired community banks in the Company's primary areas.
Both of these firms have comparatively highly valued common stock and access to
far greater amounts of capital than the Company. These firms also benefit from
greater economies of scale than the Company. Acquisitions by Greater Bay
Bancorp, Inc. and Pacific Capital Bancorp, Inc. have left the Company as the
largest local financial institution in many of its markets.
In order to compete with other financial services providers, the
Company relies upon:
o local community involvement, contributions, and visibility
o personal service and the resulting personal relationships of its staff and
customers
o the development and sale of specialized products and services tailored to
meet its customers' needs
o local and fast decision making
In addition, management considers the Company's reputation for
financial strength and competitive services, as developed over 75 years of local
Company history, as a competitive advantage in attracting and retaining
customers within its primary market area.
8
Risk Factors That May Affect Future Results
The following discusses certain factors that may affect the Company's
financial results and operations and should be considered in evaluating the
Company.
Ability Of The Company To Execute Its Business Strategy. The financial
performance and profitability of the Company will depend, in large part, on its
ability to favorably execute its business strategy in converting from a
relatively traditional savings and loan association to a community based
financial services firm. This evolution entails risks in, among other areas,
technology implementation, market segmentation, brand identification, banking
operations, and capital and human resource investments. Accordingly, there can
be no assurance that the Company will be successful in its business strategy.
Economic Conditions And Geographic Concentration. The Company's
operations are located in Central and Northern California and are concentrated
in Santa Cruz, Monterey, and Santa Clara Counties. Although management has
diversified the Company's loan portfolio into other California counties, and to
a very limited extent into other states, the vast majority of the Company's
credits remain concentrated in the three primary counties. As a result of this
geographic concentration, the Company's results depend largely upon economic and
real estate market conditions in these areas. A deterioration in economic or
real estate market conditions in the Company's primary market areas could have a
material adverse impact on the quality of the Company's loan portfolio, the
demand for its products and services, and its financial condition and results of
operations. In addition, because the Company does not require earthquake
insurance in conjunction with its real estate lending, an earthquake with an
epicenter in or near the Company's primary market areas could also significantly
adversely impact the Company's financial condition and results of operations.
Interest Rates. By nature, all financial institutions are impacted by
changing interest rates, due to the impact of such upon:
o the demand for new loans
o prepayment speeds experienced on various asset classes, particularly
mortgage backed securities and residential loans
o credit profiles of existing borrowers
o rates received on loans and securities
o rates paid on deposits and borrowings
As presented under "Item 7. Management's Discussion And Analysis Of Financial
Condition And The Results Of Operations" and under "Item 7a. Quantitative And
Qualitative Disclosure Of Market Risk", the Company is financially exposed to
parallel shifts in general market interest rates, changes in the relative
pricing of the term structure of general market interest rates, and relative
credit spreads. Therefore, significant fluctuations in interest rates may
present an adverse effect upon the Company's financial condition and results of
operations.
Government Regulation And Monetary Policy. The financial services
industry is subject to extensive federal and state supervision and regulation.
Significant new laws, changes in existing laws, or repeals of present laws could
cause the Company's financial results to materially differ from past results.
Further, federal monetary policy, particularly as implemented through the
Federal Reserve System, significantly affects credit conditions for the Company,
and a material change in these conditions could present an adverse impact on the
Company's financial condition and results of operations.
9
Competition. The financial services business in the Company's market
areas is highly competitive, and is becoming more so due to technological
advances (particularly Internet based financial services delivery), changes in
the regulatory environment, and the enormous consolidation which has occurred
among financial services providers. Many of the Company's competitors are much
larger in total assets and market capitalization, enjoy greater liquidity in
their equity securities, have greater access to capital and funding, and offer a
broader array of financial products and services. In light of this environment,
there can be no assurance that the Company will be able to compete effectively.
The results of the Company may materially differ in future periods depending
upon the nature or level of competition.
Credit Quality. A significant source of risk arises from the
possibility that losses will be sustained because borrowers, guarantors, and
related parties may fail to perform in accordance with the terms of their loans.
The Company has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for loan
losses, that management believes are appropriate to control this risk by
assessing the likelihood of non performance, tracking loan performance, and
diversifying the credit portfolio. Such policies and procedures may not,
however, prevent unexpected losses that could have a material adverse effect on
the Company's financial condition or results of operations. Unexpected losses
may arise from a wide variety of specific or systemic factors, many of which are
beyond the Company's ability to predict, influence, and control.
California Energy Crisis. The uncertain supply and cost of electricity
and natural gas in California present multiple potential impacts upon the
California economy and the financial condition of individuals and businesses.
Higher energy costs could lead to an economic dislocation, whereby energy
intensive businesses leave California. Uncertain energy supplies and costs may
also discourage new business development in California, slowing the pace of
economic growth. Less robust economic activity and a worsening financial profile
by consumers and businesses in California could lead to greater credit quality
issues for the Company in addition to slowing the demand for financial products
and services. While the State of California government is attempting to address
the California energy crisis, the Company cannot predict what, if any,
resolution may ultimately be adopted.
Technology Industry and Technological Change. The pace of economic
activity, the demand and pay rates for labor, and real estate valuations in many
of the Company's primary market areas are impacted by the technology industry. A
prolonged slowdown in the technology business would therefore likely have an
adverse impact on the Company's financial condition and results of operations.
New products and delivery mechanisms being developed as a result of new
technologies present the potential for bypassing the historic bank payments
settlement process. As such, the Company is exposed to various associated
financial risks.
Employee Retention and Recruitment. The historically low unemployment
rate experienced in California and nationally over the past several years has
combined with the draw of the Silicon Valley area adjacent to the Company's
primary market areas to magnify the Company's risk for employee retention and
recruitment. In particular, the Company has faced a continuing challenge to
attract and retain high caliber professionals with education and experience in
technology, finance, and accounting, as these disciplines have been actively
pursued by the many technology companies operating within 50 miles of the
Company's headquarters. As a local community bank, the Bank is especially
dependent upon the skills of its employees to generate business and manage risk.
Other Risks. From time to time, the Company details other risks with
respect to its business and financial results in its filings with the Securities
and Exchange Commission.
10
Lending Activities
General. The Company originates a wide variety of loan products. Loans
originated by the Company are subject to federal and state law and regulations.
Interest rates charged by the Company on loans are affected by the demand for
such loans and the supply of money available for lending purposes and the rates
offered by competitors. These factors are, in turn, affected by, among other
things, economic conditions, monetary policies of the federal government,
including the Federal Reserve Board, and legislative tax policies. The Company
targets certain lending toward low to moderate income borrowers as part of its
commitment to serve its local communities.
At December 31, 2000, the Company's net loan portfolio totaled $391.8
million. This represented the highest total in the Company's history. The vast
majority of this portfolio was associated with real estate of various types.
Loan credit commitments and purchases in 2000 totaled $169.7 million, down
slightly from $173.3 million during 1999. This decrease stemmed in part from a
less robust mortgage refinance market in 2000 versus 1999.
Net loans as a percentage of total assets increased from 77.9% at
December 31, 1999 to 80.6% at December 31, 2000. Allocating a greater percentage
of its total assets to loans is fundamental to the Company's strategy of
effectively supporting the financing needs of its local communities.
The mix of loans originated and purchased in 2000 reflected the
Company's business strategy of becoming a broader based, community focused
financial services firm with a balance sheet diversified away from the Bank's
historic concentration in relatively lower yielding residential mortgages. The
Company realized particular progress in 2000 in bolstering its production of
income property loans, taking advantage of favorable real estate markets in many
of the communities served by the Company. The Company also conducted a series of
loan participations and purchases with other financial institutions in 2000,
particularly for multifamily loans, as a means of both augmenting loan volume
and diversifying credit risk.
The Company accepts loan applications generated through brokers for
most of its product line. Broker referred loans are underwritten in the same
manner as direct originations. The Company encourages its employees to refer and
solicit loan business as an integral part of functioning as a community bank.
Employees receive various types of awards or commissions based upon the volume
and nature of business booked.
The Company requires title and hazard insurance for all real estate
loans. More detailed information regarding the Company's lending activity is
included in the following paragraphs which present activity by loan product
category.
11
Residential One To Four Unit Mortgage Lending. The Company originates
fixed rate, adjustable rate, and hybrid (fixed for a period, and then
adjustable) mortgage loans secured by one to four family residential properties.
Adjustable rate mortgage loans have interest rates that adjust monthly,
semiannually, or annually and reprice based upon various indices, primarily the
11th FHLB District Cost of Funds Index ("COFI") or the US Treasury One Year
Constant Maturities Index ("1 Year CMT") . In the Year 2001, the Company intends
to commence originating residential mortgages tied to the MTA index, which is
equivalent to the twelve month rolling average of the 1 Year CMT index. The MTA
index is utilized by a number of the Company's primary competitors and is often
preferred by consumers due to its limited volatility relative to the 1 Year CMT
index. The Company's hybrid and adjustable rate residential mortgages typically
contain various periodic and lifetime rate caps. The Company regularly adjusts
its loan products to meet changing customer needs and to respond to the
marketplace.
The majority of loan originations are to existing or past customers and
members of the Bank's local communities. The Company also originates one to four
family residential construction loans for both owner occupants and developers /
contractors ("speculative construction loans"). The Company also originates
residential mortgages secured by non-owner occupied one to four family
properties acquired as an investment by the borrower. The Company provides
escrow (impounds) services as requested by its customers and generally for those
loans in excess of 80.0% loan to value.
At December 31, 2000, the Company maintained $160.2 million in
residential permanent mortgages, representing 40.3% of loans held for investment
net of undisbursed loan funds. This compares to $168.5 million in permanent
residential mortgages a year earlier, which then constituted 46.3% of loans held
for investment net of undisbursed loan funds. This decline in residential
mortgage volume and mix was coincident with the Company's business strategy. The
Company generally sells its fixed rate residential production into the secondary
market on a servicing released basis. These sales are conducted as part of the
Company's asset / liability management strategy. The sales are generally on a
servicing released basis because the Company believes the servicing is more
valuable to high volume, low marginal cost servicers.
From time to time, based on its asset / liability strategy, the Company
purchases residential mortgage loans originated by others. In 2001, depending
upon loan origination volume and mix, the Company may consider the sale of
certain hybrid or adjustable rate residential mortgages into the secondary
market.
The majority of the residential loans at December 31, 2000 were secured
by properties located within the Company's primary market area, and to a lesser
extent the State of California. At December 31, 2000, 11.6% of the Company's
one-to-four family mortgage loans had fixed terms and 88.4% had adjustable
rates. The Company offers a variety of adjustable rate residential loan
products, including an "easy qualifier" loan with more limited documentation
required than other mortgages. The Company began originating loans subject to
negative amortization in 1996. Negative amortization involves a greater risk to
the Company because during a period of high interest rates the loan principal
may increase above the amount originally advanced. However, the Company believes
that the risk of default on these loans is mitigated somewhat by negative
amortization caps, underwriting criteria, relatively low loan to value ratios,
and the stability provided by payment schedules. At December 31, 2000, the
Company's residential loan portfolio included $33.5 million of loans subject to
negative amortization.
The Company originates one to four family residential mortgage loans in
amounts up to 80% of the lower of the appraised value or the selling price of
the property securing the loan, and up to 97% of the appraised value or selling
price if private mortgage insurance is obtained. Mortgage loans originated by
the Company generally include due on sale clauses which provide the Company with
the contractual right to deem the loan immediately due and payable in the event
the borrower transfers ownership of the property without the Company's consent.
Due on sale clauses are an important means of adjusting the rates on the
Company's mortgage loan portfolio and the Company has generally exercised its
rights under these clauses.
The largest residential loan in the Company's portfolio at December 31,
2000 totaled $3.2 million, secured by a home in Carmel Valley, California. The
second largest residential loan at December 31, 2000 was $2.2 million, secured
by a home in Monte Sereno, California. The loan to value ratios on these two
loans at origination were 50.0% and 70.0%, respectively.
12
Multifamily Lending. The Company offers hybrid and adjustable rate
permanent multifamily (five or more units) real estate loans secured by real
property in California. The Company also periodically extends construction
financing to builders of multifamily housing. From time to time, the Company
extends loans secured by mixed use property in more urban areas, which typically
present commercial (often retail) space in one part of the building (often
street level) and residential units in other parts of the building.
Multifamily housing valuations have generally increased in California
during the past several years, as supply has not expanded with the same speed as
population growth, leading to greater demand for units and thus higher market
rents.
Permanent loans on multifamily properties typically present maturities
of up to 30 years. Factors considered by the Company in reaching a lending
decision on such properties include the net operating income of the mortgaged
premises before debt service and depreciation, the debt service ratio (the ratio
of net earnings to debt service), the ratio of the loan amount to appraised
value, and the financial profile of any guarantors. Pursuant to the Company's
underwriting policies, multifamily adjustable rate mortgage loans are generally
originated in amounts up to 75% of the appraised value of the underlying
properties. The Company generally requires a debt service ratio of at least
1.10. Properties securing loans are appraised by an independent appraiser. Title
insurance is required on all loans. When evaluating the qualifications of the
borrower for a multifamily loan, the Company considers the financial resources
and income level of the borrower, the borrower's experience in owning or
managing similar property, and the Company's lending experience with the
borrower. The Company's underwriting policies require that the borrower provide
evidence of ability to repay the mortgage on a timely basis and maintain the
property from current rental income. In evaluating the creditworthiness of the
borrower, the Company generally reviews the borrower's financial statements,
employment, tax returns, and credit history, as well as other related
documentation.
Loans secured by apartment buildings and other multifamily residential
properties are generally larger and involve a greater degree of risk than one to
four family residential loans. Because payments on loans secured by multifamily
properties are often dependent on successful operation or management of the
properties, repayment of such loans may be subject to a greater extent to
adverse conditions in the real estate market or the economy. The Company seeks
to minimize these risks through its underwriting policies, which require such
loans to be qualified at origination on the basis of the property's income and
debt coverage ratio. The Company also attempts to limit its risk exposure by
requiring annual operating statements on the properties and by acquiring
personal guarantees from the borrowers when available.
As part of its operating strategy, the Company intends to continue
increasing its multifamily lending within the State of California. At December
31, 2000, the Company's portfolio of multifamily loans totaled $76.7 million, or
19.3% of loans receivable held for investment less undisbursed loan funds. This
compares to $42.2 million, or 11.6% of loans receivable held for investment less
undisbursed loan funds, at December 31, 1999. The Company acquired multifamily
loans from direct originations, broker referrals, and pool purchases during
2000.
At December 31, 2000, the Company's two largest multifamily loans had
outstanding balances of $3.8 million and $2.7 million, respectively. The loans
were secured by apartment buildings located in Fresno and Oceanside, California,
respectively.
Because the primary marketplace the Company serves has a limited volume
of multifamily properties, the Company intends to continue pursuing multifamily
real estate loans secured by properties located throughout California. The
Company's strategy in this regard includes purchasing participations in
multifamily loans originated by experienced, local lenders with a favorable
record of quality loan origination. The acquisition and origination of
multifamily loans throughout California presents the Company with geographic
diversification, but also introduces credit exposure due to the greater demands
of monitoring the demand for and value of multifamily real estate in a greater
number of local market areas.
13
Commercial & Industrial Real Estate Lending. The Company originates
both permanent and construction loans secured by commercial & industrial real
estate located primarily in California. The Company's underwriting procedures
provide that commercial & industrial real estate loans may generally be made in
amounts up to the lesser of 65% of the appraised value of the property or up to
a debt service coverage ratio of 1.20. Permanent loans may be made with terms up
to 25 years and are typically hybrid (fixed for three to five years, then
adjustable) or adjustable based upon the 1 Year CMT or COFI indices. The
Company's underwriting standards and credit review procedures on commercial &
industrial real estate loans are similar to those applicable to multifamily
loans. The Company considers the property's net operating income, the loan to
value ratio, the presence of guarantees, and the borrower's expertise, credit
history, and financial status.
The Company's commercial & industrial real estate loans are typically
secured by properties such as retail stores, retail strip centers, office
buildings, and light manufacturing facilities. The Company typically does not
extend loans for the acquisition or refinance of major manufacturing facilities,
as that type of real estate generally encompasses larger loans than the Company
makes.
The majority of the commercial & industrial real estate loans are
secured by property located in Northern and Central California. However, the
Company has in the past two years pursued participations on and purchases of
commercial & industrial real estate loans with experienced, local lenders in the
greater San Diego and Los Angeles markets as a means of increasing loans
outstanding and geographically diversifying the Company's loan portfolio.
At December 31, 2000, the Company's permanent commercial & industrial
real estate loan portfolio totaled $102.3 million, or 25.8% of loans held for
investment net of undisbursed loan funds. This compares to $72.3 million, or
19.9% of loans held for investment net of undisbursed loan funds, at December
31, 1999. This nominal and relative expansion is consistent with the Company's
business strategy of increasing the percentage of its balance sheet represented
by income property loans, with an offsetting proportional reduction in
residential mortgages.
At December 31, 2000, the Company had outstanding twenty-one loans
totaling $31.8 million secured by hotels / motels, one of which was a
construction loan. The largest such loan is a permanent loan with $5.0 million
outstanding secured by a nationally branded hotel located in Dublin, California.
The next largest hotel / motel loan at December 31, 2000 was for $2.8 million
for a property in Aptos, California, in the center of the Company's primary
market area.
At December 31, 2000, the Company had outstanding five loans to
mini-storage facilities totaling $7.3 million, two of which were construction
loans and the largest of which was a permanent loan for $2.6 million secured by
a mini-storage facility in Santa Cruz, California.
The largest permanent commercial real estate loan in the Company's
portfolio at December 31, 2000 not mentioned above was $3.8 million, secured by
a church and related facilities located in San Jose, California.
Loans secured by commercial & industrial real estate properties, like
multifamily loans, are generally larger and involve a greater degree of risk
than one to four family residential mortgage loans. Because payments on loans
secured by commercial real estate properties are often dependent on successful
operation or management of the properties, repayment of such loans may be
significantly subject to adverse conditions in the properties' management or
real estate markets in general or particular to a subject property. The Company
seeks to mitigate these risks through its underwriting standards and credit
review policy, which requires annual operating statements for each collateral
property. The Company also participates larger commercial & industrial real
estate loans with other financial institutions as a means of diversifying its
credit risk and remaining below the Bank's regulatory limit on loans to one
borrower.
Commercial & industrial real estate loans can present various
environmental risks, as such properties are sometimes located on sites or in
areas where various types of pollution may have historically occurred. The
Company attempts to mitigate this risk via environmental surveys, reports, and,
in some cases, testing; in addition to using a limited list of pre-approved
appraisers. In addition, Company lending staff directly inspect most commercial
& industrial real estate properties on which the Company lends. Commercial &
industrial real estate can also be impacted by changing government regulation.
14
Construction Lending. The Company originates construction loans for the
acquisition and development of property. Collateral has been historically
concentrated in residential properties, both owner occupied and speculative, as
well as commercial real estate, including both retail properties and warehouse /
storage facilities.
Construction financing is generally considered to involve a higher
degree of risk than long-term financing on improved, occupied real estate. The
Company's risk of loss on construction loans depends largely upon the accuracy
of the initial estimate of the property's value at completion of construction or
development and the estimated cost (including interest) of construction. If the
estimate of construction costs proves to be inaccurate, the Company may have to
advance funds beyond the amount originally committed to permit completion of the
development and to protect its security position. The Company may also be
confronted, at or prior to maturity of the loan, with a project with
insufficient value to ensure full repayment. The Company's underwriting,
monitoring, and disbursement practices with respect to construction financing
are intended to ensure that sufficient funds are available to complete
construction projects. The Company attempts to limit its risk through its
underwriting procedures, by using only approved, qualified appraisers, and by
dealing with qualified builders / borrowers. The Company also participates
larger construction loans with other financial institutions as a means of
diversifying its credit risk and remaining below the Bank's regulatory limit on
loans to one borrower.
The Company's construction loans typically have adjustable rates and
terms of 12 to 18 months. The Company originates one to four family and
multifamily residential construction loans in amounts up to 80% of the appraised
value of the property. Land development loans are determined on an individual
basis, but in general they do not exceed 70% of the actual cost or current
appraised value of the property, whichever is less. Loan proceeds are disbursed
in increments as construction progresses and as inspections warrant.
At December 31, 2000, the Company had gross construction and land
development loans totaling $59.1 million, on which there were undisbursed loan
funds of $26.6 million. The net outstanding balance of $32.5 million represented
8.2% of loans held for investment net of undisbursed loan funds at December 31,
2000. At December 31, 1999, the Company had gross construction and land
development loans totaling $79.0 million, on which there were undisbursed loan
funds of $23.9 million. The net outstanding balance of $55.2 million represented
15.1% of loans held for investment net of undisbursed loan funds at December 31,
1999.
The decline in construction loans during 2000 resulted from payoffs
from completed projects not being replaced by an adequate inflow of new
business. In general, the Company's strategy is, however, to increase the
construction loan portfolio and to have construction loans represent a greater
portion of total assets. The Company has targeted increased construction lending
because of the interest rate sensitivity of the loans, the Company's historic
expertise and experience in this type of lending, the yields available from this
type of lending, and, in the case of owner residential construction loans, the
strong customer bond developed in financing the building of someone's home.
The largest construction credit in the Company's portfolio at December
31, 2000 was a $2.85 million gross commitment to fund the construction of a
recreational vehicle park in Gilroy, California. The second largest construction
loan maintained by the Company at December 31, 2000 was a gross commitment of
$2.45 million associated with the construction and development of a mini-storage
facility in San Jose, California. The Company's construction loans are largely
concentrated in the Company's primary marketplaces, although a limited amount of
construction lending has occurred throughout Northern California.
Because construction loans are generally larger and more complex than
typical residential mortgages, they present a greater degree of credit risk. The
Company attempts to control this credit risk through its underwriting and funds
disbursement processes. In addition, it is the Company's strategy to, over time,
build a series of strong relationships with local developers / builders /
contractors with whom the Company has detailed financial knowledge and receives
a steady stream of repeat business.
15
Land Lending. The Company offers loans secured by land, generally
located in its immediate marketplace. The types of land generally considered by
the Company are suitable for residential development or are demarcated
residential lots. The Company does not extend loans on agricultural land where
repayment of the loan is dependent upon crop sales.
At December 31, 2000, the Company had land loans totaling $16.3
million, or 4.1% of gross loans held for investment net of undisbursed loan
funds. This compares to land loans totaling $13.9 million, or 3.8% of gross
loans held for investment net of undisbursed loan funds at December 31, 1999.
The largest land loan in the Company's portfolio at year-end 2000 was a $2.8
million credit secured by land targeted for future residential development
located in Los Altos, California. The Company's second largest land loan at
December 31, 2000 was $1.7 million, secured by commercially zoned land located
in Monterey, California. The Company's third largest land loan at December 31,
2000 was $1.2 million, secured by land included within a large, upscale
residential development located in Monterey, California.
Because land and lots are generally less readily marketable than
residential real estate, lending on land presents additional risks not present
in residential mortgages. The market value of land and lots can be more
susceptible to changes in interest rates, economic conditions, or local real
estate markets than the market value for homes. Zoning changes by various
government authorities may also impact the value and marketability of certain
types of land. To mitigate these risks, the Company generally restricts land and
lot loans to its primary local market areas, where the Company has the most
thorough understanding of land values and trends in the demand for land.
Business Lending. The Company offers business loans primarily
collateralized by business assets. Such collateral is typically comprised of
accounts receivable, inventory, and equipment. Business lending is generally
considered to involve a higher degree of risk than the financing of real estate,
primarily because security interests in the collateral are more difficult to
perfect and the collateral may be difficult to obtain or liquidate following an
uncured default. Business loans typically offer relatively higher yields, short
maturities, and variable interest rates. The availability of such loans enables
existing and potential business depositors to establish a more complete
financial relationship with the Bank. The Company attempts to reduce the risk of
loss associated with business lending by closely monitoring the financial
condition and performance of its customers.
As part of its business strategy, and in order to facilitate the growth
of its business lending portfolio, the Company plans in 2001 on having
substantially every business loan managed by an assigned account manager, who is
a commercial banker. The Company believes this approach provides for better
credit monitoring and facilitates the Company's seeking expanded business
relationships with growing firms. The Company's business strategy envisions
business loans representing a greater percentage of total assets in the future.
During 1999, the Company introduced its "Business Express" lending
program, whereby small businesses may obtain lines of credit of up to $25,000
with a relatively brief application and limited supporting documentation,
augmented by a quick credit decision on the part of the Bank. This program was
implemented to strengthen the Company's relationship with the small businesses
in the Company's primary market areas, many of whom have been deposit customers
for some period of time. The Company continued to support this program during
2000.
At December 31, 2000, the Company had business term loans totaling $1.6
million and drawn balances against business lines of credit totaling $1.4
million. In the aggregate, business loans comprised 0.8% of gross loans held for
investment net of undisbursed loan funds at December 31, 2000. The business loan
with the largest outstanding balance in the Company's portfolio at December 31,
2000 was a $261 thousand term loan to a retail store in Aptos, California. At
December 31, 2000, the Company had extended two business lines of credit for
$500 thousand each. These lines were extended to a wholesale distributor of food
products and a law firm. Both of these customers' operations were in Santa Cruz
County.
16
Loan Approval Procedures And Authority. The Board of Directors has
ultimate responsibility for the lending activity of the Company and establishes
the lending policies of the Company, including the appraisal policy and credit
approval authorities. The Board of Directors also approves all appraisers used
by the Company. As of December 31, 2000, the Board of Directors has authorized
the following loan approval authorities:
Real Estate Loans
(1) Residential mortgage loans in amounts up to the federal agency
(e.g. Federal National Mortgage Association or "FNMA") conforming
limit may be approved by the Company's staff underwriters.
(2) Loans in excess of the agency conforming limits and up to
$500,000 may be approved by the underwriting / processing
manager.
(3) Loans in excess of $500,000 and up to $750,000 may be approved by
the real estate loan administrator.
(4) Loans in excess of $750,000 and up to $1,000,000 require the
approval of the Chief Executive Officer / President, Chief Loan
Officer, or the Director of Commercial Banking.
(5) Loans in excess of $1,000,000 and up to $2,000,000 require the
approval of two of the Chief Executive Officer / President, Chief
Loan Officer, or Director of Commercial Banking.
(6) Loans in excess of $2,000,000 and up to $4,000,000 require the
approval of the Board of Directors Loan Committee.
(7) Loans greater than $4,000,000 must be approved by the full Board
of Directors.
Non-Real Estate Loans
(1) "Business Express" loans of up to $25,000 require the approval of
the real estate loan administrator, a professional banker, or a
business development officer.
(2) Overdraft lines of credit of up to $1,500 require the approval of
the underwriting / processing manager or the real estate loan
administrator.
(3) Loans of up to $75,000 require the approval of the Chief Loan
Officer.
(4) Loans in excess of $75,000 and up to $250,000 require the
approval of the Chief Executive Officer or Director of Commercial
Banking.
(5) Loans in excess of $250,000 and up to $2,000,000 require the
approval of the Board of Directors Loan Committee.
(6) Loans in excess of $2,000,000 must be approved by the full Board
of Directors.
The loan origination process requires that upon receipt of a completed
loan application, a credit report is obtained and certain information is
verified. If necessary, additional financial information is obtained from the
prospective borrower. An appraisal of the related real estate is performed by an
independent, licensed appraiser. If the original loan exceeds 80% loan to value
on a first trust deed loan or private mortgage insurance is required, the
borrower is required to make payments to a loan impound account from which the
Company makes disbursements for property taxes and insurance.
17
Loan Portfolio Composition. The following table presents the
composition of the Company's net loans receivable held for investment at the
dates indicated.
At December 31,
-------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------ ------------------ ------------------- ------------------
Amount % Amount % Amount % Amount % Amount %
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(Dollars In Thousands)
Loans secured by real
estate
Residential one to four $160,155 37.8% $168,465 43.4% $181,771 55.8% $201,562 70.2% $198,255 83.9%
unit
Multifamily five or more 76,727 18.1% 42,173 10.9% 33,340 10.2% 23,355 8.1% 22,455 9.5%
units
Commercial and industrial 102,322 24.1% 72,344 18.6% 39,997 12.3% 20,159 7.0% 7,524 3.2%
Construction 59,052 13.9% 79,034 20.3% 51,624 15.9% 35,150 12.3% 4,131 1.7%
Land 16,310 3.9% 13,930 3.6% 7,774 2.4% 1,869 0.7% 95 --
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Sub-total loans secured by
real estate 414,566 97.8% 375,946 96.8% 314,506 96.6% 282,095 98.3% 232,460 98.3%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Other loans
Home equity lines of 5,631 1.3% 3,968 1.0% 3,262 1.0% 3,142 1.1% 3,194 1.4%
credit
Other consumer loans 669 0.2% 587 0.2% 658 0.2% 598 0.2% 763 0.3%
Business term loans 1,641 0.4% 6,670 1.7% 6,679 2.0% 943 0.3% -- --
Business lines of credit 1,438 0.3% 1,027 0.3% 595 0.2% 270 0.1% -- --
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Sub-total other loans 9,379 2.2% 12,252 3.2% 11,193 3.4% 4,953 1.7% 3,957 1.7%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Total gross loans 423,945 100.0% 388,198 100.0% 325,699 100.0% 287,048 100.0% 236,417 100.0%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
(Less) / Plus
Undisbursed loan funds (26,580) (23,863) (24,201) (21,442) (1,822)
Unamortized premiums &
discounts 21 134 491 556 452
Deferred loan fees, net (202) (281) (434) (742) (528)
Allowance for loan losses (5,364) (3,502) (2,780) (1,669) (1,311)
------- ------- ------- ------- -------
Total loans held for
investment, net $391,820 $360,686 $298,775 $263,751 $233,208
======== ======== ======== ======== ========
18
Loan Maturity Profile. The following table shows the contractual
maturities of the Company's gross loans at December 31, 2000.
At December 31, 2000
------------------------------------------
2002 2006 Total
Through And Gross
2001 2005 Thereafter Loans
---- ---- ---------- -----
(Dollars In Thousands)
Residential one to four unit $ 2 $ 596 $159,557 $160,155
Multifamily five or more units 63 274 76,390 76,727
Commercial and industrial real estate 364 9,402 92,556 102,322
Construction 46,674 12,378 -- 59,052
Land 8,613 6,479 1,218 16,310
Home equity lines of credit 114 1,266 4,251 5,631
Other consumer loans 652 17 -- 669
Business term loans -- 1,243 398 1,641
Business lines of credit 1,434 4 -- 1,438
-------- -------- -------- --------
Total $ 57,916 $ 31,659 $334,370 $423,945
======== ======== ======== ========
The following table presents the Company's gross loans at December 31,
2000, segregating those with fixed versus adjustable interest rates and also
isolating those loans with contractual maturities less than or equal to and
greater than one year.
Matures In 2001 Matures After 2001 Total Gross Loans
-------------------- -------------------- --------------------------------
Fixed Adjustable Fixed Adjustable Fixed Adjustable All
-------- -------- -------- -------- -------- -------- --------
(Dollars In Thousands)
Residential one to four unit $ 2 $ -- $ 18,504 $141,649 $ 18,506 $141,649 $160,155
Multifamily five or more units 63 -- 933 75,731 996 75,731 76,727
Commercial and industrial real -- 364 7,500 94,458 7,500 94,822 102,322
estate
Construction 11,886 34,788 331 12,047 12,217 46,835 59,052
Land -- 8,613 -- 7,697 -- 16,310 16,310
Home equity lines of credit -- 114 -- 5,517 -- 5,631 5,631
Other consumer loans 652 -- 17 -- 669 -- 669
Business term loans -- -- -- 1,641 -- 1,641 1,641
Business lines of credit -- 1,434 -- 4 -- 1,438 1,438
-------- -------- -------- -------- -------- -------- --------
Total $ 12,603 $ 45,313 $ 27,285 $338,744 $ 39,888 $384,057 $423,945
======== ======== ======== ======== ======== ======== ========
Percent of gross loans outstanding 3.0% 10.7% 6.4% 79.9% 9.4% 90.6% 100.0%
19
Originations, Purchases, and Sales of Loans. The Company's mortgage
lending activities are conducted primarily through its eight branch offices and
approximately 60 wholesale loan brokers who deliver completed loan applications
to the Company. In addition, the Company has developed correspondent
relationships with a number of financial institutions to facilitate the
origination of real estate loans on a participation basis. Loans presented to
the Company for purchase or participation are generally underwritten
substantially in accordance with the Company's established lending standards,
which consider the financial condition of the borrower, the location of the
underlying property, and the appraised value of the property, among other
factors.
The Company plans to continue actively purchasing individual loans,
loan pools, and loan participations in 2001 as a means of utilizing the Bank's
strong regulatory capital position and supporting the more rapid transformation
of the Company's balance sheet into that more consistent with a California
community commercial bank.
On an ongoing basis, depending on its asset / liability strategy, the
Company originates one to four family residential loans for sale in the
secondary market. Loan sales are dependent on the level of loan originations and
the relative customer demand for mortgage loans, which is affected by the
current and expected future level of interest rates. During the years ended
December 31, 2000 and 1999, the Company sold $2.7 million and $8.9 million,
respectively, of fixed rate residential loans. The Company generally sells its
fixed rate residential loans on a servicing released basis in order to take
advantage of comparatively attractive servicing premiums being offered in the
secondary market. The level and timing of any future loan sales will depend upon
market opportunities and prevailing interest rates.
From time to time, depending on its asset / liability strategy, the
Company converts a portion of its mortgages into readily marketable mortgage
backed securities. In 1998, the Company converted approximately $48.4 million of
fixed rate residential loans into mortgage backed securities. The securitization
was undertaken primarily to provide greater liquidity for the assets and thereby
augment the Company's ability to manage its interest rate risk profile and cash
flows. There was no similar securitization activity in 2000 or 1999. The Company
may pursue additional securitizations and / or the sale of hybrid or adjustable
rate residential mortgages, depending upon its asset / liability management
strategy, in the future.
Loan Servicing. The Company services its own loans as well as loans
owned by others. Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, holding escrow funds for the payment of
real estate taxes and insurance premiums, contacting delinquent borrowers, and
supervising foreclosures and property dispositions in the event of unremedied
defaults. Loan servicing income includes servicing fees from investors and
certain charges collected from borrowers, such as late payment fees. At December
31, 2000, the Company was servicing $62.0 million of loans for others.
The Company's strategic plan does not contain a significant expansion
in its loan servicing for others, as management believes large volume
residential loan servicers enjoy economies of scale and efficiencies in this
business that render it difficult for the Company to compete and generate a
desirable rate of return. The significant consolidation in the residential loan
servicing industry that has occurred over the past several years, in the opinion
of management, supports this position.
20
Credit Quality
General. Although management believes that non-performing loans are
generally well secured and / or reserved, real estate acquired through
foreclosure is properly valued, and inherent losses are provided for in the
allowance for loan losses, there can be no assurance that future deterioration
in local or national economic conditions, collateral values, borrowers'
financial status, or other factors will not result in future credit losses and
associated charges against operations. In regards to real estate acquired via
foreclosure, although all such properties are actively marketed by the Company,
no assurance can be provided regarding when these properties will be sold or
what the terms of sale will be when they are sold. It is the Company's general
policy to obtain appraisals at the time of foreclosure and to periodically
obtain updated appraisals for foreclosed properties that remain unsold.
Non-accrual, Delinquent, And Restructured Loans. Management generally
places loans on non-accrual status when they become 90 days past due, unless
they are well secured and in the process of collection. Management also places
loans on non-accrual status when they are less than 90 days delinquent when
there is concern about the collection of the debt in accordance with the terms
of the loan agreement. When a loan is placed on non-accrual status, any interest
previously accrued but not collected is reversed from income. Loans are charged
off when management determines that collection has become unlikely. Restructured
loans are those where the Company has granted a concession on the interest paid
or the original repayment terms due to financial difficulties of the borrower or
because of issues with the collateral securing the loan.
Delinquent Loan Procedures. Specific delinquency procedures vary
depending on the loan type and period of delinquency. However, the Company's
policies generally provide that loans be reviewed monthly for delinquencies, and
that if a borrower fails to make a required payment when due, the Company
institutes internal collection procedures. For mortgage loans, written late
charge notices are mailed no later than the 15th day of delinquency. At 25 days
past due, the borrower is contacted by telephone and the Company makes a verbal
request for payment. At 30 days past due, the Company begins tracking the loan
as a delinquency, and at 45 days past due a notice of intent to foreclose is
mailed. When contact is made with the borrower prior to foreclosure, the Company
generally attempts to obtain full payment or develop a repayment schedule with
the borrower to avoid foreclosure.
Non-performing Assets. Non-performing loans include non-accrual loans,
loans 90 or more days past due and still accruing interest, and restructured
loans. Non-performing assets include all non-performing loans, real estate
acquired via foreclosure, and repossessed consumer assets.
Real estate acquired via foreclosure is recorded at the lower of the
recorded investment in the loan or the fair value of the related asset on the
date of foreclosure, less estimated costs to sell. Fair value is defined as the
amount in cash or cash-equivalent value of other consideration that a real
estate asset would yield in a current sale between a willing buyer and a willing
seller. Development and improvement costs relating to the property are
capitalized to the extent they are deemed to be recoverable upon disposal. The
carrying value of acquired property is regularly evaluated and, if appropriate,
an allowance is established to reduce the carrying value to fair value less
estimated costs to sell. The Company typically obtains appraisals on real estate
acquired through foreclosure at the time of foreclosure. The Company generally
conducts inspections on foreclosed properties and properties deemed in-substance
foreclosures on a quarterly basis.
21
The following table presents information regarding non-performing
assets at the dates indicated.
At December 31,
----------------------------------------------
2000 1999 1998 1997 1996
------ ------ ------ ------ ------
(Dollars In Thousands)
Outstanding Balances Before Valuation Reserves
Non-accrual loans $4,666 $6,888 $1,478 $1,598 $1,394
Loans 90 or more days delinquent and accruing interest -- -- -- -- --
Restructured loans in compliance with modified terms 75 1,294 1,437 448 354
------ ------ ------ ------ ------
Total gross non-performing loans 4,741 8,182 2,915 2,046 1,748
Investment in foreclosed real estate before valuation -- 96 322 326 --
reserves
Repossessed consumer assets -- -- -- -- --
------ ------ ------ ------ ------
Total gross non-performing assets $4,741 $8,278 $3,237 $2,372 $1,748
====== ====== ====== ====== ======
Gross non-performing loans to total loans 1.19% 2.25% 0.96% 0.77% 0.74%
Gross non-performing assets to total assets 0.98% 1.79% 0.71% 0.58% 0.41%
Allowance for loan losses $5,364 $3,502 $2,780 $1,669 $1,311
Allowance for loan losses / non-performing loans 113.14% 42.80% 95.37% 81.57% 75.00%
Valuation allowances for foreclosed real estate $ -- $ -- $ 41 $ 5 $ --
The decrease in non-accrual loans during 2000 was primarily due to the
repayment in full of a single $5.0 million business term loan that was on
non-accrual status at December 31, 1999, partially offset by a $2.85 million
commercial construction loan being placed on non-accrual status during 2000. The
decline in restructured loans during 2000 primarily resulted from a number of
residential loans that had been impacted by the bankruptcy filing of the
borrower no longer being classified as troubled debt restructurings due to the
payment performance of the borrower over an extended period of time and the
continued maintenance and receipt of market terms by the Company.
The following table presents information concerning loans 60 to 89 days
delinquent at the dates indicated.
Loans On Accrual Status And Delinquent 60 - 89 Days At December 31,
--------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
Number Number Number
(Dollars In Thousands) Of Principal Of Principal Of Principal
Loans Balance Loans Balance Loans Balance
----- ------- ----- ------- ----- -------
Residential one to four unit 4 $ 857 2 $ 285 -- $ ---
Land -- -- -- -- 1 144
Other consumer loans -- -- -- -- 1 3
- ----- - ----- - -----
Total 4 $ 857 2 $ 285 2 $ 147
= ===== = ===== = =====
Delinquent loans to gross loans
net of undisbursed loan funds 0.22% 0.08% 0.05%
22
The following table presents information regarding non-accrual loans at
the dates indicated.
Loans On Non-accrual Status At December 31,
--------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
Number Number Number
(Dollars In Thousands) Of Principal Of Principal Of Principal
Loans Balance Loans Balance Loans Balance
----- ------- ----- ------- ----- -------
Residential one to four unit 2 $ 603 4 $ 543 9 $ 1,478
Commercial and industrial real estate 2 1,133 2 1,146 -- --
Commercial construction 1 2,852 -- -- -- --
Business term loans 3 78 1 5,000 -- --
Business lines of credit -- -- 2 199 -- --
- ------- - ------- - -------
--
Total 8 $ 4,666 9 $ 6,888 9 $ 1,478
= ======= = ======= = =======
Non-accrual loans to gross loans
net of undisbursed loan funds 1.17% 1.89% 0.49%
Interest income foregone on non-accrual loans outstanding at year-end
totaled $110 thousand, $109 thousand, and $76 thousand for the years ended
December 31, 2000, 1999, and 1998, respectively. During early 2001, the separate
collateral securing the non-accrual commercial construction loan and one of the
non-accrual commercial and industrial real estate loans at December 31, 2000 was
in escrow for sale. The Company cannot predict, however, whether such escrows
will close. At December 31, 2000, the Company was in the process of foreclosing
on both of the subject properties.
The following table presents information concerning restructured loans
that were on accrual status at the dates indicated.
Troubled Debt Restructured Loans On Accrual Status At December 31,
--------------------------------------------------------------------------------
2000 1999 1998
------------------------ ------------------------ ------------------------
Number Number Number
(Dollars In Thousands) Of Principal Of Principal Of Principal
Loans Balance Loans Balance Loans Balance
----- ------- ----- ------- ----- -------
Residential one to four unit 1 $ 75 8 $ 1,294 7 $ 1,172
Multifamily five or more units -- -- -- -- 1 265
- ----- - ------- - -------
Total 1 $ 75 8 $ 1,294 8 $ 1,437
= ===== = ======= = =======
The following table presents additional information concerning loans
classified as troubled debt restructurings:
At December 31,
-----------------------------------
(Dollars In Thouands, Numbers In Whole Units) 2000 1999 1998
---- ---- ----
Troubled debt restructurings performing per terms:
Number of loans 1 8 8
Principal balance outstanding $ 75 $ 1,294 $ 1,437
Weighted average interest rate 8.95% 7.60% 7.64%
Troubled debt restructurings not performing per terms:
Number of loans 1 1 --
Principal balance outstanding $ 294 $ 119 $ --
Weighted average interest rate 8.50% 7.00% --
Total troubled debt restructurings:
Number of loans 2 9 8
Principal balance outstanding $ 369 $ 1,413 $ 1,437
Weighted average interest rate 8.60% 7.55% 7.64%
23
Criticized And Classified Assets. To measure the quality of assets, the
Company has established internal asset classification guidelines as part of its
credit monitoring system for identifying and reporting current and potential
problem assets. Under these guidelines, both asset specific and general
portfolio valuation allowances are established.
The Company currently classifies problem and potential problem assets
into one of four categories, presented below in order of increasing severity.
Category Definition
---------------------------- ------------------------------------------
Criticized Assets
Special Mention Special Mention loans (sometimes referred
to as "watch list" loans) possess
weaknesses, but do not currently expose
the Company to sufficient risk to warrant
categorization as a classified asset or
assignment of a specific valuation
allowance. Weaknesses that might
categorize a loan as Special Mention
include, but are not limited to, past
delinquencies or a general decline in
business, real estate, or economic
conditions applicable to the loan.
Classified Assets
Substandard Substandard loans have one or more defined
weakness and are characterized by the
distinct possibility that the Company will
sustain some loss if the deficiencies are
not corrected.
Doubtful Doubtful loans have the weaknesses of
substandard loans, with the additional
characteristic that the weaknesses make
collection or liquidation in full on the
basis of currently existing facts,
conditions, and values questionable; and
there is a high possibility of loss of
some portion of the principal balance.
Loss Loss loans are considered uncollectible
and their continuance as an asset is not
warranted.
Assets classified as substandard or doubtful require the establishment
of general valuation allowances in amounts considered by management to be
adequate under generally accepted accounting principles. These amounts represent
loss allowances which have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. Judgments regarding the
adequacy of general valuation allowances are based on continual evaluation of
the nature, volume and quality of the loan portfolio, other assets, and current
economic conditions that may affect the recoverability of recorded amounts.
Assets classified as a loss require either a specific valuation allowance equal
to 100% of the amount classified or a charge-off of such amount.
24
The following table presents the Company's criticized and classified
assets at the dates indicated:
At December 31,
--------------------------------
Outstanding Balances Before Specific Valuation Allowances 2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Criticized Assets
Special mention $2,283 $7,940 $6,427
====== ====== ======
Classified Assets
Substandard loans $6,923 $8,678 $5,124
Real estate acquired via foreclosure -- 96 322
------ ------ ------
Total classified assets $6,923 $8,774 $5,446
====== ====== ======
Classified assets to total loans plus other real estate owned (1) 1.74% 2.41% 1.79%
Classified assets to total assets 1.42% 1.90% 1.20%
Classified assets to shareholders' equity 15.79% 21.50% 13.25%
Allowance for loan losses to total classified assets 77.48% 39.91% 51.05%
-------------------------------------------------------------------------------
(1) Total loans equals total gross loans less undisbursed loan funds and (less)
or plus unamortized yield adjustments Other real estate owned is included
on a gross basis before any valuation allowances.
A savings institution's determination as to the classification of its
assets and the amount of its valuation allowances is subject to review by the
OTS, which can require the establishment of additional general or specific loss
allowances. The OTS, in conjunction with the other federal banking agencies, has
adopted an interagency policy statement on allowances for loan and lease losses
which provides guidance in determining the adequacy of general valuation
guidelines. The policy statement recommends that savings institutions establish
effective systems and controls to identify, monitor, and address asset quality
problems, analyze significant factors that affect the collectibility of assets,
and establish prudent allowance evaluation processes. Management believes that
the Company's allowance for loan losses is adequate given the composition and
risks of the loan portfolio. However, actual losses are dependent upon future
events and, as such, further additions to the level of specific and general loan
loss allowances may become necessary. In addition, there can be no assurance
that at some time in the future the OTS, in reviewing the Company's loan
portfolio, will not request the Company to increase its allowance for loan
losses, thus negatively impacting the Company's results of operations for that
time period.
Impaired Loans. The Company defines a loan as impaired when it meets
one or more of the following criteria:
o It is probable that the Company will be unable to collect all contractual
principal and interest in accordance with the original terms of the loan
agreement.
o The loan is ninety or more days past due.
o The loan is placed on non-accrual status although less than ninety days
past due.
o A specific valuation reserve has been allocated against the loan.
o The loan meets the criteria for a troubled debt restructuring.
25
The policy of the Company is to review each loan in the portfolio to
identify problem credits. The nature of this review varies by the type of loan
and its underlying collateral. For example, most residential mortgages are
evaluated for impairment following a delinquency, while the Company conducts
credit analysis on each income property loan exceeding certain thresholds at
least annually regardless of payment performance. In reviewing each loan, the
Company evaluates both the amount the Company believes is probable that it will
collect and the timing of such collection. As part of the loan review process,
the Company considers such factors as the ability of the borrower to continue
meeting the debt service requirements, assessments of other sources of
repayment, and the fair value of any collateral. Insignificant delays or
shortfalls in payment amounts, in the absence of other facts and circumstances,
would not alone lead to the conclusion that a loan is impaired.
Each loan identified as impaired is evaluated for the need for a
specific loss reserve. The adequacy of these specific loss reserves is reviewed
regularly, and no less frequently than quarterly. A loan's specific loss reserve
is calculated by comparing the Company's net investment in the loan to one or
more of the following, as applicable to the nature of the loan:
o the present value of the loan's expected future cash flows discounted at
the loan's effective interest rate at the date of initial impairment
o the loan's observable market price
o the fair value of the collateral securing the loan
The Company charges off a portion of an impaired loan against the specific
valuation allowance when it is probable that a part of the loan will not be
recoverable.
At December 31, 2000, the Company had impaired loans totaling $5.3
million, which have related specific reserves of $600 thousand. At December 31,
1999, the Company had impaired loans of $8.2 million, with related specific
reserves of $200 thousand. Of the $5.3 million in impaired loans at December 31,
2000, $677 thousand were on accrual status due to continued payment performance
by the borrowers. Additional information concerning impaired loans is presented
below and in Note 5 to the Consolidated Financial Statements.
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Average investment in impaired loans for the year $ 7,790 $ 2,511 $ 3,100
Interest recognized on impaired loans at December 31 $ 461 $ 590 $ 166
Interest not recognized on impaired loans at December 31 $ 110 $ 109 $ 76
The increase in the average investment in impaired loans in 2000 versus
1999 resulted from a $5.0 million business term loan originated by MBBC that was
identified as impaired in the fourth quarter of 1999 and paid off in full in
December, 2000.
Other than those loans already categorized as non-performing or
classified at December 31, 2000, the Company has not identified any other
potential problem loans, which would result in those loans being included as
non-performing or classified loans at a future date.
The Company had no loans outstanding to foreign entities at December
31, 2000.
26
Special Residential Loan Pool. During 1998, the Bank purchased a $40.0
million residential mortgage pool comprised of loans that presented a borrower
credit profile and / or a loan to value ratio outside of (less favorable than)
the Bank's normal underwriting criteria. To mitigate its credit risk for this
portfolio, concurrent with the purchase, the Bank obtained a scheduled principal
/ scheduled interest loan servicing agreement from the seller. Further, this
agreement also contains a guaranty 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 credit
enhancements, 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. See "Regulation And Supervision - Loans To One Borrower
Limitation" and Note 15 to the Consolidated Financial Statements.
At December 31, 2000, the outstanding principal balance of the Special
Residential Loan Pool was $16.5 million, with an additional $3.2 million in
December payoffs received from the seller / servicer in January, 2001. In
comparison, the outstanding principal balance of the Special Residential Loan
Pool was $35.0 million at December 31, 1999, with $1.2 million in December 1999
payoffs received from the seller / servicer in January, 2000.
While the seller / servicer met all its contractual obligations through
January 20, 2001, the Company has allocated certain general loan loss reserves
due to concerns regarding the potential losses by the seller / servicer in
honoring the guaranty, the present delinquency profile of the special
residential mortgage pool, and the differential between loan principal balances
and current appraisals for foreclosed loans and loans in the process of
foreclosure.
Because the seller / servicer provides scheduled principal and interest
payments regardless of the actual payment performance of the loans and because
the seller / servicer absorbs all losses on the disposition of associated
foreclosed real estate, the Company reports all loans within the Special
Residential Loan Pool as performing.
By December 31, 2000, all of the loans in the Special Residential Loan
Pool converted from an initial fixed rate that was maintained for the first two
years of the loan to an adjustable rate significantly above current market rates
for medium to high credit quality residential mortgages. The weighted average
gross interest rate on the Special Residential Loan Pool at December 31, 2000
was 11.44%. The differential between the interest rates on the loans and
available refinance rates contributed to the significant prepayments during
2000.
Management believes additional prepayments are likely to occur in 2001.
However, management also believes that there will be some loans that will not
refinance in the next year due to a lack of available financing for less
creditworthy borrowers or because of borrower inaction. By the end of 2001, the
Company may therefore be particularly dependent upon the financial strength and
continued performance of the seller / servicer, as the remaining portfolio is
expected to be comprised of relatively less creditworthy loans while at the same
time having a smaller remaining total principal balance and thereby providing
less periodic cash flow to the seller / servicer via the retained servicing
spread.
In conjunction with this Special Residential Loan Pool, on March 6,
2000, the Bank received a letter from the OTS mandating that the Bank (i) assign
all of the loans in the pool a 100% risk based capital weighting, and (ii) not
permit its regulatory capital ratios to decline below the levels existing at
December 31, 1999. Management does not foresee any compliance issue with this
request given:
o the Bank's regulatory capital position at December 31, 2000
o remaining a "well capitalized" financial institution is integral to the
Bank's business strategy
o the expected continued generation of regulatory capital expected through
retained earnings, the amortization of deferred stock compensation, and the
amortization of intangible assets.
27
Management cannot forecast whether the OTS will impose additional
requirements or restrictions as a result of the Special Residential Loan Pool.
Management also cannot forecast when the OTS might lift the existing additional
requirements. The Bank continues to report to the OTS regarding the Special
Residential Loan Pool on a monthly basis.
The Company monitors 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 January 20, 2001 remittance for activity
through December 31, 2000 include the following:
(Dollars In Thousands) Company
Number Outstanding
Of Investment
Category Loans In Loans
-------- ----- --------
Customer paying per note terms 72 $ 9,110
Customer 30 days delinquent 11 1,390
Customer 60 days delinquent 8 1,156
Customer 90 days or more delinquent 10 991
Foreclosed 3 663
--- --------
Total 104 $ 13,310
=== ========
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.
Additional portfolio statistics as of the January 20, 2001 remittance
for activity through December 31, 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 that was 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. In early 2001, the OTS published its position
that a FICO Score of 660 or below may represent a subprime borrower. Actual
results may vary on a case by case basis.
28
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. The information in the
following table is as of the January 20, 2001 remittance for activity through
December 31, 2000.
Company
(Dollars In Thousands) Number Outstanding
Of Investment
Original FICO Score Range Loans In Loans
------------------------- ----- --------
Less than 500 2 $ 287
500 through 549 15 1,856
550 through 599 35 4,246
600 through 649 34 4,902
650 through 699 14 1,600
700 through 749 1 67
Above 749 3 352
--- --------
Total 104 $ 13,310
=== ========
The weighted average original FICO score for the Special Residential
Loan Pool as of the January 20, 2001 remittance for activity through December
31, 2000 was 600.
The original loan to value distribution of the homes securing the loans
within the Special Residential Loan Pool as of the January 20, 2001 remittance
for activity through December 31, 2000 was as presented in the following table.
The original loan to value ratios were determined through an appraisal process
undertaken by the seller / servicer of the Special Residential Loan Pool prior
to the funding of the loans to the borrowers.
Company
(Dollars In Thousands) Number Outstanding
Of Investment
Original Loan To Value Range Loans In Loans
---------------------------- ----- --------
70.0% or less 13 $ 1,332
70.1% through 75.0% 15 1,905
75.1% through 80.0% 34 4,722
80.1% through 85.0% 23 3,078
85.1% through 90.0% 19 2,773
--- --------
Total 104 $ 13,310
=== ========
The weighted average original loan to value ratio for the Special
Residential Loan Pool as of the January 20, 2001 remittance for activity through
December 31, 2000 was 79.5%. Original loan to value ratios for individual loans
ranged from 26% to 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.
29
The geographic distribution of the homes securing the loans within the
Special Residential Loan Pool as of the January 20, 2001 remittance for activity
through December 31, 2000 was as follows.
Company
(Dollars In Thousands) Number Outstanding
Of Investment
Collateral Location Loans In Loans
------------------- ----- --------
California 31 $ 4,801
Utah 17 2,286
Oregon 11 1,394
Michigan 8 934
Arizona 8 796
North Carolina 4 540
Missouri 4 500
Indiana 4 274
Colorado 3 396
Washington (state) 3 381
Ohio 3 244
Other 8 764
--- --------
Total 104 $ 13,310
=== ========
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 Company's loan portfolio. The allowance for loan losses is
increased by provisions charged against earnings and reduced by net loan
charge-offs. Loans are charged-off when they are deemed to be uncollectible;
recoveries are generally recorded only when cash payments are received.
The allowance for loan losses is maintained at an amount management
considers adequate to cover estimated losses in loans receivable which are
deemed probable and estimable. The allowance is based upon a number of factors,
including, but not limited to, asset classifications, the size and mix of the
loan portfolio, economic trends and conditions, industry experience and trends,
industry and geographic concentrations, estimated collateral values,
management's assessment of the credit risk inherent in the portfolio, historical
loan loss experience, changes in non-performing and past due loans, and the
Company's underwriting policies.
General valuation allowances represent loss allowances that have been
established to recognize inherent risk associated with lending activities, but
which, unlike specific allowances, have not been allocated to particular problem
assets.
In addition to the requirements of Accounting Principles Generally
Accepted in the United States of America, or "GAAP", related to loss
contingencies, a federally chartered savings association's determination as to
the classification of its assets and the amount of its valuation allowances is
subject to review by the OTS. The OTS, in conjunction with other federal banking
agencies, provides guidance for financial institutions on both the
responsibilities of management for the assessment and establishment of adequate
allowances and guidance for banking agency examiners to use in determining the
adequacy of general valuation allowances. It is required that all institutions:
o have effective systems and controls to identify, monitor, and address asset
quality problems
o analyze all significant factors that affect the collectibility of the loan
portfolio in a reasonable manner
o establish acceptable allowance evaluation processes that meet the
objectives of the federal regulatory agencies
30
Various regulatory agencies, in particular the OTS, as an integral part
of their examination process, periodically review the Company's allowance for
loan losses. These agencies may require the Company to make additional
provisions for loan losses, based on their judgments of the information
available at the time of the examination. Although management believes that the
allowance for loan losses is adequate to provide for estimated inherent losses
in the loan portfolio, future provisions charged against operations will be
subject to continuing evaluations of the inherent risk in the loan portfolio. In
addition, if the national or local economy declines or asset quality
deteriorates, additional provisions could be required. Such additional
provisions could negatively and materially impact the Company's financial
condition and results of operations.
The following table presents information concerning the Company's
allowance for loan losses at the dates and for the years indicated.
(Dollars In Thousands) 2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Period end loans outstanding (1) $ 397,184 $ 364,188 $ 303,732 $ 265,934 $ 234,649
Average loans outstanding (1) 379,823 339,036 259,358 250,370 231,530
Period end non-performing loans outstanding 4,741 8,182 2,915 2,046 1,748
Allowance for loan losses
Balance, at beginning of year $ 3,502 $ 2,780 $ 1,669 $ 1,311 $ 1,362
Charge-offs:
Residential one to four unit real estate loans (371) (113) -- (20) (106)
Other consumer loans -- -- -- (1) (24)
------- ------- ------- ------- -------
Total charge-offs (371) (113) -- (21) (130)
------- ------- ------- ------- -------
Recoveries:
Residential one to four unit real estate loans 58 -- 3 4 50
Other consumer loans -- -- -- -- 1
------- ------- ------- ------- -------
Total recoveries 58 -- 3 4 51
------- ------- ------- ------- -------
Net (charge-offs) recoveries (313) (113) 3 (17) (79)
------- ------- ------- ------- -------
Provision charged to operations 2,175 835 692 375 28
Allowance acquired in conjunction with loan purchase -- -- 416 -- --
------- ------- ------- ------- -------
Balance, at end of year $ 5,364 $ 3,502 $ 2,780 $ 1,669 $ 1,311
======= ======= ======= ======= =======
Net charge-offs (recoveries) to average gross loans 0.08% 0.03% -- 0.01% 0.03%
outstanding
Allowance as a percent of year end loans outstanding (1) 1.35% 0.96% 0.92% 0.63% 0.56%
Allowance as a percent of non-performing loans 113.14% 42.80% 95.37% 81.57% 75.00%
-----------------------------------------------------------
(1) net of undisbursed loan funds, unamortized purchase premiums net of
purchase discounts, and deferred loan fees and costs, net
The charge-offs recorded by the Company in 2000 stemmed from a single
residential mortgage. This loan was adversely impacted by substantial earth
movement which significantly damaged the house and altered the parcel. The
Company has been working with the borrower to address this situation, and
recorded a $55 thousand partial recovery before the end of 2000.
31
The following table provides a summary of the allocation of the
allowance for loan losses for specific loan categories at the dates indicated.
The allocation presented should not be interpreted as an indication that charges
to the allowance for loan losses will be incurred in these amounts or
proportions, or that the portion of the allowance allocated to each loan
category represents the total amounts available for future losses that may occur
within these categories. The unallocated portion of the allowance and the total
allowance is applicable to the entire loan portfolio.
At December 31,
------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ----------------- ------------------ ----------------- ------------------
% Of % Of % Of % Of % Of
Loans In Loans In Loans In Loans In Loans In
Category Category Category Category Category
To Gross To Gross To Gross To Gross To Gross
(Dollars In Thousands) Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
Residential $ 1,143 37.8% $ 663 43.4% $ 925 56.1% $ 744 70.3% $ 883 83.9%
Multifamily 470 18.1% 185 10.9% 277 10.2% 260 8.1% 171 9.5%
Commercial real estate 1,232 24.1% 918 18.6% 514 12.2% 226 7.0% 173 3.2%
Construction 1,164 13.9% 960 20.3% 533 15.7% 209 12.2% 19 1.7%
Land 400 3.9% 137 3.6% 101 2.4% 54 0.7% 1 --
Home equity lines of 32 1.3% 32 1.0% 34 1.0% 38 1.1% 40 1.4%
credit
Other consumer loans 11 0.2% 15 0.2% 11 0.2% 19 0.2% 23 0.3%
Business term loans 148 0.4% 243 1.7% 190 2.0% 19 0.3% -- --
Business lines of credit 25 0.3% 83 0.3% 26 0.2% 19 0.1% -- --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total allocated 4,625 100.0% 3,236 100.0% 2,611 100.0% 1,588 100.0% 1,310 100.0%
====== ====== ====== ====== ======
Unallocated 739 266 169 81 1
------ ------ ------ ------ ------
Total $5,364 $3,502 $2,780 $1,669 $1,311
====== ====== ====== ====== ======
Other information
Gross loans outstanding $423,945 $388,198 $327,876 $287,562 $236,547
Over the past several years, the Company has increased its allowance
for loan losses in conjunction with three key trends within the loan portfolio:
o The growth in the nominal size of the loan portfolio has led management to
increase the amount of the allowance.
o The greater diversification in the mix of the loan portfolio away from
residential one to four unit permanent mortgages toward other types of
lending, particularly income property and construction loans, has led to
higher nominal and relative allowance levels, as these newer types of
lending typically present more risk than residential mortgages. This
increased risk stems both from the nature of the lending and the greater
individual credit amounts associated with income property and construction
loans.
o The increasing concentration of the portfolio in relatively less seasoned
credits, because of the Company's growth rate in recent years, has also led
management to increase the level of the allowance, as less seasoned loans
typically present greater risk than loans which have been performing for
many years.
32
The Company's loan portfolio at December 31, 2000 presented significant
geographic concentration, consistent with the Company's focus of serving local
individuals and businesses as a community commercial bank. The majority of the
Company's loans outstanding at December 31, 2000 were secured by real estate
located in the three counties which constitute the Company's primary market
area:
o Santa Cruz County
o Monterey County
o Santa Clara County
This concentration provides certain benefits. For example, the Company becomes
well known in its local area and therefore attracts more business. In addition,
management develops a more comprehensive knowledge of real estate values and
business trends in markets where lending is regularly conducted. However, this
concentration also presents certain risks. A natural disaster such as an
earthquake centered in the Greater Monterey Bay Area would impact the Company
more significantly than firms with loans geographically dispersed over a wider
area. Another concentration risk is that a downturn in the economy or real
estate values in the Greater Monterey Bay Area would disproportionately
unfavorably impact the Company versus a State-wide or national lender. The
geographic concentration of the Company's loans is an important factor that
management considers in determining appropriate levels of general loan loss
reserves.
At December 31, 2000, the Company had outstanding less than $15.0
million in loans outside the State of California, with a majority of such
associated with the Special Residential Loan Pool (see Note 15 to the
Consolidated Financial Statements). The Company's strategic plan does not
include substantial lending in 2001 outside the State of California. The Company
does, however, intend to pursue the purchase of loans, particularly income
property loans, in Northern and Southern California during 2001.
The Company increased the amount of the unallocated allowance during
2000 in response to a number of trends and factors which in management's opinion
increased the inherent loss in the loan portfolio at December 31, 2000:
o the California energy crisis, with impacts upon the availability and price
of electricity, business costs, consumer spending and disposable income,
and the pace of economic activity in the State
o the financial difficulties experienced by many technology related companies
in the Silicon Valley area adjacent to the Bank's primary market areas
o the impact of lower technology stock prices on consumer spending,
liquidity, and investment, with a particular concern regarding effects on
the demand and pricing for real estate in the Bank's primary market areas
o the general reduction in national economic growth and the increased volume
of layoffs being announced by major corporations
To the extent that the Company is successful in its strategic plan and
therefore continues to expand its loan portfolio and to increase the proportion
of non-residential loans therein, management anticipates increasing, in future
periods, the allowance for loan losses in a manner consistent with the Company's
loan loss allowance methodology.
33
Investment Activities
Cash Equivalents. The Company does not include certain short term,
highly liquid investments as investment securities, instead classifying these as
cash equivalents. These include:
o federal funds sold
o securities purchased under agreements to resell
o commercial paper
o money market mutual fund investments
o banker's acceptances
o certificates of deposit in federally insured financial institutions
Liquidity Maintenance. Federally chartered savings institutions have
the authority to invest in various types of liquid assets, as defined in
applicable regulations, including United States Treasury obligations, securities
of or guaranteed by various federal agencies, certificates of deposit of insured
banks and savings institutions, bankers' acceptances, repurchase agreements, and
federal funds. Additionally, the Bank must maintain minimum levels of
investments that qualify as liquid assets under OTS regulations. See "Regulation
And Supervision - Liquidity." Historically, the Bank has maintained liquid
assets above the minimum OTS requirements and at a level considered to be
adequate to meet foreseeable operational needs.
Investment Policies. In addition to the above liquid assets, subject to
various restrictions, federally chartered savings institutions may also invest
in various other types of securities, including investment-grade corporate debt
securities, asset-backed securities, collateralized mortgage obligations not
guaranteed by a federal agency, and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly. The Company maintains separate internal investment
policies for the Bank and MBBC. These policies are established by the Board of
Directors with the key objectives of:
o providing and maintaining liquidity
o generating a favorable total return on a risk-adjusted basis
o managing the overall interest rate risk profile of the entities
o maintaining compliance with various associated regulations
o controlling credit risk exposure
Specifically, the Company's policies generally limit investments to publicly
traded securities that are investment grade. These policies prohibit the
Company's maintenance of a trading portfolio as defined under SFAS No. 115.
Accounting And Reporting. Investment securities classified as available
for sale are recorded at fair value, while investment securities classified as
held to maturity are recorded at cost. Unrealized gains or losses on available
for sale securities, net of the deferred tax effect, are reported as a component
of other comprehensive income and are included in stockholders' equity.
34
The amortized cost and estimated fair value of securities are presented
in the following tables:
December 31, 2000
---------------------------------------------------------------------
Gross Gross Estimated
(Dollars In Thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale
Corporate trust preferreds $ 7,696 $ -- $ (336) $ 7,360
FHLMC certificates 1,090 13 -- 1,103
FNMA certificates 4,220 30 (2) 4,248
GNMA certificates 1,060 -- (11) 1,049
Collateralized mortgage obligations:
Agency issuance 19,095 5 (266) 18,834
Non Agency issuance 18,210 4 (498) 17,716
-------- ----- ------- --------
$ 51,371 $ 52 $(1,113) $ 50,310
======== ===== ======== ========
December 31, 1999
---------------------------------------------------------------------
Gross Gross Estimated
(Dollars In Thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale
Corporate trust preferreds $ 11,456 $ 50 $ (43) $ 11,463
FHLMC certificates 1,930 -- (36) 1,894
FNMA certificates 25,132 95 (379) 24,848
GNMA certificates 4,531 -- (96) 4,435
Collateralized mortgage obligations:
Agency issuance 11,152 -- (974) 10,178
Non Agency issuance 16,965 -- (604) 16,361
-------- ----- ------- --------
$ 71,166 $ 145 $(2,132) $ 69,179
======== ===== ======== ========
Held to maturity
FNMA certificates $ 60 $ -- $ -- $ 60
====== ===== ====== ======
December 31, 1998
---------------------------------------------------------------------
Gross Gross Estimated
(Dollars In Thousands) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Available for sale
Corporate trust preferreds $ 18,658 $ 496 $ -- $ 19,154
FNMA debentures 252 4 -- 256
FHLMC certificates 4,735 28 -- 4,763
FNMA certificates 32,870 891 (10) 33,751
GNMA certificates 11,927 39 (20) 11,946
Collateralized mortgage obligations:
Agency issuance 13,945 14 (124) 13,835
Non Agency issuance 33,681 89 (59) 33,711
-------- ----- ------- --------
$ 116,068 $ 1,561 $ (213) $ 117,416
========= ======= ======= =========
Held to maturity
FNMA certificates $ 97 $ -- $ (1) $ 96
====== ===== ======= ======
35
At December 31, 2000, the Company's investment in corporate trust
preferred securities was entirely composed of variable rate securities which
reprice quarterly based upon a margin over the three month LIBOR rate. These
corporate trust preferred securities were also all rated "A-" or better by
Standard & Poors ratings agency at December 31, 2000.
The following table presents certain information regarding the
amortized cost, fair value, weighted average yields, and contractual maturities
of the Company's securities as of December 31, 2000.
At December 31, 2000
--------------------------------------------------------------------------
2002 2006 2011
Through Through And
2001 2005 2010 Thereafter Total
---- ---- ---- ---------- -----
(Dollars In Thousands)
Available for sale securities (1)
Corporate trust preferreds $ -- $ -- $ -- $ 7,696 $ 7,696
FHLMC certificates -- -- -- 1,090 1,090
FNMA certificates -- -- 3,015 1,205 4,220
GNMA certificates -- -- 811 249 1,060
Collateralized mortgage obligations: -- --
Agency issuance 406 -- 3,746 14,943 19,095
Non Agency issuance -- -- -- 18,210 18,210
----- ---- ------- ------- -------
Total amortized cost $ 406 $ -- $ 7,572 $ 43,393 $51,371
===== ====== ======= ======== =======
Estimated fair value $ 407 $ -- $ 7,558 $42,345 $50,310
===== ====== ======= ======= =======
Weighted average yield (2) 8.21% -- 6.64% 6.98% 6.94%
-----------------------------------------------
(1) Mortgage backed securities and collateralized mortgage obligations ("CMOs")
are shown at contractual maturity; however, the average life of these
securities and the actual maturity of these securities may differ
significantly from the contractual maturity dates due to prepayments and,
in the case of CMOs, the priority of principal allocation among the
tranches within the securities.
(2) Weighted average yield is calculated based upon amortized cost.
The Company maintained no tax-preferenced securities at December 31, 2000.
At December 31, 2000, the Company did not own debt securities issued by any one
issuer that exceeded ten percent of stockholders' equity. For additional
information regarding the Company's securities, please refer to Notes 3 and 4 to
the Consolidated Financial Statements.
36
Sources Of Funds
General. The Company's primary sources of funds are customer deposits,
principal, interest, and dividend payments on loans and securities, FHLB
advances and other borrowings, and, to a lesser extent, proceeds from sales of
securities and loans. While maturities and scheduled amortization of loans and
securities are predictable sources of funds, deposit flows and loan and security
prepayments are greatly influenced by general interest rates, economic
conditions, and competition.
Deposits. The Company offers a variety of deposit accounts with a range
of interest rates and terms. The Company's deposits consist of demand deposit
and NOW checking accounts, savings accounts, money market accounts, and
certificates of deposit. The flow of deposits is influenced significantly by
general economic conditions, changes in money market rates, prevailing interest
rates, and competition. The Company's deposits are obtained predominantly from
the areas in which its branch offices are located. The Company relies primarily
on customer service and long standing relationships with customers to attract
and retain these deposits; however, market interest rates and rates offered by
competing financial institutions and mutual funds significantly affect the
Company's ability to attract and retain deposits. While the Bank is currently
eligible to accept brokered deposits, it has not done so. The Bank participates
in the State of California Time Deposit Program, whereby the State places
certificates of deposit with banks as a means of encouraging lending back into
California's communities. Management continually monitors the Company's
certificate accounts and historically the Company has retained a large portion
of such accounts upon maturity.
In recent years, the Company has introduced a series of money market
accounts specifically designed for certain target markets. For example, in 2000
the Company introduced a highly tiered money market account specifically
designed to attract higher average balance depositors who might otherwise pursue
money market mutual funds. As a result, money market deposit balances have
increased in recent years, from $60.5 million at December 31, 1998 to $81.2
million at December 31, 1999 to $87.7 million at December 31, 2000. The Company
plans to further refine and augment its money market account product line in
2001 following its conversion to a new core data processing system.
The Company's other area of focus in deposit acquisition in recent
years has been checking accounts, coincident with the Company's business
strategy of becoming more of a community based financial services organization,
meeting the primary financial needs of both consumers and small businesses. The
Company has enjoyed particular success with its "40 +" checking product, a NOW
account that provides free checking to customers 40 years of age or older
meeting certain other minimum requirements. In 2000, the Company introduced its
Interest Checking Plus product, a SuperNow account that provides relatively
higher, tiered interest rates for those consumers who maintain more substantial
balances in their checking accounts. This product has averaged in excess $25
thousand per account, providing the Company with efficiencies versus typical
consumer checking accounts that contain much smaller average balances. In 2001,
the Company plans to continue building its base of business checking accounts,
including demand deposits on account analysis, consistent with sales efforts by
the new Professional Banking and Commercial Banking Groups. Checking accounts
expanded from 10.1% of total deposits at December 31, 1998 to 13.3% at December
31, 1999 to 14.4% at December 31, 2000.
In preparation for its planned systems conversion in 2001, during the
fourth quarter of 2000 and during the first quarter of 2001, the Company took
steps to convert all of its passbook based deposit accounts to statement based
deposit accounts, specifically certain savings and certificate of deposit
products. The Company chose not to continue supporting passbook based deposits
post conversion to the new data processing system, as management believes
passbook based products do not integrate effectively with the increasingly
numerous and varied means of customer electronic access to their funds; e.g.
Internet banking, electronic bill payment, debit / point of sale, ATM networks,
and telephone banking.
37
During 2000, the Company's certificate of deposit portfolio increased
by $22.6 million, of which $14.0 million represented inflows from the State of
California Time Deposit Program. During the past two years, the Company has
focused its deposit related sales efforts on transaction accounts as a means of
increasing net interest margins, bolstering fee income, and building more
comprehensive customer relationships. In addition, during 2000, the Company
encountered significant price competition for certificates of deposit from one
very large thrift in particular, and from Internet banks seeking to build their
customer bases through aggressive pricing without regard to short term
profitability.
The Company's weighted average cost of deposits at December 31, 2000
was 4.72%, equal to 90 basis points below the 11th District Cost Of Funds Index
("COFI") for December 2000 of 5.62%. While COFI contains funding components
other than deposits, the Company uses a comparison to COFI as a benchmark of its
success in managing its cost of deposits. The Company's cost of deposits was 81
basis points below COFI at December 31, 1999. The Company seeks to manage its
cost of deposits both via pricing for individual products and through the
deposit portfolio product mix.
The Company maintained no deposits in foreign banking offices at
December 31, 2000 or December 31, 1999.
The following table presents the deposit activity of the Company for
the periods indicated.
For The Year Ended December 31,
----------------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Deposits $ 1,585,674 $ 1,205,268 $ 988,794
Purchased deposits -- -- 29,651
Withdrawals (1,562,500) (1,223,666) (984,948)
----------- ----------- ---------
Net deposits 23,174 (18,398) 33,497
Interest credited on deposits 17,212 15,123 16,621
----------- ----------- ---------
Total increase (decrease) in deposits $ 40,386 $ (3,275) $ 50,118
=========== =========== =========
The following table summarizes the Company's deposits at the dates
indicated.
December 31, 2000 December 31, 1999
------------------------------- -------------------------------
Weighted Weighted
Average Average
(Dollars In Thousands) Balance Rate Balance Rate
------- ---- ------- ----
Demand deposit accounts $ 17,065 -- $ 17,316 --
NOW accounts 41,859 1.53% 31,385 1.53%
Savings accounts 16,503 1.96% 15,312 1.80%
Money market accounts 87,651 4.78% 81,245 4.13%
Certificates of deposit < $100,000 166,905 5.68% 169,646 4.78%
Certificates of deposit $100,000 or more 77,805 5.97% 52,498 4.97%
-------- --------
$407,788 $367,402
======== ========
Weighted average nominal interest rate 4.72% 4.04%
The weighted average interest rates are at the end of the period and are based
upon stated interest rates without giving consideration to daily compounding of
interest or forfeiture of interest because of premature withdrawal.
38
The following table presents the amount and weighted average rate of
time deposits equal to or greater than $100,000 at December 31, 2000. The amount
maturing in three months or less includes $14.0 million associated with the
State of California Time Deposit Program.
At December 31, 2000
------------------------------
Weighted
(Dollars In Thousands) Average
Amount Rate
------ ----
Maturity Period
Three months or less $ 40,309 5.98%
Over three through 6 months 14,117 5.90%
Over 6 through 12 months 14,128 6.00%
Over 12 months 9,251 6.00%
-------- ----
$ 77,805 5.97%
========
The following table presents the distribution of the Company's average
balances of deposit accounts for the periods indicated and the weighted average
interest rates on each category of deposits presented.
For The Year Ended December 31,
-------------------------------------------------------------------------------------------
2000 1999 1998
----------------------------- ----------------------------- -----------------------------
% Of % Of % Of
Average Weighted Average Weighted Average Weighted
Average Total Average Average Total Average Average Total Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
(Dollars In Thousands)
Demand deposits $ 16,719 4.3% -- $ 17,610 4.8% -- $ 15,401 4.4% --
NOW accounts 36,317 9.4% 1.51% 25,205 6.8% 1.54% 14,534 4.1% 1.56%
Savings accounts 15,803 4.1% 1.78% 15,583 4.2% 1.80% 15,204 4.3% 1.83%
Money market accounts 87,733 22.7% 4.60% 82,006 22.2% 4.15% 42,603 12.0% 4.03%
Certificates of deposit 230,099 59.5% 5.37% 229,493 62.0% 4.82% 266,225 75.2% 5.41%
------- ----- ----- ------- ----- ----- ------- ----- -----
Total $386,671 100.0% 4.45% $369,897 100.0% 4.09% $353,967 100.0% 4.70%
======== ===== ==== ======== ===== ==== ======== ===== ====
Please refer to Note 10 to the Consolidated Financial Statements for
additional information concerning deposits.
39
Borrowings
From time to time, the Company obtains borrowed funds through FHLB
advances, federal funds purchased, and securities sold under agreements to
repurchase as alternatives to retail deposit funds, and may do so in the future
as part of its operating strategy. Borrowings are also utilized to acquire
certain other assets as deemed appropriate by management for investment purposes
and to better utilize the capital resources of the Bank and Company. Borrowings
are also used as a tool in the Company interest rate risk management process.
FHLB advances are collateralized by the Bank's pledged mortgage loans,
pledged mortgage backed securities, and investment in the capital stock of the
FHLB. See "Regulation And Supervision - Federal Home Loan Bank System." FHLB
advances are made pursuant to several different credit programs with varying
interest rate, embedded option (callable / putable), amortization, and maturity
terms. All of the Bank's FHLB advances outstanding at December 31, 2000 were
fixed rate, non-amortizing advances with single individual maturity dates
("bullet advances"). The maximum amount that the FHLB will advance to member
institutions, including the Bank, fluctuates from time to time in accordance
with the policies of the FHLB. During 2000, the Bank periodically used FHLB
advances to provide needed liquidity and to supplement deposit gathering
activity.
From time to time, the Company enters into reverse repurchase
agreements (securities sold under agreements to repurchase) with approved
security dealers. Over the past several years, MBBC has in particular utilized
securities sold under agreements to repurchase, as the holding company is not
eligible for obtaining FHLB advances.
The Bank maintains federal funds lines of credit with four
correspondent banks. These lines are not committed lines, but rather function on
a funds availability basis. From time to time, the Bank borrows federal funds
from its correspondent banks as a source of short term liquidity.
MBBC maintains a committed $2.0 million revolving line of credit with
one of the Bank's correspondent banks. This line of credit expires in November,
2001, although it is the intention of MBBC to renew the facility. Funds drawn on
the line are priced based upon either the London InterBank Offer Rate curve
("LIBOR") or the correspondent bank's reference rate. This line of credit
contains various covenants and certain restrictions on the use of funds.
The following table sets forth information regarding the Company's
borrowed funds at or for the indicated years.
(Dollars In Thousands) At Or For The Year Ended December 31,
--------------------------------------------
2000 1999 1998
---- ---- ----
FHLB Advances
Average balance outstanding $ 43,946 $ 37,600 $ 28,059
Weighted average rate on average balance outstanding 5.72% 5.53% 5.93%
Year end balance outstanding $ 32,582 $ 49,582 $ 35,182
Weighted average rate on year end balance outstanding 5.48% 5.65% 5.54%
Maximum amount outstanding at any month end during the year $ 50,582 $ 49,582 $ 73,787
Securities Sold Under Agreements To Repurchase
Average balance outstanding $ 155 $ 3,182 $ 5,007
Weighted average rate on average balance outstanding 6.45% 5.65% 5.92%
Year end balance outstanding $ -- $2,410 $ 4,490
Weighted average rate on year end balance outstanding -- 6.08% 5.69%
Maximum amount outstanding at any month end during the year $ -- $ 4,350 $ 5,200
Please refer to Notes 11, 12, and 13 to the Consolidated Financial
Statements for additional information regarding borrowings and lines of credit.
40
Subsidiary Activities
Portola, a California corporation wholly owned by the Bank, is engaged,
on an agency basis, in the sale of insurance, mutual funds, individual
securities, and annuity products, primarily to the Bank's customers and members
of the local communities which the Bank serves. During 2000, gross commission
income generated through Portola included $334 thousand for variable annuity
sales, $134 thousand for mutual fund sales, and $71 thousand for fixed annuity
sales. Portola also functions as trustee for the Bank's deeds of trust. At
December 31, 2000, Portola had $157 thousand in total assets. Portola recorded a
net loss of $25 thousand for the year ended December 31, 2000. In early 2001,
Portola hired a new President with significant related experience.
Personnel
As of December 31, 2000, the Company had 120 full-time employees and 17
part-time employees. The employees are not represented by a collective
bargaining unit. The Company considers its relationship with its employees to be
good.
REGULATION AND SUPERVISION
General
Savings and loan holding companies and savings associations are
extensively regulated under both federal and state law. This regulation is
intended primarily for the protection of depositors and the Savings Association
Insurance Fund ("SAIF") and not for the benefit of stockholders of the Company.
The following information describes certain aspects of that regulation
applicable to the Company and the Bank, and does not purport to be complete. The
following discussion is qualified in its entirety by reference to all particular
statutory or regulatory provisions.
Regulation of the Company
General. The Company is a unitary savings and loan holding company
subject to regulatory oversight by the Office of Thrift Supervision ("OTS"). As
such, the Company is required to register and file reports with the OTS and is
subject to regulation and examination by the OTS. In addition, the OTS has
enforcement authority over the Company and its subsidiaries, which also permits
the OTS to restrict or prohibit activities that are determined to be a serious
risk to the subsidiary savings association.
Although savings and loan holding companies are not, at December 31,
2000, subject to specific capital requirements (see Activities Restriction Test,
below) or specific restrictions on the payment of dividends or other capital
distributions, the Home Owners Loan Act ("HOLA") does prescribe such
restrictions on subsidiary savings institutions, as described below. The Bank
must notify the OTS 30 days before declaring any dividend to MBBC.
The HOLA prohibits a savings and loan holding company directly, or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of
the voting stock of another savings institution or holding company thereof,
without prior written approval of the OTS; acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary company engaged in activities other
than those permitted by the HOLA; or acquiring or retaining control of a
depository institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of the
company and institution involved, the effect of the acquisition on the risk to
the deposit insurance funds, the convenience and needs of the community, and
competitive factors.
41
Activities Restriction Test. As a unitary savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank satisfies the Qualified Thrift Lender ("QTL") test or meets the
definition of domestic building and loan association pursuant to the Internal
Revenue Code of 1986, as amended (the "Code"). The Company presently intends to
continue to operate as a unitary savings and loan holding company. Recent
legislation terminated the "unitary thrift holding company exemption" for all
companies that apply to acquire savings associations after May 4, 1999. Since
the Company is grandfathered, its unitary holding company powers and authorities
were not affected. See "Financial Services Modernization Legislation." However,
if the Company acquires control of another savings association as a separate
subsidiary, it would become a multiple savings and loan holding company, and the
activities of the Company and any of its subsidiaries (other than the Bank or
any other SAIF-insured savings association) would become subject to restrictions
applicable to bank holding companies unless such other associations each also
qualify as a QTL or domestic building and loan association and were acquired in
a supervisory acquisition. Furthermore, if the Company were in the future to
sell control of the Bank to any other company, such company would not succeed to
the Company grandfathered status under and would be subject to the same business
activity restrictions. See "Qualified Thrift Lender Test."
On October 27, 2000, the OTS issued a proposed rule that would require some
savings and loan holding companies to notify the OTS 30 days before undertaking
certain significant new business activities. As proposed, thrift companies would
have to give the OTS advance notice if:
o debt, combined with all other transactions by MBBC or any subsidiaries
other than the thrift during the past 12 months, increases non-thrift
liabilities by 5 percent or more; and non-thrift liabilities, after the
debt transaction, equal 50 percent or more of the company's consolidated
core capital;
o an asset acquisition or series of such transactions by MBBC or non-thrift
subsidiary during the past 12 months that involves assets other than cash,
cash equivalents and securities or other obligations guaranteed by the U.S.
Government and exceeds 15 percent of MBBC's consolidated assets; and
o any transaction that, when combined with all other transactions during the
past 12 months, reduces the Company's capital by 10 percent or more.
Exempt from the notice requirement would be any holding company with
consolidated subsidiary thrift assets of less than 20 percent of total assets or
consolidated holding company capital of at least 10 percent. The OTS could
object to or conditionally approve an activity or transaction if it finds a
material risk to the safety and soundness and stability of the thrift. The
review period could be extended an additional 30 days if necessary.
The OTS proposal also would codify current practices and the factors
relevant to a holding company's need for capital. To determine the need for and
level of an explicit holding company capital requirement, the OTS will look at
overall risk at the thrift and the consolidated entity, their tangible and
equity capital, whether the holding company's debt-to-capital ratio is rising,
what investments or activities are funded by debt, its cash flow, how much the
holding company relies on dividends from subsidiary thrift to service debt or
fulfill other obligations, earnings volatility and the thrift's standing in the
corporate structure.
The comment period for the proposed rule was extended to February 9,
2001.
Restrictions on Acquisitions. MBBC must obtain approval from the OTS
before acquiring control of any other SAIF-insured association. The OTS is
prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, subject to two exceptions: (i) the approval of interstate supervisory
acquisitions by savings and loan holding companies and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary in
the extent to which they permit interstate savings and loan holding company
acquisitions.
42
Federal law generally provides that no "person," acting directly or
indirectly or through or in concert with one or more other persons, may acquire
"control," as that term is defined in OTS regulations, of a federally insured
savings association without giving at least 60 days written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition. In
addition, no company may acquire control of such an institution without prior
OTS approval. These provisions also prohibit, among other things, any director
or officer of a savings and loan holding company, or any individual who owns or
controls more than 25% of the voting shares of a savings and loan holding
company, from acquiring control of any savings association not a subsidiary of
the savings and loan holding company, unless the acquisition is approved by the
OTS. For additional restrictions on the acquisition of a unitary thrift holding
company, see "- Financial Services Modernization Legislation."
Financial Services Modernization Legislation
General. On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act of 1999 (the "Financial Services Modernization Act"). The
Financial Services Modernization Act repeals the two affiliation provisions of
the Glass-Steagall Act:
o Section 20, which restricted the affiliation of Federal Reserve Member
Banks with firms "engaged principally" in specified securities activities;
and
o Section 32, which restricts officer, director, or employee interlocks
between a member bank and any company or person "primarily engaged" in
specified securities activities.
In addition, the Financial Services Modernization Act also contains
provisions that expressly preempt any state law restricting the establishment of
financial affiliations, primarily related to insurance. The general effect of
the law is to establish a comprehensive framework to permit affiliations among
commercial banks, insurance companies, securities firms, and other financial
service providers by revising and expanding the Bank Holding Company Act
framework to permit a holding company system to engage in a full range of
financial activities through a new entity known as a "Financial Holding
Company." "Financial activities" is broadly defined to include not only banking,
insurance, and securities activities, but also merchant banking and additional
activities that the Federal Reserve Board, in consultation with the Secretary of
the Treasury, determines to be financial in nature, incidental to such financial
activities, or complementary activities that do not pose a substantial risk to
the safety and soundness of depository institutions or the financial system
generally.
The Financial Services Modernization Act provides that no company may
acquire control of an insured savings association unless that company engages,
and continues to engage, only in the financial activities permissible for a
Financial Holding Company, unless grandfathered as a unitary savings and loan
holding company. The Financial Institution Modernization Act grandfathers any
company that was a unitary savings and loan holding company on May 4, 1999 or
became a unitary savings and loan holding company pursuant to an application
pending on that date. Such a company may continue to operate under present law
as long as the company continues to meet the two tests: it can control only one
savings institution, excluding supervisory acquisitions, and each such
institution must meet the QTL test. Such a grandfathered unitary savings and
loan holding company also must continue to control at least one savings
association, or a successor institution, that it controlled on May 4, 1999.
The Financial Services Modernization Act also permits national banks to
engage in expanded activities through the formation of financial subsidiaries. A
national bank may have a subsidiary engaged in any activity authorized for
national banks directly or any financial activity, except for insurance
underwriting, insurance investments, real estate investment or development, or
merchant banking, which may only be conducted through a subsidiary of a
Financial Holding Company. Financial activities include all activities permitted
under new sections of the Bank Holding Company Act or permitted by regulation.
43
The Company and the Bank do not believe that the Financial Services
Modernization Act has had or will have a material adverse effect on the
operations of the Company and the Bank in the near-term. However, to the extent
that the act permits banks, securities firms, and insurance companies to
affiliate, the financial services industry may experience further consolidation.
The Financial Services Modernization Act is intended to grant to community banks
certain powers as a matter of right that larger institutions have accumulated on
an ad hoc basis and which unitary savings and loan holding companies already
possess. Nevertheless, this Act may have the result of increasing the amount of
competition that the Company and the Bank face from larger institutions and
other types of companies offering financial products, many of which may have
substantially more financial resources than the Company and the Bank. In
addition, because the Company may only be acquired by other unitary savings and
loan holding companies or Financial Holding Companies, the legislation may have
an anti-takeover effect by limiting the number of potential acquirors or by
increasing the costs of an acquisition transaction by a bank holding company
that has not made the election to be a Financial Holding Company under the new
legislation.
Privacy. Under the Financial Services Modernization Act, federal
banking regulators are required to adopt rules that will limit the ability of
banks and other financial institutions to disclose non-public information about
consumers to nonaffiliated third parties. Federal banking regulators issued
final rules on May 10, 2000. Pursuant to those rules, financial institutions
must provide:
o initial notices to customers about their privacy policies, describing the
conditions under which they may disclose nonpublic personal information to
nonaffiliated third parties and affiliates;
o annual notices of their privacy policies to current customers; and
o a reasonable method for customers to "opt out" of disclosures to
nonaffiliated third parties.
The rules were effective November 13, 2000, but compliance is optional until
July 1, 2001. These privacy provisions will affect how consumer information is
transmitted through diversified financial companies and conveyed to outside
vendors. It is not possible at this time to assess the impact of the privacy
provisions on the Company's financial condition or results of operations.
Consumer Protection Rules - Sale of Insurance Products. In December
2000, pursuant to the requirements of the Financial Services Modernization Act,
the federal bank and thrift regulatory agencies adopted consumer protection
rules for the sale of insurance products by depository institutions. The rule is
effective on April 1, 2001. The final rule applies to any depository institution
or any person selling, soliciting, advertising, or offering insurance products
or annuities to a consumer at an office of the institution or on behalf of the
institution. Before an institution can complete the sale of an insurance product
or annuity, the regulation requires oral and written disclosure that such
product:
o is not a deposit or other obligation of, or guaranteed by, the depository
institution or its affiliate;
o is not insured by the FDIC or any other agency of the United States, the
depository institution or its affiliate; and
o has certain risks in investment, including the possible loss of value.
44
Finally, the depository institution may not condition an extension of credit:
o on the consumer's purchase of an insurance product or annuity from the
depository institution or from any of its affiliates, or
o on the consumer's agreement not to obtain, or a prohibition on the consumer
from obtaining, an insurance product or annuity from an unaffiliated
entity.
The rule also requires formal acknowledgement from the consumer that disclosures
were received.
In addition, to the extent practicable, a depository institution must
keep insurance and annuity sales activities physically segregated from the areas
where retail deposits are routinely accepted from the general public.
Safeguarding Confidential Customer Information. In January 2000, the
banking agencies adopted guidelines requiring financial institutions to
establish an information security program to:
o identify and assess the risks that may threaten customer information
o develop a written plan containing policies and procedures to manage and
control these risks
o implement and test the plan
o adjust the plan on a continuing basis to account for changes in technology,
the sensitivity of customer information, and internal or external threats
to information security
Each institution may implement a security program appropriate to its size and
complexity and the nature and scope of its operations.
The guidelines outline specific security measures that institutions
should consider in implementing a security program. A financial institution must
adopt those security measures determined to be appropriate. The guidelines
require the Board of Directors to oversee an institution's efforts to develop,
implement, and maintain an effective information security program and approve
written information security policies and programs. The guidelines are effective
July 1, 2001.
Regulation of the Bank
General. As a federally chartered, SAIF insured savings association,
the Bank is subject to extensive regulation, examination, and supervision by the
OTS, as its primary federal regulator, and the FDIC, as the insurer of customer
deposits. The Bank must file reports with the OTS and the FDIC concerning its
activities and financial condition. In addition, the Bank must obtain various
regulatory approvals prior to conducting certain types of business or entering
into selected transactions; e.g. mergers with, or acquisitions of, other
financial institutions. Lending activities and other investments of the Bank
must comply with various statutory and regulatory requirements. The relationship
between the Bank and depositors and borrowers is also regulated by federal and
state law, especially in such matters as the ownership of savings accounts and
the form and content of mortgage documents utilized by the Bank. The OTS and /
or the FDIC conduct periodic examinations to test the Bank's safety and
soundness, its operations (including technology utilization), and its compliance
with applicable laws and regulations, including, but not limited to:
o the Community Reinvestment Act ("CRA")
o the Real Estate Settlement Procedures Act ("RESPA")
o the Bank Secrecy Act ("BSA")
o the Fair Credit Reporting Act ("FCRA")
o the Home Mortgage Disclosure Act ("HMDA")
45
The regulatory structure provides the supervisory authorities extensive
discretion across a wide range of the Company's operations, including, but not
limited to:
o loss reserve adequacy
o capital requirements
o credit classification
o limitation or prohibition on dividends
o assessment levels for deposit insurance and examination costs
o permissible branching
Any change in regulatory requirements and policies, whether by the OTS,
the FDIC, the Federal Reserve Board, or Congress, could have a material adverse
impact on the Company.
Capital Requirements And Capital Categories
The following discussion regarding regulatory capital requirements is
applicable to the Bank.
Capital Requirements. OTS capital regulations require savings
institutions to meet three minimum capital standards (as defined by applicable
regulations):
o a 1.5% tangible capital ratio
o a 3.0% leverage (core) capital ratio
o an 8.0% risk-based capital ratio
The capital standard applicable to savings institutions must be no less
stringent than those for national banks. In addition, the prompt corrective
action ("PCA") standards discussed below also establish, in effect, the
following minimum standards:
o a 2.0% tangible capital ratio
o a 4.0% leverage (core) capital ratio (3.0% for institutions receiving the
highest regulatory rating under the CAMELS rating system)
o a 4.0% Tier One risk based capital ratio
The OTS also has the authority, after giving the affected institution
notice and an opportunity to respond, to establish specific minimum capital
requirements for a single institution which are higher than the general industry
minimum requirements presented above. The OTS can take this action upon a
determination that a higher minimum capital requirement is appropriate in light
of an institution's particular circumstances.
Tangible capital is composed of:
o common stockholders' equity (including retained earnings)
o certain noncumulative perpetual preferred stock and related earnings
o minority interests in equity accounts of consolidated subsidiaries
less:
o intangible assets other than certain asset servicing rights
o investments in and loans to subsidiaries engaged in activities as
principal, not permissible for a national bank
o deferred tax assets as defined under Statement of Financial Accounting
Standards ("SFAS") Number 109 - "Accounting for Income Taxes" in excess of
certain thresholds
46
Core capital consists of tangible capital plus various adjustments for
certain intangible assets. At December 31, 2000 and 1999, the Bank's tangible
capital was equivalent to its core capital, as the Bank did not maintain any
qualifying adjustments. In general, total assets calculated for regulatory
capital purposes exclude those assets deducted from capital in determining the
applicable capital ratio.
The risk based capital standard for savings institutions requires the
maintenance of Tier One capital (core capital) and total capital (defined as
core capital plus supplementary capital) to risk weighted assets of 4.0% and
8.0%, respectively. In determining the amount of an institution's risk weighted
assets, all assets, including certain off balance sheet positions, are
multiplied by a risk weight of 0.0% to 100.0%, as assigned by OTS regulations
based upon the amount of risk perceived as inherent in each type of asset. The
components of supplementary capital include:
o cumulative preferred stock
o long term perpetual preferred stock
o mandatory convertible securities
o certain subordinated debt
o intermediate preferred stock
o the general allowance for loan and lease losses, subject to a limit of
1.25% of risk weighted assets
Overall, the amount of supplementary capital included as part of total
capital cannot exceed 100.0% of core capital.
A savings association with a greater than "normal" level of interest
rate exposure must deduct an interest rate risk ("IRR") component in calculating
its total capital for purposes of determining whether it meets its risk-based
capital requirement. Interest rate exposure is measured, generally, as the
decline in an institution's net portfolio value that would result from a 200
basis point increase or decrease in market interest rates (whichever would
result in lower net portfolio value), divided by the estimated economic value of
the savings association's assets. The interest rate risk component to be
deducted from total capital is equal to one-half of the difference between an
institution's measured exposure and "normal" IRR exposure (which is defined as
2%), multiplied by the estimated economic value of the institution's assets. In
August 1995, the OTS indefinitely delayed implementation of its IRR regulation.
Management believes that, were the OTS to proceed with implementation of its IRR
capital regulation at December 31, 2000, the Bank would not have an associated
incremental regulatory capital requirement.
As disclosed in Note 15 to the Consolidated Financial Statements, at
December 31, 2000, the Bank exceeded all minimum regulatory capital
requirements.
FDICIA PCA Regulations. The Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") dictated that the OTS implement a system
requiring regulatory sanctions against institutions that are not adequately
capitalized, with severity of the sanctions increasing as the institution's
capital declines. The OTS has established specific capital ratios under the PCA
Regulations for five separate capital categories:
1. well capitalized
2. adequately capitalized
3. under capitalized
4. significantly under capitalized
5. critically undercapitalized
47
Under the OTS regulations implementing FDICIA, an insured depository
institution will be classified in the following categories based, in part, on
the following capital measures:
Well Capitalized Under Capitalized
---------------- -----------------
Total risk based capital ratio of at least 10.0% Total risk based capital ratio of less than 8.0%
Tier One risk based capital ratio of at least 6.0% Tier One risk based capital ratio of less than 4.0%
Leverage ratio of at least 5.0% Leverage ratio of less than 4.0%
Adequately Capitalized Significantly Under Capitalized
---------------------- -------------------------------
Total risk based capital ratio of at least 8.0% Total risk based capital ratio of less than 6.0%
Tier One risk based capital ratio of at least 4.0% Tier One risk based capital ratio of less than 3.0%
Leverage ratio of at least 4.0% Leverage ratio of less than 3.0%
Critically Under Capitalized
----------------------------
Tangible capital of less than 2.0%
An institution that, based upon its capital levels, is classified in
one of the top three categories may be regulated as though it were in the next
lower capital category if the appropriate federal banking agency, after notice
and an opportunity for hearing, determines that the operation or status of the
institution warrants such treatment. There are numerous mandatory supervisory
restrictions on the activities of under capitalized institutions. An institution
that is under capitalized must submit a capital restoration plan to the OTS that
the OTS may approve only if it determines that the plan is likely to succeed in
restoring the institution's capital and will not appreciably increase the risks
to which the institution is exposed. In addition, the institution's performance
under the capital restoration plan must be guaranteed by every company that
controls the institution. Under capitalized institutions may not acquire an
interest in any company, open a new branch office, or engage in a new line of
business without OTS or FDIC approval. An under capitalized institution is also
limited in its ability to increase average assets, accept brokered deposits, pay
management fees, set deposit rates, and make capital distributions. Additional
restrictions apply to significantly and critically under capitalized
institutions. In addition, the OTS maintains extensive discretionary sanctions
which may be applied to under capitalized institutions, including the issuance
of a capital directive and replacement of officers and directors.
Adequately capitalized institutions may accept brokered deposits only
with a waiver from the FDIC and are subject to restrictions on the interest
rates that can be paid on such deposits. Under capitalized institutions may not
accept, renew, or roll over brokered deposits. At December 31, 2000, the Bank
was eligible to acquire brokered deposits, but had none.
As disclosed in Note 15 to the Consolidated Financial Statements, at
December 31, 2000, the Bank met the requirements to be classified as a "well
capitalized" institution under PCA regulations.
48
The Financial Institutions Reform, Recovery, and Enforcement Act of
1989 ("FIRREA") and FDICIA capital requirements are viewed as minimum standards
by the OTS, and most institutions are expected to maintain capital levels well
above the minimum. In addition, the OTS regulations provide that minimum capital
levels higher than those provided in the regulations may be established by the
OTS for individual savings associations, upon a determination that the savings
association's capital is or may become inadequate in view of its circumstances.
The OTS regulations provide that higher individual minimum regulatory capital
requirements may be appropriate in circumstances where, among others:
o a savings association has a high degree of exposure to interest rate risk,
prepayment risk, credit risk, concentration of credit risk, certain risks
arising from nontraditional activities, or similar risks or a high
proportion of off-balance sheet risk;
o a savings association is growing, either internally or through
acquisitions, at such a rate that supervisory problems are presented that
are not dealt with adequately by OTS regulations
o a savings association may be adversely affected by activities or condition
of its holding company, affiliates, subsidiaries, or other persons, or
savings associations with which it has significant business relationships.
Special OTS Capital Requirements. On March 6, 2000, the Bank was
informed by the OTS that:
1. All loans associated with the pool of residential mortgages acquired from a
seller / servicer that guaranteed the pool (the "Special Residential Loan
Pool") be assigned to the 100% risk based capital category in calculating
capital ratios that incorporate risk weighted assets. See "Credit Quality -
Special Residential Loan Pool" and Note 15 to the Consolidated Financial
Statements.
2. The Bank's regulatory capital position at December 31, 1999 was required to
reflect this 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.
Management does not foresee any compliance issue resulting from these
requirements given the Bank's regulatory capital position at December 31, 2000,
and the expected continued generation of regulatory capital through retained
earnings, the amortization of deferred stock compensation, and the amortization
of intangible assets. Furthermore, the Company's maintenance of a "well
capitalized" regulatory capital position is integral to its business plan.
In specifying the above requirements, the OTS did not request that the
Bank restate any of its historic regulatory capital ratios for prior periods,
before December 31, 1999, during which the Bank owned the specifically
identified pool of purchased residential mortgages.
Regulatory Capital Requirements Associated With Sub-Prime Lending. As a
result of a number of federally insured financial institutions extending their
risk selection standards to attract lower credit quality accounts due to such
credits having higher interest rates and fees, in March 1999, the federal
banking regulatory agencies jointly issued Interagency Guidelines on Subprime
Lending. In addition, expanded guidelines were issued by the agencies on January
31, 2001. Subprime lending involves extending credit to individuals with less
than perfect credit histories.
49
These guidelines provide that if the risks associated with subprime
lending are not properly controlled, the agencies consider subprime lending a
high-risk activity that is unsafe and unsound. Specifically, the 2001 guidelines
direct examiners to expect regulatory capital one and one-half to three times
higher than that typically set aside for prime assets for institutions that:
o have subprime asset concentration of 25% Tier 1 capital or higher; or
o have subprime portfolios experiencing rapid growth or adverse performance
trends, administered by inexperienced management, or having inadequate or
weak controls.
The Bank does not normally engage in subprime lending. However,
substantially all of the Special Residential Loan Pool (see "Credit Quality -
Special Residential Loan Pool" and Note 15 to the Consolidated Financial
Statements), if owned without the credit guaranty of the seller / servicer,
would qualify as subprime lending under the characterics published by the OTS in
early 2001. Management believes that the seller / servicer of the Special
Residential Loan Pool has considerable experience in administering subprime
residential mortgages.
Proposed Capital Requirements for Community Institutions. In November
2000, the federal bank and thrift regulatory agencies requested public comment
on an advance notice of proposed rulemaking that considers the establishment of
a simplified regulatory capital framework for non-complex institutions.
In the proposal, the agencies suggested criteria that could be used to
determine eligibility for a simplified capital framework, such as the nature of
a bank's activities, its asset size and its risk profile. In the advance notice,
the agencies seek comment on possible minimum regulatory capital requirements
for non-complex institutions, including a simplified risk-based ratio, a simple
leverage ratio, or a leverage ratio modified to incorporate certain off-balance
sheet exposures.
The advance notice solicits public comment on the agencies' preliminary
views. Comments are due on the proposal on February 1, 2001. Given the
preliminary nature of the proposal, it is not possible to predict its impact on
the Bank at this time.
Safety and Soundness Standards
In addition to the PCA provisions discussed above based on an
institution's regulatory capital ratios, FDICIA contains several measures
intended to promote early identification of management problems at depository
institutions and to ensure that regulators intervene promptly to require
corrective action by institutions with inadequate operational and managerial
controls. The OTS has established minimum standards in this regard related to:
o internal controls, information systems, and internal audit systems
o loan documentation
o credit underwriting
o asset growth
o earnings
o interest rate risk exposure
o compensation, fees, and benefits
If the OTS determines that an institution fails to meet any of these
minimum standards, the agency may require the institution to submit to the
agency an acceptable plan to achieve compliance with the standard. In the event
the institution fails to submit an acceptable plan within the time allowed by
the agency or fails in any material respect to implement an accepted plan; the
agency must, by order, require the institution to correct the deficiency and may
implement a series of supervisory sanctions.
50
Effective October 1, 1996, the federal banking agencies (including the
OTS) promulgated safety and soundness regulations and accompanying interagency
compliance guidelines on asset quality and earnings standards. These guidelines
provide six standards for establishing and maintaining a system to identify
problem assets and prevent those assets from deteriorating. The institution
should:
1. conduct periodic asset quality reviews to identify problem assets
2. estimate the inherent losses in those assets and establish reserves that
are sufficient to absorb estimated losses
3. compare problem asset totals to capital
4. take appropriate corrective action to resolve problem assets
5. consider the size and potential risks of material asset concentrations
6. provide periodic asset reports with adequate information for management and
the board of directors to assess the level of asset risk
These guidelines also set forth standards for evaluating and monitoring
earnings and for ensuring that earnings are sufficient for the maintenance of
adequate capital and reserves. If the institution fails to comply with a safety
and soundness standard, the appropriate federal banking agency may require the
institution to submit a compliance plan. Failure to submit a compliance plan or
to implement an accepted plan may result in enforcement action.
Potential Enforcement Actions
The OTS has primary enforcement responsibility over savings
institutions and maintains the authority to bring actions against the
institution and all institution affiliated parties, as defined under the
applicable regulations, for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation, condition imposed in
writing by the agency, or any written agreement with the agency. Enforcement
actions may include the imposition of a conservator or receiver, the issuance of
a cease and desist order that can be judicially enforced, the termination of
insurance of deposits (in the case of the Bank), the imposition of civil money
penalties, the issuance of directives to increase capital, the issuance of
formal and informal agreements, the issuance of removal or prohibition orders
against institution affiliated parties, and the imposition of restrictions under
the PCA provisions of FDICIA. Federal law also establishes criminal penalties
for certain violations.
Under the FDI Act, the FDIC has the authority to recommend to the
Director of the OTS enforcement action to be taken with respect to a particular
savings institution. If action is not taken by the Director of the OTS, the FDIC
has authority to take such action under certain circumstances.
Additionally, a holding company's inability to serve as a source of
strength to its subsidiary financial institutions could serve as an ancillary
basis for regulatory action against the holding company. Neither MBBC, the Bank,
or any subsidiary thereof are currently subject to any enforcement actions,
other than the requirements for the Bank to allocate additional regulatory
capital against one specific pool of purchased residential mortgages and to
maintain regulatory capital ratios at levels no lower than the levels at
December 31, 1999 until further notice. See "Credit Quality - Special
Residential Loan Pool" and Note 15 to the Consolidated Financial Statements.
51
Insurance of Deposit Accounts
The Bank's deposit accounts are presently insured by the SAIF, except
for certain acquired deposits which are insured by the BIF, up to the maximum
permitted by law. The SAIF and the BIF are administered by the FDIC. Insurance
of deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operation, or has violated any applicable law, regulation, rule,
order, or condition imposed by the FDIC or the institution's primary regulator.
The management of the Bank does not know of any practice, condition, or
violation that might lead to the termination of deposit insurance.
The FDIC currently assesses its premiums based upon the insured institution's
position on two factors:
1. the institution's capital category under PCA regulations
2. the institution's supervisory category as determined by the FDIC based upon
supervisory information provided by the institution's primary federal
regulator and other information deemed pertinent by the FDIC
The supervisory categories are:
o Group A: financially sound with only a few minor weaknesses
o Group B: demonstrates weaknesses that could result in significant
deterioration
o Group C: poses a substantial probability of loss
Annual FDIC deposit insurance assessment rates as of January 1, 2001 were as
follows:
FDIC Deposit Insurance Rates Expressed In Terms
As Of January 1, 2001 Of Annual Cents Per $100 of Assessed Deposits
--------------------------------------------------
Group A Group B Group C
------- ------- -------
PCA Capital Category
Well capitalized 0 3 17
Adequately capitalized 3 10 24
Under capitalized 10 24 27
As of January 1, 2001, the Bank had been notified by the FDIC that its
deposit insurance assessment rate during the first half of calendar 2001 would
be 3 basis points.
In addition to the deposit insurance premiums presented in the above
table, both BIF and SAIF insured institutions must also pay FDIC premiums
related to the servicing of Financing Corporation ("FICO") bonds. FICO is an
agency of the federal government that was established to recapitalize the
predecessor to the SAIF. These assessments will continue until the FICO bonds
mature in 2017. The current annual assessment rate for the FICO bonds is
approximately 2 basis points per annum on insured deposits.
Branching
OTS regulations permit nationwide branching by federally chartered
savings institutions to the extent allowed by federal statute. This permits
federal savings institutions to establish interstate networks and to
geographically diversify their loan portfolios and lines of business. The OTS
authority preempts any state law purporting to regulate branching by federal
savings institutions. At this time, the Company's management has no plans to
establish physical branches outside of California, although the Bank does serve
customers domiciled outside of California via alternative delivery channels such
as telephone, mail, the Internet, and ATM networks.
52
Transactions With Related Parties
The Bank's authority to engage in transactions with related parties or
"affiliates" (e.g., any company that controls or is under common control with an
institution, including the Company and its non-savings institution subsidiaries)
is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section
23A limits the aggregate amount of covered transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution. The
aggregate amount of covered transactions with all affiliates is limited to 20%
of the savings institution's capital and surplus. A "covered transaction"
includes:
o a loan or extension of credit to an affiliate
o a purchase of investment securities issued by an affiliate
o a purchase of assets from an affiliate, with some exceptions
o the acceptance of securities issued by an affiliate as collateral for a
loan or extension of credit to any party
o the issuance of a guarantee, acceptance, or letter of credit on behalf of
an affiliate
Certain transactions with affiliates are required to be secured by
collateral in an amount and of a type described in Section 23A and the purchase
of low quality assets from affiliates is generally prohibited. Section 23B
generally provides that certain transactions with affiliates, including loans
and asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
OTS regulation generally excludes all non-bank and non-savings
association subsidiaries of savings associations from treatment as affiliates,
except to the extent that the OTS or Federal reserve decides to treat these
subsidiaries as affiliates. The regulation also requires savings associations to
make and retain records that reflect affiliate transactions in reasonable detail
and provides that specific classes of savings associations may be required to
give the OTS prior notice of affiliate transactions.
The Bank's authority to extend credit to executive officers, directors,
and 10% shareholders, ("insiders"), as well as entities such persons control, is
governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder.
Among other things, such loans are required to be made on terms substantially
the same as those offered to unaffiliated individuals and to not involve more
than the normal risk of repayment. Specific legislation created an exception for
loans made pursuant to a benefit or compensation program that is widely
available to all employees of the institution and does not give preference to
insiders over other employees. Regulation O also places individual and aggregate
limits on the amount of loans the Bank may make to insiders based, in part, on
the Bank's capital position and requires certain Board approval procedures to be
followed. For information concerning loans to executive officers and directors
of the Company, please refer to Note 5 to the Consolidated Financial Statements.
53
Community Reinvestment Act
The Community Reinvestment Act ("CRA") generally requires most insured
depository institutions to:
o identify and delineate the communities served through and by the
institution's offices
o affirmatively meet the credit needs of their delineated communities,
including low and moderate income neighborhoods
o market the types of credit the institution is prepared to extend within
such communities
The CRA also requires the OTS to assess the performance of the institution
in meeting the credit needs of its communities and to take such assessment into
consideration in reviewing applications for mergers, acquisitions, and other
transactions. An unsatisfactory CRA rating may be the basis for denying such an
application. In addition, federal banking agencies may take compliance with CRA
into account when regulating and supervising other activities.
An institution's CRA performance is assessed on the basis of the
institution's actual lending, service, and investment performance. In connection
with its assessment of the Bank's CRA performance, the OTS assigns one of the
following ratings:
o outstanding
o satisfactory
o needs improvement
o substantial noncompliance
Based upon its most recent CRA examination, the Bank received a "satisfactory"
CRA rating.
Fair Lending Laws
The Equal Credit Opportunity Act and the Fair Housing Act prohibit
lenders from discriminating in their lending practices on the basis of
characteristics specific in those statutes. A savings institution's failure to
comply with these acts could result in the OTS, other federal regulatory
agencies, or the Department of Justice taking enforcement action.
Qualified Thrift Lender Test
The HOLA requires thrift institutions to meet a qualified thrift lender
("QTL") test. A thrift institution is permitted to meet the QTL test in one of
two alternative ways. Under the first method, in at least nine out of every
twelve months, the thrift institution is required to maintain at least 65% of
its "portfolio assets," defined as total assets less (i) specified liquid assets
up to 20% of total assets, (ii) intangible assets, including goodwill and (iii)
the value of property used to conduct business, in certain "qualified thrift
investments." Assets constituting qualified thrift investments include
residential mortgages, qualifying mortgage backed securities, educational loans,
small business loans, and credit card loans. Certain other types of assets also
qualify as "qualified thrift investments" up to certain limitations. These
limited other types of assets include home equity lines of credit and consumer
loans. Alternatively, savings institutions are permitted to meet the QTL test by
qualifying as a "domestic building and loan association" under the Internal
Revenue Code.
A savings institution that fails the QTL test is subject to certain
operating restrictions and may be required to convert to a commercial bank
charter. At December 31, 2000, the Bank maintained 70.9% of its portfolio assets
in qualified thrift investments and, therefore, met the QTL test.
54
Loans To One Borrower Limitation
Under the HOLA, thrift institutions are generally subject to the limits
on loans to one borrower applicable to national banks. Generally, thrift
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of its unimpaired capital and surplus. The term
"unimpaired capital and surplus" is defined as an institution's regulatory
capital, plus that portion of an institution's general valuation allowances that
is not includable in the institution's regulatory capital. An additional amount
may be lent, equal to 10% of unimpaired capital and surplus, if such loan is
secured by readily marketable collateral, which is defined to include certain
financial instruments and specifically excludes real estate. At December 31,
2000, the Bank's limit on loans to one borrower was $6.5 million. At December
31, 2000, the Bank's largest aggregate outstanding balance of loans to one
borrower totaled approximately $16.5 million. This position arose as the result
of a credit guarantee by a seller / servicer of a pool of residential mortgages,
as more fully detailed under "Credit Quality - Special Residential Loan Pool"
and Note 15 to the Consolidated Financial Statements.
Limitations On Capital Distributions
OTS regulations impose limitations upon all capital distributions by
savings institutions, such as cash dividends, payments to repurchase or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out merger, and other distributions charged against capital.
The OTS recently adopted an amendment to these capital distribution
limitations. Under the new rule, a savings association in some circumstances
may:
o be required to file an application and await approval from the OTS before
it makes a capital distribution
o be required to file a notice 30 days before the capital distribution
o be permitted to make the capital distribution without notice or application
to the OTS
The OTS regulations require a savings association to file an application
if:
o it is not eligible for expedited treatment of its other applications under
OTS regulations
o the total amount of all of capital distributions, including the proposed
capital distribution, for the applicable calendar year exceeds its net
income for that year to date plus retained net income for the preceding two
years
o it would not be at least adequately capitalized, under the prompt
corrective action regulations of the OTS following the distribution
o the association's proposed capital distribution would violate a prohibition
contained in any applicable statute, regulation, or agreement between the
savings association and the OTS, or the FDIC, or violate a condition
imposed on the savings association in an OTS-approved application or notice
In addition, a savings association must give the OTS notice of a
capital distribution if the savings association is not required to file an
application, but:
o would not be well capitalized under the prompt corrective action
regulations of the OTS following the distribution
o the proposed capital distribution would reduce the amount of or retire any
part of the savings association's common or preferred stock or retire any
part of debt instruments like notes or debentures included in capital,
other than regular payments required under a debt instrument approved by
the OTS
o the savings association is a subsidiary of a savings and loan holding
company (applicable to the Bank)
55
If neither the savings association nor the proposed capital
distribution meet any of the above listed criteria, the OTS does not require the
savings association to submit an application or give notice when making the
proposed capital distribution. The OTS may prohibit a proposed capital
distribution that would otherwise be permitted if the OTS determines that the
distribution would constitute an unsafe or unsound practice. Further, a federal
savings association, like the Bank, cannot distribute regulatory capital that is
needed for its liquidation account.
Activities of Subsidiaries
A savings association seeking to establish a new subsidiary, acquire
control of an existing company or conduct a new activity through a subsidiary
must provide 30 days prior notice to the FDIC and the OTS and conduct any
activities of the subsidiary in compliance with regulations and orders of the
OTS. The OTS has the power to require a savings association to divest any
subsidiary or terminate any activity conducted by a subsidiary that the OTS
determines to pose a serious threat to the financial safety, soundness, or
stability of the savings association or to be otherwise inconsistent with sound
banking practices.
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 2000, the regulatory
liquidity ratio of the Bank exceeded regulatory requirements.
Restrictions On Investments And Loans
In addition to those restrictions presented above in reference to
Liquidity and QTL Test requirements of federal thrift institutions, OTS
regulations do not permit the Bank to invest directly in equity securities (with
certain very limited exceptions), non investment grade debt securities, or real
estate, other than real estate used for the institution's offices and
facilities. Indirect equity investment in real estate through a subsidiary, such
as Portola, is permissible, but is subject to certain limitations and deductions
from regulatory capital. The Company's management has no plans to pursue real
estate development or investment activity through Portola.
The OTS and other federal banking agencies have jointly adopted uniform
rules on real estate lending and related Interagency Guidelines for Real Estate
Lending Policies (the "Guidelines"). The uniform rules require that institutions
adopt and maintain comprehensive written policies for real estate lending. The
policies must reflect consideration of the Guidelines and must address relevant
lending procedures, such as loan to value limitations, loan administration
procedures, portfolio diversification standards and documentation, and approval
and reporting requirements. Although the uniform rules do not impose specific
maximum loan to value ratios, the related Guidelines state that such ratio
limits established by an individual institution's board of directors generally
should not exceed levels set forth in the Guidelines, which range from a maximum
of 65% for loans secured by unimproved land to 85% for improved property. No
limit is set for single family residential mortgages, but the Guidelines state
that such loans equal to or exceeding a 90.0% loan to value ratio should have
private mortgage insurance or some other form of credit enhancement. The
Guidelines further permit a limited amount of loans that do not conform to these
criteria.
Aggregate loans secured by non residential real property are generally
limited to 400% of a thrift institution's total capital, as defined.
56
Classification Of Assets
Thrift institutions are required to classify their assets on a regular
basis, to establish appropriate allowances for losses, and to report the results
of such classifications quarterly to the OTS. A thrift institution is also
required to set aside adequate valuation allowances, and to establish
liabilities for off balance sheet items, such as letters of credit, when loss
becomes probable and estimable. The OTS has the authority to review the
institution's classification of its assets and to determine whether and to what
extent (i) additional assets must be classified, and (ii) whether the
institution's allowances must be increased. Such instruction by the OTS to
increase valuation allowances could have a material impact upon both the Bank's
reported earnings and its financial condition.
Current or potential problem assets are segregated into one of four
categories:
Category Description
-------- -----------
Special Mention These assets, also called "criticized assets",
present weaknesses or deficiencies deserving
continued monitoring and heightened management
attention.
Substandard These assets, or portions thereof, possess well
defined weaknesses which could jeopardize the
timely liquidation of the asset or the realization
of the collateral at values at least equal to the
Company's investment in the asset. These assets are
therefore characterized by the possibility that the
institution will sustain some loss if the
deficiencies or weaknesses are not corrected.
Prudent general valuation and specific valuation
allowances, as applicable, are required to be
established for such assets. The Company classifies
all real estate acquired through foreclosure as
substandard.
Doubtful These assets, or portions thereof, present probable
loss of principal, but the amount of loss, if any,
is subject to the outcome of future events which
are not fully determinable at the time of
classification. The Company allocates specific
reserves against all assets classified as doubtful.
Loss These assets, or portions thereof, present
quantified losses to the institution. These assets
are considered uncollectible and of such little
value that their continuance as bankable assets is
not warranted. The institution must either
establish a specific reserve equal to the
institution's investment in the asset or charge off
the asset.
The OTS and the other federal banking regulatory agencies have adopted
an interagency policy statement regarding the appropriate levels of general
valuation allowances for loan and lease losses that insured depository
institutions should maintain. Under this policy statement, examiners will
generally accept management's evaluation of the adequacy of general valuation
allowances if the institution has:
o maintained effective systems and controls for identifying and addressing
asset quality problems
o analyzed in a reasonable manner all significant factors that affect the
collectibility of the portfolio
o established an acceptable process for evaluating the adequacy of general
valuation allowances
57
However, the policy statement also provides that OTS examiners will review
management's analysis more closely if general valuation allowances do not at
least equal the following benchmarks:
o 15% of assets classified as substandard
o 50% of assets classified as doubtful
o for the portfolio of unclassified loans and leases, an estimate of credit
losses over the upcoming twelve months based upon the institution's recent
average rate of net charge-offs on similar loans, adjusted for current
trends and conditions
The Company's internal credit policy is to comply with the interagency
policy statement and to maintain adequate reserves for estimable losses.
However, the determination of estimable losses is by nature an uncertain
practice, and hence no assurance can be given that the Company's loss allowances
will prove adequate to cover future losses.
Assessments
Thrift institutions are required to pay assessments to the OTS to fund
the agency's operations. The general assessment, paid on a semi-annual basis, is
computed based upon a three component equation. The components are total assets,
regulatory rating, and amount and nature of off balance sheet activities. The
Bank's general assessment for the six month period commencing January 1, 2001
was $63 thousand. The general assessments paid by the Bank for the fiscal year
ended December 31, 2000 totaled $94 thousand.
Federal Home Loan Bank ("FHLB") System
The FHLB provides a comprehensive credit facility to member
institutions. As a member of the FHLB-San Francisco, the Bank is required to own
capital stock in an amount at least equal to the greater of:
o 1.0% of the aggregate principal amount of outstanding residential loans, as
defined, at the beginning of each calendar year
o 5.0% of its advances from the FHLB
At its most recent evaluation, the Bank was in compliance with this
requirement. FHLB advances must be secured by specific types of collateral,
including various types of mortgage loans and securities, and the Bank's
investment in the capital stock of the FHLB. It is the policy of the Bank to
maintain an excess of pledged collateral with the FHLB at all times to serve as
a ready source of additional liquidity.
The FHLB's are required to provide funds to contribute toward the payment
of certain bonds issued in the past to fund the resolution of insolvent thrifts.
In addition, FHLB's are required by statute to contribute funds toward
affordable housing programs. These requirements could reduce the amount of
dividends the FHLB's pay on their capital stock and could also negatively impact
the pricing offered for on and off balance sheet credit products - events which
could unfavorably impact the profitability of the Company.
Recent federal legislation has addressed capital requirements for the
Federal Home Loan Bank System. Each Federal Home Loan Bank is to develop its own
capital plan, including what types of stock it may issue. At December 31, 2000,
the FHLB-SF was in the process of determining its capital plan. Alternatives
being discussed included the issuance of more than one class of stock, with the
different classes possibly having various rights and restrictions. The Company
cannot predict what the final capital plan of the FHLB-SF might be, or what
impact such might have on the Company's investment in the capital stock of the
FHLB or on the Bank's access to and utilization of FHLB financial services.
58
Federal Reserve System
The Federal Reserve Board ("FRB") requires insured depository
institutions to maintain non-interest-earning ("sterile") reserves against
certain of their transactional accounts (primarily deposit accounts that may be
accessed by writing unlimited checks). At December 31, 2000, the regulations
generally required that reserves be maintained against qualified net transaction
accounts as follows:
First $5.5 million Exempt
Next $37.3 million 3.0%
Above $42.8 million 10.0%
The reserve requirement may be met by certain qualified cash balances.
The balances maintained to meet the reserve requirements of the FRB may be used
to satisfy OTS liquidity requirements. For the calculation period including
December 31, 2000, the Bank was in compliance with its FRB reserve requirements.
As a creditor and an insured depository institution, the Bank is
subject to certain regulations promulgated by the FRB, including, but not
limited to:
Regulation B Equal Credit Opportunity Act
Regulation C Home Mortgage Disclosure Act
Regulation D Reserves
Regulation E Electronic Funds Transfers Act
Regulation F Limits On Interbank Liabilities
Regulation Z Truth In Lending Act
Regulation X Real Estate Settlement Procedures Act
Regulation CC Expedited Funds Availability Act
Regulation DD Truth In Savings Act
Potential Federal Legislation and Regulation
The US Congress continues to consider a broad range of legislative
initiatives that might impact the financial services industry. Among these
initiatives are:
o the potential merger of the BIF and SAIF insurance funds of the FDIC
o potential FDIC deposit insurance reforms, including an increase in the
amount of coverage, changes in coverage for municipal deposits, and
modifications in the assessment formula for FDIC insurance
o the potential for insured depository institutions to pay interest on
business checking deposits, perhaps in conjunction with authorization for
the Federal Reserve to pay interest on sterile reserves
o the potential relaxation of transaction count restrictions on money market
demand deposits, thereby facilitating internal fund "sweeps" (of particular
benefit to smaller financial institutions such as the Bank)
o possible modifications in federal bankruptcy laws, including potential
revisions that would encourage Chapter 13 filings (with payment
requirements) versus Chapter 7 filings (debt forgiveness)
The Company cannot predict what legislation and regulation, if any, might emerge
from Congress and the various federal regulatory agencies, and the potential
impact of such legislation and regulation upon the Company.
59
Environmental Regulation
The Company's business and properties are subject to federal and state
laws and regulations governing environmental matters, including the regulation
of hazardous substances and wastes. For example, under the federal Comprehensive
Environmental Response, Compensation, and Liability Act ("CERCLA") and similar
state laws, owners and operators of contaminated properties may be liable for
the costs of cleaning up hazardous substances without regard to whether such
persons actually caused the contamination. Such laws may affect the Company as
an owner or operator of properties used in its business, and through the Bank,
as a secured lender of property that is found to contain hazardous substances or
wastes.
Although CERCLA and similar state laws generally exempt holders of
security interests, the exemption may not be available if a secured party
engages in the management of its borrower or the securing property in a manner
deemed beyond the protection of the secured party's interest. Recent federal and
state legislation, as well as guidance issued by the United State Environmental
Protection Agency and a number of court decisions, have provided assurance to
lenders regarding the activities they may undertake and remain within CERCLA's
secured party exemption. However, these assurances are not absolute and
generally will not protect a lender or fiduciary that participates or otherwise
involves itself in the management of its borrower, particularly in foreclosure
proceedings. As a result, CERCLA and similar state statutes may influence the
Bank's decision whether to foreclose on property that may be or is found to be
contaminated. The Bank has adopted environmental underwriting requirements for
commercial and industrial real estate loans. The Bank's general policy is to
obtain an environmental assessment prior to foreclosure on commercial and
industrial real estate. See "Business - General" and "Lending Activities - Loan
Portfolio Composition" regarding the recent and rapid expansion in the Bank's
commercial and industrial real estate loan portfolio. The existence of hazardous
substances or wastes on commercial and industrial real estate properties could
cause the Bank to elect not to foreclose on the property, thereby limiting, and
in some cases precluding, the Bank from realizing on the related loan. Should
the Bank foreclose on property containing hazardous substances or wastes, the
Bank would become subject to other environmental statutes, regulations, and
common law relating to matters such as, but not limited to, asbestos abatement,
lead-based paint abatement, hazardous substance investigation and remediation,
air emissions, wastewater discharges, hazardous waste management, and third
party claims for personal injury and property damage.
Federal Securities Laws
The Company's common stock is registered with the SEC under Section
12(g) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to periodic reporting requirements, proxy solicitation
rules, insider trading restrictions, tender offer rules, and other requirements
under the Exchange Act. In addition, certain activities of the Company, its
executive officers, and directors are covered under the Securities Act of 1933,
as amended (the "Securities Act").
Non-Banking Regulation
The Company is impacted by many other laws and regulations, not
necessarily unique to insured depository institutions. Among these other laws
and regulations are federal bankruptcy laws.
60
Federal Taxation
General. The Bank and the Company report their income on a consolidated
basis using the accrual method of accounting and will be subject to federal
income taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS during the last
five years. For its 2000 taxable year, the Bank is subject to a maximum federal
income tax rate of 35%.
Bad Debt Reserve. For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Internal Revenue Code of 1986 (the "Code") were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans (generally
secured by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which
was enacted on August 20, 1996, requires savings institutions to recapture
(i.e., take into income) certain portions of their accumulated bad debt
reserves. The 1996 Act repeals the reserve method of accounting for bad debts
effective for tax years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the Experience Method applicable
to such institutions, while thrift institutions that are treated as large banks
(those generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in method of
accounting, initiated by the taxpayer, and having been made with the consent of
the IRS. Any Section 481 (a) adjustment required to be taken into income with
respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to the residential loan requirement.
Under the residential loan requirement provision, the recapture
required by the 1996 Act will be suspended for each of two successive taxable
years, beginning with the Bank's current taxable year, in which the Bank
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank
is permitted to make additions to its tax bad debt reserves. In addition, the
Bank is required to recapture (i.e., take into income) over a six year period
the excess of the balance of its tax bad debt reserves as of December 31, 1995
over the balance of such reserves as of December 31, 1987.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
61
The amount of additional taxable income triggered by an non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion its bad debt reserves.
Corporate Alternative Minimum Tax. The Internal Revenue Code of 1986,
as amended (the "Code") imposes a tax on alternative minimum taxable income
("AMTI") at a rate of 20%. The excess of the bad debt reserve deduction using
the percentage of taxable income method over the deduction that would have been
allowable under the experience method is treated as a preference item for
purposes of computing the AMTI. Only 90% of AMTI can be offset by net operating
loss carryovers of which the Bank currently has none. AMTI is increased by an
amount equal to 75% of the amount by which the Bank's adjusted current earnings
exceeds its AMTI (determined without regard to this preference and prior to
reduction for net operating losses). In addition, for taxable years beginning
after December 31, 1986 and before January 1, 1996, an environmental tax of
0.12% of the excess of AMTI (with certain modifications) over $2.0 million is
imposed on corporations, including the Company, whether or not an Alternative
Minimum Tax ("AMT") is paid. The Bank does not expect to be subject to the AMT,
but may be subject to the environmental tax liability.
Dividends Received Deduction and Other Matters. The Company may exclude
from its income 100% of dividends received from the Bank as a member of the same
affiliated group of corporations. The corporate dividends received deduction is
generally 70% in the case of dividends received from unaffiliated corporations
with which the Company and the Bank will not file a consolidated tax return,
except that if the Company or the Bank own more than 20% of the stock of a
corporation distributing a dividend then 80% of any dividends received may be
deducted.
State and Local Taxation
State of California. The California franchise tax rate applicable to
the Bank equals the franchise tax rate applicable to corporations generally,
plus an "in lieu" rate approximately equal to personal property taxes and
business license taxes paid by such corporations (but not generally paid by
banks or financial corporations such as the Bank); however, the total tax rate
cannot exceed 10.84%. Under California regulations, bad debt deductions are
available in computing California franchise taxes using a three or six year
weighted average loss experience method. The Bank and its California subsidiary
file California State franchise tax returns on a combined basis. The Company, as
a savings and loan holding company commercially domiciled in California, is
treated as a financial corporation and subject to the general corporate tax rate
plus the "in lieu" rate as discussed previously for the Bank.
Please refer to Note 14 to the Consolidated Financial Statements for
additional information regarding income taxes.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempted from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware.
62
Additional Item. Executive Officers of the Registrant
The following table sets forth certain information with respect to each
executive officer of the Company or Bank who is not also a director of the
Company. The Board of Directors appoints or reaffirms the appointment of all of
the Company's executive officers each year. Each executive officer serves until
the following year or until a respective successor is appointed.
Date
Age At Position(s) With Company Started In Previous Experience If Less
Name 12/31/00 And / or Bank Position Than Five Years In Current Position
---- -------- ------------- -------- -----------------------------------
Carlene F. Anderson 48 Assistant Corporate 6/11/99 Corporate Secretary, Monterey Bay
Secretary Bancorp, Inc.
Monterey Bay Bancorp, Inc. 1994 - 1999
Assistant Corporate 6/11/99 Corporate Secretary, Monterey Bay Bank
Secretary
Vice President, Compliance 8/15/98 1994 - 1999
Monterey Bay Bank.
Mark R. Andino 41 Chief Financial Officer 1/26/00 Treasurer, Chela Financial, 1999
Treasurer Senior Vice President, Chief Financial
Officer
Monterey Bay Bancorp, Inc. HF Bancorp, Inc., Hemet Federal, 1996 -
1999
Senior Vice President 1/26/00
Chief Financial Officer
Treasurer
Monterey Bay Bank
Victor F. Davis 45 Controller 11/21/00 Senior Vice President
Monterey Bay Bancorp, Inc. Chief Financial Officer
San Benito Bank
Controller 8/1/00 1990 - 2000
Monterey Bay Bank
Karen A. Flores 57 Assistant Corporate 3/22/01 Branch Operations Specialist
Secretary
Monterey Bay Bancorp, Inc. Monterey Bay Bank
1996 - 2001
Assistant Corporate 3/22/01
Secretary
Branch Operations 9/1/96
Specialist
Monterey Bay Bank
Susan F. Grill 48 Senior Vice President 2/12/01 Personal Banking Executive
Director of Retail Banking Region Executive
Monterey Bay Bank Centura Bank, 1998 - 2001
President 2/12/01
Portola Investment
Corporation
David E. Porter 51 Senior Vice President 10/30/00 Executive Vice President
Director of Commercial Chief Credit Officer
Banking
Monterey Bay Bank Southern Pacific Bank
1996 - 2000
Ben A. Tinkey 48 Senior Vice President 9/20/94
Chief Loan Officer
Monterey Bay Bank
63
Item 2. Properties.
The following table sets forth information relating to each of the
Company's offices as of December 31, 2000:
Lease Original Date of
Location Or Date Lease
Owned Leased or Expiration
Acquired
----------------------------------- ------------- --------------- -------------
Administrative Offices:
15 Brennan Street
Watsonville, California 95076 Owned 12-31-65 N/A
567 Auto Center Drive
Watsonville, California 95076 Owned 03-23-98 N/A
Branch Offices:
35 East Lake Avenue
Watsonville, California 95076 Owned 12-31-65 N/A
805 First Street
Gilroy, California 95020 Owned 12-01-76 N/A
1400 Munras Avenue
Monterey, California 93940 Owned 07-07-93 N/A
1890 North Main Street
Salinas, California 93906 Owned 07-07-93 N/A
1127 South Main Street
Salinas, California 93901 Leased 08-08-93 06-30-05
8071 San Miguel Canyon Road
Prunedale, California 93907 Leased 12-24-93 12-24-03
601 Bay Avenue
Capitola, California 95020 Owned 12-10-96 N/A
6265 Highway 9
Felton, California 95018 Leased 04-07-98 04-30-03
64
Item 3. Legal Proceedings.
From time to time, the Company is party to claims and legal proceedings
in the ordinary course of business. Management believes that the ultimate
aggregate liability represented thereby, if any, will not have a material
adverse effect on the Company's consolidated financial position or results of
operations, with the possible exception of the legal proceeding discussed in the
subsequent paragraph.
During the third quarter of 2000, the Company established a $250
thousand accrual for a separation package associated with the former President &
Chief Operating Officer, who resigned from the Company effective September 29,
2000. At December 31, 2000, the Company was still in the process of settling
this matter, which is governed by employment contracts between Monterey Bay Bank
and the individual and Monterey Bay Bancorp, Inc. and the individual. The
governing employment contracts call for settlement exclusively by arbitration,
which the Company was pursuing at December 31, 2000. Management believes its
accrual reflects the Company's consolidated obligation and related direct costs
under the associated contracts. A settlement payment consistent with the
Company's aforementioned position was rejected during the fourth quarter of
2000. In November 2000, the former President & Chief Operating Officer filed
suit in the Santa Cruz County Superior Court seeking an unspecified amount and
the reinstatement of certain benefits. At December 31, 2000, the former
President & Chief Operating Officer was pursuing a more substantial, though not
clearly defined, settlement. The Santa Cruz County Superior Court directed the
issue to be pursued through arbitration consistent with the employment
contracts. The Company has retained specialists within its corporate law firm to
represent it in this regard. Counsel has advised the Company that its position
is reasonable.
Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted during the quarter ended December 31, 2000 to a
vote of Monterey Bay Bancorp, Inc.'s security holders through the solicitation
of proxies or otherwise.
65
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock of Monterey Bay Bancorp, Inc. is traded over the
counter on the National Association Of Securities Dealers Automated Quote
("NASDAQ") system under the symbol "MBBC." The stock commenced trading on
February 15, 1995, when the Company went public and sold 4,492,085 shares at a
price of $6.40 per share (adjusted for a 5:4 stock split on July 31, 1998).
As of March 6, 2001, there were 3,419,764 shares of the Company's
common stock outstanding. As of February 28, 2001, there were 293 stockholders
of record, not including persons or entities who hold their stock in nominee or
"street" name.
The following table sets forth the high and the low daily closing
prices of the Company's common stock for each of the following calendar
quarters.
High Low
---- ---
Year Ended December 31, 2000:
Fourth quarter $ 10.750 $ 9.125
Third quarter $ 10.000 $ 8.250
Second quarter $ 9.375 $ 7.813
First quarter $ 10.625 $ 7.875
Year Ended December 31, 1999:
Fourth quarter $ 15.000 $ 9.375
Third quarter $ 15.625 $ 10.500
Second quarter $ 15.000 $ 10.000
First quarter $ 14.750 $ 11.000
The board of directors declared, and the Company paid, cash dividends
of $0.08 and $0.15 per share during the years ended December 31, 2000 and 1999,
respectively. As previously announced, the Board of Directors has indefinitely
suspended the declaration and payment of cash dividends.
The Company is subject to certain restrictions and limitations on the
payment of dividends pursuant to existing and applicable laws and regulations
(see "Item 1. Business - Regulation And Supervision - Limitation On Capital
Distributions" and Note 15 to the Consolidated Financial Statements).
66
Item 6. Selected Financial Data.
Set forth below are selected consolidated financial and other data of
the Company for the periods and the dates indicated. This financial data is
derived in part from, and should be read in conjunction with, the Consolidated
Financial Statements and related Notes of the Company presented elsewhere
herein. All per share information has been adjusted to reflect a five for four
stock split paid to stockholders of record in July 1998.
At December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars In Thousands)
Selected Financial Condition Data:
Total assets $ 486,190 $ 462,827 $ 454,046 $ 406,960 $ 424,275
Investment securities available for sale 7,360 11,463 19,410 40,355 49,955
Investment securities held to maturity -- -- -- 145 404
Mortgage backed securities available for sale 42,950 57,716 98,006 70,465 116,610
Mortgage backed securities held to maturity -- 60 97 142 173
Loans receivable held for investment, net 391,820 360,686 298,775 263,751 233,208
Loans held for sale -- -- 2,177 514 130
Allowance for loan losses 5,364 3,502 2,780 1,669 1,311
Deposits 407,788 367,402 370,677 320,559 318,145
FHLB advances 32,582 49,582 35,182 32,282 46,807
Securities sold under agreements to repurchase -- 2,410 4,490 5,200 13,000
Stockholders' equity 43,837 40,803 41,116 46,797 44,272
Non-performing loans 4,741 8,182 2,915 2,046 1,748
Real estate acquired by foreclosure, net -- 96 281 321 --
For The Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars In Thousands, Except Share Data)
Selected Operating Data:
Interest and dividend income $ 37,757 $ 33,417 $ 30,911 $ 29,677 $ 23,986
Interest expense 19,777 17,388 18,588 18,413 14,333
-------- -------- -------- -------- --------
Net interest income before provision for
loan losses 17,980 16,029 12,323 11,264 9,653
Provision for loan losses 2,175 835 692 375 28
-------- -------- -------- -------- --------
Net interest income after provision for loan 15,805 15,194 11,631 10,889 9,625
losses
Non-interest income 2,340 2,505 2,177 1,614 941
Non-interest expense (1) 13,676 11,887 11,144 9,507 9,091
-------- -------- -------- -------- --------
Income before provision for income taxes 4,469 5,812 2,664 2,996 1,475
Provision for income taxes 1,946 2,511 1,228 1,230 623
-------- -------- -------- -------- --------
Net income $ 2,523 $ 3,301 $ 1,436 $ 1,766 $ 852
======= ======= ======= ======= =====
Shares applicable to basic earnings per share 3,110,910 3,231,162 3,501,738 3,632,548 3,688,599
Basic earnings per share $ 0.81 $ 1.02 $ 0.41 $ 0.49 $ 0.23
======== ======== ======== ======== ========
Shares applicable to diluted earnings per share 3,123,552 3,320,178 3,638,693 3,763,038 3,734,226
Diluted earnings per share $ 0.81 $ 0.99 $ 0.39 $ 0.47 $ 0.23
======== ======== ======== ======== ========
Cash dividends per share $ 0.08 $ 0.15 $ 0.12 $ 0.09 $ 0.04
======== ======== ======== ======== ========
(footnotes at end of table)
67
At Or For The Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Selected Financial Ratios and Other Data (2):
Performance Ratios
Return on average assets (3) 0.53% 0.73% 0.33% 0.43% 0.26%
Return on average stockholders' equity (4) 6.24% 8.05% 3.29% 3.99% 1.89%
Average stockholders' equity to average assets 8.52% 9.04% 10.06% 10.70% 13.58%
Stockholders' equity to total assets at
end of period 9.02% 8.82% 9.06% 11.50% 10.43%
Interest rate spread during the period (5) 3.54% 3.27% 2.43% 2.31% 2.29%
Net interest margin (6) 3.96% 3.69% 2.96% 2.83% 3.00%
Interest rate margin on average total assets (7) 3.79% 3.53% 2.84% 2.72% 2.92%
Average interest-earning assets /
average interest-bearing liabilities 109.62% 110.61% 112.00% 111.29% 116.09%
Non-interest expense / average total assets 2.88% 2.62% 2.57% 2.30% 2.75%
Efficiency ratio (8) 67.30% 64.14% 76.86% 73.82% 85.82%
Regulatory Capital Ratios (9)
Tangible capital 8.03% 7.11% 6.53% 9.13% 7.95%
Core capital 8.03% 7.11% 6.53% 9.14% 8.03%
Total risk based capital 12.28% 10.56% 11.35% 16.82% 18.58%
Asset Quality Ratios
Non-performing loans / gross loans
receivable (10) 1.19% 2.25% 0.96% 0.77% 0.74%
Non-performing assets / total assets (11) 0.98% 1.79% 0.71% 0.58% 0.41%
Net charge-offs / average gross loans receivable 0.08% 0.03% -- 0.01% 0.03%
Allowance for loan losses / gross
loans receivable (10) 1.35% 0.96% 0.92% 0.63% 0.56%
Allowance for loan losses / non-performing loans 113.14% 42.80% 95.37% 81.57% 75.00%
Allowance for total estimated losses /
non-performing assets 113.14% 42.30% 87.15% 70.57% 75.00%
Other Data
Number of full-service customer facilities 8 8 8 7 6
Number of deposit accounts 29,129 27,831 26,124 21,780 20,271
Number of ATM's 11 10 10 9 6
------------------------------------------------------
(1) Non-interest expense for 1996 includes a non-recurring special FDIC
insurance premium assessment of $1.4 million.
(2) Regulatory Capital Ratios and Asset Quality Ratios are end of period
ratios. With the exception of end of period ratios, all ratios are based on
average daily balances during the indicated periods.
(3) Return on average assets is net income divided by average total assets.
(4) Return on average stockholders' equity is net income divided by average
stockholders' equity.
(5) Interest rate spread during the period represents the difference between
the weighted average yield on interest-earning assets and the weighted
average cost of interest-bearing liabilities.
(6) Net interest margin equals net interest income as a percent of average
interest-earning assets.
(7) Interest rate margin on average total assets equals net interest income as
a percent of average total assets.
(8) The efficiency ratio is calculated by dividing non-interest expense by the
sum of net interest income and non-interest income. The efficiency ratio
measures how much in expense the Company invests in order to generate each
dollar of net revenue.
(9) Regulatory capital ratios are defined in Item 1. - "BUSINESS - Supervision
And Regulation - Capital Requirements And Capital Categories."
(10) Gross loans receivable includes loans held for investment and loans held
for sale, less undisbursed loan funds and unamortized yield adjustments.
(11) Non-performing assets includes all nonperforming loans (nonaccrual loans
and restructured loans) and real estate acquired via foreclosure or by
acceptance of a deed in lieu of foreclosure.
68
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations.
The following discussion and analysis should be read in conjunction
with the Company's Consolidated Financial Statements and Notes to the
Consolidated Financial Statements presented elsewhere in this Annual Report.
Certain matters discussed or incorporated by reference in this Annual Report
including, but not limited to, matters described in this Item 7., are forward
looking statements that are subject to risks and uncertainties that could cause
actual results to differ materially from those projected or implied in such
statements.
General
The Company's primary business is providing financial services to
individuals and businesses. The Company is headquartered in Watsonville,
California, along the Central Coast. The Bank's history dates back 75 years,
over which time the Bank has built its customer base to exceed 29,000 deposit
accounts.
The Company pursues its business through conveniently located branch
offices, where it attracts checking, money market, savings, and certificate of
deposit accounts. These deposits, and other available funds, are invested in a
variety of loans and securities. The vast majority of the Company's loans at
December 31, 2000 are secured by various types of real estate. The Bank's
deposit gathering and lending markets are concentrated in the communities
surrounding its eight full service branch offices located in Santa Cruz,
northern Monterey, and southern Santa Clara Counties, in California. The Company
also conducts its business by a variety of electronic means, including Internet
banking, telephone banking, and automated teller machine ("ATM") networks.
The most significant component of the Company's revenue is net interest
income. Net interest income is the difference between interest and dividend
income, primarily from loans, mortgage backed securities, and investment
securities, and interest expense, primarily on deposits and borrowings. The
Company's net interest income and net interest margin, which is defined as net
interest income as a percent of average interest-earning assets, are affected by
its asset growth and quality, its asset and liability composition, and the
general interest rate environment.
The Company's service charges on deposits, mortgage loan servicing
fees, and commissions from the sale of non-FDIC insured insurance products and
investments through Portola also have significant effects on the Company's
results of operations. An additional major factor in determining the Company's
results of operations are non-interest expenses, which consist primarily of
employee compensation, occupancy and equipment expenses, data and item
processing fees, and other operating expenses. The Company's results of
operations are also significantly affected by the level of provisions for loan
losses and general economic and competitive conditions, particularly absolute
and relative levels and changes in market interest rates, government policies,
and actions of regulatory agencies.
As discussed under "Item 1. Business - Business Strategy", the Company
is in the process of transforming itself from a relatively traditional savings
and loan association into a community based commercial bank. This transformation
is being undertaken to enhance stockholder value while at the same time better
meeting the financial needs of the individuals, families, professionals, and
businesses in the Greater Monterey Bay Area of Central California.
69
Interest Rate Environment
The table below presents an overview of the interest rate environment
during the two years ended December 31, 2000. In mid-1999, the Federal Reserve
commenced what would become six consecutive interest rate increases totaling 175
basis points, concluding in May, 2000. These increases were implemented by the
Federal Reserve in response to strong economic growth and tight labor markets,
among other factors. The Federal Reserve did not adjust its benchmark interest
rates (including the target rate for overnight federal funds) again until
January, 2001. In January, 2001, the Federal Reserve decreased its benchmark
rates by a total of 100 basis points, in response to concerns regarding a
rapidly slowing economy and a sharp decline in manufacturing activity, among
other factors.
While the Federal Reserve took no formal rate adjustment action between
June 2000 and December 2000, the capital markets did reflect the changing
economic environment. Many capital markets interest rates, such as the London
InterBank Offer Rate ("LIBOR") curve, peaked about May, 2000, and then commenced
a gradual decline throughout the remainder of the year. For example, the one
year LIBOR rate at May 31, 2000 was 7.50%, declining to 6.00% by December 31,
2000.
The Treasury yield curve shifted from a more traditional positively sloped
curve at the beginning of 2000 to significantly negatively sloped curve by the
end of the year. Inverted yield curves often present challenges to financial
institutions, as short term funding rates can be higher than longer term
investment rates.
Yields on longer term Treasuries over the past two years have been
influenced by both the general economic and interest rate environment, and the
federal budget surplus. The federal budget surpluses have allowed the US
government to repurchase longer term Treasury securities in the open markets,
increasing demand and therefore also supporting higher prices and lower
effective yields.
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.
Index/ Rate 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99 3/31/00 6/30/00 9/30/00 12/31/00
----------- -------- ------- ------- ------- -------- ------- ------- ------- --------
3 month Treasury bill 4.46% 4.47% 4.76% 4.85% 5.31% 5.87% 5.85% 6.20% 5.89%
6 month Treasury bill 4.54% 4.51% 5.03% 4.95% 5.73% 6.14% 6.22% 6.27% 5.70%
1 year Treasury bill 4.52% 4.71% 5.05% 5.17% 5.96% 6.23% 6.05% 6.08% 5.36%
2 year Treasury note 4.53% 4.98% 5.52% 5.59% 6.24% 6.47% 6.36% 5.97% 5.09%
5 year Treasury note 4.54% 5.10% 5.65% 5.75% 6.34% 6.31% 6.18% 5.85% 4.97%
10 year Treasury note 4.65% 5.24% 5.78% 5.88% 6.44% 6.00% 6.03% 5.80% 5.11%
30 year Treasury bond 5.09% 5.62% 5.97% 6.05% 6.48% 5.83% 5.90% 5.88% 5.46%
Target federal funds 4.75% 4.75% 5.00% 5.25% 5.50% 6.00% 6.50% 6.50% 6.50%
Prime rate 7.75% 7.75% 7.75% 8.25% 8.50% 9.00% 9.50% 9.50% 9.50%
COFI 4.66% 4.52% 4.50% 4.61% 4.85% 5.00% 5.36% 5.55% 5.62%
70
Business Strategy
During 2000, the Company achieved progress in its business strategy of
transforming a 75 year old savings and loan into an effective community based
financial services company. Elements of this business strategy include:
o Increasing the Company's ratio of loans to deposits as a means of enhancing
net interest income, serving more customers, moderating exposure to change
in general market interest rates, and better utilizing the Company's
capital resources.
o Diversifying the product mix within the loan portfolio to reduce the
historic high concentration in relatively commoditized residential
mortgages while also meeting the financing needs of consumers and small
businesses within the Company's market areas.
o Enhancing the Company's delivery of relationship banking, where the
Company's employees invest time and resources in thoroughly understanding
their customers and thereby provide a comprehensive financial services
solution
o Expanding services for businesses, including improved deposit courier
service and cash management products.
o Acquiring customers disaffected by the acquisition of their financial
services provider.
o Capitalizing on the Company's position as one of the largest independent
financial institutions in the Greater Monterey Bay Area.
o Bolstering non-interest income from an expanding list of fee based products
and services, including ATM surcharges, deposit account and branch service
charges, and sales of non-FDIC insured investment products including mutual
funds and annuities.
o Changing the Company's deposit mix to emphasize transaction accounts as a
means of cementing customer relationships, lowering the Company's relative
cost of funds, generating fee income, and increasing the duration of the
Company's funding.
o Capitalizing on business opportunities unique to the Company's primary
service areas; for example, installing remote ATM's at highly trafficked
tourist attractions.
o Pursuing alternative forms of delivery for financial products and services
as a means of attracting a greater volume of business while also improving
the Company's efficiency ratio.
o Installing new technologies that support a greater range of financial
products and services while at the same time increasing the speed,
accuracy, and efficiency of the Company's operations.
The Company intends to continue pursuing this business strategy in
2001, with specific goals of installing a more modern and technologically robust
core processing system, expanding the recently formed Commercial Banking and
Professional Banking groups, offering bilingual telephone banking, increasing
customer use of Internet banking and electronic bill payment, pursuing
additional remote ATM sites, and expanding the Company's market coverage through
either additional traditional, full service branches or other alternatives,
possibly including supermarket banking. However, there can be no assurance that
any such steps will be implemented, or if implemented, whether such steps will
improve the Company's financial performance.
71
Analysis Of Results Of Operations For The Years Ended December 31, 2000 And
December 31, 1999
Overview
The Company reported net income of $2.5 million for the year ended
December 31, 2000, down from net income of $3.3 million realized during the
prior year. These amounts translate to $0.81 basic and diluted earnings per
share in 2000, compared to $1.02 basic and $0.99 diluted earnings per share in
1999. The Company's return on average assets decreased from 0.73% in 1999 to
0.53% in 2000. The Company's average return on equity also fell, from 8.05% in
1999 to 6.24% in 2000. The overall reduction in net income during 2000 resulted
from a number of factors, including a higher provision for loan losses, greater
operating expenses, and less favorable results from the sale of securities.
These factors more than offset increases in net interest income and most sources
of non-interest income other than results from the sale of securities.
Net Interest Income
During the years ended December 31, 2000, 1999, and 1998, net interest
income before the provision for loan losses was $18.0 million, $16.0 million,
and $12.3 million, respectively. The level of average interest-earning assets
over the same years was $454.1 million, $434.8 million, and $416.2 million,
respectively. The net interest spread was 3.54%, 3.27%, and 2.43%, respectively,
for the years ended December 31, 2000, 1999, and 1998. During these same
periods, the ratio of net interest income to average total assets was 3.79%,
3.53%, and 2.84%, respectively.
The $2.0 million, or 12.2%, increase in net interest income generated
in 2000 versus the prior year was primarily produced by three key changes in the
Company's balance sheet composition:
1. On the asset side of the balance sheet, the Company redirected its
earning asset mix towards loans receivable, reducing the proportion of
earning assets comprised of relatively lower yielding cash equivalents,
investment securities, and mortgage backed securities. Loans
receivable, net, increased from 78.0% of average interest earning
assets in 1999 to 83.6% of average interest earning assets in 2000.
Loans receivable, net, earned a weighted average rate of 8.57% during
2000, comparing favorably to 6.33% on cash equivalents, 7.73% on
investment securities, and 6.98% on mortgage backed securities.
2. On the liability side of the balance sheet, the Company increased the
percentage of average interest bearing liabilities composed of
transaction deposit accounts (NOW, savings, and money market) from
31.2% in 1999 to 33.8% in 2000. Transaction deposit accounts present a
relatively lower cost of funding than most alternative sources. The
proportional increase in average transaction accounts was offset by a
decline in the percentage of average interest bearing liabilities
represented by certificates of deposit. Certificates of deposit
represented 55.5% of average interest bearing liabilities in 2000,
versus 58.4% the prior year.
3. The Company increased its average balance of interest earning assets by
$19.3 million, or 4.4%, in 2000 versus 1999. Due to the deposit growth
the Company achieved during 2000, this rise in average interest earning
assets was accomplished with only a slight increase in the proportion
of funding provided by comparatively higher cost borrowings. Borrowings
as a percentage of average interest bearing liabilities increased from
10.4% in 1999 to 10.7% in 2000. The Company's larger average balance
sheet in 2000 versus 1999 contributed to the $2.0 million rise in net
interest income.
In conjunction with its business strategy, the Company intends to
continue its pursuit of nominal and proportional increases in average
non-interest bearing liabilities (primarily demand deposit accounts) during 2001
through a combination of enhanced marketing to businesses, redesigned checking
products following the planned systems conversion, and expanded business
services such as various types of lines of credit and courier deposit
collection. Average non-interest bearing liabilities increased from $19.4
million during 1999 to $19.8 million during 2000. An increase in average
non-interest bearing liabilities would favorably impact the Company's net
interest income.
72
Average Balances, Average Rates, And Net Interest Margin
The following table presents the average amounts outstanding for the
major categories of the Company's assets and liabilities, the average rate
earned upon each major category of interest earning assets, the average 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 years indicated.
Year Ended December 31, 2000 Year Ended December 31, 1999 Year Ended December 31, 1998
------------------------------ ------------------------------ -----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ---- ------- -------- ----
Assets (Dollars In Thousands)
Interest earning assets:
Cash equivalents (1) $ 8,533 $ 540 6.33% $ 5,837 $ 280 4.80% $10,721 $ 578 5.39%
Investment securities (2) 8,915 689 7.73% 13,620 871 6.40% 37,397 2,335 6.24%
Mortgage backed securities(3) 53,822 3,755 6.98% 73,122 4,884 6.68% 105,223 6,910 6.57%
Loans receivable, net (4) 379,823 32,556 8.57% 339,036 27,218 8.03% 259,358 20,882 8.05%
FHLB stock 3,003 217 7.23% 3,139 164 5.22% 3,512 206 5.87%
----- ------ ----- ------- ------ ----- ------- ------ -----
Total interest earning assets 454,096 37,757 8.31% 434,754 33,417 7.69% 416,211 30,911 7.43%
------ ------ ------
Non-interest earnings assets 20,391 18,691 17,424
------ ------ ------
Total assets $474,487 $453,445 $433,635
======== ======== ========
Liabilities & Equity
--------------------
Interest bearing liabilities:
NOW accounts $36,317 550 1.51% $25,205 388 1.54% 14,534 227 1.56%
Savings accounts 15,803 281 1.78% 15,583 280 1.80% 15,204 278 1.83%
Money market accounts 87,733 4,040 4.60% 82,006 3,402 4.15% 42,603 1,716 4.03%
Certificates of deposit 230,099 12,360 5.37% 229,493 11,060 4.82% 266,225 14,407 5.41%
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-bearing 369,952 17,231 4.66% 352,287 15,130 4.29% 338,566 16,628 4.91%
deposits
FHLB advances 43,946 2,514 5.72% 37,600 2,078 5.53% 28,059 1,663 5.93%
Other borrowings (5) 359 32 8.91% 3,182 180 5.65% 5,007 297 5.93%
------- ------ ----- ------- ------ ----- ------- ------ -----
Total interest-bearing 414,257 19,777 4.77% 393,069 17,388 4.42% 371,632 18,588 5.00%
liabilities ------ ------ ------
Non-interest bearing 19,824 19,386 18,379
liabilities -------- -------- ------
Total liabilities 434,081 412,455 390,011
Stockholders' equity 40,406 40,990 43,624
------ ------ ------
Total liabilities & equity $474,487 $453,445 $433,635
======== ======== ========
Net interest income $ 17,980 $ 16,029 $ 12,323
======== ======== ========
Interest rate spread (6) 3.54% 3.27% 2.43%
Net interest earning assets 39,839 41,685 44,579
Net interest margin (7) 3.96% 3.69% 2.96%
Net interest income /
average total assets 3.79% 3.53% 2.84%
Interest earnings assets /
interest bearing 1.10 1.11 1.12
liabilities
Average balances in the above table were calculated using average daily figures.
Interest income is reflected on an actual basis, as the Company maintained no
tax preferenced securities during the periods reported.
-----------------------------------------
(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 CMOs, 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, undisbursed loan funds, and allowances for
estimated loan losses. Interest income on loans includes amortized loan
fees of $250,000, $293,000, and $233,000 in 2000, 1999, and 1998,
respectively.
(5) Includes federal funds purchased, securities sold under agreements to
repurchase, and borrowings under MBBC's line of credit.
(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.
73
Rate/Volume Analysis
The most significant impact on the Company's net interest income
between periods is derived from the interaction of changes in the volumes of and
rates earned or paid on interest-earning assets and interest-bearing
liabilities. The following table utilizes the figures from the preceding table
to present a comparison of interest income and interest expense resulting from
changes in the volumes and the rates on average interest earning assets and
average interest bearing liabilities for the years indicated. Changes in
interest income or interest expense attributable to volume changes are
calculated by multiplying the change in volume by the prior year 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 average 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.
Year Ended December 31, 2000 Year Ended December 31, 1999
Compared To Compared To
Year Ended December 31, 1999 Year Ended December 31, 1998
----------------------------------------- -----------------------------------------
Increase (Decrease) Due To Increase (Decrease) Due To
----------------------------------------- -----------------------------------------
Volume Volume
Volume Rate / Rate Net Volume Rate / Rate Net
------ ---- ------ --- ------ ---- ------ ---
(Dollars In Thousands)
Interest-earning assets
Cash equivalents $ 129 $ 89 $ 42 $ 260 $ (264) $ (61) $ 28 $ (297)
Investment securities (301) 182 (63) (182) (1,484) 55 (35) (1,464)
Mortgage backed securities (1,289) 218 (58) (1,129) (2,108) 118 (36) (2,026)
Loans receivable, net 3,274 1,842 222 5,338 6,415 (56) (24) 6,335
FHLB Stock (7) 63 (3) 53 (22) (22) 2 (42)
-------- -------- --------- --------- -------- ------ -------- -------
Total interest-earning 1,806 2,394 140 4,340 2,537 34 (65) 2,506
assets -------- -------- --------- --------- -------- ------ -------- -------
Interest-bearing liabilities
NOW Accounts 171 (6) (3) 162 167 (3) (3) 161
Savings accounts 4 (3) -- 1 7 (5) -- 2
Money market accounts 238 374 26 638 1,587 52 47 1,686
Certificates of deposit 29 1,267 4 1,300 (1,988) (1,575) 216 (3,347)
-------- -------- --------- --------- -------- ------ -------- -------
Total interest-bearing 442 1,632 27 2,101 (227) (1,531) 260 (1,498)
deposits
FHLB advances 351 73 12 436 565 (111) (39) 415
Other borrowings (159) 104 (93) (148) (108) (14) 5 (117)
-------- -------- --------- --------- -------- ------ -------- -------
Total interest-bearing 634 1,809 (54) 2,389 230 (1,656) 226 (1,200)
liabilities -------- -------- --------- --------- -------- ------ -------- -------
Increase (decrease) in net
interest income $1,172 $ 585 $ 194 $1,951 $2,307 $1,690 $ (291) $3,706
====== ===== ===== ====== ====== ====== ======= ======
74
Interest Income
Interest income for the year ended December 31, 2000 totaled $37.8
million, an increase of $4.3 million from the prior year. The increase resulted
from a shift in asset mix toward higher yielding assets, the generally higher
interest rate environment in 2000 versus 1999, a decision by the FHLB-SF to pay
particularly high dividend rates during the first half of 2000 in conjunction
with its capital management program, and a larger average balance of interest
earning assets. The larger average balance of interest earning assets stemmed
from the Company's desire to effectively utilize the Bank's regulatory capital
and liquidity in building the size of the loan portfolio. The weighted average
yield on interest earning assets increased from 7.69% during 1999 to 8.31%
during 2000. The yield on the Company's assets generally benefits from a higher
interest rate environment, as the vast majority of the Company's assets are
either adjustable rate or fixed rate with limited duration.
Interest income on loans increased 18.9% from $27.2 million in 1999 to
$32.6 million in 2000. This rise was due to a greater average balance of loans
outstanding and higher average rates. The higher average rates stemmed from both
the higher general interest rate environment and the shift in loan mix away from
relatively lower yielding residential mortgages and toward generally higher
yielding multifamily and commercial real estate loans.
Interest income on mortgage backed securities decreased from $4.9
million in 1999 to $3.8 million in 2000, as the impact of lower average balances
more than offset the effect of higher average rates. A similar pattern applied
to interest income on investment securities, which decreased from $871 thousand
in 1999 to $689 thousand in 2000. The average rate on the Company's investments
in corporate trust preferred securities rose relatively rapidly during 2000 due
to their repricing quarterly off the responsive three month LIBOR index. The
increase in rate was, however, insufficient to offset the impact of lower
average volumes resulting from the sale of corporate trust securities with a
face value of $4.0 million during 2000.
Interest income on cash equivalents rose during 2000, as a greater
average balance was complemented by higher average rates resulting from the
increases in the target federal funds rate implemented by the Federal Reserve.
The Company maintained a higher average balance of cash equivalents during 2000
primarily due to the periodic build up of excess liquidity in support of pending
loan originations and purchases. In addition, during 2000, the Company placed
$180 thousand in short term certificates of deposit with minority focused
financial institutions in conjunction with its proactive program under the
Community Reinvestment Act.
Interest Expense
Interest expense on deposits increased from $15.1 million during 1999
to $17.2 million during 2000 due to a combination of greater average balances
and higher average rates. The greater average balances stemmed from the
Company's deposit acquisition initiatives throughout the year to attract more
consumer and business deposit accounts. These initiatives included holding 75th
anniversary celebrations at each of the Company's facilities. Current and
potential customers were invited to attend each of the events, at which
management and directors highlighted the Bank's accomplishments and strengths,
and solicited additional business. The average rate paid on deposits during 2000
increased from the prior year, despite a favorable shift in deposit mix, due to
the higher general interest rate environment. The average cost of interest
bearing deposits rose from 4.29% during 1999 to 4.66% during 2000.
Interest expense on borrowings increased from $2.3 million during 1999
to $2.5 million during 2000. Higher average volumes and greater average rates
each contributed to the rise in interest expense. The Company primarily used
FHLB advances as a source of borrowings during 2000, with MBBC far less active
in selling securities under agreements to repurchase during 2000 versus prior
years due to the sale of MBBC's security portfolio in early 2000.
75
Provision For Loan Losses
Implicit in lending activities is the risk that losses will occur and
that the amount of such losses will vary over time. Consequently, the Company
maintains an allowance for loan losses by charging a provision to operations.
Loans determined to be losses are charged against the allowance for loan losses.
The allowance for loan losses is maintained at a level considered by management,
at a point in time and with then available information, to be adequate to
provide for probable losses inherent in the existing portfolio.
In evaluating the adequacy of the allowance for loan losses, management
estimates the amount of probable loss for each individual loan that has been
identified as having greater than standard credit risk, including loans
identified as criticized ("Special Mention"), classified ("Substandard" or lower
graded), impaired, troubled debt restructured, and non-performing. In
determining specific and general loss estimates, management incorporates such
factors as collateral value, portfolio composition and concentration, trends in
local and national economic and real estate conditions, the duration of the
current business cycle, seasoning of the loan portfolio, historical credit
experience, and the financial status of borrowers. While the general allowance
is segmented by broad portfolio categories to analyze its adequacy, the
allowance is general in nature and is available for the loan portfolio in its
entirety. Although management believes that the allowance is adequate, future
provisions are subject to continuing evaluation of inherent risk in the loan
portfolio, as conducted by both management and the Bank's regulators.
Provision for loan losses increased from $835 thousand during 1999 to
$2.2 million during 2000. This increase resulted from the following factors:
1. The growth in the size of the loan portfolio during 2000.
2. Net charge-offs of $313 thousand in 2000 versus $113 thousand in 1999.
3. The continued shift in loan mix away from residential mortgages and toward
income property loans, which typically present more credit risk than
residential mortgages.
4. Specific reserves rose from $200 thousand at December 31, 1999 to $600
thousand at December 31, 2000. The $600 thousand specific reserve at
December 31, 2000 was associated with a $2.85 million commercial
construction loan located in the Company's primary market area. At December
31, 2000, the Company was in the process of foreclosing on the subject
collateral. The property's construction was substantially completed at
December 31, 2000, but the borrower experienced difficulty in obtaining an
occupancy permit from local government agencies primarily due to concerns
regarding the traffic capacity of nearby roads.
5. The increasing credit concentrations in the Company's loan portfolio
associated with a smaller number of comparatively larger income property
loans versus a larger number of comparatively smaller residential mortgages
6. An increase in unallocated general reserves from $266 thousand at December
31, 1999 to $739 thousand at December 31, 2000. This increase in
unallocated reserves resulted from management's concerns about several key
factors which management believes have negatively impacted the inherent
loss in the Company's credit portfolio, including:
o the California energy crisis, with impacts upon the availability and
price of electricity, business costs, consumer spending and disposable
income, and the pace of economic activity in the State
o the financial difficulties experienced by many technology related
companies in the Silicon Valley area adjacent to the Bank's primary
market areas
o the impact of lower technology stock prices on consumer spending,
liquidity, and investment, with a particular concern regarding effects
on the demand and pricing for real estate in the Bank's primary market
areas
o the general reduction in national economic growth and the increased
volume of layoffs being announced by major corporations
76
To the extent that the Company is successful in its business strategy
and thereby continues building the size of its loan portfolio while also
extending increased volumes of construction, income property, and business
lending, management anticipates that additional provisions will be required and
charged against operations in 2001, with the ratio of allowance for loan losses
to loans receivable increasing to reflect the greater credit exposure inherent
in the loan mix.
Non-interest Income
Non-interest income declined from $2.5 million in 1999 to $2.3 million
in 2000. This decrease was primarily due to less favorable results on the sale
of securities more than offsetting increased non-interest income from most other
components of the Company's fee based businesses.
The Company experienced a net pre-tax loss of $55 thousand on the sale
of mortgage backed and investment securities during 2000, versus a gain of $496
thousand in 1999. The gains realized in 1999 occurred during the first half of
that year, in a comparatively low general interest rate environment that
increased the market value of the Company's securities.
Commissions from the sale of non-insured products rose from $626
thousand in 1999 to $676 thousand in 2000. The Company earns these commissions
primarily on the sale of annuities and mutual funds to consumers in its primary
market areas. The Company presently has four licensed account representatives
that work for Portola and assist individuals with meeting their financial
objectives through an investment program.
Customer service charges increased from $1.0 million during 1999 to
$1.3 million during 2000 due to the growth in the customer base reflected in the
increased number of transaction accounts combined with the implementation of a
new fee & service charge schedule in mid 2000.
Income from loan servicing increased from $84 thousand in 1999 to $118
thousand in 2000. The Company anticipates that this source of income will
decline in future periods, as the majority of the Company's loan sales now occur
on a servicing released basis. During 2001, the Company may consider the sale of
its Agency servicing portfolio.
Further augmenting non-interest income constitutes a primary component
of the Company's business strategy. In 2001, the Company plans to enhance its
revenues from the sale of non-FDIC insured investment products by reviewing
third party contracts, considering the licensing of additional staff, and
broadening its product line. For example, the Company is evaluating the possible
securities licensing of its new Professional Banking Group members. In addition,
a new non-FDIC insured product program manager was hired in February, 2001.
Also in 2001, the Company plans to augment customer service charges by
adjusting the Bank's fee and service charge schedule, redesigning its checking
products in conjunction with the planned systems conversion, continuing to
market electronic bill payment and debit card services, further increasing the
number of transaction accounts, and selling depository and cash management
services to business customers who would be charged via account analysis. No
assurance can, however, be provided that the Company will be successful in its
plans to increase non-interest income.
77
Non-Interest Expense
Non-interest expense totaled $13.7 million in 2000, up $1.8 million
from $11.9 million the prior year. Factors contributing to the rise in 2000
included:
1. Compensation and employee benefits increased from $5.6 million during 1999
to $6.6 million during 2000. This increase resulted from a number of
factors, including:
o The hiring of additional staff to support the Company's strategic plan,
including the Bank's first experienced commercial loan officer.
o Changes in the Company's senior management team.
o The settlement of certain non-qualified benefits obligations.
o A $250 thousand accrual for a separation package for the former
President and Chief Operating Officer. This accrual was recorded in
conjunction with the applicable employment agreements between the
individual and the Company. At December 31, 2000, the Company was
pursuing arbitration in this regard, as called for under the employment
contracts.
o The implementation of an expanded performance based incentive
compensation program.
2. Data processing expense increased from $1.0 million in 1999 to $1.14
million in 2000 due to servicing a greater volume of loan and deposit
accounts and processing a greater number of transactions, and because of
costs associated with the planned data processing conversion. The greater
number of accounts and transaction also led to increased spending on
supplies, printing, and postage costs.
3. The payment of $108 thousand in expenses during the fourth quarter of 2000
in support of the planned data processing conversion. These expenses
included costs for travel, training, deconversion services from the
existing data processor, and consultants assisting with the technology
implementation. The Company anticipates incurring an increased level of
similar expenses during the first half of 2001 as the conversion project
progresses.
4. Recruitment and relocation expenses for hiring new members of the Company's
management team, including a new Chief Executive Officer, Chief Financial
Officer, Controller, and Director of Commercial Lending.
5. The adoption of a Directors Emeritus program that provides cash recognition
payments to retiring directors meeting certain eligibility requirements.
6. Higher outside professional costs. The Company incurred significant legal
costs, in aggregate, during 2000 in conjunction with the successful
collection of a $5.0 million non-performing loan, a review of charter
alternatives, and addressing the potential settlement of claims by the
former President & Chief Operating Officer. The Company also incurred
higher accounting related costs in 2000 in conjunction with an expansion of
its co-sourced internal audit program.
Primarily because of the higher operating costs described above, the
Company's average efficiency ratio for 2000 increased to 67.3%, up from 64.1%
during 1999. The transformation of the Company has also contributed to increases
in the efficiency ratio, as up front operating costs and other expenses must
often be incurred prior to the realization of associated revenues as the Company
changes its business mix and redirects its sales efforts.
78
The Company's new management team commenced a series of initiatives to
improve the Company's efficiency ratio during the second half of 2000. These
initiatives included:
o the replacement of certain vendors with more efficient and lower cost
providers, particularly those that interface effectively via the Internet
o elimination of certain discretionary costs throughout the branch network
o changes to the Company's ongoing operations, such as the elimination of
passbook based deposit accounts and the elimination of most monthly
statements on certificates of deposit
o reallocating employee resources to areas providing a greater financial
contribution
o increasing emphasis upon variable, performance based compensation
o the acquisition and installation of more efficient technology throughout
the Company and the integration of that technology to speed operations and
improve productivity and accuracy
However, due to the time required to conclude existing contractual
obligations, implement these initiatives (including employee training), and
conduct required customer notification, many of the above initiatives provided
little economic benefit during 2000. The Company cannot predict whether the
above initiatives will be successfully implemented, and if implemented, whether
they will produce a sufficient benefit to offset other factors that might work
to increase the efficiency ratio, including the implementation of the Company's
strategic plan.
Provision For Income Taxes
The provision for income taxes decreased from $2.5 million during 1999
to $1.9 million during 2000 due to a reduction in pre-tax income. The Company's
effective book tax rate increased slightly in 2000, in part due to the greater
impact of non-deductible expenses and other tax related adjustments on a lower
base of pre-tax income.
Comparison Of Financial Condition At December 31, 2000 And December 31, 1999
Total assets of the Company were $486.2 million at December 31, 2000,
compared to $462.8 million at December 31, 1999, an increase of $23.4 million,
or 5.0%.
Investment securities declined from $11.5 million at December 31, 1999
to $7.4 million at December 31, 2000 due to the sale of a corporate trust
preferred security during 2000 in order to generate funding for the Company's
increasing loan portfolio. The Company's investment security portfolio at
December 31, 2000 was composed of two variable rate, quarterly repricing,
corporate trust preferred securities issued by major US banks. These two
securities were rated "A-" or better by Standard & Poors rating agency at
December 31, 2000. Management may consider selling these two securities in 2001
in order to bolster the Bank's Qualified Thrift Lender ratio, shift funds into
assets that function as more effective collateral under secured borrowing
arrangements, and provide funds for further expansion in loans receivable.
79
Mortgage backed securities declined from $57.8 million at December 31,
1999 to $43.0 million at December 31, 2000. This reduction stemmed from ongoing
principal repayments (including prepayments), maturities, and the sale of
mortgage backed securities with a face value of $24.5 million, partially offset
by purchases during the year. The Company decreased the size of its mortgage
backed security portfolio during 2000 to raise funds for investment into higher
yielding loans receivable, improve the interest rate risk profile of the
Company, and generate additional liquidity for MBBC.
The Company significant altered the mix of its mortgage backed
securities portfolio during 2000. Traditional Agency pass-through certificates
declined from 54.1% of total mortgage backed securities at December 31, 1999 to
14.9% at December 31, 2000. In contrast, CMOs increased from 45.9% of total
mortgage backed securities at December 31, 1999 to 85.1% at December 31, 2000.
The Company undertook this change in mix:
o to reallocate the Company's capacity for longer term, fixed rate assets
from the security portfolio to the loan portfolio, where management
believes better yields are obtainable for the same level of interest rate
risk
o to acquire CMOs that present relatively more certain cash flows (e.g.
Planned Amortization Classes, or "PACs") than traditional pass-through
certificates and thereby facilitate the Company's cash management
o to take advantage of the generally higher yields available in non-Agency
CMOs versus those presented by similar profile Agency securities
All of the CMOs were rated "AAA" by at least one nationally recognized
ratings agency at December 31, 2000.
Loans receivable held for investment, net of allowances for loan
losses, were $391.8 million at December 31, 2000, compared to $360.7 million at
December 31, 1999. This 8.6% increase stemmed from $169.7 million in credit
commitments during 2000, partially offset by repayments and sales. The mix in
the portfolio of loans receivable held for investment, net, changed
significantly during 2000, with a reduced concentration in residential mortgages
and a significant increase in the proportion of income property loans
(multifamily and commercial real estate). This change in loan mix was pursued in
conjunction with the Company's strategic plan of transforming itself into a
community commercial bank, and thereby financing a broader range of credit needs
in the communities served. This change in mix also supports a greater yield on
the loan portfolio and an increase in deposits, as the Company seeks to acquire
operating accounts for income properties financed and for businesses receiving a
line of credit or term business loan.
In 2001, the Company intends to continue pursuing this pattern of
change in loan mix. Should market conditions prove favorable, management may
pursue an increase in the percentage of total loans represented by construction
loans. Construction loans represented 13.9% of gross loans at December 31, 2000.
While the Bank had an excess of qualifying assets over its Qualified Thrift
Lender Test minimum requirement at December 31, 2000, to the extent the Bank is
successful in continuing to alter its loan mix, it may need to consider changing
to a commercial bank charter in the future.
The Company's investment in the capital stock of the FHLB declined in
2000 due to a mandatory redemption required by the FHLB.
The Company's balance of premises and equipment, net, increased by $333
thousand in 2000 primarily due to leasehold improvements at one branch. This
branch was remodeled to enable the leasing of the second floor to a tenant,
thereby increasing the Company's future monthly rental income. Management
anticipates a further increase in premises and equipment in 2001 as a result of
computer hardware and software purchases and licensing in conjunction with the
planned new core processing system.
The Company continued to amortize its intangible assets during 2000,
reducing their balance from $2.9 million at December 31, 1999 to $2.2 million at
December 31, 2000. This amortization, which is a non-cash charge to operations,
bolsters the Bank's regulatory capital ratios (all else held constant), as
intangible assets are deducted from GAAP capital in determining regulatory
capital. This amortization also increases the Company's tangible book value per
share.
80
At December 31, 2000, the Company maintained $165 thousand in
originated mortgage servicing rights, down from $253 thousand a year earlier.
Because the Company has adopted a program of generally selling its loans on a
servicing released basis, management anticipates that the balance of originated
mortgage servicing rights will continue to decline as the existing portfolio of
loans serviced for others pays off.
During the year ended December 31, 2000, the Company's liabilities
increased by $20.4 million to $442.4 million, from $422.0 million at December
31, 1999. An increase in deposits more than offset declines in other types of
liabilities. Total deposits rose from $367.4 million at December 31, 1999 to
$407.8 million at December 31, 2000. This increase resulted from multiple
factors, including the introduction of new checking and money market products
and the acquisition of $14.0 million in certificates of deposit through the
State of California Time Deposit Program. The Bank was also successful in
attracting some deposit customers during 2000 from local competitors undergoing
a merger or acquisition.
FHLB advances declined from $49.6 million at December 31, 1999 to $32.6
million at December 31, 2000. Securities sold under agreements to repurchase
declined from $2.4 million at December 31, 1999 to none at December 31, 2000.
The inflow of deposits and the reduction in securities provided sufficient funds
to fund the growth in loans receivable, retire maturing borrowings, and prepay
certain borrowings during 2000. The Company did not pursue extensive leveraging
via wholesale assets and liabilities during 2000, as management determined that
available risk adjusted spreads in the capital markets did not support the
associated allocation of capital.
Stockholders' equity increased $3.0 million from $40.8 million at
December 31, 1999 to $43.8 million at December 31, 2000, even with the
repurchase of $1.25 million in Treasury shares during 2000 and the payment of
$274 thousand in cash dividends during the first quarter of 2000. The rise in
equity resulted from net income, continued amortization of deferred stock
compensation, Company directors receiving their fees in Company stock, and an
improvement in the fair value of securities classified as available for sale.
The Company reduced its aggregate deferred stock compensation by $1.3 million
during 2000. This significant reduction was caused by:
o ESOP shares continuing to be committed to be released under the terms of
that tax qualified plan
o the distribution of certain non-qualified deferred compensation payable in
Company stock
o the acceleration of benefits under the Recognition and Retention Plan for
outside directors leading to the termination of that plan and the savings
of future related administrative expense
o continued vesting of shares previously awarded under the Performance Equity
Plan for officers and employees
o the use of Company stock for incentive payments in lieu of cash under
certain employee incentive plans
Management intends to continue pursuing the accelerated amortization of
deferred stock compensation and the award of Company shares in lieu of certain
cash incentive payments during 2001 as a means of increasing employee ownership,
more closely aligning employee interests with those of stockholders, enhancing
the Company's equity position, and increasing the Company's tangible book value
per share. The Board of Directors determined in early 2001 to amend the
Company's Bylaws to mandate a minimum direct ownership of Company shares by the
members of the Board of Directors and to continue requiring the payment of
director fees in Company stock. The Board of Directors took these steps to
highlight their support for the Company and to communicate their acknowledgement
of the importance of aligning the Board of Directors with stockholder interests.
Given the Bank's favorable regulatory capital position at December 31,
2000, the indefinite suspension of cash dividends by the Company during 2000,
and the additional liquidity and capital available at MBBC at December 31, 2000,
management anticipates pursuing opportunities to expand the balance sheet during
2001. The Board of Directors plans to evaluate the merits of periodic stock
repurchases during 2001.
81
Analysis Of Results Of Operations For The Years Ended December 31, 1999 And
December 31, 1998
Overview
The Company reported net income of $3.3 million for the year ended
December 31, 1999, up significantly from net income of $1.4 million realized
during the prior year. These amounts translate to $1.02 basic and $0.99 diluted
earnings per share in 1999, respectively, and $0.41 basic and $0.39 diluted
earnings per share in 1998, respectively. The Company's return on average assets
improved from 0.33% in 1998 to 0.73% in 1999. Due to the Company's equity
management program, return on average equity improved more dramatically, rising
from 3.29% in 1998 to 8.05% in 1999. The increase in 1999 net income resulted
from the Company's continued progress and success in implementing its business
strategy, complemented by a strong economy and vibrant local real estate
markets, which helped constrain loan delinquencies, net charge-offs, and
expenses associated with foreclosed real estate.
Net Interest Income
During the years ended December 31, 1999, and 1998, net interest income
before the provision for loan losses was $16.0 million and $12.3 million,
respectively. The level of average interest-earning assets over the same years
was $434.8 million and $416.2 million, respectively. The net interest spread was
3.27% and 2.43%, respectively, during the years ended December 31, 1999 and
1998. During these same periods, the ratio of net interest income to average
total assets was 3.53% and 2.84%, respectively.
The $3.7 million, or 30.1%, increase in net interest income generated
in 1999 compared to the prior year was primarily produced by three key changes
in the Company's balance sheet composition:
1. On the asset side of the balance sheet, the Company significantly
redirected its asset mix towards loans receivable, reducing the proportion
of the balance sheet comprised of lower yielding cash equivalents,
investment securities, and mortgage backed securities. Loans receivable
produced a weighted average yield rate of 8.03% during 1999, comparing
favorably to 4.80% on cash equivalents, 6.40% on investment securities, and
6.68% on mortgage backed securities. This change in asset mix was enabled
by a credit commitment volume of $173.3 million accomplished in 1999,
partially offset by repayments and sales, that was primarily funded by the
sale of securities and increased borrowings.
2. On the liability side of the balance sheet, the Company significantly
reduced the percentage of deposits represented by relatively higher cost
certificates in favor of a larger proportion of transaction accounts.
Certificates of deposit, which generated a weighted average cost of 4.82%
in 1999 and 5.41% in 1998, declined from 78.6% of average interest bearing
deposits in 1998 to 65.1% in 1999. The Company successfully offset the
decline in certificates of deposit with increases in lower cost checking
and money market accounts. By comparison, money market accounts produced an
average cost of funds of 4.03% in 1998 and 4.15% in 1999. At December 31,
1999, certificates of deposit comprised 60.5% of total deposits, down from
69.4% a year earlier.
3. The Company increased its average balance of interest earning assets by
$18.5 million, or 4.5%. The Company funded this balance sheet expansion
largely with an increase in borrowings, as overall deposit growth was
limited by the Company's objective of decreasing its cost of deposits
relative to key capital market indices such as COFI and the 1 year Treasury
yield. The Company was successful in this regard, as the weighted average
cost of deposits declined from 4.56% at December 31, 1998 to 4.04% at
December 31, 1999, while at the same time the COFI index rose from 4.66% to
4.85% and the 1 year Treasury yield rose from 4.52% to 5.96%.
82
Interest Income
For the year ended December 31, 1999, interest income was $33.4
million, an increase of $2.5 million, or 8.1%, over the amount recorded for the
year ended December 31, 1998. The primary reason for the increase in interest
income during 1999 was growth in average outstanding balances of loans
receivable, which in turn stemmed from the level of loan production recorded
during 1999. Interest income on loans receivable, which accounted for 81.4% of
total interest income for the year ended December 31, 1999, grew by $6.3 million
in 1999 compared to 1998. Interest income on mortgage backed securities during
1999 declined by $2.0 million from the prior year due to reduced average volumes
outstanding. During 1999, the Company used scheduled payments, prepayments, and
sales of mortgage backed securities as sources of cash to fund the expanding
portfolio of loans receivable. Similarly, lower average volumes of investment
securities during 1999 versus the prior year led to a $1.5 million year to year
decline in interest income on investment securities.
The weighted average yield on interest-earning assets was 7.69% for the
year ended December 31, 1999, compared to 7.43% for the prior year. The increase
in the yield on interest-earning assets was principally due to loans receivable
increasing as a percentage of interest-earning assets, from 62.3% during 1998 to
78.0% during 1999. Yields on mortgage backed and investment securities increased
slightly during 1999, but represented a significantly smaller portion of total
interest-earning assets. The increase in general market interest rates that
occurred in 1999 also bolstered the Company's yield on interest earning assets,
particularly those portfolios such as construction loans and corporate trust
preferred securities that reprice based upon relatively responsive indices such
as Prime and LIBOR, respectively. The weighted average nominal rate on the
Company's loan portfolio increased from 7.92% at December 31, 1998 to 8.17% at
December 31, 1999.
Interest Expense
Interest expense for the year ended December 31, 1999 was $17.4
million, compared to $18.6 million for the year ended December 31, 1998, a
decrease of $1.2 million, or 6.5%. The decline in interest expense was primarily
attributable to a reduction in the Company's average cost of deposits, which was
a result of a combination of the change in deposit mix and from the Company's
adopting a less aggressive pricing strategy, particularly for certificates of
deposit, than had been employed in prior periods. The Company's average cost of
interest-bearing deposits declined to 4.29% in 1999, from 4.91% in 1998.
Interest expense on FHLB advances rose from $1.7 million in 1998 to $2.1 million
in 1999, as the impact of greater average balances outstanding more than offset
the effect of a decline in the average rate paid.
Provision For Loan Losses
For the year ended December 31, 1999 the provision for loan losses was
$835 thousand, compared to $692 thousand for the year ended December 31, 1998.
During 1999, the amount and timing of provisions for loan losses were primarily
generated the following key factors:
o the increasing absolute size of the loan portfolio
o the continuing change in mix within the loan portfolio, away from
residential mortgages to other types of lending, particularly construction
loans and mortgages secured by commercial and industrial real estate
o a rise in criticized assets and classified assets from $6.4 million and
$5.4 million, respectively, at December 31, 1998 to $7.9 million and $8.8
million, respectively, at December 31, 1999
o net charge-offs of $113 thousand recorded in 1999, versus net recoveries of
$3 thousand in 1998
83
Construction, commercial real estate, multifamily, and business lending
generally involve a greater risk of loss than do mortgages on single family
residences.
The Company's allowance for loan losses totaled $3.5 million at
December 31, 1999, comprised of $3.3 million in general reserves and $200
thousand in specific reserves. This compares to an allowance of $2.8 million at
December 31, 1998, all but $67 thousand of which was in general reserves. The
allowance represented 0.96% of loans receivable at December 31, 1999, compared
to 0.92% a year earlier.
Non-interest Income
Non-interest income increased by 15.1% to $2.5 million for the year
ended December 31, 1999, compared to $2.2 million for the year ended December
31, 1998, primarily due to:
o a rise in net gains on the sale of mortgage backed and investment
securities from $283 thousand in 1998 to $496 thousand in 1999
o customer service charges increasing from $824 thousand in 1998 to $1.0
million in 1999
o commissions from the sale of non-FDIC insured products rising from $537
thousand in 1998 to $626 thousand in 1999
The Company sold mortgage backed and investment securities in 1999 as a
means of funding expansion in the loan portfolio and in order to moderate the
Company's exposure to increases in general market interest rates. The increase
in customer service charges in 1999 was primarily due to a larger customer base
and a higher number of transaction related customer deposit accounts. The
increase in commission income from sales of noninsured products reflects more
effective cross-selling of these products to the Company's customer base.
Non-Interest Expense
Non-interest expense totaled $11.9 million and $11.1 million,
respectively, for the years ended December 31, 1999 and 1998. Factors
contributing to the rise in 1999 included:
o The operation of the Felton branch for all of 1999, versus eight months in
1998.
o The addition of staff to support the Company's greater volumes of loan
origination, loan servicing, and deposit account transactions
o Increased commission expense associated with greater sales of non-FDIC
insured investment products
o Higher incentive payments associated with the Company's sales and financial
success in 1999
o Greater postage and data and item processing costs driven by an increased
volume of transaction deposit accounts
o Non-recurring costs of $86 thousand associated with a single operating loss
stemming from the operation of non-qualified benefit plans
Provision For Income Taxes
The Company recorded a provision for income taxes of $2.5 million for
the year ended December 31, 1999 compared to $1.2 million during 1998. This rise
was entirely associated with an increase in pre-tax income in 1999 versus 1998,
as the Company's effective tax rate declined modestly in 1999 versus the prior
year.
84
Comparison Of Financial Condition At December 31, 1999 And December 31, 1998
Total assets of the Company were $462.8 million at December 31, 1999,
compared to $454.0 million at December 31, 1998, an increase of $8.8 million, or
1.9%.
Investment securities declined from $19.4 million at December 31, 1998
to $11.5 million at December 31, 1999 due to sales conducted in order to
generate funding for the Company's increasing loan portfolio. The Company's
investment security portfolio at December 31, 1999 was entirely composed of
variable rate trust preferred securities.
Mortgage backed securities declined from $98.1 million at December 31,
1998 to $57.8 million at December 31, 1999. This reduction stemmed from ongoing
principal repayments and $17.6 million in sales. This decrease was accomplished
in conjunction with management's strategy of reducing interest rate risk and
increasing the overall yield of interest-earning assets by selling longer
duration and comparatively lower yielding mortgage backed securities and
reinvesting into shorter duration and higher yielding loans receivable.
Loans receivable held for investment, net, were $360.7 million at
December 31, 1999, compared to $298.8 million at December 31, 1998. This 20.7%
increase stemmed from $173.3 million in credit commitments during 1999,
partially offset by repayments and sales, of which the largest category was
construction loans with $61.7 million in new credit commitments. Construction
loans net of undisbursed loan funds rose from $27.4 million at December 31, 1998
to $55.2 million at December 31, 1999, thereby accounting for 31.0% of the
overall rise in net loans receivable accomplished during 1999.
Commercial and industrial real estate loans increased from $40.0
million at December 31, 1998 to $72.3 million at December 31, 1999 in
conjunction with the Company's business strategy. At December 31, 1999,
residential mortgages continued to be the largest single category of the
Company's net loans receivable held for investment, totaling $168.5 million, or
46.7% of the portfolio. This percentage compares to 60.8% at December 31, 1998.
The Company continued to amortize its intangible assets during 1999,
reducing their balance from $3.6 million at December 31, 1998 to $2.9 million
one year later. This amortization, which is a non-cash charge to operations,
enhances the Bank's regulatory capital ratios, as intangible assets are deducted
from GAAP capital in determining regulatory capital.
During the year ended December 31, 1999, the Company's liabilities
increased by $9.1 million to $422.0 million, from $412.9 million at December 31,
1998. The increase in liabilities was primarily attributable to an increase of
$14.4 million, or 40.9 %, in advances from the FHLB. The increase in advances
was used primarily to fund the growth in loans receivable. None of the Company's
advances at December 31, 1999 were "putable", thereby exposing the Company to
increased funding costs in a rising interest rate environment. Deposits
decreased to $367.4 million at December 31, 1999 from $370.7 million at December
31, 1998, as the Company focused upon changing its deposit mix and reducing its
average cost of deposits in priority over building nominal deposit balances.
Shareholders equity declined $0.3 million from $41.1 million at
December 31, 1998 to $40.8 million one year later. The decrease in equity
occurred despite record earnings by the Company, as, during 1999:
o the Company repurchased 116,500 of its outstanding shares, which decreased
shareholders' equity by $1.7 million
o accumulated other comprehensive income declined by $2.0 million due to
reduced market values for the Company's security portfolios, which in turn
stemmed from the increasing interest rate environment and the relatively
high duration of a significant portion of the mortgage backed securities
portfolio
o the Company paid $530 thousand in cash dividends
o the Company acquired $682 thousand of its stock in conjunction with its
non-qualified stock compensation plans
85
Liquidity
Liquidity is actively managed to ensure sufficient funds are available
to meet the ongoing needs of both the MBBC and the Bank. 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 Bank's primary sources of liquidity are deposits, principal
and interest payments (including prepayments) on its asset portfolios, retained
earnings, FHLB advances, other borrowings, and, to a lesser extent, sales of
loans originated for sale and securities classified as available for sale. The
Bank's primary uses of funds include loan originations, customer drawdowns on
lines of credit and undisbursed construction loan commitments, loan purchases,
customer withdrawals of deposits, interest paid on liabilities, and operating
expenses.
During 2000, the Bank increased its sources of liquidity and funding
by:
o Arranging four federal funds lines of credit with correspondent banks in an
aggregate amount of $25.5 million. Funds under these lines are provided on
an available, as opposed to on a committed, basis.
o Completing agreements to be able to issue "DTC" or publicly traded
certificates of deposit through two large investment banks with significant
national retail client bases.
o Signing PSA agreements with a greater number of approved counterparties to
facilitate the sale of securities under agreements to repurchase.
o Pledging multifamily loans to the FHLB-SF to increase the Bank's borrowing
capacity.
o Participating in the State of California Time Deposit Program.
o Distributing its security collateral to optimize its sources of funding and
the cost of its funding.
The Bank pledges excess collateral to the FHLB in order to have ready
access to additional liquidity. At December 31, 2000, the Bank maintained
available borrowing capacity in excess of $150 million at the FHLB. In addition,
at December 31, 2000, the Bank owned a significant volume of unpledged loans and
securities which could be used for either liquidation or secured borrowings in
order to meet future liquidity requirements.
From time to time, depending upon its asset and liability strategy, the
Bank converts a portion of its residential whole loans into mortgage backed
securities. These conversions provide increased liquidity because the mortgage
backed securities are typically more readily marketable than the underlying
loans and because they can more effectively be used as collateral for
borrowings. The Bank did not securitize any portion of its residential mortgages
during 2000.
The Company's ratio of loans to deposits at December 31, 2000 was
96.1%. To the extent the Company is successful in its strategic plan and further
increases this ratio as a means of increasing average asset yields and the
percentage of total assets comprised of loans, the Bank may need to seek
alternative sources of liquidity and funding. Following the planned systems
conversion in 2001, the Bank intends to pursue the specific pledging of
individual loans to the FHLB (versus blanket lien), thereby increasing the
volume and types of loans eligible as collateral, increasing the financial
efficiency of the pledging, and augmenting the Bank's borrowing capacity.
Throughout 2000, the Bank maintained a regulatory liquidity ratio in
excess of that required by the OTS. The Bank's strategy generally is to maintain
its liquidity ratio slightly above the required minimum in order to maximize its
yield on alternative investments. At December 31, 2000, the Bank maintained $6.4
million in commitments to fund loans. The Bank anticipates that it will have
sufficient funds available to meet these commitments, not all of which will
necessarily be drawn upon.
86
MBBC, as a company separate from the Bank, must provide for its own
liquidity. Substantially all of MBBC's cash inflows are obtained from principal
and interest payments on loans, interest on its security and cash equivalent
positions, repayment of the funds advanced for the ESOP, exercise of vested
stock options, sales of Treasury shares to the Bank for subsequent payment as
director fees, and dividends declared and paid by the Bank. There are statutory
and regulatory provisions that limit the ability of the Bank to pay dividends to
MBBC. As of December 31, 2000, MBBC did not have any commitments for capital
expenditures or to fund loans. As discussed under "Item 1. Business - Capital
Requirements And Capital Categories", the Bank was informed by the OTS during
the first quarter of 2000 that it would be required to maintain its regulatory
capital ratios at levels equal to or above those reported at December 31, 1999.
This additional regulatory capital requirement may limit the Bank's ability to
pay dividends to MBBC until the requirement is terminated by the OTS.
During 2000, MBBC improved its liquidity by:
o Collecting in full on a $5.0 million business term loan that was
non-performing at December 31, 1999.
o Arranging a committed $2.0 million line of credit from a correspondent
bank, secured by 500 thousand shares of Treasury stock
At December 31, 2000, MBBC had cash and cash equivalents of $3.8
million. This figure increased by over $800 thousand in January, 2001 due to the
exercise of vested stock options.
Capital Resources
The Bank's position as a "well capitalized" financial institution under
the PCA regulatory framework is further enhanced by the financial resources
present at the MBBC holding company level. At December 31, 2000, the
consolidated GAAP capital position of the Bank was $40.3 million, while the
consolidated GAAP capital position of the Company was $43.8 million. Note 15 to
the Consolidated Financial Statements provides additional information concerning
the Bank's regulatory capital position, including amounts by which the Bank
exceeds minimum and "well capitalized" thresholds for regulatory capital, and
the amount by which the Bank exceeds the institution specific regulatory capital
requirements established by the OTS in the first quarter of 2000.
Management believes the Bank's regulatory capital position in 2000 will
continue to benefit from three key factors:
o the continued amortization of intangible assets
o the continued amortization of deferred stock compensation
o the Bank's earnings for the year
The potential continued increase in the size of the loan portfolio,
combined with the ongoing planned shift in mix toward construction, income
property, and business lending, may result in the Bank's having higher levels of
nominal and risk weighted assets during 2001, thereby possibly offsetting the
effect of the above three factors upon regulatory capital ratios.
87
The Company has conducted share repurchases since 1995. Through
December 31, 2000, the Company had repurchased a cumulative and gross 1,269,600
shares of its common stock. At December 31, 2000, there were 3,321,210 shares
outstanding. During January 2001, vested stock options representing 91,549
shares were exercised. The Company issued the shares associated with these
options from Treasury stock, thereby increasing the total shares outstanding.
The Board of Directors considers the appropriateness of additional share
repurchases on an ongoing basis.
The Company paid cash dividends of $0.08 per share in 2000 and $0.15
per share in 1999. As previously announced, during mid 2000 the Board of
Directors determined to indefinitely suspend the declaration and payment of cash
dividends. In making this decision, the Board of Directors expressed their
belief that alternative uses of MBBC's capital and liquidity presented more
favorable financial results and impacts upon stockholder value. During the
fourth quarter of 2000, MBBC invested an additional $2.1 million into the Bank
to support the implementation of the strategic plan and the Bank's potential
growth in 2001.
Impact of Inflation And Changing Prices
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with generally accepted accounting
principles ("GAAP"), which requires the measurement of most financial positions
and operating results in terms of historical dollar amounts without considering
the changes in the relative purchasing power of money over time due to
inflation. Unlike industrial companies, the Company's assets and liabilities are
nearly all monetary in nature. Consequently, relative and absolute levels of
interest rates present a greater impact on the Company's performance and
condition than do the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services. The Company's operating costs, however, are subject to
the impact of inflation, particularly in the case of salaries and benefits
costs, which typically constitute almost one-half of the Company's total
non-interest expense. During 2000, relatively low unemployment rates contributed
to increased salary and benefits costs, especially as the Company sought to
continue expanding its business generation while also attracting experienced
financial services industry employees to facilitate and accelerate its strategic
transformation into a community based financial services firm.
Recent Accounting Pronouncements
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 and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. Management
believes that adopting these components of SFAS No. 140 will not have a material
impact on the financial position or results of operations of the Company. SFAS
No. 140 must be applied prospectively. For recognition and reclassification of
collateral and for disclosures about securitizations and collateral, this
Statement was adopted as of December 31, 2000 and did not have a material impact
on the financial position or results of operations of the Company.
88
Item 7a. Quantitative And Qualitative Disclosure Of Market Risk.
The results of operations for financial institutions such as
the Company may be materially and adversely affected by changes in prevailing
economic conditions, including rapid changes in interest rates, declines in real
estate market values, and the monetary and fiscal policies of the federal
government. Interest rate risk ("IRR") and credit risk typically constitute the
two greatest sources of financial exposure for banks and thrifts. For a
discussion of the Company's credit risk, please see "Item 7. Management's
Discussion And Analysis Of Financial Condition And Results Of Operations -
Provision For Loan Losses". The Company utilizes no derivatives to mitigate
either its credit risk or its IRR, instead relying on loan review and adequate
loan loss reserves in the case of credit risk and portfolio management
techniques in the case of IRR. The Company is not significantly exposed to
foreign currency exchange rate risk, commodity price risk, or other market risks
other than interest rate risk.
IRR represents the impact that changes in absolute and relative levels
of general market interest rates might have upon the Company's net interest
income, results of operations, and theoretical liquidation value, also called
net portfolio value ("NPV"). Interest rate changes impact earnings and NPV in
many ways, including effects upon the yields generated by variable rate assets,
the cost of deposits and other sources of funds, the exercise of options
embedded in various financial instruments (especially residential mortgages),
and customer demand for and market supply of different financial assets,
liabilities, and positions.
In order to manage IRR, the Company has established an Asset /
Liability Management Committee ("ALCO"), which includes representatives from
senior management and the Board of Directors. ALCO is responsible for managing
the Company's financial assets and liabilities in a manner which balances
profitability, IRR, and various other risks (e.g. liquidity). ALCO operates
under policies and within risk limits prescribed by and periodically reviewed
and approved by the Board of Directors.
The primary objective of the Company's IRR management program is to
maximize net interest income while controlling IRR exposure to within prudent
levels. Financial institutions are subject to IRR whenever assets and
liabilities mature or reprice at different times (repricing, or gap, risk),
based upon different capital markets indices (basis risk), for different terms
(yield curve risk), or are subject to various embedded options, such as the
right of mortgage borrowers to refinance their loans when general market
interest rates decline. Companies with high concentrations of real estate
lending, such as the Company, are significantly impacted by prepayment rates on
loans, as such prepayments generally return investable funds to the Company at a
time of relatively lower prevailing general market interest rates.
Decisions to control or accept IRR are analyzed with consideration of
the probable occurrence of future interest rate changes. Stated another way, IRR
management encompasses the evaluation of the likely additional return associated
with an incremental change in the IRR profile of the Company. For example,
having liabilities that mature or reprice faster than assets can be beneficial
when interest rates decline, but may be detrimental when interest rates rise.
Assessment of potential changes in market interest rates and the relative
financial impact to earnings and NPV is used by the Company to help quantify and
manage IRR. As with credit risk, the complete elimination of IRR would curtail
the Company's profitability, as the Company generates a return, in part, through
effective risk management.
The Company monitors its interest rate risk using various analytical
methods that include participation in the OTS net portfolio value interest rate
risk modeling. The Company's exposure to IRR as of December 31, 2000 was well
within the limits established by the Board of Directors.
A common, if analytically limited, measure of financial institution IRR
is the institution's "static gap". Static gap is the difference between the
amount of assets and liabilities (adjusted by off balance sheet positions, if
any) which are expected to mature or reprice within a specified period. A static
gap is considered positive when the amount of interest rate sensitive assets
exceeds the amount of interest rate sensitive liabilities in a given time period
or cumulatively through that time period. The converse is true for a negative
static gap.
89
The following table presents the maturity and rate sensitivity of
interest-earning assets and interest-bearing liabilities as of December 31,
2000. The "repricing gap" figures in the table reflect the estimated difference
between the amount of interest-earning assets and interest-bearing liabilities
that are contractually scheduled to mature or reprice (whichever occurs first)
during future periods.
At December 31, 2000
-------------------------------------------------------------------------------------
More Than More Than More Than Non-
3 Months 3 Months 1 Year 3 Years Over Interest
Or Less To 1 Year To 3 Years To 5 Years 5 Years Bearing Total
------- --------- ---------- ---------- ------- ------- -----
(Dollars In Thousands)
Assets
Interest earning cash $ 10,538 $ -- $ -- $ -- $ -- $ -- $ 10,538
equivalents
Investment securities 7,360 -- -- -- -- -- 7,360
Mortgage backed securities 576 407 -- -- 41,967 -- 42,950
Loans receivable, net of LIP 167,795 70,278 48,527 78,537 32,228 -- 397,365
FHLB stock 2,884 -- -- -- -- -- 2,884
-------- -------- -------- ------- -------- -------- --------
Gross interest-earning assets 189,153 70,685 48,527 78,537 74,195 -- 461,097
Less:
Unamortized yield adjustments -- -- -- -- -- (181) (181)
Allowance for loan losses -- -- -- -- -- (5,364) (5,364)
-------- -------- -------- ------- -------- -------- --------
Interest-earning assets 189,153 70,685 48,527 78,537 74,195 (5,545) 455,552
Non-interest-earning assets -- -- -- -- -- 30,638 30,638
-------- -------- -------- ------- -------- -------- --------
Total assets $ 189,153 $ 70,685 $ 48,527 $ 78,537 $ 74,195 $ 25,093 $486,190
========= ======== ======== ======== ======== ======== ========
Liabilities and Equity
NOW accounts $ 41,859 $ -- $ -- $ -- $ -- $ -- $ 41,859
Savings accounts 16,503 -- -- -- -- -- 16,503
Money market accounts 87,651 -- -- -- -- -- 87,651
Certificates of deposit 96,026 109,136 37,699 1,849 -- -- 244,710
-------- -------- -------- ------- -------- -------- --------
Total interest-bearing deposits 242,039 109,136 37,699 1,849 -- -- 390,723
FHLB advances -- -- 25,000 1,782 5,800 -- 32,582
Other borrowings -- -- -- -- -- -- --
-------- -------- -------- ------- -------- -------- --------
Total interest bearing 242,039 109,136 62,699 3,631 5,800 -- 423,305
liabilities
Non-interest bearing liabilities -- -- -- -- -- 19,048 19,048
Shareholders' equity -- -- -- -- -- 43,837 43,837
-------- -------- -------- ------- -------- -------- --------
Total liabilities and equity $242,039 $109,136 $ 62,699 $ 3,631 $ 5,800 $ 62,885 $486,190
======== ======== ======== ======= ======== ======== ========
Periodic repricing gap (52,886) (38,451) (14,172) 74,906 68,395
Cumulative repricing gap (52,886) (91,337) (105,509) (30,603) 37,792
Periodic repricing gap as a %
of interest earning assets (11.6%) (8.5%) (3.1%) 16.5% 15.0%
Cumulative repricing gap as a
% of interest earning (11.6%) (20.1%) (23.2%) (6.7%) 8.3%
assets
Cumulative net interest-earning
assets as a % of cumulative
interest-bearing 78.1% 74.0% 74.5% 92.7% 108.9%
liabilities
90
As presented in the prior table, at December 31, 2000, the Company's
cumulative one year and three year static gaps, based upon contractual repricing
and maturities (i.e. ignoring prepayments and other non-contractual factors)
were (20.1%) and (23.2%), respectively, of total interest earning assets. These
figures suggest that net interest income would increase if general market
interest rates were to decline (and vice-versa), reflecting a "net liability
sensitive" position.
However, static gap analysis such as that presented above fails to
capture material components of IRR, and therefore provides only a limited, point
in time view of the Company's IRR exposure. The assumptions and factors which
are by definition excluded from static gap analysis prepared on a contractual
basis encompass:
o prepayments on assets
o how rate movements and the shape of the Treasury curve, or the LIBOR swap
curve, affect borrower behavior
o that all loans and deposits repricing at a given time will not adjust to
the same degree or by the same magnitude
o that the nature of rate changes for assets and liabilities in the over
one-year category have a greater long term economic impact than those for
shorter term assets and liabilities
o transaction deposit accounts (significant to the Company) do not have
scheduled repricing dates or contractual maturities, and therefore may
respond to interest rate changes differently than other financial
instruments
o potential Company strategic and operating responses to changes in absolute
and relative interest rate levels
o the financial impact of options embedded in various financial instruments
Another measure of IRR, required to be performed by insured depository
institutions regulated by the OTS, is a procedure specified by Thrift Bulletin
13a, "Interest Rate Risk Management". This test measures the impact upon NPV of
an immediate and sustained change in interest rates in 100 basis point
increments. The following table presents the estimated impacts of such changes
in interest rates upon the Company as of December 31, 2000, calculated in
compliance with Thrift Bulletin 13a. However, the results from any cash flow
simulation model are dependent upon a lengthy series of assumptions about
current and future economic, behavioral, and financial conditions, including
many factors over which the Company has no control. These assumptions include,
but are not limited to, prepayment rates on various asset portfolios and decay
rates on core deposits, including savings, checking, and money market accounts.
Because of the uncertainty regarding the accuracy of assumptions utilized and
because such an analytical technique does not contemplate any actions the
Company might undertake in response to changes in interest rates, no assurance
can be provided that the valuations presented in the following table are
representative of what might actually be obtainable. In addition, the following
figures are by definition not indicative of the Company's economic value as a
going concern or of the Company's market value.
Projected Change In
-------------------------------------------
Change In Interest Rates (In Basis Points) NPV Dollars Percent
------------------------------------------ --- ------- -------
(Dollars In Thousands)
+300 $ 52,833 $ (3,553) (6.7%)
+200 54,839 (1,547) (2.8%)
+100 55,777 (609) (1.1%)
Base scenario 56,386 -- --
-100 55,995 (391) (0.7%)
-200 55,386 (1,000) (1.8%)
-300 56,133 (253) (0.4%)
91
The prior table results show that the Company's liquidation value is
relatively balanced in its exposure to both rising and falling interest rates.
The prior table also highlights that the Company's highest theoretical
liquidation value occurs in the base scenario. This position primarily results
from the embedded options, held by borrowers, within most mortgage related
products, as described in the following two paragraphs.
Under rising interest rates, the Company's assets experience a
lengthening of duration relative to the liability side, resulting in a reduction
of NPV. This occurs due to the slower prepayment behavior (under rising rates)
the analysis assumed on mortgage related assets, in conjunction with embedded
options such as periodic and lifetime rate adjustment caps on adjustable rate
loans, all of which work to constrain aggregate asset repricing (relative to
liabilities) and reduce NPV. Such results are directionally consistent with the
static gap analysis presented above.
Under falling interest rates, the Company's assets experience a
shortening of duration relative to the liability side, resulting in a reduction
in NPV. This occurs due to the faster prepayment behavior (under falling rates)
the analysis assumed on mortgage related assets, as borrowers take advantage of
a lower interest rate environment to refinance their loans. This assumed
refinancing provides cash flow into the Company at a time when reinvestment
alternatives present lower rates than the assets being paid off.
A significant portion of the Company's total IRR exposure at December
31, 2000 was concentrated in two asset portfolios: mortgage backed securities
and long term, fixed rate residential mortgages held for investment. Within the
mortgage backed securities portfolio, a relatively small number of securities
represent a disproportional amount of the IRR exposure, particularly a few high
duration CMO's that contain relatively greater maturity extension risk.
The Company has, over the past several years, generally exhibited a
greater degree of interest rate risk than presented in the above table,
particularly in its exposure to rising interest rate scenarios. During 2000, the
Company's IRR exposure has been reduced through a combination of several
strategies, including:
o increasing core deposits, particularly checking accounts, as a means of
increasing the weighted average duration of the Company's funding
o originating and retaining variable-rate loans, including those tied to
relatively responsive capital markets indices such as the 1 Year CMT and
the Wall Street Journal Prime Rate
o selling fixed-rate mortgage-backed securities from the available for sale
portfolio to fund loan growth
o concentrating new security purchases in relatively low duration, high cash
flow, strongly structured CMO's
o selling the vast majority of the new production of fixed rate, residential
mortgages into the secondary market
o continuing to diversify the loan portfolio away from its historic
concentration in residential mortgages towards increased income property
lending, which typically generates more interest sensitive, and higher
yielding, assets
Despite the Company's IRR management program and the initiatives
detailed above, due to the multiple factors which influence the Company's
exposure to IRR, many of which are beyond the control of the Company, there can
be no assurance that the Company's earnings or economic value will be maintained
in future periods, nor that the Company will be successful in continuing to
maintain a relatively balanced IRR exposure.
92
Item 8. Financial Statements And Supplementary Data.
Index To Consolidated Financial Statements
Page(s)
-------
Independent Auditors' Report 94
Consolidated Statements Of Financial Condition As Of December 31, 2000 and 1999 95
Consolidated Statements Of Operations For The Years Ended
December 31, 2000, 1999, and 1998 96
Consolidated Statements Of Changes In Stockholders' Equity For The Years Ended 97 - 99
December 31, 2000, 1999, and 1998
Consolidated Statements Of Cash Flows For The Years Ended
December 31, 2000, 1999, and 1998 100 - 101
Notes To Consolidated Financial Statements 102 - 143
93
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Monterey Bay Bancorp, Inc.
Watsonville, California
We have audited the accompanying consolidated statements of financial condition
of Monterey Bay Bancorp, Inc. and subsidiary (the "Company") as of December 31,
2000 and 1999, and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in the period
ended December 31, 2000. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Monterey Bay Bancorp, Inc. and
subsidiary as of December 31, 2000 and 1999, and the results of their operations
and their cash flows, for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
San Francisco, California
February 8, 2001
94
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2000 AND 1999
(Dollars In Thousands, Except Per Share Amounts)
-------------------------------------------------------------------------------------------------------------------
December 31,
-------------------------------
2000 1999
---- ----
ASSETS
Cash and cash equivalents $ 25,159 $ 12,833
Securities available for sale, at estimated fair value:
Investment securities 7,360 11,463
Mortgage backed securities 42,950 57,716
Securities held to maturity, at amortized cost:
Mortgage backed securities (fair value 1999: $60) -- 60
Loans receivable held for investment (net of allowances for loan losses of
$5,364 at December 31, 2000 and $3,502 at December 31, 1999) 391,820 360,686
Investment in capital stock of the Federal Home Loan Bank, at cost 2,884 3,213
Accrued interest receivable 2,901 2,688
Premises and equipment, net 7,375 7,042
Core deposit premiums and other intangible assets, net 2,195 2,918
Real estate acquired via foreclosure, net -- 96
Other assets 3,546 4,112
-------- --------
TOTAL ASSETS $486,190 $462,827
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $407,788 $367,402
Advances from the Federal Home Loan Bank 32,582 49,582
Securities sold under agreements to repurchase -- 2,410
Accounts payable and other liabilities 1,983 2,630
-------- --------
Total liabilities 442,353 422,024
-------- --------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Preferred stock, $0.01 par value, 2,000,000 authorized; none issued) Common
stock, $0.01 par value, 9,000,000 shares authorized;
4,492,085 issued at December 31, 2000 and December 31, 1999;
3,321,210 outstanding at December 31, 2000 and
3,422,637 outstanding at December 31, 1999 45 45
Additional paid-in capital 28,278 28,237
Retained earnings, substantially restricted 32,722 30,473
Unallocated ESOP shares (920) (1,150)
Treasury shares designated for compensation plans, at cost (35,079 shares
at December 31, 2000 and 126,330 shares at December 31, 1999) (338) (1,376)
Treasury stock, at cost (1,170,875 shares at December 31, 2000 and
1,069,448 shares at December 31, 1999) (15,326) (14,257)
Accumulated other comprehensive loss, net of taxes (624) (1,169)
-------- --------
Total stockholders' equity 43,837 40,803
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $486,190 $462,827
======== ========
See Notes to Consolidated Financial Statements
95
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(Dollars In Thousands, Except Per Share Amounts)
-------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
-----------------------------------------------
INTEREST AND DIVIDEND INCOME: 2000 1999 1998
---- ---- ----
Loans receivable $ 32,556 $ 27,218 $ 20,882
Mortgage backed securities 3,755 4,884 6,911
Investment securities and cash equivalents 1,446 1,315 3,118
------ ------ ------
Total interest and dividend income 37,757 33,417 30,911
------ ------ ------
INTEREST EXPENSE:
Deposit accounts 17,231 15,130 16,628
Federal Home Loan Bank advances and other borrowings 2,546 2,258 1,960
------ ------ ------
Total interest expense 19,777 17,388 18,588
------ ------ ------
NET INTEREST INCOME BEFORE PROVISION
FOR LOAN LOSSES 17,980 16,029 12,323
PROVISION FOR LOAN LOSSES 2,175 835 692
------ ------ ------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES 15,805 15,194 11,631
------ ------ ------
NON-INTEREST INCOME:
(Losses) gains on sale of mortgage backed securities
and investment securities, net (55) 496 283
Commissions from sales of noninsured products 676 626 537
Customer service charges 1,306 1,032 824
Income from loan servicing 118 84 227
Other income 295 267 306
------ ------ ------
Total 2,340 2,505 2,177
------ ------ ------
NON-INTEREST EXPENSE:
Compensation and employee benefits 6,569 5,648 5,310
Occupancy and equipment 1,278 1,173 1,112
Deposit insurance premiums 188 164 139
Data processing fees 1,142 990 833
Legal and accounting expenses 661 423 523
Supplies, postage, telephone, and office expenses 679 601 561
Advertising and promotion 361 310 359
Amortization of intangible assets 723 712 695
Other expenses 2,075 1,866 1,612
------ ------ ------
Total 13,676 11,887 11,144
------ ------ ------
INCOME BEFORE INCOME TAXES 4,469 5,812 2,664
PROVISION FOR INCOME TAXES 1,946 2,511 1,228
------ ------ ------
NET INCOME $2,523 $3,301 $1,436
====== ====== ======
EARNINGS PER SHARE:
BASIC EARNINGS PER SHARE $ 0.81 $ 1.02 $ 0.41
====== ====== ======
DILUTED EARNINGS PER SHARE $ 0.81 $ 0.99 $ 0.39
====== ====== ======
See Notes to Consolidated Financial Statements
96
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars And Shares In Thousands)
-------------------------------------------------------------------------------------------------------------------
Shares
Desig-
nated Accum-
For ulated
Addi- Unal- Com- Other
tional Re- located pen- Compre-
Common Stock Paid-In tained ESOP sation Treasury hensive
------------
Shares Amount Capital Earnings Shares Plans Stock Income Total
------ ------ ------- -------- ------ ----- ----- ------ -----
Balance At January 1, 1998 4,037 $45 $ 27,347 $ 26,729 $(1,610) $(1,210) $(4,642) $138 $ 46,797
Purchase of treasury stock (567) (8,624) (8,624)
Options exercised using treasury 35 50 346 396
stock
Dividends paid ($0.12 per share) (463) (463)
Amortization of stock
compensation 429 230 259 918
Comprehensive income:
Net income 1,436 1,436
Other comprehensive income:
Change in net
unrealized gain
on securities
available for
sale, net of taxes 822 822
of $583
Reclassification
adjustment for
gains on
securities available
for sale included
in income,
net of taxes of $(118) (166) (166)
-----
Other comprehensive income, net 656
---
Total comprehensive income 2,092
-----
----- --- -------- -------- ------- ----- -------- ---- --------
Balance at December 31, 1998 3,505 $45 $ 27,826 $ 27,702 $(1,380) $(951) $(12,920) $794 $ 41,116
----- --- -------- -------- ------- ----- -------- ---- --------
See Notes to Consolidated Financial Statements
97
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars And Shares In Thousands)
------------------------------------------------------------------------------------------------------------------------
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
------ ------ ------- -------- ------ ----- ----- ------ -----
Balance At December 31, 1998 3,505 $45 $ 27,826 $ 27,702 $(1,380) $(951) $(12,920) $794 $ 41,116
Purchase of treasury stock (116) (1,668) (1,668)
Options exercised using treasury 34 60 331 391
stock
Dividends paid ($0.15 per share) (530) (530)
Amortization of stock
compensation 351 230 257 838
Purchase of stock for stock
compensation plans (682) (682)
Comprehensive income:
Net income 3,301 3,301
Other comprehensive income:
Change in net
unrealized gain /
(loss) on
securities available
for sale, net of
taxes
of $(1,168) (1,671) (1,671)
Reclassification
adjustment for
gains on
securities available
for sale included
in income,
net of taxes of $(204) (292) (292)
-----
Other comprehensive income, net (1,963)
-------
Total comprehensive income 1,338
-----
----- --- -------- -------- ------- ----- -------- ---- --------
Balance at December 31, 1999 3,423 $45 $ 28,237 $ 30,473 $(1,150) $ (1,376) $(14,257) $(1,169) $ 40,803
----- --- -------- -------- ------- ----- -------- ---- --------
See Notes to Consolidated Financial Statements
98
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Continued)
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(Dollars And Shares In Thousands)
-------------------------------------------------------------------------------------------------------------------
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
------ ------ ------- -------- ------ ----- ----- ------ -----
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)
Cash dividends paid ($0.08 per (274) (274)
share)
Director fees paid using treasury 18 9 182 191
stock
Amortization of stock
compensation 32 230 822 1,084
Sale of stock for stock
compensation
plans 216 216
Comprehensive income:
Net income 2,523 2,523
Other comprehensive income:
Change in net
unrealized gain /
(loss) on
securities available
for sale, net of 513 513
taxes of $359
Reclassification
adjustment for
losses on
securities available
for sale included
in income,
net of taxes of $23 32 32
--
Other comprehensive income, net 545
---
Total comprehensive income 3,068
-----
----- --- -------- -------- ------- ----- -------- ---- --------
Balance at December 31, 2000 3,321 $45 $ 28,278 $ 32,722 $ (920) $ (338) $(15,326) $(624) $ 43,837
===== === ======== ======== ======= ===== ======== ==== ========
See Notes to Consolidated Financial Statements
99
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(Dollars In Thousands)
-------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES:
Net income $ 2,523 $ 3,301 $ 1,436
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization of premises and equipment 441 472 456
Amortization of intangible assets 723 712 695
Amortization of purchase premiums, net of accretion of discounts 104 516 953
Amortization of deferred loans fees (250) (293) (233)
Provision for loan losses 2,175 835 692
Provision for real estate losses -- 12 --
Federal Home Loan Bank stock dividends (214) (174) (202)
Gross ESOP expense before dividends received on unallocated shares 334 486 555
Compensation expense related to stock compensation plans 296 297 326
Loss (gain) on sale of investment and mortgage-backed securities 55 (496) (283)
(Gain) loss on the sale of loans held for sale (22) (54) (82)
Loss (gain) on sale of real estate acquired via foreclosure 5 (18) (12)
(Gain) loss on sale of fixed assets -- 2 (23)
Origination of loans held for sale (2,652) (6,693) (15,886)
Proceeds from sales of loans held for sale 2,674 8,923 14,305
Deferred income taxes (595) (743) (279)
(Increase) decrease in accrued interest receivable (213) (151) (197)
Decrease (increase) in other assets 566 (1,285) 1,380
(Decrease) increase in accounts payable and other liabilities (647) 49 459
Other, net (1,280) 1,526 (2,398)
------- ------- -------
Net cash provided by operating activities 4,023 7,224 1,662
------- ------- -------
INVESTING ACTIVITIES:
Net increase in loans held for investment (31,134) (61,911) (35,025)
Purchases of investment securities available for sale -- (7) (34,643)
Proceeds from maturities of investment securities -- -- 26,344
Proceeds from sales of investment securities available for sale 3,730 8,005 29,976
Purchases of mortgage backed securities available for sale (26,818) -- (102,981)
Principal repayments on mortgage backed securities available for sale 18,422 19,645 27,913
Proceeds from maturities of mortgage backed securities held to maturity 60 -- --
Proceeds from sales of mortgage backed securities available for sale 24,425 17,643 48,036
Redemptions (purchases) of FHLB stock, net 543 -- 545
Purchases of premises and equipment (774) (1,200) (2,352)
Proceeds from the sale of premises and equipment -- -- 419
------- ------- -------
Net cash used in investing activities (11,546) (17,825) (41,768)
------- ------- -------
See Notes to Consolidated Financial Statements
100
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
(Dollars In Thousands)
--------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
---------------------------------------
2000 1999 1998
---- ---- ----
FINANCING ACTIVITIES:
Net increase (decrease) in deposits 40,386 (3,275) 50,118
(Repayments) proceeds of FHLB advances, net (17,000) 14,400 2,900
(Repayments) proceeds of securities sold under agreements to
repurchase, net (2,410) (2,080) (710)
Cash dividends paid to stockholders (274) (530) (463)
Purchases of treasury stock (1,251) (1,668) (8,624)
Sales of treasury stock 182 318 322
Sales (purchases) of stock for stock compensation plans, net 216 (682) --
-------- -------- --------
Net cash provided by financing activities 19,849 6,483 43,543
-------- -------- --------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 12,326 (4,118) 3,437
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 12,833 16,951 13,514
-------- -------- --------
CASH & CASH EQUIVALENTS AT END OF YEAR $ 25,159 $ 12,833 $ 16,951
======== ======== ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for:
Interest on deposits and borrowings 19,655 17,380 18,957
Income taxes 3,060 3,163 1,037
SUPPLEMENTAL DISCLOSURES OF NON CASH
INVESTING AND FINANCING ACTIVITIES
Loans transferred to held for investment, at market value 385 171 --
Mortgage backed securities acquired in exchange for securitized
loans, net of deferred fees -- -- 47,703
Real estate acquired in settlement of loans -- 376 299
See Notes to Consolidated Financial Statements
101
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization And Nature Of Operations
Monterey Bay Bancorp, Inc. ("MBBC") is a unitary savings and loan holding
company incorporated in 1994 under the laws of the state of Delaware. MBBC
operates as the holding company for its wholly owned subsidiary Monterey Bay
Bank (the "Bank"), a federally chartered savings and loan association. The Bank
has one wholly owned subsidiary, Portola Investment Corporation ("Portola"),
which sells various non-FDIC insured investment products and provides trustee
services to the Bank. Portola operates within the Bank's facilities in
segregated areas. MBBC, the Bank, and Portola are hereinafter collectively
referred to as the "Company".
The Company's primary business is attracting checking, money market, savings,
and certificate of deposit accounts through its branch facilities and various
electronic means, and investing such deposits and other available funds in
various types of loans, including real estate mortgages, business loans,
construction loans, and consumer loans. The Company also provides a range of fee
based services. The Bank's deposit gathering and lending markets are primarily
concentrated in the communities surrounding its full service offices located in
Santa Cruz, Northern Monterey, and Southern Santa Clara Counties, in California.
At December 31, 2000, the Bank maintained eight full service branch offices and
eleven ATM's, two of which were stand-alone.
Summary Of Significant Accounting Policies
Basis of Consolidation - The consolidated financial statements include the
accounts of Monterey Bay Bancorp, Inc. and its wholly-owned subsidiary, Monterey
Bay Bank, and the Bank's wholly-owned subsidiary, Portola Investment
Corporation. All significant inter-company transactions and balances are
eliminated in consolidation.
Financial Statement Presentation And Use Of Estimates - The financial statements
have been prepared and presented in accordance with accounting principles
generally accepted in the United States of America, or "GAAP" and general
practices within the banking and savings and loan industry. The preparation of
the financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, and contingent assets and liabilities, and disclosure of contingent
assets and liabilities, as of the balance sheet dates and revenues and expenses
for the reporting periods. Actual results could differ from those estimates.
Cash And Cash Equivalents - Cash and cash equivalents include cash on hand,
amounts due from banks, federal funds sold, investments in money market mutual
funds, securities purchased under agreements to resell with original maturities
of three months of less, certificates of deposit with original maturities of
three months or less, and highly liquid debt instruments purchased with
remaining terms to maturity of three months or less from the date of
acquisition.
102
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Securities Purchased Under Agreements To Resell - The amounts advanced under
these agreements represent short-term loans and are accounted for as a secured
lending and carried at cost as an asset in the Consolidated Statement of
Financial Condition. The Company may sell, loan, or otherwise dispose of such
securities to other parties in the normal course of operations. The identical or
substantially the same securities are to be resold at the maturity of the
agreements. The Company usually enters into these agreements with terms to
maturity of three months or less.
Securities Available For Sale - Securities to be held for indefinite periods of
time, including securities that management intends to use as part of its asset /
liability management strategy that may be sold in response to changes in
interest rates, loan prepayments, or other factors, are classified as available
for sale. Securities available for sale are carried at estimated fair value.
Gains or losses on the sale of securities are determined using the specific
identification method. Premiums and discounts are recognized in interest income
using the interest method over the period to contractual maturity. Unrealized
holding gains or losses, net of tax, for securities available for sale are
reported as a component of other comprehensive income.
Securities Held To Maturity - Securities held to maturity are recorded at
amortized cost, with any premium or discount recognized in interest income using
the interest method over the period to contractual maturity. The Company has the
ability and management has the positive intent to hold these securities to
maturity. The Company designates securities as held to maturity or available for
sale upon acquisition.
A decline in the fair value of individual securities held to maturity and
securities available for sale below their cost that is deemed other than
temporary would be recognized through a write down of the investment securities
to their fair value by a charge to earnings as a realized loss.
For the years ended December 31, 2000 and 1999, the Company did not have any
securities classified as trading.
Mortgage Backed Securities - The Company's mortgage backed securities include
collateralized mortgage obligations ("CMO's") issued by both federal Agencies
and private entities ("private label CMO's"). Private label CMO's expose the
Company to credit and liquidity risks not typically present in federal Agency
issued securities.
Loans Held For Sale - Loans held for sale are carried at the lower of aggregate
cost, including qualified loan origination costs and related fees, or estimated
fair value, grouped by category. Unrealized losses by category are recognized
via a charge against operations. Realized gains and losses on loans held for
sale are accounted for under the specific identification method. Qualified loan
origination fees and costs are retained and not amortized during the period the
loans are held for sale. Transfers of loans held for sale to the held for
investment portfolio are recorded at the lower of cost or estimated fair value
on the transfer date. While the Company had no loans held for sale at December
31, 2000 and 1999, it did originate and hold loans for sale during each of the
three years ended December 31, 2000, 1999, and 1998.
103
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Loans Receivable Held For Investment - Loans receivable held for investment are
stated at unpaid principal balances less undisbursed loan funds for
constructions loans, unearned discounts, deferred loan origination fees, and
allowances for estimated loan losses, plus unamortized premiums (including
purchase premiums) and qualified deferred loan origination costs. These loans
are not adjusted to the lower of cost or market because it is management's
intention, and the Company has the ability, to hold these loans to maturity.
Interest Income On Loans - Interest income on loans is accrued and credited to
income as it is earned. However, interest is generally not accrued on loans over
90 days contractually delinquent. In addition, interest is not accrued on loans
that are less than 90 days contractually delinquent, but where management has
identified concern over future collection. Accrued interest income is reversed
when a loan is placed on non-accrual status. Discounts, premiums, and net
deferred loan origination fees are amortized into interest income over the
contractual lives of the related loans using a procedure approximating the
interest method, except when a loan is in non-accrual status. When a loan pays
off or is sold, any unamortized balance of any related premiums, discounts, and
qualified net deferred loan origination fees is recognized in income. Payments
received on non-accrual loans are allocated between principal and interest based
upon the terms of the underlying note.
Sales Of Loans - Gains or losses resulting from sales of loans are recorded at
the time of sale and are determined by the difference between (i) the net sales
proceeds plus the estimated fair value of any interests retained in the loans,
such as loan servicing rights, and (ii) the carrying value of the assets sold.
The difference between the adjusted carrying value of the interests retained and
the face amount of the interests retained is amortized to operations over the
estimated remaining life of the associated loans using a method that
approximates the interest method. The fair value of any interests retained is
periodically evaluated, with any shortfall in estimated fair value versus
carrying amount being charged against operations.
Securitization Of Loans - Effective January 1, 1999, the Company adopted SFAS
No. 134, Accounting For Mortgage-Backed Securities Retained After The
Securitization Of Mortgage Loans Held for Sale By A Mortgage Banking Enterprise.
SFAS No. 134 permits companies that hold mortgage loans for sale to classify
mortgage-backed securities retained in a securitization of such loans as either
held-to-maturity, available for sale, or trading based on the Company's capacity
and management's intent, unless the Company has already committed to sell the
security before or during the securitization process. This guidance is
consistent with the treatment established for investments covered by SFAS 115,
Accounting For Certain Investments In Debt And Equity Securities.
Troubled Debt Restructured - A loan is considered "troubled debt restructured"
when the Company provides the borrower certain concessions that it would not
normally consider. The concessions are provided with the objective of maximizing
the recovery of the Company's investment. Troubled debt restructured includes
situations in which the Company accepts a note (secured or unsecured) from a
third party in payment of its receivable from the borrower, other assets in
payment of the loan, an equity interest in the borrower or its assets in lieu of
the Company's receivable, or a modification of the terms of the debt including,
but not limited to, (i) a reduction in the stated interest rate to below market
rates, (ii) an extension of maturity at an interest rate or other terms below
market, (iii) a reduction in the face amount of the debt, and / or (iv) a
reduction in the accrued interest receivable.
104
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Impaired Loans - The Company accounts for impaired loans in accordance with SFAS
No. 114, Accounting By Creditors For Impairment Of A Loan, as amended by SFAS
No. 118, Accounting By Creditors For Impairment Of A Loan - Income Recognition
And Disclosures. SFAS No. 114 generally requires all creditors to account for
impaired loans, except those loans that are accounted for at fair value or at
the lower of cost or fair value, at the present value of the expected future
cash flows discounted at the loan's effective interest rate at the date of
initial impairment, or, as a practical expedient, at the loan's observable
market price or fair value of the collateral if the loan is collateral
dependent. SFAS No. 114 indicates that a creditor should evaluate the
collectibility of both contractual interest and contractual principal when
assessing the need for a loss accrual. Interest income received on impaired
non-accrual loans is recognized on a cash basis. Interest income on other
impaired loans is recognized on an accrual basis.
The Company considers a loan to be impaired when it is deemed probable by
management that the Company will be unable to collect all contractual interest
and contractual principal payments in accordance with the terms of the original
loan agreement. However, when determining whether a loan is impaired, management
also considers the current ratio of the loan's balance to collateral value,
other sources of repayment, and the borrower's present financial position. In
evaluating whether a loan is considered impaired, insignificant delays or
shortfalls in payments, in the absence of other facts and circumstances, would
not alone lead to the conclusion that a loan is impaired. The Company includes
among impaired loans all loans that (i) are contractually delinquent 90 days or
more, (ii) meet the definition of a troubled debt restructuring, (iii) are
classified in part or in whole as either doubtful or loss, (iv) the Company has
suspended accrual of interest, and (v) have a specific loss allowance applied to
adjust the loan to fair value.
The Company applies the measurement provisions of SFAS No. 114 to all loans in
its portfolio, and utilizes the cash basis method of accounting for payments
received on impaired loans.
Allowances For Loan Losses - Specific valuation allowances are established for
loans that are deemed impaired if the fair value of the loan or the collateral
is estimated to be less than the Company's investment in the loan. In developing
specific valuation allowances, the Company considers (i) the estimated cash
payments expected to be received by the Company, (ii) the estimated net sales
proceeds from the loan or its collateral, (iii) cost of refurbishment, (iv)
certain operating income and expenses, and (v) the costs of acquiring and
holding the collateral. The Company charges off a portion of an impaired loan
against the specific valuation allowance when that portion is deemed probable to
not be recoverable.
General valuation allowances are maintained at levels that management believes
adequate to cover inherent losses in the loan portfolio and are continually
reviewed and adjusted. The Company adheres to an internal asset review system
and an established loan loss reserve methodology. Management evaluates factors
such as the prevailing and anticipated economic conditions, including the
duration of the current business cycle, seasoning of the loan portfolio,
historic loss experiences, composition of the loan portfolio by collateral and
product types, levels and trends of criticized and classified loans, and loan
delinquencies in assessing overall valuation allowance levels to be maintained.
While management uses currently available information to provide for estimated
losses on loans, additions to or recoveries from the general valuation allowance
may be necessary based upon a number of factors including, but not limited to,
changes in economic conditions and credit quality trends, particularly in the
real estate market, borrower financial status, the regulatory environment, real
estate values, and loan portfolio size and composition. Many of these factors
are beyond the Company's control and, accordingly, periodic provisions for
estimated loan losses may vary from time to time. In addition, various
regulatory agencies, as an integral part of the examination process,
periodically review the Bank's allowance for estimated loan losses. Such
regulatory agencies may develop judgements different from those of management
and may require the Bank to recognize additional provisions against operations.
105
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Real Estate Owned - Real estate acquired through foreclosure is initially
recorded at the lower of amortized cost or fair value less estimated costs to
sell. If the fair value less estimated costs to sell is less than amortized
cost, a charge against the allowance for loan losses is recorded at property
acquisition. Declines in property fair value less estimated costs to sell
subsequent to acquisition are charged to operations. Expenses incurred in
conjunction with the maintenance of real estate acquired through foreclosure are
charged to operations.
Recognition of gains on the sale of real estate is dependent upon the
transaction meeting certain criteria relating to the nature of the property and
the terms of the sale and potential financing. Losses on disposition of real
estate, including expenses incurred in connection with the disposition, are
charged to operations.
Allowances For Real Estate Losses - Allowances for real estate acquired by
foreclosure are established based upon management's estimates of fair value less
costs to sell. Such estimates may change from time to time based upon a number
of factors, including, but not limited to, general economic conditions and the
level of local demand for the specific properties. The Bank's allowances for
real estate assets are also subject to review and adjustment by various
regulatory agencies.
Premises And Equipment - Land is carried at cost. Other premises and equipment
are stated at cost, less accumulated depreciation and amortization. The
Company's policy is to depreciate or amortize premises and equipment on a
straight-line basis over the estimated useful lives of the various assets, and
to amortize leasehold improvements over the shorter of the asset's useful life
or the term of the lease. The useful lives for the principal classes of assets
are:
Asset Useful Life
Buildings 30 to 40 years
Leasehold improvements Shorter of term on lease or life of improvement
Furniture and equipment 3 to 10 years
The cost of repairs and maintenance is charged to operations as incurred,
whereas expenditures that improve or extend the service lives of assets are
capitalized.
Impairment Of Long-Lived Assets - The Company periodically evaluates the
recoverability of long-lived assets in accordance with SFAS No. 121, Accounting
For Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of.
Long-lived assets and certain identifiable intangibles to be held and used are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be recoverable. Determination of
recoverability is based on an estimate of undiscounted future cash flows
resulting from the use of the asset and its eventual disposition. Measurement of
an impairment loss for long-lived assets and identifiable intangibles that
management expects to hold and use are based on the fair value of the asset.
Long-lived assets and certain identifiable intangibles to be disposed of are
reported at the lower of carrying amount or fair value less estimated cost to
sell.
106
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Core Deposit Intangibles - These assets arise from the acquisition of deposits
and are amortized on a straight-line basis over the estimated life of the
deposit base acquired, generally seven years. The Company periodically evaluates
the periods of amortization to determine whether later events and circumstances
warrant revised estimates.
Securities Sold Under Agreements To Repurchase - The Company enters into sales
of securities under agreements to repurchase with selected dealers and banks.
Such agreements are treated as financings. The obligations to repurchase
securities sold are reflected as a liability in the Consolidated Statements of
Financial Condition. The securities underlying the agreements are delivered to
the dealer or bank with whom each transaction is executed. The dealers or banks,
who may sell, loan, or otherwise dispose of such securities to other parties in
the normal course of their operations, agree to resell the Company either the
identical or substantially the same securities at the maturities of the
agreements. The Company retains the right of substitution of collateral
throughout the terms of the agreements. The Company usually enters into these
agreements with terms to maturity of three months or less.
Stock Based Compensation - The Company accounts for its stock option and stock
award plans under SFAS No. 123, Accounting For Stock-Based Compensation. This
Statement establishes financial accounting and reporting standards for
stock-based compensation plans. These standards include the recognition of
compensation expense over the vesting period of the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS. No 123 also
permits entities to continue to apply the provisions of APB No. 25, Accounting
For Stock Issued To Employees, and provide pro forma net earnings (loss) and pro
forma net earnings (loss) per share disclosures as if the fair value based
method defined in SFAS No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB No. 25, using the intrinsic value method
of accounting for stock based compensation, and provide the pro forma disclosure
requirements of SFAS No. 123 in the footnotes to its audited financial
statements.
Employee Stock Ownership Plan ("ESOP") - The Company accounts for shares
acquired by its ESOP in accordance with the guidelines established by the
American Institute of Certified Public Accountants Statement of Position 93-6,
Employers' Accounting for Employee Stock Ownership Plans ("SOP 93-6"). Under SOP
93-6, the Company recognizes compensation cost equal to the fair value of the
ESOP shares during the periods in which they become committed to be released. To
the extent that the fair value of the Company's ESOP shares committed to be
released differ from the cost of such shares, the differential is charged or
credited to equity. Employers with internally leveraged ESOPs such as the
Company do not report the loan receivable from the ESOP as an asset and do not
report the ESOP debt from the employer as a liability. The Company's ESOP is a
tax-qualified plan. Non-vested shares owned by the ESOP are accounted for via a
contra-equity account based upon historic cost. ESOP shares that have not been
committed to be released (uncommitted shares) are excluded from outstanding
shares on a weighted average basis for earnings per share calculations.
Income Taxes - The Company accounts for income taxes under SFAS No. 109,
Accounting For Income Taxes, which follows the liability method. Under this
method, deferred tax assets and deferred tax liabilities are recognized for
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of certain existing assets and liabilities,
and their respective bases for Federal income and California franchise taxes.
Deferred tax assets and liabilities are calculated by applying current effective
tax rates against future deductible or taxable amounts. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in operations
in the period that includes the enactment date. Future tax benefits attributable
to temporary differences are recognized to the extent the realization of such
benefits is more likely than not.
Commissions From Sales Of Non-FDIC Insured Products - The Company realizes
commissions from the sales of various non-FDIC insured products, including
mutual funds, annuities, and specific securities, as a result of business
conducted through Portola. Commission income is typically based upon a
percentage of sales. Periodic commission income varies based on the volume and
mix of investment products sold, and is recognized on an accrual basis for
certain transactions where the amount is determinable as earned, and on a cash
basis for other transactions.
107
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Stock Split - In July, 1998, the Company authorized a five for four stock split
thereby increasing the number of issued and outstanding shares. All references
in the accompanying financial statements to the number of common shares and per
share amounts have been restated to reflect the stock split.
Earnings Per Share - The Company follows SFAS No. 128, Earnings Per Share, in
calculating basic and diluted earnings per share. Basic earnings per share
excludes dilution and is computed by dividing net income available to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that
could occur if contracts to issue common stock or securities convertible into
common stock were exercised or converted. Dilution resulting from the Company's
stock option and stock award plans is calculated using the treasury stock
method.
Comprehensive Income - Comprehensive income includes (i) net income and (ii)
other comprehensive income. The Company's only source of other comprehensive
income is derived from unrealized gains and losses on securities available for
sale. The Company displays comprehensive income within the Consolidated
Statements of Changes in Stockholders' Equity. Reclassification adjustments
result from gains or losses on securities that were realized and included in net
income of the current period that also had been included in other comprehensive
income as unrealized holding gains or losses in the period in which they arose.
Such adjustments are excluded from current period comprehensive income in order
to avoid double counting.
Segment Disclosure - The Company operates a single line of business (financial
services) with no customer accounting for more than 10.0% of its revenue and
manages its operation under a unified management and reporting structure.
Therefore, no additional segment disclosures are required.
Derivative Instruments and Hedging Activities - SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133, as amended, establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. Under SFAS
No. 133, as amended, certain contracts that were not formerly considered
derivatives may now meet the definition of a derivative. The Company will adopt
SFAS No. 133 effective January 1, 2001. Management believes the adoption of SFAS
No. 133 will not have a significant impact upon the financial position, results
of operations, or cash flows of the Company.
Reclassifications - Certain reclassifications have been made to prior period
financial statements to conform them to the current year presentation.
Recent Accounting Developments
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 and servicing of financial assets and extinguishments of liabilities
occurring after March 31, 2001. Management believes that adopting these
components of SFAS No. 140 will not have a material impact on the financial
position or results of operations of the Company. SFAS No. 140 must be applied
prospectively. For recognition and reclassification of collateral and for
disclosures about securitizations and collateral, this Statement was adopted as
of December 31, 2000 and did not have a material impact on the financial
position or results of operations of the Company.
108
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
2. CASH AND CASH EQUIVALENTS
Cash and cash equivalents are summarized as follows:
December 31,
-------------------------------------
2000 1999
---- ----
(Dollars In Thousands)
Cash on hand $ 1,483 $ 3,667
Due from banks 13,544 9,066
Certificates of deposit 187 --
Federal funds sold 6,735 --
Money market mutual funds 3,210 100
-------- --------
$ 25,159 $ 12,833
======== ========
3. INVESTMENT SECURITIES
The amortized cost and estimated fair value of investment securities are
presented below. All securities held are publicly traded.
December 31, 2000
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars In Thousands)
Available for sale
Corporate trust preferreds $ 7,696 $ -- $ (336) $ 7,360
======= ==== ======= =======
December 31, 1999
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars In Thousands)
Available for sale
Corporate trust preferreds $ 11,456 $ 50 $ (43) $ 11,463
======== ==== ====== ========
The following table shows the amortized cost, estimated fair value, and weighted
average yield of the Company's investment securities by year of contractual
maturity. Actual maturities may differ from contractual maturities due to rights
of issuers to call obligations.
December 31, 2000
-----------------------------------------------------------------
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
Available for sale (Dollars In Thousands)
Corporate trust preferreds
Due in 2011 and thereafter $ 7,696 $ 7,360 7.49%
======= ======= =====
109
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Proceeds from and realized gains and losses on sales of investment securities
available for sale are summarized as follows:
Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Proceeds from sales $ 3,730 $ 8,005 $ 29,976
Gross realized gains on sales -- 518 48
Gross realized losses on sales 44 -- 70
4. MORTGAGE BACKED SECURITIES
The amortized cost and estimated fair value of mortgage backed securities are
presented below. All securities held are publicly traded.
December 31, 2000
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars In Thousands)
Available for sale
FHLMC pass-through certificates $ 1,090 $ 13 $ -- $ 1,103
FNMA pass-through certificates 4,220 30 (2) 4,248
GNMA pass-through certificates 1,060 -- (11) 1,049
CMOs:
Agency issuance 19,095 5 (266) 18,834
Non Agency issuance 18,210 4 (498) 17,716
------- ----- ------ -------
$43,675 $ 52 $ (777) $42,950
======= ===== ======= =======
December 31, 1999
---------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(Dollars In Thousands)
Available for sale
FHLMC pass-through certificates $ 1,930 $ -- $ (36) $ 1,894
FNMA pass-through certificates 25,132 95 (379) 24,848
GNMA pass-through certificates 4,531 -- (96) 4,435
CMOs:
Agency issuance 11,152 -- (974) 10,178
Non Agency issuance 16,965 -- (604) 16,361
------- ----- ------ -------
$59,710 $ 95 $(2,089) $57,716
======= ===== ======== =======
Held to maturity
FNMA pass-through certificates $ 60 $ -- $ -- $ 60
====== ===== ====== ======
110
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
The following table shows the amortized cost, estimated fair value, and weighted
average yield of the Company's mortgage backed securities by year of contractual
maturity. Actual maturities may differ from contractual maturities due to
principal prepayments or rights of issuers to call obligations.
December 31, 2000
-----------------------------------------------------------------
Estimated Weighted
Amortized Fair Average
Cost Value Yield
---- ----- -----
(Dollars In Thousands)
Available for sale
Due in 2001 $ 406 $ 407 8.21%
Due in 2006 through 2010 7,572 7,558 6.64%
Due in 2011 and thereafter 35,697 34,985 6.87%
------- ------- ----
$43,675 $42,950 6.84%
======= ======= =====
Proceeds from and realized gains and losses on sales of mortgage backed
securities available for sale are summarized as follows:
Year Ended December 31,
-----------------------------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Proceeds from sales $ 24,425 $ 17,643 $ 48,036
Gross realized gains on sales 72 30 373
Gross realized losses on sales 83 52 68
The Company pledges mortgage backed securities to the Federal Home Loan Bank as
collateral for advances, to the State of California as collateral for certain
deposits, and to the Federal Reserve as collateral for certain customer
payments. The following table details the amortized cost of mortgage backed
securities not pledged and pledged for various purposes:
December 31,
---------------------------
2000 1999
---- ----
(Dollars In Thousands)
Not pledged $ 7,010 $ 16,017
Pledged to the Federal Home Loan Bank 18,210 43,316
Pledged to the State of California 18,058 --
Pledged to the Federal Reserve 397 437
-------- --------
$ 43,675 $ 59,770
======== ========
111
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
5. LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable, net are summarized as follows:
December 31,
----------------------------------
2000 1999
---- ----
(Dollars In Thousands)
Held for investment:
Loans secured by real estate:
Residential one to four unit $160,155 $168,465
Multifamily five or more units 76,727 42,173
Commercial and industrial 102,322 72,344
Construction 59,052 79,034
Land 16,310 13,930
-------- --------
Sub-total loans secured by real estate 414,566 375,946
Other loans:
Home equity lines of credit 5,631 3,968
Loans secured by deposits 494 385
Consumer lines of credit, unsecured 175 202
Business term loans 1,641 6,670
Business lines of credit 1,438 1,027
-------- --------
Sub-total other loans 9,379 12,252
Sub-total gross loans held for investment 423,945 388,198
(Less) / Plus:
Undisbursed construction loan funds (26,580) (23,863)
Unamortized purchase premiums, net of purchase discounts 21 134
Deferred loan fees and costs, net (202) (281)
Allowance for loan losses (5,364) (3,502)
-------- --------
Loans receivable held for investment, net $391,820 $360,686
======== ========
112
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
The Company serviced various types of loans for others, primarily residential
mortgages, with the outstanding principal balance amounts summarized below:
December 31,
----------------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Loans serviced for others $ 62,031 $ 74,225 $ 75,407
Activity in the allowance for loan losses is summarized as follows:
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Balance, beginning of year $ 3,502 $ 2,780 $ 1,669
Provision for loan losses 2,175 835 692
Acquired allowance associated with
Commercial Pacific Bank loans -- -- 416
Charge-offs:
Residential one to four family real estate loans (371) (113) --
Recoveries:
Residential one to four family real estate loans 58 -- 3
------- ------- -------
Balance, end of year $ 5,364 $ 3,502 $ 2,780
======= ======= =======
113
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
The following tables summarizes the Company's recorded investment in impaired
loans by type:
Accrual Status Non-Accrual Status Total Impaired Loans
---------------------------- --------------------------- ---------------------------
Specific Specific Specific
Principal Allowances Principal Allowances Principal Allowances
--------- ---------- --------- ---------- --------- ----------
(Dollars In Thousands)
December 31, 2000
Residential one to four $ 677 $ -- $ 603 $ -- $ 1,280 $ - -
unit
Commercial real estate -- -- 1,133 -- 1,133 --
Construction -- -- 2,852 600 2,852 600
Business term loans -- -- 78 -- 78 --
------- ------ ------- ----- ------- -----
Total $ 677 $ -- $ 4,666 $ 600 $ 5,343 $ 600
====== ====== ======= ===== ======= =====
December 31, 1999
Residential one to four $ 1,294 $ -- $ 543 $ -- $ 1,837 $ - -
unit
Commercial real estate -- -- 1,146 -- 1,146 --
Business term loans -- -- 5,000 200 5,000 200
Business lines of credit -- -- 199 -- 199 --
------- ------ ------- ----- ------- -----
Total $ 1,294 $ -- $ 6,888 $ 200 $ 8,182 $ 200
======= ====== ======= ===== ======= =====
Additional information concerning impaired loans is as follows:
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Average investment in impaired loans for the year $ 7,790 $ 2,511 $ 3,100
======= ======= =======
Interest recognized on impaired loans at December 31 $ 461 $ 590 $ 166
===== ===== =====
Interest not recognized on impaired loans at December 31 $ 110 $ 109 $ 76
===== ===== =====
Additional information concerning non-accrual loans is as follows:
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Interest recognized on non-accrual loans at December 31 $ 400 $ 80 $ 55
===== ==== ====
Interest not recognized on non-accrual loans at December 31 $ 110 $ 109 $ 76
===== ===== ====
The Company extends loans to executive officers and directors in the ordinary
course of business. These transactions were on substantially the same terms as
those prevailing at the time for comparable transactions with unrelated parties
and do not involve more than normal risk or unfavorable terms for the Company.
An analysis of the activity of these loans is as follows:
Year Ended December 31,
-----------------------------
2000 1999
---- ----
(Dollars In Thousands)
Balance, beginning of year $ 631 $ 644
New loans and line of credit advances 2,119 2
Repayments (728) (15)
Other (298) --
------- -----
Balance, end of period $ 1,724 $ 631
======= =====
114
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Under Office of Thrift Supervision ("OTS") regulations, the Bank may not make
real estate loans to one borrower in an amount exceeding 15% of the Bank's
unimpaired capital and surplus, plus an additional 10% for loans secured by
readily marketable collateral. At December 31, 2000 and 1999, such limitation
would have been approximately $6,520,000 and $5,329,000, respectively.
The majority of the Company's loans are secured by real estate primarily located
in Santa Cruz, Monterey, Santa Clara, and San Benito counties. The Company's
credit risk is therefore primarily related to the economic conditions and real
estate valuations of this region. Loans are generally made on the basis of a
secure repayment source, which is based on a detailed cash flow analysis;
however, collateral is generally a secondary source for loan qualification.
Under the Company's policy, private mortgage insurance is required for all
residential real estate secured loans with an initial loan to value ratio
greater than 80%.
6. INVESTMENT IN CAPITAL STOCK OF THE FEDERAL HOME LOAN BANK
As a member of the Federal Home Loan Bank of San Francisco, the Bank is required
to own capital stock in an amount specified by regulation. As of December 31,
1999 and 1998, the Bank owned 28,838 and 32,131 shares, respectively, of $100
par value FHLB stock. The amount of stock owned meets the most recent annual
regulatory determination.
7. ACCRUED INTEREST RECEIVABLE
Accrued interest receivable is summarized as follows:
December 31,
----------------------------------
2000 1999
---- ----
(Dollars In Thousands)
Interest receivable on cash equivalents $ 13 $ 1
Interest receivable on investment securities 102 114
Interest receivable on mortgage backed securities 246 347
Interest receivable on capital stock of the Federal Home Loan Bank 48 44
Interest receivable on loans 2,492 2,182
------- -------
$ 2,901 $ 2,688
======= =======
115
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
8. PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
December 31,
-------------------------------
2000 1999
---- ----
(Dollars In Thousands)
Land $ 3,213 $ 3,213
Buildings and improvements 4,373 4,091
Equipment 2,832 2,340
------- -------
Total, at cost 10,418 9,644
Less accumulated depreciation (3,043) (2,602)
------- -------
Premises and equipment, net $ 7,375 $ 7,042
======= =======
Depreciation expense was $441 thousand, $472 thousand, and $456 thousand for the
years ended December 31, 2000, 1999, and 1998, respectively.
9. REAL ESTATE ACQUIRED VIA FORECLOSURE
Real estate acquired by foreclosure is summarized as follows:
December 31,
-------------------------
2000 1999
---- ----
(Dollars In Thousands)
Residential real estate acquired through foreclosure $ -- $ 96
Less allowance for estimated real estate losses -- --
----- -----
$ -- $ 96
===== =====
At December 31, 1999, the Company's inventory of foreclosed real estate was
comprised of one single family residence.
116
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
10. DEPOSITS
Deposits are as follows:
December 31,
----------------------------------
(Dollars In Thousands) 2000 1999
---- ----
Demand deposit accounts $ 17,065 $ 17,316
NOW accounts 41,859 31,385
Savings accounts 16,503 15,312
Money market accounts 87,651 81,245
Certificates of deposit < $100,000 166,905 169,646
Certificates of deposit $100,000 or more 77,805 52,498
-------- --------
$407,788 $367,402
======== ========
The following table sets forth the maturity distribution of certificates of
deposit:
December 31, 2000
-----------------------------------------------------------------
Balance Balance
Less Than $100,000
$100,000 And Over Total
-------- -------- -----
(Dollars In Thousands)
Three months or less $ 55,717 $ 40,309 $ 96,026
Over three through six months 42,486 14,117 56,603
Over six through twelve months 38,405 14,128 52,533
Over twelve months through two years 26,157 8,803 34,960
Over two years through three years 2,639 100 2,739
Over three years 1,501 348 1,849
--------- -------- ---------
$ 166,905 $ 77,805 $ 244,710
========= ======== =========
At December 31, 2000 and 1999, respectively, total accounts with balances of
$100,000 or greater in deposit products other than certificates of deposit
amounted to $52,447,000 and $40,809,000.
Interest expense on deposits is summarized as follows:
Year Ended December 31,
--------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
NOW accounts $ 550 $ 388 $ 227
Savings accounts 281 280 278
Money market accounts 4,040 3,402 1,716
Certificates of deposit 12,360 11,060 14,407
------ ------ ------
$17,231 $15,130 $16,628
======= ======= =======
117
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
11. ADVANCES FROM THE FEDERAL HOME LOAN BANK
The Bank is a member of the Federal Home Loan Bank ("FHLB") of San Francisco and
borrows from the FHLB through various types of collateralized advances,
including, at various times, bullet, amortizing, and structured advances. Assets
pledged to the FHLB to collateralize advances include the Bank's ownership
interest in the capital stock of the FHLB, investment and mortgage backed
securities, and various types of qualifying whole loans.
A summary of advances from the FHLB and related maturities follows. All FHLB
advances outstanding at December 31, 2000 and December 31, 1999 were term,
bullet maturity, and non-structured advances.
December 31,
----------------------------------
Year Of Maturity 2000 1999
---------------- ---- ----
(Dollars In Thousands)
2000 -- 17,000
2003 25,000 25,000
2004 282 282
2005 1,500 1,500
2006 4,800 4,800
2010 1,000 1,000
------- -------
$32,582 $49,582
======= =======
Weighted average nominal rate 5.48% 5.65%
Additional information concerning advances from the FHLB includes:
2000 1999
---- ----
(Dollars In Thousands)
Average amount outstanding during the year $ 43,946 $ 37,600
Maximum amount outstanding at any month-end during the year $ 50,582 $ 49,582
Weighted average interest rate during the year 5.72% 5.53%
Collateral pledged to secured advances from the FHLB is comprised of the
following (amortized cost):
December 31,
------------------------------
2000 1999
---- ----
(Dollars In Thousands)
Mortgage backed securities $ 18,210 $ 39,922
Capital stock in the Federal Home Loan Bank 2,884 3,213
Mortgage loans 232,604 120,598
118
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
12. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
From time to time, the Company sells investment and mortgage backed securities
under agreements to repurchase. There were no such agreements in effect at
December 31, 2000. At December 31, 1999, all such agreements matured in less
than one year. The following is a summary of securities sold under agreements to
repurchase during the past two years:
Year Ended December 31,
-----------------------
2000 1999
---- ----
(Dollars In Thousands)
Amount outstanding at the end of the year $ -- $ 2,410
Average amount outstanding during the year 155 3,182
Maximum amount outstanding at any month-end during the year -- 4,350
Weighted average interest rate during the year 6.45% 5.65%
Weighted average interest rate at the end of the year -- 6.08%
Securities sold under agreements to repurchase are conducted with a limited list
of security dealers approved and monitored by the Company. The lender maintains
possession of the collateral securing these agreements.
13. LINES OF CREDIT
During the fourth quarter of 2000, Monterey Bay Bancorp, Inc. obtained a
revolving line of credit from a correspondent bank of Monterey Bay Bank. The
line of credit is for $2.0 million and expires on November 21, 2001. There was
no balance outstanding on the line of credit at December 31, 2000. The line of
credit is collateralized by five hundred thousand shares of Monterey Bay
Bancorp, Inc.'s treasury stock, which is in the custody of the correspondent
bank. The line of credit contains various covenants regarding the maintenance of
certain financial conditions and the provision of financial and operating
information. The line of credit also contains a prohibition of its use for
repurchases of the Company's common stock. This line of credit provides an
additional source of liquidity to the Monterey Bay Bancorp, Inc. holding
company.
119
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
14. INCOME TAXES
The components of the provision for income taxes are as follows:
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Current:
Federal $ 1,889 $ 2,453 $ 1,150
State 652 801 357
------- ------- -------
Total current 2,541 3,254 1,507
------- ------- -------
Deferred:
Federal (457) (605) (244)
State (138) (138) (35)
------- ------- -------
Total deferred (595) (743) (279)
------- ------- -------
Provision for income taxes $ 1,946 $ 2,511 $ 1,228
======= ======= =======
A reconciliation from the statutory federal income and state franchise tax rates
to the consolidated effective tax rates, expressed as a percentage of income
before income taxes, follows:
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Statutory federal income tax rate 34.0% 34.0% 34.0%
California franchise tax, net of federal income tax benefit 7.6% 7.5% 8.0%
Other 1.9% 1.7% 4.1%
---- ---- ----
Effective income tax rate 43.5% 43.2% 46.1%
==== ==== ====
120
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Deferred income taxes reflect the net tax effects of temporary differences,
between the carrying amount of assets and liabilities for financial reporting
purposes and the amount used for income tax purposes. Net deferred tax assets
are included within other assets on the Consolidated Statements of Financial
Condition. The tax effects of temporary differences that gave rise to
significant portions of the deferred tax assets and liabilities are as follows:
December 31,
----------------------------------
2000 1999
---- ----
(Dollars In Thousands)
Deferred tax assets:
Allowance for loan losses $ 1,864 $ 1,115
Intangible assets 969 835
Deferred compensation 319 485
Unrealized loss on securities available for sale 437 818
Other 75 172
------- -------
Total gross deferred tax assets 3,664 3,425
------- -------
Deferred tax liabilities:
FHLB stock dividends (419) (392)
State franchise taxes (2) 40
Other (64) (108)
------- -------
Total gross deferred tax liabilities (485) (460)
------- -------
Net deferred tax asset $ 3,179 $ 2,965
======= =======
The Company believes that it is more likely than not that it will realize the
above deferred tax assets in future periods; therefore, no valuation allowance
has been provided against its deferred tax assets.
Legislation regarding bad debt recapture became law in 1996. The law requires
recapture of reserves accumulated after 1987, and required that the recapture
tax on post-1987 reserves be paid over a six year period starting in 1996. The
Company will complete this recapture in 2001.
The Bank maintains a tax bad debt reserve of approximately $5.0 million that
arose in tax years that began prior to December 31, 1987. This tax bad debt
reserve will, in future years, be subject to recapture in whole or in part upon
the occurrence of certain events, including, but not limited to:
o a distribution to stockholders in excess of the Bank's current and
accumulated post-1951 earnings and profits
o distributions to shareholders in a partial or complete redemption or
liquidation of the Bank
o the Bank ceases to be a "bank" or "thrift" as defined under the Internal
Revenue Code
The Bank does not intend to make distributions to stockholders that would result
in recapture of any portion of its tax bad debt reserve if such recapture would
create an additional tax liability. As a result, an associated deferred tax
liability has not been recorded for the $5.0 million pre-1988 tax bad debt
reserve.
121
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
15. REGULATORY CAPITAL REQUIREMENTS AND OTHER REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
result in certain mandatory, and possibly additional discretionary, actions by
regulators that, if undertaken, could present a direct material effect upon the
Bank's and the Company's financial statements.
The OTS maintains regulations that require the Bank to maintain a minimum
regulatory tangible capital ratio (as defined) of 1.50%, a minimum regulatory
core capital ratio (as defined) of 4.00% (unless the Bank has been assigned the
highest composite rating under the Uniform Financial Institutions Rating System,
in which case 3.00%), and a regulatory risk based capital ratio (as defined) of
8.00%. The following table presents a reconciliation as of December 31, 2000 and
1999, between the Bank's capital under accounting principles generally accepted
in the United States of America ("GAAP") and regulatory capital as presently
defined under OTS regulations, in addition to a review of the Bank's compliance
with OTS capital requirements:
(Dollars In Thousands)
Tangible Capital Core (Tier One) Risk Based
Capital Capital
------------------------ ------------------------ ------------------------
As Of December 31, 2000 Amount Percent Amount Percent Amount Percent
----------------------- ------ ------- ------ ------- ------ -------
Capital of the Bank presented on a GAAP $ 40,274 $ 40,274 $ 40,274
basis
Adjustments to GAAP capital to derive
regulatory capital:
Net unrealized loss on debt
securities classified as 624 624 624
available for sale
Non-qualifying intangible assets (2,195) (2,195) (2,195)
Qualifying general allowance for
loan losses -- -- 4,393
-------- -------- --------
Bank regulatory capital 38,703 8.03% 38,703 8.03% 43,096 12.28%
Less minimum capital requirement 7,227 1.50% 19,272 4.00% 28,083 8.00%
-------- ---- -------- ---- -------- ----
Regulatory capital in excess of minimums $ 31,476 6.53% $ 19,431 4.03% $ 15,013 4.28%
======== ===== ======== ===== ======== =====
Additional information:
Bank regulatory total assets $ 481,795
Bank regulatory risk based assets $ 351,038
(Dollars In Thousands)
Tangible Capital Core (Tier One) Risk Based
Capital Capital
------------------------ ------------------------ ------------------------
As Of December 31, 1999 Amount Percent Amount Percent Amount Percent
----------------------- ------ ------- ------ ------- ------ -------
Capital of the Bank presented on a GAAP $ 34,022 $ 34,022 $ 34,022
basis
Adjustments to GAAP capital to derive
regulatory capital:
Net unrealized loss on debt
securities classified as 1,123 1,123 1,123
available for sale
Non-qualifying intangible assets (2,918) (2,918) (2,918)
Qualifying general allowance for
loan losses -- -- 3,302
-------- -------- --------
Bank regulatory capital 32,227 7.11% 32,227 7.11% 35,529 10.56%
Less minimum capital requirement 6,800 1.50% 18,134 4.00% 26,906 8.00%
-------- ---- -------- ---- -------- ----
Regulatory capital in excess of minimums $ 25,427 5.61% $ 14,093 3.11% $ 8,623 2.56%
======== ===== ======== ===== ======= =====
Additional information:
Bank regulatory total assets $ 453,345
Bank regulatory risk based assets $ 336,323
122
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Federal thrift institutions such as the Bank are also subject to various
provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). Among these provisions are requirements for prompt corrective action
in the event an insured institution fails to meet certain regulatory capital
thresholds. The prompt corrective action regulations define five specific
capital categories based upon an institution's regulatory capital ratios. These
five capital categories, in declining order, are "well capitalized", "adequately
capitalized", "undercapitalized", "significantly undercapitalized", and
"critically undercapitalized". Institutions categorized as "undercapitalized" or
worse are subject to certain restrictions, including the requirement to file a
capital plan with the OTS, prohibitions on the payment of dividends and
management fees, restrictions on executive compensation, and increased
supervisory monitoring, among other things. Other restrictions may be imposed on
the institution either by the OTS or by the FDIC, including requirements to
raise additional capital, sell assets, or sell the entire institution.
As of December 31, 2000 and 1999, the most recent notification from the OTS
categorized the Bank as "well capitalized" under the regulatory framework for
prompt corrective action. To be categorized as "well capitalized", the Bank must
maintain minimum core capital, tier one risk based, and total risk based capital
ratios as presented in the following table. There are no conditions or events
since that notification that management believes have changed the Bank's
category.
To Be Well
Capitalized
Under Prompt
For Capital Adequacy Corrective
Actual Purposes Action Provisions
--------------------- ---------------------- ----------------------
As Of December 31, 2000 Amount Ratio Amount Ratio Amount Ratio
----------------------- ------ ----- ------ ----- ------ -----
Total Capital (to risk weighted assets) $ 43,096 12.28% $ 28,083 8.00% $ 35,104 10.00%
Tier One Capital (to risk weighted 38,703 11.03% N/A N/A 21,062 6.00%
assets)
Core Capital (to adjusted tangible 38,703 8.03% 19,272 4.00% 24,090 5.00%
assets)
Tangible Capital (to tangible assets) 38,703 8.03% 7,227 1.50% N/A N/A
As Of December 31, 1999
-----------------------
Total Capital (to risk weighted assets) $ 35,529 10.56% $ 26,906 8.00% $ 33,632 10.00%
Tier One Capital (to risk weighted 32,227 9.58% N/A N/A 20,179 6.00%
assets)
Core Capital (to adjusted tangible 32,227 7.11% 18,134 4.00% 22,667 5.00%
assets)
Tangible Capital (to tangible assets) 32,227 7.11% 6,800 1.50% N/A N/A
The above amounts for December 31, 2000 and 1999 reflect a 100% risk-based
capital category classification for a specific portfolio of residential mortgage
loans, as discussed below.
At December 31, 2000, the Bank was under institution specific requirements from
the OTS that regulatory capital ratios not decline below their levels at
December 31, 1999. At December 31, 2000, the Bank was in compliance with these
institution specific requirements and maintained $4.4 million in regulatory
capital in excess of these institution specific requirements.
Management believes that, under current regulations, the Bank will continue to
meet its minimum capital requirements in the coming year. However, events beyond
the control of the Bank, such as changing interest rates or a downturn in the
economy and / or real estate markets where the Bank maintains most of its loans,
could adversely affect future earnings and, consequently, the ability of the
Bank to meet its future minimum regulatory capital requirements.
OTS rules impose certain limitations regarding stock repurchases and
redemptions, cash-out mergers, and any other distributions charged against an
institution's capital accounts. The payment of dividends by Monterey Bay Bank to
Monterey Bay Bancorp, Inc. is subject to OTS regulations. "Safe-harbor" amounts
of capital distributions can be made after providing notice to the OTS, but
without needing prior approval. For Tier 1 institutions such as the Bank, the
safe harbor amount is the greater of (1) net income earned during the year or
(2) the sum of net income earned during the year plus one-half of the
institution's capital in excess of the OTS capital requirement as of the end of
the prior year. Distributions beyond these amounts are allowed only with the
specific, prior approval of the OTS. In addition, the Bank must continue to
comply with the institution specific regulatory capital requirements in paying
any dividends.
123
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Special Residential Loan Pool
During 1998, the Bank purchased a $40.0 million residential mortgage pool
comprised of loans that presented a borrower credit profile and / or a loan to
value ratio outside of (less favorable than) the Bank's normal underwriting
criteria. To mitigate its credit risk for this portfolio, concurrent with the
purchase, the Bank obtained a scheduled principal / scheduled interest loan
servicing agreement from the seller. Further, this agreement also contains a
guaranty 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. As a result of obtaining these credit enhancements, 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 December 31, 2000, the outstanding principal balance of this mortgage loan
pool was $16.5 million, with an additional $3.2 million in December payoffs
received from the seller / servicer in January, 2001. While the seller /
servicer met all its contractual obligations through December 31, 2000, the
Company has allocated certain general loan loss reserves due to concerns
regarding the potential losses by the seller / servicer in honoring the
guaranty, the present delinquency profile of the special residential mortgage
pool, and the differential between certain loan principal balances for
foreclosed loans and loans in the process of foreclosure and the estimated
amounts to be recovered from the sales of such properties.
Because the seller / servicer provides scheduled principal and interest payments
regardless of the actual payment performance of the loans and because the seller
/ servicer absorbs all losses on the disposition of associated foreclosed real
estate, the Company reports all loans within the special residential loan pool
as performing; with the allocation of certain general loan loss reserves to this
pool.
By December 31, 2000, all of the loans in the special residential loan pool
converted from an initial fixed rate that was maintained for the first two years
of the loan to an adjustable rate significantly above current market rates for
medium to high credit quality residential mortgages. The weighted average gross
interest rate on the special residential loan pool at December 31, 2000 was
11.44%. The differential between the interest rates on the loans and available
refinance rates contributed to significant prepayments during 2000.
Management believes additional prepayments are likely to occur in 2001. However,
management also believes that there will be some loans that will not refinance
in the next year due to a lack of available financing for less creditworthy
borrowers or because of borrower inaction. By the end of 2001, the Company may
therefore be particularly dependent upon the financial strength and continued
performance of the seller / servicer, as the remaining portfolio is expected to
be comprised of relatively less creditworthy loans while at the same time having
a smaller total principal balance outstanding and thereby providing less
periodic cash flow to the seller / servicer via the retained servicing spread.
In conjunction with this Special Residential Loan Pool, on March 6, 2000, the
Bank received a letter from the OTS mandating that the Bank (i) assign all of
the loans in the pool a 100% risk based capital weighting, and (ii) not permit
its regulatory capital ratios to decline below the levels existing at December
31, 1999. Management does not foresee any compliance issue with this request
given the Bank's regulatory capital position at December 31, 2000 and due to the
expected continued generation of regulatory capital through retained earnings,
the amortization of deferred stock compensation, and the amortization of
intangible assets.
124
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in certain legal proceedings arising in the normal
course of business. In the opinion of management, the outcomes of such
proceedings should not have a material adverse effect on the Company's financial
position or results of operations.
The Company is a party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments represent commitments to originate fixed and
variable rate loans, letters of credit, lines of credit, and loans in process,
and involve, to varying degrees, elements of interest rate risk and credit risk
in excess of the amount recognized in the Consolidated Statements of Financial
Condition. The Company uses the same credit policies in making commitments to
originate loans, lines of credit, and letters of credit as it does for
on-balance sheet instruments.
At December 31, 2000, the Company had outstanding commitments to originate $5.7
million of real estate loans, including $284 thousand for fixed rate loans and
$5.4 million for adjustable rate loans. At December 31, 2000, the Company also
had outstanding commitments to originate $710 thousand in commercial business
loans. Commitments to fund loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have expiration dates or other termination clauses. In addition,
external market forces may impact the probability of commitments being
exercised; therefore, total commitments outstanding do not necessarily represent
future cash requirements.
At December 31, 2000, the Company had made available various business, personal,
and residential lines of credit totaling approximately $15.6 million, of which
the undisbursed portion was approximately $6.8 million.
Standby letters of credit are conditional commitments issued by the Company to
guarantee the performance of a customer to a third party. At December 31, 2000,
the Company maintained outstanding letters of credit totaling $136 thousand,
compared to $2.0 million at December 31, 1999.
At December 31, 2000, the Company had recourse liability on $1.5 million of sold
residential loans. No losses stemming from this recourse liability were recorded
during 2000. Management includes a consideration of this recourse liability in
establishing the allowance for loan losses.
125
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
At December 31, 2000, 1999, and 1998, the Company was obligated under
non-cancelable operating leases for office space. Certain leases contain
escalation clauses providing for increased rentals based primarily on increases
in real estate taxes or on the average consumer price index. Rent expense under
operating leases, included in occupancy and equipment expense, was approximately
$133 thousand, $121 thousand, and $170 thousand for the years ended December 31,
2000, 1999, and 1998, respectively.
Certain branch offices are leased under the terms of operating leases expiring
at various dates through the year 2005. At December 31, 2000, future minimum
rental commitments under non-cancelable operating leases were as follows:
(Dollars In Thousands)
2001 $ 134
2002 134
2003 111
2004 62
2005 31
Thereafter --
-----
Total $ 472
=====
In the normal course of business, the Company and Bank have negotiated
employment agreements with the Chief Executive Officer / President and the Chief
Financial Officer.
In addition, at December 31, 2000, the Company and Bank also maintained change
in control agreements with six officers. These agreements result in severance
payments following certain events associated with a change in control of the
Company or the Bank.
126
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
17. EARNINGS PER SHARE
The Company calculates Basic and Diluted Earnings Per Share ("EPS") in
accordance with SFAS No. 128, Earnings Per Share. Basic EPS are computed by
dividing net income available to common stockholders by the weighted average
number of common shares outstanding during each period. During the years 1998
through 2000, all of the Company's net income was available to common
stockholders. The weighted average number of common shares outstanding for the
Company is decreased in each reporting period by:
o shares associated with the Company's ESOP which have not been committed to
be released
o shares associated with the Company's stock grant programs which are not yet
vested to Plan participants
o the weighted average number of Treasury shares maintained by the Company
during each period
The computation of Diluted EPS also considers, via the treasury stock method of
calculation, the impact of shares issuable upon the assumed exercise of
outstanding stock options (both incentive stock options and non-statutory stock
options) and stemming from the grant of time-based stock awards under the
Company's associated Plans for officers and directors. In calculating diluted
earnings per share, no anti-dilutive calculations are permitted and diluted
share counts are applicable only in the event of positive earnings. For the
years 1998 through 2000, there was no difference in the Company's income used in
calculating basic and diluted earnings per share.
The following table reconciles the calculation of the Company's Basic and
Diluted EPS for the periods indicated.
For The Year Ended December 31,
----------------------------------------------------
(In Whole Dollars And Whole Shares) 2000 1999 1998
---- ---- ----
Net income $ 2,523,000 $ 3,301,000 $ 1,436,000
=========== =========== ===========
Average shares issued 4,492,085 4,492,085 4,492,085
Less weighted average:
Uncommitted ESOP shares (161,719) (197,657) (233,594)
Non-vested stock award shares (60,612) (88,689) (118,630)
Treasury shares (1,158,844) (974,577) (638,123)
--------- --------- ---------
Sub-total (1,381,175) (1,260,923) (990,347)
--------- --------- ---------
Weighted average BASIC shares outstanding 3,110,910 3,231,162 3,501,738
Add dilutive effect of:
Stock options 12,483 83,730 125,536
Stock awards 159 5,286 11,419
--------- --------- ---------
Sub-total 12,642 89,016 136,955
--------- --------- ---------
Weighted average DILUTED shares outstanding 3,123,552 3,320,178 3,638,693
========= ========= =========
Earnings per share:
BASIC $ 0.81 $ 1.02 $ 0.41
====== ====== ======
DILUTED $ 0.81 $ 0.99 $ 0.39
====== ====== ======
127
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
18. OTHER COMPREHENSIVE INCOME
The Company's only source of other comprehensive income has been derived from
unrealized gains and losses on the portfolios of investment and mortgage backed
securities classified as available for sale.
Reclassification adjustments for the change in net gains (losses) included in
other comprehensive income from investment and mortgage backed securities
classified as available for sale during the past three years are summarized as
follows:
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Gross reclassification adjustment $ (55) $ 496 $ 284
Tax benefit (expense) 23 (204) (118)
------ ----- -----
Reclassification adjustment, net of tax $ (32) $ 292 $ 166
======= ===== =====
A reconciliation of the net unrealized gain or loss on available for sale
securities recognized in other comprehensive income is as follows:
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Holding gain (loss) arising during the year, net of tax $ 513 $ (1,671) $ 822
Reclassification adjustment, net of tax 32 (292) (166)
------ ----- -----
Net unrealized gain (loss) recognized in other comprehensive income $ 545 $(1,963) $ 656
====== ======== ======
128
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
19. STOCK BENEFIT PLANS
Stock Option Programs - On August 24, 1995, the stockholders of the Company
approved the 1995 Incentive Stock Option Plan (the "Stock Option Plan"). Under
the Stock Option Plan, the Company may grant to officers and employees of the
Company and its affiliate, the Bank, both non-statutory and incentive stock
options, as defined under the Internal Revenue Code, to purchase shares of the
Company's common stock.
On August 24, 1995, the stockholders of the Company also approved the 1995 Stock
Option Plan For Outside Directors (the "Directors Option Plan"). Under the
Directors' Option Plan, directors who are not officers or employees of the
Company or Bank may be granted non-statutory stock options to purchase shares of
the Company's common stock.
On May 25, 2000, the stockholders of the Company approved amendments to the
Stock Option Plan. These amendments included:
o an increase in the number of shares reserved for issuance under the Stock
Option Plan from 414,107 shares to 660,000 shares
o an increase in the strike price of options granted under the Stock Option
Plan from not less than 100% of the fair market value of the common stock
on the date of grant (except that the exercise price for beneficial owners
of more than 10.0% of the outstanding voting stock of the Company must be
equal to 110% of the fair market value of the common stock on the date of
grant) to at least 110% of the fair market value of the common stock on the
date of grant for all grants occurring on or after May 25, 2000
o providing additional flexibility in the vesting schedule for both incentive
stock options and non-statutory stock options
o allowing non-employee directors to be eligible for the grant of
non-statutory stock options under the Stock Option Plan
Options granted under the Stock Option Plan prior to May 25, 2000 entitle the
holder to purchase one share of the common stock at the fair market value of the
common stock on the date of grant. Options granted under the Stock Option Plan
prior to May 25, 2000 begin to vest one year after the date of grant ratably
over five years and expire no later than ten years after the date of grant.
Options granted under the Stock Option Plan after May 24, 2000 entitle the
holder to purchase one share of the common stock at 110% of the fair market
value of the common stock on the date of grant. Options granted under the Stock
Option Plan after May 24, 2000 vest at various times as specified under each
individual option agreement and expire no later than ten years after the date of
grant.
Options granted under the Directors Option Plan entitle the holder to purchase
one share of the common stock at the fair market value of the common stock on
the date of grant. Options begin to vest one year after the date of grant
ratably over five years and expire no later than ten years after the date of
grant.
As of December 31, 2000, no stock options under either the Stock Option Plan or
the Directors Option Plan were granted to an individual owning common stock
representing more than 10.0% of the total combined voting power of the Company's
common stock.
129
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
All options under the Stock Option Plan become 100% exercisable in the event
that the employee terminates his employment due to death, disability, or, to the
extent not prohibited by the OTS, in the event of a change in control of the
Company or the Bank.
All options under the Directors Option Plan become 100% exercisable in the event
that the director terminates membership on the board of directors due to death,
disability, or, to the extent not prohibited by the OTS, in the event of a
change in control of the Company or the Bank.
The Company applies Accounting Principles Board ("APB") Opinion No. 25 and
related interpretations in accounting for stock options. Under APB No. 25,
compensation cost for stock options is measured as the excess, if any, of the
fair market value of the Company's stock at the date of grant over the amount
the employee or director must pay to acquire the stock. Because the Company's
stock option Plans provide for the issuance of options at a price of no less
than the fair market value at the date of grant, no compensation cost is
required to be recognized for the stock option Plans.
Had compensation costs for the stock option Plans been determined based upon the
fair value at the date of grant consistent with SFAS No. 123, Accounting For
Stock Based Compensation, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below. The pro forma
amounts presented below were calculated utilizing the Black-Scholes option
pricing model, with forfeitures recognized as they occur, incorporating the
assumptions detailed on the following page.
Year Ended December 31,
----------------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands, Except Share Data)
Net income:
As reported $ 2,523 $ 3,301 $ 1,436
Pro forma $ 2,223 $ 3,022 $ 1,177
Basic earnings per share:
As reported $ 0.81 $ 1.02 $ 0.41
Pro forma $ 0.71 $ 0.94 $ 0.34
Diluted earnings per share:
As reported $ 0.81 $ 0.99 $ 0.39
Pro forma $ 0.71 $ 0.91 $ 0.32
Shares utilized in Basic EPS calculations 3,110,910 3,231,162 3,501,738
Shares utilized in Diluted EPS calculations 3,123,552 3,320,178 3,638,693
The original number of stock options allowed under the Stock Option Plan in 1995
was 351,758 shares. Pursuant to the terms of the Stock Option Plan, the Board of
Directors authorized increases in allowable shares of 28,123 in 1998 and 34,226
in 1999. On May 25, 2000, stockholders approved an increase in allowable shares
to 660,000.
The original number of stock options allowed under the Directors Option Plan in
1995 was 97,929 shares. This figure has not changed since the initial adoption
of the Directors Option Plan.
130
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
The status of the aggregate stock options under the two Plans as of December 31,
2000, 1999, and 1998, and changes during the years then ended, are presented
below. The abbreviation "FMV" represents "fair market value".
December 31,
------------ ------------ --- -------------------------- -- ------------ -------------
2000 1999 1998
------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
Options outstanding at the
beginning of the year 362,597 $10.30 418,311 $10.38 381,279 $9.21
Granted 197,865 $10.00 5,000 $14.75 85,498 $14.90
Canceled 10,226 $10.49 26,932 $13.59 13,117 $9.10
Exercised -- $ -- 33,782 $9.40 35,349 $9.10
------- ------- -------
Options outstanding at year end 550,236 $10.19 362,597 $10.30 418,311 $10.38
======= ======= =======
Options outstanding at year end:
Granted at 100% FMV 464,236 $10.04
Granted at 110% FMV 86,000 $10.98
Options exercisable at year end:
Granted at 100% FMV 308,262 $9.65 239,853 $9.51 191,569 $9.19
Granted at 110% FMV 17,240 $11.76 -- --
------- ------- -------
Total 325,502 $9.76 239,853 $9.51 191,569 $9.19
Options available for future grants 127,543 69,289 13,131
Weighted average remaining
contractual life of options
outstanding at year end 6.6 years 6.2 years 7.3 years
Weighted average information for
options granted during the year
at 100% of FMV:
Fair value $4.68 $7.76 $7.74
Weighted average information for
options granted during the year
at 110% of FMV:
Fair value $4.41 -- --
Assumptions utilized in the Black-
Scholes option-pricing model
(for all options granted each
year)
Dividend Yield 0.00% 1.00% 1.00%
Expected stock price volatility 35.00% 45.00% 45.00%
Average risk-free interest rate 6.11% 5.73% 6.49%
Expected option lives 8 years 8 years 8 years
131
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
The following table summarizes information about the stock options outstanding
at December 31, 2000:
Options Granted At 100% Of Fair Market Value:
Weighted
Average
Remaining
Exercise Number Life Number
Price Outstanding In Years Exercisable
----- ----------- -------- -----------
$ 8.19 45,000 9.3 0
$ 9.10 274,090 4.6 274,090
$ 9.69 26,865 9.2 0
$10.13 40,000 9.1 0
$10.70 9,658 5.5 7,726
$14.75 5,000 8.5 1,000
$14.80 56,250 7.5 22,500
$16.60 7,373 7.2 2,946
$8.19 - $16.60 464,236 6.2 308,262
======= === =======
Options Granted At 110% Of Fair Market Value:
Weighted
Average
Remaining
Exercise Number Life Number
Price Outstanding In Years Exercisable
----- ----------- -------- -----------
$ 9.77 12,500 9.6 0
$ 9.90 10,000 9.4 0
$11.21 43,500 9.9 0
$11.76 20,000 5.7 17,240
------ ------
$9.77 - $11.76 86,000 8.8 17,240
====== === ======
TOTAL 550,236 6.6 325,502
======= === =======
132
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Stock Award Programs - The Company maintains a Performance Equity Program
("PEP") for officers and employees. In addition, prior to the end of 2000, the
Company maintained a Recognition and Retention Plan for Outside Directors
("RRP"). The Company accelerated the vesting of the remaining RRP shares,
distributed the remaining shares, and terminated the RRP during 2000. These two
stock award Plans (PEP and RRP) were designed to provide directors, officers,
and employees with a proprietary interest in the Company in a manner designed to
encourage such persons to remain with the Company and to improve the financial
performance of the Company.
The Bank contributed $1.7 million during the fourth quarter of 1995 and the
first quarter of 1996 to purchase 179,687 shares of Company common stock in the
open market at a weighted average cost of $9.62 per share. This contribution was
initially recorded as a reduction in stockholders' equity and then is ratably
charged to compensation expense over the vesting period of the actual stock
awards. Of the 179,687 shares acquired, 38,010 were allocated to the RRP, with
the remaining 141,677 allocated to the PEP.
The PEP provides for two types of stock awards: time-based grants and
performance-based grants. Time-based grants vest pro-rata on each anniversary of
the grant date and become fully vested over the applicable time period as
determined by the board of directors, typically five years. Vesting of
performance-based grants is dependent upon achievement of criteria established
by the board of directors for each stock award. Under the RRP, outside directors
of the Company received exclusively time-based grants.
All stock awards granted will be immediately vested in the event the recipient
terminates his employment (or in the case of a director, his service, including
service as a Director Emeritus) due to death, disability, or a change in control
of Monterey Bay Bank or Monterey Bay Bancorp, Inc. In the event the award
recipient terminates his employment or service due to any reason other than
death, disability, or a change in control, all unvested stock awards become null
and void. In addition, to the extent that criteria for performance-based stock
awards are not achieved, associated awards are forfeited and become available
for re-issuance.
Periodic operating expense for time-based stock awards is recognized based upon
fair market value at date of grant. Periodic operating expense for
performance-based stock awards is recognized based upon fair market value at the
earlier of the reporting date or the performance measurement date.
During 2000, the Company utilized previously unallocated shares under the PEP to
compensate certain employees for their favorable performance. These shares were
granted in lieu of cash incentive compensation and vested immediately.
133
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
A summary of the PEP as of December 31, 2000, 1999, and 1998, and changes and
related expense during the years ended on those dates, is presented below:
2000 1999 1998
---- ---- ----
Stock awards outstanding at the beginning of the year 30,864 56,772 71,503
Stock award activity during the year:
Time based shares granted 11,576 -- 14,000
Performance based shares granted 18,168 -- --
Performance based shares granted in lieu of cash compensation 3,160 -- --
Performance based shares immediately vested upon grant (3,160) -- --
Time based shares canceled -- (1,450) (1,798)
Performance based shares canceled (1,129) (4,781) (6,276)
Time based shares vested (11,860) (12,668) (11,095)
Performance based shares vested (12,540) (7,009) (9,562)
------- ------ ------
Stock awards outstanding at the end of the year 35,079 30,864 56,772
====== ====== ======
Available for future awards at the end of the year -- 31,775 25,544
====== ====== ======
PEP compensation expense (In Whole Dollars) $229,771 $227,093 $259,397
======== ======== ========
A summary of the status of the RRP as of December 31, 2000, 1999, and 1998, and
changes and related expense during the years ended on those dates, is presented
below:
2000 1999 1998
---- ---- ----
Stock awards outstanding at the beginning of the year 9,541 16,588 18,661
Stock award activity during the year:
Time based shares granted -- -- 4,146
Time based shares canceled -- -- --
Time based shares vested (9,541) (7,047) (6,219)
------ ------ ------
Stock awards outstanding at the end of the year -- 9,541 16,588
====== ====== ======
Available for future awards at the end of the year -- -- --
====== ====== ======
RRP compensation expense (In Whole Dollars) $66,349 $70,042 $66,594
======= ======= =======
134
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Employee Stock Ownership Plan and Trust - The Company established for eligible
employees an Employee Stock Ownership Plan and Trust ("ESOP"), which became
effective upon the conversion of the Bank from a mutual to a stock association.
Eligible full-time employees employed with the Bank who have been credited with
at least 1,000 hours during a twelve month period, have attained age twenty-one,
and were employed on the last business day of the calendar year are eligible to
participate.
The ESOP subscribed for 8.0% (or 359,375) of the shares of Company common stock
issued in the Conversion at an adjusted price of $6.40 per share. On February
14, 1995, the ESOP borrowed $2.3 million from Monterey Bay Bancorp, Inc. in
order to fund the purchase of the common stock. This loan is being repaid
pro-rata over an approximately ten year period concluding on December 31, 2004,
with the funds for repayment primarily coming from the Bank's contributions to
the ESOP over a similar time period. The loan is collateralized by the shares of
common stock held by the ESOP.
As an internally leveraged ESOP, no interest income or interest expense is
recognized on the loan in the consolidated financial statements of the Company.
Annual principal payments of $230,000 are scheduled for the conclusion of each
calendar year in conjunction with a release of shares for allocation to
individual employee accounts. Shares are allocated on the basis of eligible
compensation, as defined in the ESOP plan document, in the year of allocation.
Benefits generally become 100% vested after seven years of credited service.
Employees with at least three, but fewer than seven, years of credited service
receive a partial vesting according to a sliding schedule. However, in the event
of retirement, disability, or death, any unvested portion of benefits shall vest
immediately. Any share forfeitures are allocated among participating employees
in the same proportion as annual share allocations. Benefits are payable upon
separation from service based on vesting status and share allocations made.
As of December 31, 2000, 215,625 shares were allocated to participants and
committed to be released. As of December 31, 2000, the fair market value of the
143,750 unearned shares was $1.5 million based upon a closing market price per
share of $10.69. The outstanding ESOP loan balance, which is not a component of
the Company's consolidated financial statements, was $920 thousand at December
31, 2000.
Periodic operating expense associated with the ESOP is recognized based upon:
o the number of Company common shares pro-rata allocated
o the fair market value of the Company's common stock at the dates shares are
committed to be released
o any dividends received on unallocated shares as a reduction to periodic
operating expense
The benefits expenses, not including administrative costs, related to the ESOP
for the years ended December 31, 2000, 1999, and 1998 were $317 thousand, $454
thousand, and $526 thousand, respectively. At December 31, 2000 and 1999, the
unearned compensation related to the ESOP was $920 thousand and $1.15 million,
respectively. These amounts are shown as a reduction of stockholders' equity in
the Consolidated Statements Of Financial Condition.
20. 401(K) PLAN
The Company maintains a tax deferred employee savings plan under Section 401(k)
of the Internal Revenue Code. All employees are eligible to participate who are
21 years of age, have been employed by the Company for at least 90 days, and are
scheduled to complete 1,000 hours of service or more per calendar year. The
Company does not provide periodic or matching contributions to the 401(k) Plan.
However, the Plan contains a profit sharing component under which the Company
may elect to contribute. Through December 31, 2000, the Company has not made
such an election.
The trust that administers the 401(k) Plan had assets of approximately $1.8
million and $1.9 million as of December 31, 2000 and 1999, respectively. None of
these assets have been maintained at the Company or its subsidiary.
135
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
21. OFFICERS SALARY CONTINUATION PLAN
The Company historically maintained a non-qualified Salary Continuation Plan for
the benefit of certain officers of the Bank. Officers participating in the Plan
are entitled to receive a fixed monthly payment for a period of ten years upon
retirement. The Plan provides that payments will be accelerated upon the death
of the Participant or in the event of a change in control of Monterey Bay
Bancorp, Inc. or Monterey Bay Bank. The Plan was closed to new participants in
1999. In addition, during 1999, the Plan was amended to allow participants to
make an irrevocable election to convert their benefits into shares of Company
common stock.
As a non-qualified Plan, no Company assets are segregated to meet the future
obligations of the Company. Plan participants are general creditors of the
Company.
During 2000, the Company offered a lump sum settlement to all remaining Plan
participants in order to eliminate future periodic administrative costs
associated with the Plan. All but two participants elected to receive a lump sum
distribution. Such distributions were effected in either cash or Company common
stock, as applicable, prior to the end of 2000.
At December 31, 2000, the Company maintained an accrued liability of $238
thousand, included in other liabilities, related to its cash payment obligations
to the remaining two participants in the Plan, both of whom are currently
receiving periodic cash payments. This figure represents the present value of
the future payments due to the participants discounted at 5.0%.
At December 31, 1999, the Company designated 3,098 shares of common stock in
conjunction with its obligation to provide benefits in the form of Company
common stock and an accrued liability of $256 thousand for future cash benefits
payable under the Plan.
Periodic expense associated with the Plan was $3 thousand in 2000, $44 thousand
in 1999, and $19 thousand in 1998.
Payment obligations by the Company under the Plan as of December 31, 2000 extend
through October, 2007.
136
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
22. DIRECTORS RETIREMENT PLAN
The Company historically maintained a non-qualified Directors Retirement Plan
for the benefit of certain directors of the Bank. Under this Plan, directors of
the Bank who have served on the board of directors for a minimum of nine years
are entitled to receive a quarterly payment equal to the amount of the quarterly
retainer fee in effect at the date of retirement, continuing for a period of ten
years. The Plan provides that payments will be accelerated upon the death of the
participant or in the event of a change in control of the Monterey Bay Bancorp,
Inc. or Monterey Bay Bank. The Plan was closed to new participants in 1999. In
addition, during 1999, the Plan was amended to allow participants to make an
irrevocable election to convert their benefits into shares of Company common
stock.
As a non-qualified Plan, no Company assets are segregated to meet the future
obligations of the Company. Plan participants are general creditors of the
Company.
During 2000, the Company offered a lump sum settlement to all remaining Plan
participants in order to eliminate future periodic administrative costs
associated with the Plan. All but two participants elected to receive a lump sum
distribution. Such distributions were effected in either cash or Company common
stock, as applicable, prior to the end of 2000.
At December 31, 2000, one of the two remaining participants had elected to
receive a lump sum distribution in 2001 in satisfaction of the Company's
obligations to him under the Plan. The heirs of the other remaining Plan
participant at December 31, 2000 are receiving periodic cash payments under the
Plan. At December 31, 2000, the Company maintained an accrued liability of $122
thousand included in other liabilities related to its cash payment obligations.
This figure represents the present value of the future payments due to the
participants discounted at 5.0%
At December 31, 1999, the Company maintained 29,788 shares related to its
obligations to participants under the Plan. At December 31, 1999, the Company
maintained an accrued liability of $196 thousand related to its cash payment
obligations under the Plan.
Periodic expense associated with the Plan was $3 thousand in 2000, $68 thousand
in 1999, and $33 thousand in 1998.
Payment obligations by the Company under the Plan as of December 31, 2000 extend
through March, 2004.
137
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
23. PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
The Parent Company and its subsidiary, the Bank, file consolidated federal
income tax returns in which the taxable income or loss of the Parent Company is
combined with that of the Bank. The Parent Company's share of income tax expense
is based on the amount which would be payable if separate returns were filed.
Accordingly, the Parent Company's equity in the net income of its subsidiaries
(distributed and undistributed) is excluded from the computation of the
provision for income taxes for stand alone financial statement purposes.
The condensed financial statements of Monterey Bay Bancorp, Inc. (parent company
only) are as follows:
CONDENSED STATEMENTS OF FINANCIAL CONDITION
December 31,
------------------------
2000 1999
(Dollars In Thousands)
ASSETS:
Cash and due from depository institutions $ 558 $ 62
Overnight deposits 3,210 100
------- -------
Total cash & cash equivalents 3,768 162
Mortgage-backed securities available for sale -- 3,750
Loan receivable, net -- 4,800
Other assets 51 524
Investment in subsidiary 40,274 34,022
------- -------
TOTAL ASSETS $44,093 $43,258
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY:
Liabilities:
Securities sold under agreements to repurchase $ -- $ 2,410
Other liabilities 256 45
------- -------
Total Liabilities 256 2,455
Stockholders' equity 43,837 40,803
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $44,093 $43,258
======= =======
138
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
CONDENSED STATEMENTS OF OPERATIONS AND
COMPREHENSIVE INCOME
Year Ended December 31,
---------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
Interest income:
Interest on mortgage backed securities and investment securities $ 19 $ 334 $ 605
Interest on loan receivable 560 414 306
Other interest income 46 46 165
------ ------ ------
Total interest income 625 794 1,076
Interest expense:
Interest on securities sold under agreements to repurchase 10 180 297
Other borrowings 21 -- --
------ ------ ------
Total interest expense 31 180 297
Net interest income before (benefit) provision for loan losses 594 614 779
(Benefit) provision for loan losses (200) 50 150
------ ------ ------
Net interest income after (benefit) provision for loan losses 794 564 629
Loss on sale of mortgage backed securities available for sale 79 7 1
Non-interest expense 817 552 503
------ ------ ------
Income before (benefit) provision for income taxes (102) 5 125
(Benefit) provision for income taxes (42) 3 50
------ ------ ------
(Loss) income before undistributed net income of subsidiary (60) 2 75
Undistributed net income of subsidiary 2,583 3,299 1,361
------ ------ ------
Net income $2,523 $3,301 $1,436
====== ====== ======
Other comprehensive income (loss) 545 (1,963) 656
------ ------ ------
Comprehensive income $3,068 $1,338 $2,092
====== ====== ======
139
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
---------------------------------------
2000 1999 1998
---- ---- ----
(Dollars In Thousands)
OPERATING ACTIVITIES:
Net income $ 2,523 $ 3,301 $ 1,436
Adjustments to reconcile net income to net cash provided by operating
activities:
Undisbursed net income of subsidiary (2,583) (3,299) (1,361)
Amortization of premiums on securities -- 64 102
(Benefit) provision for loan losses (200) 50 150
Loss on sale of securities 79 7 --
Cash receipts associated with ESOP 460 257 555
Decrease (increase) in other assets 473 (466) 46
Other, net (44) 310 84
------- ------- -------
Net cash provided by operating activities 708 224 1,012
------- ------- -------
INVESTING ACTIVITIES:
Loans originated -- -- (5,000)
Proceeds from repayments of loans 5,000 -- --
Dividend from subsidiary -- -- 8,500
Investment in subsidiary (2,100) -- --
Principal repayments on mortgage backed securities available for sale 49 2,021 3,199
Proceeds from sales of mortgage backed securities available for sale 3,702 724 975
Proceeds from maturities of investment securities -- -- 100
------- ------- -------
Net cash provided by investing activities 6,651 2,745 7,774
------- ------- -------
FINANCING ACTIVITIES:
Repayments from reverse repurchase agreements, net (2,410) (2,080) (710)
Cash dividends paid to stockholders (274) (530) (463)
Sales of treasury stock 182 318 322
Purchases of treasury stock (1,251) (1,668) (8,624)
------- ------- -------
Net cash used in financing activities (3,753) (3,960) (9,475)
------- ------- -------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 3,606 (991) (689)
CASH & CASH EQUIVALENTS AT BEGINNING OF YEAR 162 1,153 1,842
------- ------- -------
CASH & CASH EQUIVALENTS AT END OF YEAR $ 3,768 $ 162 $ 1,153
======= ===== =======
140
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
24. ESTIMATED FAIR VALUES OF FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Company, using
available market information and appropriate valuation methodologies. However,
considerable judgement is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different assumptions and / or estimation
methodologies may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used by the Company in computing the
estimated fair values:
Cash And Cash Equivalents - Current carrying amounts approximate estimated fair
value.
Capital Stock Of The Federal Home Loan Bank - Fair value is based upon its
redemption value, which equates to current carrying amounts.
Investment Securities and Mortgage Backed Securities - Fair values of these
securities are based on year-end market prices or dealer quotes. If quoted
market prices are not available, estimated fair values were based upon quoted
market prices of comparable instruments.
Loans Receivable Held For Investment - For fair value estimation purposes, these
loans have been categorized by type of loan (e.g., one to four unit residential)
and then further segmented between adjustable or fixed rates. Where possible,
the fair value of these groups of loans has been based on secondary market
prices for loans with similar characteristics. The fair value of the remaining
loans has been estimated by discounting the future cash flows using current
interest rates being offered for loans with similar remaining terms to borrowers
of similar credit quality. Prepayment estimates were based on historical
experience and published data for similar loans.
Transaction Deposit Accounts - The estimated fair value of checking, savings,
and money market deposit accounts is the amount payable on demand at the
reporting dates.
Certificates Of Deposit - Fair value has been estimated by discounting the
contractual cash flows using current market rates offered in the Company's
market area for similar time deposits with comparable remaining terms.
FHLB Advances - Fair value was estimated by discounting the contractual cash
flows using current market rates offered for advances with comparable conditions
and remaining terms.
Securities Sold Under Agreements To Repurchase - Fair value was estimated by
discounting the contractual cash flows using current market rates offered for
borrowings with comparable conditions and remaining terms.
141
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
Commitments To Extend Credit - The estimated fair values of commitments to fund
loans are estimated using the fees currently charged to enter into similar
agreements, considering the remaining terms of the agreements and the present
creditworthiness of the counterparties. For fixed rate loan commitments, the
estimated fair values also incorporate the difference between current levels of
interest rates for similar commitments and the committed rates.
Standby Letters Of Credit - The estimated fair values of standby letters of
credit were determined by using the fees currently charged taking into
consideration the remaining terms of the agreements and the creditworthiness of
the counterparties.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
December 31, 2000 December 31, 1999
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
(Dollars In Thousands)
ASSETS:
Cash and cash equivalents $ 25,159 $ 25,159 $ 12,833 $ 12,833
Investment securities available for sale 7,360 7,360 11,463 11,463
Mortgage backed securities available for sale 42,950 42,950 57,716 57,716
Mortgage backed securities held to maturity -- -- 60 60
Loans receivable held for investment, net 391,820 398,257 360,686 364,129
FHLB stock 2,884 2,884 3,213 3,213
LIABILITIES:
Transaction deposit accounts 163,078 163,078 145,258 145,258
Certificates of deposit 244,710 244,400 222,144 221,734
Advances from the Federal Home Loan Bank 32,582 32,501 49,582 48,009
Securities sold under agreements to repurchase -- -- 2,410 2,410
OFF-BALANCE SHEET
Commitments to fund loans -- -- -- --
Standby letters of credit -- -- -- --
The fair value estimates presented herein are based upon pertinent information
available to management as of December 31, 2000 and 1999. The fair value amounts
have not been comprehensively reevaluated since the reporting date. Therefore,
current estimates of fair value and the amounts realizable in current secondary
market transactions may differ significantly from the amounts presented herein.
142
MONTEREY BAY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 (Continued)
--------------------------------------------------------------------------------
25. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of quarterly results:
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(Dollars In Thousands, Except Share Data)
Year Ended December 31, 2000:
Interest and dividend income $9,050 $ 9,411 $ 9,514 $ 9,782
Interest expense 4,557 4,859 5,115 5,246
Provision for loan losses 250 775 650 500
Non-interest income 501 583 630 626
Non-interest expense 3,337 3,369 3,552 3,418
Provision for income taxes 608 437 366 535
Net income 799 554 461 709
Shares applicable to Basic earnings per share 3,138,424 3,075,153 3,100,164 3,129,897
Basic earnings per share $ 0.25 $ 0.18 $ 0.15 $0.23
Shares applicable to Diluted earnings per share 3,150,825 3,076,403 3,103,799 3,163,182
Diluted earnings per share $ 0.25 $ 0.18 $0.15 $0.22
Cash dividends paid per share $ 0.08 $ 0.00 $ 0.00 $ 0.00
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(Dollars In Thousands, Except Share Data)
Year Ended December 31, 1999:
Interest and dividend income $8,225 $ 8,173 $ 8,578 $ 8,441
Interest expense 4,451 4,268 4,218 4,451
Provision for loan losses 220 200 265 150
Non-interest income 684 778 564 479
Non-interest expense 2,822 2,890 2,971 3,204
Provision for income taxes 612 691 738 470
Net income 804 902 950 645
Shares applicable to Basic earnings per share 3,213,941 3,235,190 3,256,419 3,219,098
Basic earnings per share $ 0.25 $ 0.28 $ 0.29 $0.20
Shares applicable to Diluted earnings per share 3,308,823 3,323,205 3,359,124 3,289,561
Diluted earnings per share $ 0.24 $ 0.27 $0.28 $0.20
Cash dividends paid per share $ 0.07 $ 0.00 $ 0.08 $ 0.00
143
Item 9. Changes In And Disagreements With Accountants On Accounting And
Financial Disclosure
None.
PART III
Item 10. Directors And Executive Officers Of The Registrant
The information relating to Directors and Executive Officers of the
Registrant is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 24, 2001,
which will be filed no later than 120 days following Registrant's fiscal year
end. Information concerning Executive Officers who are not Directors is also
contained in Part I of this report pursuant to paragraph (b) of Item 401 of
Regulation S-K in reliance on Instruction G.
Item 11. Executive Compensation
The information relating to Director and Executive Officer compensation
is incorporated herein by reference to the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held on May 24, 2001, excluding the
Compensation Committee Report on Executive Compensation and the Stock
Performance Graph, which will be filed no later than 120 days following the
Registrant's fiscal year end.
Item 12. Security Ownership Of Certain Beneficial Owners And Management.
The information relating to security ownership of certain beneficial
owners and management is incorporated herein by reference to the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held on May 24,
2001, which will be filed no later than 120 days following the Registrant's
fiscal year end.
Item 13. Certain Relationships And Related Transactions.
The information relating to certain relationships and related
transactions is incorporated herein by reference to the Registrant's Proxy
Statement for the Annual Meeting of Stockholders to be held on May 24, 2001,
which will be filed no later than 120 days following the Registrant's fiscal
year end.
144
PART IV
Item 14. Exhibits, Financial Statement Schedules, And Reports On Form 8-K.
(a)(1) Financial Statements
The following consolidated financial statements of the Registrant are
filed as a part of this document under Item 8, "Financial Statements and
Supplementary Data."
Consolidated Statements Of Financial Condition At December 31, 2000 And
1999.
Consolidated Statements of Operations For Each Of The Years In The
Three Year Period Ended December 31, 2000.
Consolidated Statements Of Changes In Stockholders' Equity For Each Of
The Years In The Three Year Period Ended December 31, 2000.
Consolidated Statements Of Cash Flows For Each Of The Years In The
Three Year Period Ended December 31, 2000.
Notes To Consolidated Financial Statements.
Independent Auditors' Report.
(a)(2) Financial Statement Schedules
Financial Statement Schedules have been omitted because they are not
applicable or the required information is shown in the Consolidated Financial
Statements or Notes thereto under Item 8, "Financial Statements and
Supplementary Data."
(a)(3) Management Contracts (see Item 14 (c), below)
(b) Reports On Form 8-K Filed During The Last Quarter Of The
Registrant's Fiscal Year Ended December 31, 2000
(1) Form 8-K dated October 20, 2000 which includes the
announcement of David E. Porter joining Monterey Bay
Bank as a Senior Vice President, the appointment of
C. Edward Holden to the additional position of
President of Monterey Bay Bancorp, Inc. and Monterey
Bay Bank, and the resignation of Gary C. Tyack as a
Senior Vice President of Monterey Bay Bank.
(2) Form 8-K dated October 31, 2000 which includes the
announcement of earnings for the quarter ended
September 30, 2000 and changes in the Board of
Directors.
(3) Form 8-K dated December 26, 2000 which includes the
announcement of the repayment in full of a $4.8
million business term loan that had been maintained
on non-accrual status since the fourth quarter of
1999. This Form 8-K also includes the announcement of
an additional investment of $2.1 million by Monterey
Bay Bancorp, Inc. into its Monterey Bay Bank
subsidiary.
145
(4) Form 8-K dated February 8, 2001 which includes the
announcement of earnings for the quarter and full
fiscal year ended December 31, 2000, the addition of
Susan F. Grill as a Senior Vice President of Monterey
Bay Bank, the appointment of Larry A. Daniels as a
Director of Monterey Bay Bancorp, Inc. and Monterey
Bay Bank, the date for the 2001 annual meeting of
stockholders, and the record date for voting at the
2001 annual meeting of stockholders.
(c) Exhibits Required by Securities and Exchange Commission
Regulation S-K
Exhibit Number
--------------
3.1 Certificate Of Incorporation Of Monterey Bay Bancorp, Inc.*
3.3 Bylaws Of Monterey Bay Bancorp, Inc. As Amended And Restated Effective
March 22, 2001
4.0 Stock Certificate Of Monterey Bay Bancorp, Inc.*
10.8 Form Of Monterey Bay Bank Of Employee Severance Compensation Plan.*
10.9 Monterey Bay Bank 401(k) Plan.*
10.10 Monterey Bay Bank 1995 Retirement Plan For Executive Officers And
Directors.*
10.11 Form Of Monterey Bay Bank Performance Equity Program For Executives.**
10.12 Form Of Monterey Bay Bank Recognition And Retention Plan For Outside
Directors.**
10.13 Form Of Monterey Bay Bancorp, Inc. 1995 Incentive Stock Option Plan As
Amended And Restated Effective May 25, 2000.***
10.14 Form Of Monterey Bay Bancorp, Inc. 1995 Stock Option Plan For Outside
Directors.**
10.17 Form Of Amended Change In Control Agreement Between Monterey Bay
Bancorp, Inc., Monterey Bay Bank, And Seven Officers Effective March
22, 2001
21 Subsidiary information is incorporated herein by reference to "Part I -
Subsidiaries."
23 Consent Of Deloitte & Touche LLP, Independent Auditors.
27 Financial Data Schedule (in electronic filing only).
* Incorporated herein by reference from the Exhibits to the Registration
Statement on Form S-1, as amended, filed on September 21, 1994,
Registration No. 33-84272.
** Incorporated herein by reference from the Proxy Statement for the
Annual Meeting of Stockholders' filed on July 26, 1995.
*** Incorporated herein by reference from the Proxy Statement for the
Annual Meeting of Stockholders' filed on April 14, 2000.
146
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
MONTEREY BAY BANCORP, INC.
Date: March 22, 2001 By: /s/ C. Edward Holden
--------------------- --------------------
C. Edward Holden
Vice Chairman, Director, Chief Executive Officer, President
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ McKenzie Moss Chairman of the Board of Directors March 22, 2001
----------------------------------- --------------
McKenzie Moss
/s/ Eugene R. Friend Vice Chairman, Director March 22, 2001
----------------------------------- --------------
Eugene R. Friend
/s/ C. Edward Holden Vice Chairman, Director, Chief Executive Officer, March 22, 2001
----------------------------------- President --------------
C. Edward Holden
/s/ Mark R. Andino Chief Financial Officer (Principal Financial March 22, 2001
----------------------------------- and Accounting Officer) --------------
Mark R. Andino
/s/ Josiah T. Austin Director March 22, 2001
----------------------------------- --------------
Josiah T. Austin
/s/ P. W. Bachan Director March 22, 2001
----------------------------------- --------------
P. W. Bachan
/s/ Edward K. Banks Director March 22, 2001
----------------------------------- --------------
Edward K. Banks
/s/ Nicholas C. Biase Director March 22, 2001
----------------------------------- --------------
Nicholas C. Biase
/s/ Diane S. Bordoni Director March 22, 2001
----------------------------------- --------------
Diane S. Bordoni
/s/ Larry A. Daniels Director March 22, 2001
----------------------------------- --------------
Larry A. Daniels
/s/ Steven Franich Director March 22, 2001
----------------------------------- --------------
Steven Franich
/s/ Stephen G. Hoffmann Director March 22, 2001
----------------------------------- --------------
Stephen G. Hoffmann
/s/ Gary L. Manfre Director March 22, 2001
----------------------------------- --------------
Gary L. Manfre
147
(THIS PAGE INTENTIONALLY LEFT BLANK)
148